1992-4(2)-SAcLJ-333-LimChan-GohLow

Negligent Misstatements

DEVELOPMENTS IN THE LAW RELATING TONEGLIGENT MISSTATEMENTS:

ANY RECOURSE FOR INVESTORS AND CREDITORS?

Introduction

Traditionally, the courts have been reluctant to award damages for pureeconomic loss which is not a consequence of physical damage to theplaintiffs person or property. The main exception is when the loss iscaused by a negligent misstatement. However, given that statements maybe widely disseminated and their effects are more far-ranging than that ofphysical acts, the courts have been very cautious in imposing liability onthe maker for fear of exposing him to liability in an indeterminate amountfor an indeterminate time to an indeterminate class.1

Recovery for economic loss resulting from negligent misstatements wasfirst allowed in the landmark case of Hedley Byrne & Co Ltd v. Heller &Partners Ltd.2 Since then, much litigation has ensued on the scope of thenew liability. Most of the cases have turned on the question of thecircumstances which would give rise to a duty of care. In order to keepliability within reasonable bounds, the courts have generally required theexistence of a special relationship between the maker and recipient ofthe statement. This special relationship is said to exist if: (a) the maker ofthe statement possesses (or professes to possess) special skill or informa-tion), (b) the maker knows or ought to have known that the recipientwould rely on the statement, and (c) it was reasonable for the recipient torely.

Recent cases have indicated a major shift in judicial policy, brought aboutby the fear of placing an unduly heavy burden on the professions. Whereasearlier cases3 had allowed recovery on the basis of Lord Wilberforces testof foreseeability and policy consideration laid down in Anns v MertonLBC4, this test has been decisively rejected by the House of Lords inCaparo Industries plc v. Dickman and others.5 The single general principleapproach previously used to determine the existence and scope of a duty ofcare in every situation has been discarded in favour of a more cautious andrestrictive case-by-case approach, using the concepts of foreseeability,proximity and fairness.

3334 S.Ac.L.J. Part II

per Cardozo CJ, Ultramares Corp v. Touche (1931) 255 NY 170 at 179.[1964] AC 465.Scott Group Ltd v. McFarlane & Robinson [1978] NZLR 553, JEB Fasteners Ltd v. MarksBloom & Co (a firm) [1981] 3 All ER 289, Twomax Ltd v. Dickson McFarlane &Robinson 1982 SC 113.[1977] 2 All ER 492.[1990] 1 All ER 568.

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Given the somewhat narrow ambit of the Caparo decision, and the variedcommercial situations to which professionals lend their advice, the newapproach has been criticised as giving rise to uncertainty and inconsistencyin the law. Many of the recent cases concerned the issues of whether and towhom an accountant or auditor owes a duty of care when he is preparing orauditing a set of acounts. It is pertinent to note that accountants today domore than traditional book-keeping and preparation of accounts. Theyalso give advice as consultants on a wide range of activities from taxplanning, corporate structuring, information systems planning to takeoversand mergers. In doing so, their exposure to the risk of liability for negligentmisstatements is far greater than ever before, and raises interestingquestions concerning their liability for professional negligence.

The aim of this article is to examine the cases decided in the aftermath ofCaparo, and to try and extract some principles which may help inidentifying the situations in which members of the accounting profession(accountants and auditors) and other financial advisors may be held to owea duty not to make inaccurate and misleading statements which may causeeconomic loss to a recipient who relies on them.

Caparo and other cases

In Caparo Industries plc v Dickman, The House of Lords had theopportunity to review the caselaw relating to the duty of auditors forstatements made in a companys annual audited reports. Caparo Industriesplc (Caparo), who were shareholders of Fidelity plc, purchased additionalshares in the company and subsequently took over the company in relianceon the companys audited reports. After the takeover, Caparo brought anaction against, inter alia, the auditors of Fidelity plc, alleging that theauditors owed them a duty of care, either as potential bidders or as existingshareholders. It was argued that the auditors had breached this duty of carein preparing accounts that were inaccurate and misleading as the stockswere overvalued and after sales credits had been underprovided for, thusreflecting a profit when it should have shown a loss.

