Price Waterhouse v Caribbean Steel Company Ltd

JurisdictionJamaica
CourtSupreme Court
Judge JONES, J:
Judgment Date24 May 2006
Judgment citation (vLex)[2006] 5 JJC 2401

IN THE SUPREME COURT OF JUDICATURE OF JAMAICA

IN THE CIVIL DIVISION

BETWEEN
CARIBBEAN STEEL COMPANY LIMITED
CLAIMANT
AND
PRICE WATERHOUSE (A FIRM)
DEFENDANT

AUDITORS - Duty of care

COMPANY LAW - Auditors - Duty of care

JONES, J
1

[1] "The office of auditor is of high antiquity." It is not easy to determine the exact date of its origin, but it can be said that from as early as 423 B.C, Aristophanes, the famous Greek comedy writer refers to the incorrect accounts of Pericles in his play "The Clouds". It can also be said that the ancient Egyptians and Babylonians set up auditing systems in which everything that went into and came out of storehouses were double-checked. These "audit reports" were given out loud, hence the later term "auditor", derived from the Latin "audire", to hear.

2

[2] Price Waterhouse is an international firm of auditors and accountants who were engaged as auditors of Caribbean Steel Company Limited (Carib Steel) and Caribbean Cable Company Limited (Carib Cable) and who were subsequently requested to conduct a valuation of the shares of Carib Cable a company, which the auditors were aware, Carib Steel intended to acquire. Carib Steel is a company registered under the Companies Act and engaged in the business of steel manufacturing in Jamaica.

3

[3] Carib Steel complained that their auditors, Price Waterhouse, were guilty of:

  • a) Breach of contract, breach of fiduciary duty, and negligence while engaged in providing a valuation which they relied on for the purchase of the 50.1 % of the issued share capita! of Carib Cable,

  • b) Breach of contract, breach of statutory duty and negligence in failing to identify or report on financial irregularities in the operations of Carib Cable after Carib Steel had acquired the majority shares in Carib Cable.

4

[4] Price Waterhouse, on the other hand, denied that they were guilty of breach of contract, breach of statutory duty or were negligent in the performance of their duties in either the conduct of the valuation of the shares of Carib Cable or in the subsequent audit, having regard to the standard of care applicable to auditors at the time of their engagement. Implicit in their denial is an assertion that they are victims of a disgruntled client (Carib Steel) who, simply, made a bad investment in purchasing the majority shares in Carib Cable at a premium.

5

[5] The issues in this case may be stated as follows:

  • a) Was there an expressed or implied duty of care owed by Price Waterhouse to Carib Steel to use reasonable care and skill in the performance of their duties:

    • (i) Under the terms of the contract for the valuation of shares as set out in the Engagement Letter.

    • (ii) In the conduct of the audit on the accounts of Carib Cable subsequent to the purchase of the shares

  • b) Whether or not Price Waterhouse breached their duty of care to use reasonable care and skill:

    • (i) in the preparation of the share valuation report for Carib Steel having regard to the standard of care applicable to accountants and auditors;

    • (ii) In the preparation of the consolidated audited accounts after the acquisition of the majority shares of Carib Cable by Carib Steel having regard to the standard of care applicable to auditors.

  • c) What is an appropriate award of damages in this case and whether or not an award for exemplary and/or aggravated damages is appropriate in this case.

6

The first issue: was there an expressed or implied duty of care owed by Price Waterhouse to Carib Steel to use reasonable care and skill in the performance of their duties; (a) under the terms of the contract for the valuation of shares as set out in the Engagement Letter, and; (b) in the conduct of the audit on the accounts of Carib Cable subsequent to the purchase of the shares

7

Duties of an Auditor

8

[6] In the mid-thirteenth century Sir Walter of Henley in his Treatise on Husbandry set out, in broad terms, the duties of the auditor in the following passage which appears in the chapter on the "Office of the Seneschal":

"It is not necessary to speak to the auditors about making audit, because of their office, for they ought to be so prudent, and so faithful, and so knowing in their business that they have no need of other teaching about things connected with the account"

9

[7] Of course, in modern times the duties of the auditor would in most cases depend mainly on the contract between the auditor and the client. This contract between the auditor and the client will usually set out the nature and extent of the duties and an indication of the standard of performance which is expected. In general, though, it can be said that the duty of the company's auditors is to provide an independent opinion on an organization's financial statements, annually. Their approach is generally historical in nature, as they assess whether the financial statements conform to generally accepted accounting principles. They also assess whether; the statements fairly present the financial position of the organization; the results of operations for a given period of time are accurately represented; and whether the financial statements have been materially affected by particular items.

