“Bannerman clause” upheld to protect auditor from liability to third party

Bannerman-clause-upheld-to-protect-auditor-from-liability-to-third-party

In what is believed to be the first case to consider the effectiveness of “Bannerman clauses”, under which auditors disclaim liability in respect of audit reports to anyone other than the company and its members, the High Court has held that such clauses are reasonable.

The case, Barclays Bank plc v Grant Thornton LLP [2015] EWHC 320 (Comm), considered the effectiveness of disclaimer clauses in non-statutory audit reports produced by Grant Thornton as auditor of Von Essen Hotels Limited (VEH). Grant Thornton had previously been engaged by Barclays (and others) to review the financial affairs of VEH and its subsidiaries in connection with a proposed refinancing. VEH and Barclays entered into a facility agreement and Grant Thornton subsequently took over as the company’s auditors. The facility agreement required VEH to provide Barclays with audited consolidated financial statements for VEH and its subsidiaries. In fact, because VEH was itself a wholly owned subsidiary, it was exempt from the requirement to prepare group accounts. Accordingly, the group holding company engaged Grant Thornton to produce consolidated non-statutory financial statements for the VEH group. Although Barclays had engaged Grant Thornton directly in relation to its review of the group’s affairs, it was not party to the engagement letter concerning the non-statutory financial statements. That engagement was purely between the group holding company and Grant Thornton.

The non-statutory audit reports contained “Bannerman clauses” which largely followed the standard ICAEW wording, excluding “responsibility to anyone other than the company and the company’s director” for their audit work (the standard wording actually refers to the “company’s members as a body” rather than the company’s director). The audit reports also stated that Grant Thornton had audited the statements “in order to assist you to fulfil your duties under the terms of your loan facility”.

When the VEH group went into administration it was discovered that VEH’s finance director had deliberately manipulated its financial records in order to make it appear that the company was meeting the covenants in the facility agreement. Barclays claimed that Grant Thornton owed it a duty of care in relation to the non-statutory audit reports on the basis that those reports were issued in order to provide information to Barclays as VEH’s funders. It was claimed that this duty of care had been breached by Grant Thornton failing to uncover the alleged fraud at VEH. Barclays claimed £45 million in respect of the shortfall of repayments under the facility agreement.

The court dismissed Barclays claim granting summary judgment to Grant Thornton on the basis that Barclays would have no realistic prospect of success and there was no good reason

why the action should go to trial. The judge stated that it was clear from the wording used in the reports that Grant Thornton anticipated they would be forwarded to Barclays. In the absence of the disclaimer comprised in the “Bannerman clause”, therefore, it was arguable that a duty would exist between Grant Thornton and Barclays. So, the key question was whether the Bannerman disclaimer was reasonable. The following points were significant in the judge deciding that the clause was indeed reasonable in this case:

• Barclays was a sophisticated commercial party, used to reading accounts and audit reports;

• the disclaimers were clear and obvious on the face of the reports and therefore Barclays ought reasonably to have been aware of their existence – Grant Thornton could not anticipate that any competent banker would fail to read the first two paragraphs of a two page report;

• Barclays did not engage or pay Grant Thornton for the reports yet it had engaged them directly before, both in relation to the review of the VEH group’s affairs and in connection with the production of statutory reports for the purposes of a financial assistance “whitewash”. In each of those engagements, Grant Thornton had limited its liability to Barclays. If the disclaimers in the non-statutory reports were struck down, Barclays would be in a better position than if it had entered into a direct engagement and paid for the relevant services since any such engagement would have contained a limitation of liability; and

• Barclays could have taken steps to protect its own position by obtaining its own report via a direct engagement with Grant Thornton but it had chosen not to do so.

Accordingly, in the face of the express disclaimer, it was not enough to say that both Barclays and Grant Thornton expected Barclays to rely on the terms of the report for the purposes of the facility agreement. The reports told Barclays expressly that it relied on the reports at its own risk.

Comment: This decision will be welcomed by auditors as reflecting the clear intentions behind Bannerman clauses. The judge noted that, although the disclaimers in this case had been amended and were being used in non-statutory reports, they reflected the industry standard clauses used in statutory reports. Such standard clauses are more likely to represent a fair balance between the competing interests of the relevant parties and therefore are more likely to satisfy the reasonableness test. However, that alone was not conclusive and all the facts of the case had to be considered.