At the trial of a preliminary issue as to whether the auditors owed a duty ofcare to Caparo, Sir Neil Lawson held that no such duty of care existed toindividual shareholders, although a duty may be owed to the shareholdersas a class. On appeal, the Court of Appeal by a majority (OConnor LJdissenting), allowed the appeal in part on the ground that the auditorsowed a duty to the respondents as existing shareholders because there wassufficient proximity between an existing shareholder and the auditors whowere considered to have voluntarily assumed a direct responsibility for theaccuracy of audited accounts. However, it was decided that no duty of carewas owed to Caparo as potential investors.

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The auditors appealed from this decision to the House of Lords whichunanimously allowed the appeal and held that no duty of care was owed bythe auditors to Caparo, whether as an individual shareholder or as apotential investor. The law lords emphasised the importance of the needfor proximity of relationship between the parties in addition to therequirement of foreseeability. Proximity was to be determined by thecircumstances in and the purposes for which the statements were made.

Since the statements in question had been contained in the companysaudited accounts, it was decided that the statements had been made for thepurpose of fulfilling the statutory requirements of the Companies Act1985. The purpose behind the statutory requirement for audited accounts,their lordships reasoned, was to provide existing shareholders of thecompany with reliable information to enable them to exercise their classrights at the companys general meeting. As such, the auditors owed noduty of care to the takeover bidder because the accounts had not beenprepared specifically for the purpose of giving financial advice in relationto a takeover bid. Nor was there a duty of care owed to Caparo in theircapacity as an existing shareholder because the audited accounts had notbeen prepared for the purpose of assisting existing shareholders in decidingwhether or not to acquire additional shares.

Immediately after this judgement, there was a great deal of speculation asto how the decision of the House of Lords would be interpreted andapplied in subsequent cases6. It did not take long for the courts to be facedwith another case on negligent misstatement within the context of anothertakeover scenario. Applying Caparo, the Court of Appeal in JamesMcNaughton Paper Group Ltd v Hicks Anderson & Co7 applied theconcepts of foreseeability, proximity and reasonableness and held that afirm of chartered accountants who had prepared a set of draft accounts fora corporate group did not owe a duty of care to a takeover bidder who hadrelied on the accounts. This was so in spite of the fact that the accountantshad met with the potential investor during negotiations for the takeoverand had made an oral representation concerning the financial status of thecompany in question. The court placed a great deal of emphasis on the factthat the accounts presented to the potential investor had been merely draftaccounts and thus it was not foreseeable that the bidder would rely on themin the same way as one would rely on final accounts.

Robert Baxt, The Shutting of the gate on shareholders in actions for negligence theCaparo decision in the House of Lords 1990 Companies & Securities Forum, CCH 2;Hugh Evans, The Application of Caparo v Dickman 1990 Vol 6 PN No 2 76; John GFleming, The Negligent Auditor and Shareholders 1990 V106 LQR 349.[1991] 1 All ER 134.


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As for the accountants oral representation to the effect that the companywas breaking even or doing marginally worse, it was decided that this wasmerely a general statement. According to Neill LJ, this general statementdid not affect the specific figures in the draft accounts and the accountantscould not have foreseen that the takeover bidder would rely on it withoutfurther inquiry or advice. The Court of Appeal did not seriously considerthe question of proximity because the takeover bidder had failed to satisfythe court that it was foreseeable that they would rely on the draft accountsand the oral representation.

In a matter of months, the Court of Appeal had further opportunity toconsider the same issue in Morgan Crucible Co plc v Hill Samuel & CoLtd8, which arose out of similar facts. Here, the takeover bidder sought toamend his statement of claim (in view of the decision in Caparo) to allegethat there was the necessary proximity for the defendants (including thecompanys directors, a firm of financial advisors and a firm of auditors) toowe him a duty of care in relation to financial statements made after thebid was announced. It was agreed by all parties to the action that no duty ofcare could have arisen before the bidder was identified. The court thendecided that the moment the initial bid was made, there was an arguablecase for liability of the directors, financial advisors and auditors. Caparowas distinguished on the ground that here there was an identified bidderand this could give rise to sufficient proximity.

Referring to the pre-bid statements, Slade J rejected the argument thatthey could be regarded as continuing representations which if notwithdrawn, could give rise to liability once the bid was first made.However, he felt that there was an arguable case for liability forrepresentations made after the takeover bidder was identified and thisbeing a question of critical importance for the trial judge to consider, heallowed the takeover bidder to amend his statement of claim and referredthe case to trial. Unfortunately, the case was eventually settled by theparties just before the hearing of the trial.

Since then, the Caparo approach has been applied to situations other thantakeover bids. In Al-Nakib Investments (Jersey) Ltd v Longcroft,9 the issuewas the extent of the directors duty of care for financial statements otherthan the information provided in the annual audited report. The directorsof a company were held not to owe a duty of care to shareholders who hadpurchased shares in the market in reliance on alleged misstatements in aprospectus and an interim report issued in relation to the incorporation of a

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[1991] 1 All ER 148.[1990] 1 WLR 1390.

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subsidiary company. The reason for the courts decision was once againbased on the ground of a lack of proximity between the directors and theshareholders as the prospectus and interim report had been sent by thedirectors to the existing shareholders of the parent company for thepurpose of enabling them to decide whether or not to take up an offer of arights issue and not to assist them in deciding whether to purchase shares inthe market.

This requirement for proximity has also been applied and extended in Al-Saudi Banque v Clarke Pixley10 to negate the existence of any duty of careby auditors to existing or potential bank creditors of a company eventhough it may be foreseeable that banks might give credit in reliance on thecompanys audited accounts. Millett J concluded that there was no close ordirect relationship between the auditors and the banks and thus theelement of proximity was lacking. This judgement was given after theCourt of Appeal decision in Caparo but before the final decision of theHouse of Lords. However, it is consistent with the House of Lords viewthat the purpose of the auditors report is only to enable the shareholdersto make an informed decision at the companys general meeting.

Some important principles can be extracted from the abovementionedcases and these will be dealt with in turn below.

Principles to be applied in determining whether a duty of care exists

1. Foreseeabttity is not the sole criterion of liability.Foreseeability of damage, per se, is not sufficient to impose a duty of careon the maker of a statement. Additionally, there must be a relationship ofproximity between the maker and the recipient, and it must be fair, justand reasonable to impose the liability.11 These three requirements arenecessary to keep the law of negligence within the bounds of commonsense and practicality.12

Foreseeability of damage to the recipient is not difficult to establish. In the


[1989] 3 All ER 361.This has been tirelessly reiterated in Caparo, ibid, at pp. 573574, 584587, McNaughtonPapers Group Ltd v. Hicks Anderson & Co (a firm) supra, at 141142, Morgan CrucibleCo plc v Hill Samuel Bank Ltd and others supra, at 157.Lord Oliver in Caparo, supra, at 585e. The learned judge was concerned that given thefar-reaching effects of statements which could be circulated with or without the consent orknowledge of the maker, there was a need to impose some discernible limits to liability insuch cases. To apply as a test of liability only the foreseeability of possible damagewithout some further control would be to create a liability wholly indefinite in area,duration and amount and would open up a limitless vista of uninsurable risk for theprofessional man. at 593c.

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words of Lord Oliver, it is almost always foreseeable that someone,somewhere and in some circumstances, may choose to alter his position onthe faith of the accuracy of a statement or report which comes to hisattention and it is always foreseeable that a report, even a confidentialreport, may come to be communicated to persons other than the original orintended recipient.13

Invariably, it is the requirement of a relationship of proximity between themaker and the recipient of the statement that poses the greatest obstacle torecovery for the plaintiff. Proximity has been ascribed as being no morethan a covenient label to describe circumstances from which the law willattribute a duty of care. Such a duty is not a duty to take care in theabstract but a duty to avoid causing to the particular plaintiff damage of theparticular kind which he has in fact sustained.14

2. The duty only extends to the particular transaction in the makers mind atthe time of making the statement, ie. the makers liability is restricted tothe purpose for which the advice or information was required to be given.

In order for proximity to exist between the maker of the statement andthe plaintiff, the maker when giving the advice or information must haveknown that his statement would be communicated to the plaintiff, either asan individual or as a member of an identifiable class, specifically inconnection with a particular transaction or transactions of a particularkind, and that the plaintiff would be very likely to rely on it for the purposeof deciding whether or not to enter on that transaction or on a transactionof that kind.15 Lord Bridge observed that this was the salient feature in allthe cases allowing recovery to the plaintiff.16

Therefore, the mere possibility of reliance on a statement by strangers forany one of a variety of different purposes which the maker had no specificreason to anticipate would not impose a duty of care on the maker to therecipient. In cases where the advice has not been given for the specificpurpose of the recipient acting on it, it should only be in cases where theadviser knows that there is a high degree of probability that some other

Caparo, supra, at 593bc.Lord Oliver in Caparo, supra, at 599ef.Lord Bridge in Caparo, supra, at 576h.Ibid, at 576c. He was referring to Cann v Wilson (1988) 39 Ch D 39, Denning LJsdissenting judgement in Candler v Crane Christmas & Co Ltd [1951] 1 All ER 426, theHedley Byrne case, supra, and Smith v Eric S Bush (a firm) [1989] 2 All ER 514, Harris vWyre Forest DC [1989] 2 WLR 790.

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3. It must be fair, just and reasonable to impose liability on the maker.The courts have not dwelt at length on this point. Much of their attentionhas been focused on foreseeability and proximity. However, LordOliver in Caparo, ventured to suggest that what have been treated asthree separate requirements are . . . in most cases, in fact merely facets ofthe same thing, for in some cases the degree of foreseeability is such that itis from that alone that the requisite proximity can be deduced, whilst inothers the absence of that essential relationship can most rationally beattributed simply to the courts view that it would not be fair andreasonable to hold the defendant responsible.19

What the cases have made abundantly clear is that it would not be fair andreasonable to impose liability on a maker of a statement to unknown orunintended recipients who have relied on his statement for one or more ofa variety of purposes which the maker had no reason to anticipate at thetime he made the statement.

Lord Oliver in Caparo, supra, at 591c. This high degree of probability was found to bepresent in the cases of Smith v Eric S Bush (a firm), supra, and Harris v Wyre Forest,supra, the appeals of which were heard together. Although the purpose of the surveyorsreport was to advise the mortgagee on whether to make advances for proposed purchases,it was highly probable that the purchaser would in fact act on its contents in decidingwhether or not to enter into a contract to purchase a house. The evidence adduced showedthat surveyors knew that approximately 90% of purchasers did so rely, and also that asurveyor only obtains the work because the purchaser is willing to pay his fee.James McNaughton Papers Group Ltd v Hicks Anderson & Co (a firm), supra.Supra, at 585f-g.


identifiable person will act on the advice that a duty of care should beimposed.17

The above points are summarised in Neill LJs list of the factors to beconsidered in determining whether a duty of care is owed by the maker tothe recipient.18 They include:

the purpose for which the statement was made;

the purpose for which the statement was communicated;

the relationship between the maker, the recipient and any relevantthird party;

the size of any class to which the recipient belongs;

the state of knowledge of the maker; and

reliance by the recipient.

(a)(b)(c)

(d)(e)(f)

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Circumstances in which the maker of a statement may be liable to therecipient

Given that the above principles are to be applied on a case-by-case basis,the question of the existence of a duty of care in each case will depend onits own particular facts. Notwithstanding this, it is possible, given somejudicial clues, to identify the circumstances in which a duty of care may beheld to be owed by accountants, auditors and financial advisers to investorsand creditors in general.

a. Investors (shareholders and takeover bidders)It is clear from Caparo, that an auditor owes no duty of care to an existingshareholder, a potential shareholder or a takeover bidder, who has reliedon audited accounts to sell or to buy shares and suffered economic loss.The original, central and primary purpose of the auditors report,statutorily required under the Companies Act, is to enable the share-holders, as a body, to exercise informed control of the company.20 As such,any use of the auditors statement by any person for purposes other thanthe statutory purpose would not attract any liability on the part of theauditor.21 This poses significant problems for the average shareholder whoinvariably has no option but to rely on the audited statements as hisprimary, or perhaps, even as his sole source of information in investmentdecisions22. He would therefore be investing in the stock market at his ownrisk, without recourse to anyone if he relied on audited reports.

As for other financial statements made by accountants and other financialadvisers, it would appear from McNaughtons case that the scope ofliability would be determined in the same way, that is, by looking at thespecific purpose for which the statement was required. As the draftaccounts in that case had been prepared for the company and not theplaintiffs, the defendants were not liable when the plaintiffs, who wereunintended recipients, acted on the draft accounts to their detriment.

In ascertaining the purpose of the maker, the state of his knowledge at thetime of making the statement is relevant. It depends on whether he knew

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Lord Oliver in Caparo, supra, at 584de.The decision in Caparo has been heavily criticised for being out of step with commercialreality. See Accountancy, Mar 1990 1. One author has noted that a reference to Hansardwould easily rebut the statutory purpose of the audit as divined by the House of Lords See Mullis & Oliphant, Auditors liability, PN Mar 1991 22.Baxt, see note 6. As the average shareholder would not easily or cheaply be able to obtainany additional information to determine whether to retain his investment or increase it,the author argues that it would not be unreasonable for the shareholder to rely on theauditor, since the auditor is appointed to look after the interests of all shareholders.However, no duty is owed to a potential investor who is not a shareholder of the company.

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the purpose for which the statements were required and for whose use thestatements were intended. In Morgan Crucible, Slade LJ conceded thatthere was an arguable case for liability of the financial advisers and theauditors for statements made after the takeover bidder had been identi-fied. The defendants had intended the bidder to rely on the statements andthey owed the bidder a duty of care not to be negligent in makingrepresentations which might mislead him. Caparos case was distinguishedon the ground that it concerned an unidentified bidder. Thus, it can beseen that if a bidder is identified and statements were made to himthereafter, intending that he should rely on them for the purpose ofdeciding whether or not to make an increased bid, and he did so rely, themaker will be liable.

However, this did not appear to be the view held by the court inMcNaughtons case, decided a few months before Morgan Crucible. InMcNaughton, apart from the draft accounts, the defendants had alsoinaccurately stated, in response to a question by the plaintiff, that thecompany, as a result of rationalisation was breaking even or doingmarginally worse. The court held that the statement was a very generalanswer and the defendants could not have reasonably foreseen that theplaintiff would rely on that statement without any further inquiry oradvice. With respect, the authors disagree. The defendants were awarethat the plaintiff was intending to make a takeover bid for the company. Assuch, the plaintiff was an identified bidder. Given that the defendants werethe companys accountants, and therefore the persons who were the mostwell-acquainted with the companys financial situation, it can be arguedthat the defendants knew that the plaintiff would rely on the statementwithout further inquiry or advice, and that it was reasonable for them to sorely. In any case, one questions whether, in reality, independent inquiry bythe plaintiff would turn up any more information than what the companysown accountants are willing to divulge. Had McNaughtons case come upfor determination after Morgan Crucible, perhaps the judge would havedecided differently.

The specific purpose approach has also been applied to other situationsinvolving statements contained in prospectuses and interim reports. In Al-Naklb Investments (Jersey) Ltd v Longcroft, it was decided that thedirectors of a company owed no duty of care to shareholders who hadpurchased shares in the market in reliance on alleged misstatements in aprospectus and interim report issued in connection with the incorporationof a subsidiary company. This was so because the purpose of theprospectus had been to enable the shareholders to decide on whether totake up an offer of shares by way of rights issue, while the interim reportshad been issued for the purpose of informing the shareholders of the



activities of the subsidiary company. However, the use of these documentsfor a different and unrelated purpose would not attract any liability as thenecessary proximity is lacking.

b. CreditorsIt is common for creditors to examine a companys audited accounts whendeciding whether or not to grant credit facilities. The auditors, whencertifying that the companys accounts present a true and fair view, do notowe a duty of care to a bank which lends money to the company in relianceon audited reports, regardless of whether the bank is an existing creditor ofthe company making further advances or is only a potential creditor of thecompany.23 Millett J. likened the position of the banks which were notalready existing creditors to that of the potential investors in Caparo, towhom no duty of care was owed by the auditor because the element ofproximity between them was lacking24. As for the banks which werealready existing creditors, their position was not the same as that of theexisting shareholders in Caparo, because the auditors were under nostatutory obligation to report to them nor did they do so. In the absence ofdirect contact between the parties, mere knowledge on the auditors part,that some person or persons may rely on the report, would not establishthe necessary proximity.

The learned judge also hastened to add that even if the requirement ofproximity were satisfied, it would not be just and reasonable to imposeliability on the auditors25. Although there would be no danger of exposingthe auditors to an indeterminate class (where the creditors were known tothem), they would be exposed to liability for an indeterminate amount.The problem is all the more acute where the company is insolvent and theadvance is irrecoverable. The auditors maximum liability would fall to bemeasured by the amount of the advance, which would be unknown to theauditors and could not have been foreseen by them.

In relation to other financial statements made by persons other thanauditors, the ambit of the duty of care to creditors is likewise to berestricted by the transaction in which the maker intended the statement tobe relied on, and the recipient or class of recipients to whom the makermade the statement or to whom he intended or knew that it was intendedto be communicated. The same considerations of justice and reason-ableness in imposing liability on the maker would probably apply. It would

Al Saudi Banque and others v Clark Pixley (a firm), supra.at 370h.at 371 j.

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not be fair to extend the duty of care to a prospective lender unless theamount or at least the scale of the proposed loan was known to the maker.

Conclusion

In the light of the potentially wide dissemination of financial statementsand their far-ranging effects, the judges in Caparo and subsequent caseshave adopted a restrictive approach to imposing liability on the makers ofsuch statements. This approach has been considered as an overly cautiousone given that there are many factors which have to be proved beforeliability for negligent misstatements can arise26. In addition to proving theexistence of a duty of care, there has to be an actual breach of that duty ofcare by the accountants, auditors or financial advisers. The standard ofcare required is that which is to be expected of an ordinary skilledprofessional, thus accounting standards and practices would be relevant inconsidering the issue of breach of duty. Next, the plaintiff would have toestablish that the loss suffered had been caused by actual reliance on thestatement made, using the but-for test, which does not follow as a matterof course since it is possible that the error may not have had any influenceat all on the decision made by the plaintiff27. Furthermore the type ofdamages claimed must also have been forseeable in the circumstances.

This restrictive approach is said to be justified on policy grounds, it beingunfair to expose the maker of a statement to liability which is indetermi-nate in scope and amount. Hence, the maker would be liable only if heintended a known or identified recipient to rely on the statement for aspecific purpose and the recipient did so rely to his detriment.