10

[8] These duties may also extend to other task for which the auditor is engaged. In Fox v Morrish, Grant and Co 1

a firm of accountants were engaged to check the books of accounts from which balance sheets were prepared. It was held that the accountants committed a breach of duty as they checked the books of accounts without verifying the correctness of the cash and bank balances that were stated in the books and without informing the client that they had not done so
11

The Duty of Care for the Conduct of the Share Valuation

12

[9] Carib Steel entered into an agreement with Michael Poole and Michael Locker in October 1984 to subscribe for 50.1% of the issued share capital of Carib Cable at a price of $32,173,400.00. The agreement to purchase the shares was subject to Price Waterhouse's valuation of Carib Cable Company Limited. The terms of the agreement for the valuation is set out in letters dated September 29, 1994, from the Carib Steel to Price Waterhouse and the Engagement Letter dated October 5, 1994. The relevant provisions in the contract for the valuation as set out in the Engagement Letter dated October 5,1994, were as follows:

  • a) Carib Steel required an estimate of value for Carib Cable as the basis for negotiating for the purchase of Carib Cable's shares.

  • b) The valuation by Price Waterhouse would provide an estimate of the fair market value of Carib Cable.

  • c) Price Waterhouse would use either the earning approach or the asset based approach to conduct the valuation.

  • d) Price Waterhouse rejected any responsibility or liability for any losses by Carib Steel arising from the use of un-audited interim financial statements prepared by the management of Carib Cable in the valuation. The agreement included a provision that Carib Steel would indemnify Price Waterhouse against any loss or damage other than those arising from Price Waterhouse's gross negligence or wilful misconduct.

13

[10] Carib Steel now claims damages for breach of contract based on the Engagement Letter dated October 5, 1994, and a parallel claim for breach of the duty of care owed to them in tort. Price Waterhouse says that it is doubtful whether Carib Steel can bring an action in contract as well as tort. They rely on some dicta by Lord Scarman in Tai Hing Cotton Mill Ltd v Lin Chong Hing Bank 2

where he said

"Their Lordships do not believe that there is anything to the advantage of the law's development in searching for a liability in tort where the parties are in a contractual relationship"

14

[11] However, in Henderson v Merrett Syndicates Ltd 3

the House of Lords made it clear that where liabilities arise concurrently in tort and contract it was open to the claimant to emphasize the cause of action that was to his advantage. There cannot be any doubt that it was an implied term of the contract that Price Waterhouse in conducting this valuation would owe to Carib Steel a duty of care to exercise the necessary skill and care of a professional valuator. It is also implicit in the terms of the contract that they should consider Carib Steel's purpose in seeking the valuation (which was known to Price Waterhouse) and should exercise prudence and be careful in conducting the valuation. The disclaimer is not relevant, as it does not protect Price Waterhouse from an act of gross negligence or wilful misconduct, which is what is being claimed here. Accordingly, I find that Price Waterhouse owed a duty of care to Carib Steel to exercise the necessary skill and care under the terms of the contract for the share valuation and they also have a concurrent duty in tort
15

The Duty of Care for the Conduct of the Audit

16

[12] As far as the subsequent audit of Carib Cable's accounts is concerned, Price Waterhouse contends that they did not owe a duty of care or a contractual duty to Carib Steel for the conduct of the audit. They say that they did not have a contract with Carib Steel for the audit of Carib Cable and the auditor's only duty is to the company with whom he has a contractual relationship.

17

[13] The duty of care to a third party by an auditor in the absence of a contract was considered at length Caparo Industries plc v Dickman 4

. The House of Lords held in that case that an auditor could not be sued in negligence by any person, whether existing shareholder, prospective shareholder, or institutional lender who suffered financial loss as a result of relying upon an annual report and accounts negligently prepared. In relation to the duty of care owed to the shareholders, Lord Bridge said 5

The shareholders of a company have a collective interest in the company's proper management and...

To continue reading

Request your trial
1 cases

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT