The Law Society v KPMG Peat Marwick & Ors (2000)
The imposition on a reporting accountant of a duty of care owed to the Law Society, for whose purposes the accountant's report was required, was fair, just and reasonable. The report was intended to assist the Law Society in deciding whether and when to exercise its powers of intervention in order to protect the Compensation Fund. The reporting accountant should be held responsible for loss to the Compensation Fund caused by that negligence. * Leave to appeal to the House of Lords refused.
Appeal from a judgment of the Sir Richard Scott V-C, deciding a preliminary issue in favour of the claimants ('the Law Society') in their action for damages against the defendants. He held that accountants who reported on the accounts of solicitors owed to the Law Society a duty of care when preparing their reports.
(1) This was not a situation where it was self-evident that a duty was owed, as the Law Society had a number of distinct functions, both in public and private law, and it did not necessarily follow that because there was a duty owed in relation to one role there was also a duty owed in relation to the other. (2) The Vice-Chancellor correctly identified the approach as being to examine the question of the duty of care against the test in Caparo Industries plc v Dickman & Ors (1990) 2 AC 605. (3) A distinction between the Council of the Law Society and the Law Society was devoid of any merit. (4) Previous cases which dealt with situations where a duty of care to protect against economic loss existed were all concerned with a potential commercial transaction. However, no difference in principle arose because here it was regulatory action which the Law Society would have taken. The Caparo test could still be applied and the requirements were fulfilled. There was no reason why there should not be a private law duty owed to the Law Society, the performance of which would assist it to perform its public duty. (5) If it was fair, just and reasonable that the accountants should be liable for the loss to the Compensation Fund then such consequences had to be accepted. There was no reason of policy why accountants should not be liable. A distinction could be made with the position of the Solicitors' Indemnity Fund, which was an insurer of solicitors and would not expect to be owed a duty by the auditors. The Compensation Fund was a fund of last resort. (6) The Vice-Chancellor's decision did not prevent it being argued that the scale of the loss was beyond anything the auditors could have foreseen having regard to the accounts to which the report related and that therefore the loss or the whole of the loss was not recoverable (Al Saudi Banque v Clarke Pixley (1990) 1 Ch 313).