However, this specific purpose approach does have its drawbacks. It hasbeen criticised as being too simplistic. While it works well where there is asingle, defined purpose behind the transaction in question, it ignores thefact that there may be more than one purpose behind a document. Defencedocuments, for instance, are intended to fulfil several purposes inpractice.28 When addressed to the shareholders of a company, they mayhelp the management to persuade the shareholders not to accept atakeover bid. On the other hand, the information contained in the defencedocument may be intended to elicit an increased offer from the bidder. Thelatter purpose was clearly recognised in Morgan Crucible with regard tofinancial statements made after the bidder had been identified. The courttook a step in the right direction when they conceded that a duty of care

Robert Baxt, see note 6 at 12.FEB Fasteners Ltd v Bloom & Co (a firm) [1981] 3 All ER 289 at 305g.Mary Percival, After Caparo Liability in Business Transactions Revisited, 54 MLR739.


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might be owed to an identified bidder in such a situation. Unfortunately,the case was settled before the trial, otherwise it would have proved mostilluminating in this confused area of the law. Much depends on whatconstitutes the original, central and primary purpose of financialstatements other than those contained in audited reports.

Given the uncertainty that shrouds the question of whether there issufficient proximity to found a duty to take care, the business communityhas devised a means to side-step Caparo. Institutional lenders in Englandhave attempted to established the requisite proximity between them and acompanys auditors by asking the latter to sign privity letters29. Theseletters, in effect, amount to a confirmation by the auditors that theproposed lender can rely on the auditors report for the purpose ofassessing whether or not to grant a specified credit facility to the companyconcerned. It would thus create the required proximity between the partiessince the auditors report (which had originally been prepared for statutorypurposes) is now being relied on by an identified party, for the purpose ofdeciding whether to grant a particular credit facility, with the consent andknowledge of the auditors. The privity letter would also ensure that theauditor has knowledge of the details of the loan, such as the repaymentperiod and the amount of the loan.

In the case of a takeover bidder who has made a bid and has beenidentified, it is questionable whether he would be likely to succeed inobtaining a privity letter from the companys accountants or auditors inrelation to the audited reports and other financial information provided bythem, especially in the case of a hostile takeover. In any case, the privityletter is essential to create proximity between the parties, which wouldotherwise not exist, because at the instance prior to the disclosure of theidentity of the bidder and his intentions, the auditor would not realise thata potential investor is relying on the accounts for the specific purpose of apossible takeover bid. However, it must be noted that the privity letterwould, at most, only create proximity in relation to actions taken by thebidder after the acknowledgement from the accountants or auditors hasbeen secured. So it would not create any proximity in relation to the initialbid which had already been made, as it is unlikely that the courts willaccept the idea of a privity letter that is designed to be retrospective ineffect.

The ordinary stock market investor, who lacks the clout of an institutionallender, would probably be unable to obtain a privity letter from the

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Neil Cuthbert & Alan Berg, After Caparo:can banks rely on audited financialstatements? 1990 Apr IFLR 17.

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companys accountants or auditors. In any case, it may not be a practicablesafeguard because investment decisions in the stock market are usuallydecisions in which timing is crucial. The ordinary investors other source ofinformation are reports prepared by financial analysts in stockbrokingfirms. Invariably, however, these reports are published with a disclaimer,and reasonably so, since they are mostly based on information culled froma companys audited report.

Thus the ordinary stock market investor is left largely unprotected as far ashis rights in negligence against the accountants, auditors and financialadvisers are concerned. This group of investors belong to an indeterminateclass, which raises numerous policy issues, which, at this state of thedevelopment of the law, are perhaps, more appropriate for the legislatureto consider. Given that the law since Hedley Byrne seems to have come fullcircle, the burden of appropriating the loss in stock market investmentsbetween investors and accountants, auditors and financial advisors shouldno longer be left to the courts. Instead, it may be timely for Parliament todecide whether statutory reform in this area of the law is necessary.

ANGELINA LIM CHAN HUI LIAN*ERIN GOH LOW SOEN YIN

Both lecturers at the Division of Legal Studies and Taxation, School of Accountancy andBusiness, Nanyang Technological University.

Negligent Misstatements 345

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Documents

1992-4(2)-SAcLJ-333-LimChan-GohLow