ADT v BDO Binder Hamlyn (1995)

The action arose out of ADT’s acquisition of Britannia Securities Group (BSG). BDO Binder
Hamlyn (BDO) was one of BSG’s joint auditors and had been involved in an audit of BSG’s
1989 accounts. Prior to the acquisition, ADT made it clear to BDO that the final hurdle before
making the offer was to obtain certain assurances from BDO.
During a meeting with ADT, BDO’s audit partner confirmed to ADT at its request that he
would “stand by their accounts” and that he was aware of nothing else which ADT should be
told. The audit turned out to have been negligently performed and ADT suffered loss in making
the acquisition. ADT claimed that but for the representations made by BDO, it would not have
proceeded with the acquisition or, at least, it would have proceeded on different terms.
The English High Court decided that BDO, through the representations made by its audit
partner, had assumed responsibility towards ADT for the accuracy of the audited accounts. In
particular, the judge said, if the audit partner had insisted on a disclaimer, this would have been
regarded as a red flag by ADT, which would then have made further inquiries.
The court awarded damages against BDO of £65m, which after adding interest and costs,
amounted to a total of £105m. The award exceeded the indemnity cover by around £34m.
The case demonstrates how the auditors of a target company can incur colossal liabilities
towards a prospective purchaser as a result of unguarded assurances. This case highlights the
need for auditors to protect themselves either via a disclaimer or to abstain from giving such
assurances in these circumstances
 Reasons to be careful
By The Lawyer 3 December 1996 00:00

A damages bill of £65 million and a final High Court judgment debt of £105 million;
it happened to Binder Hamlyn and, warns Mark Chapman, it could happen to you

On 6 December last year, the High Court awarded damages of £65 million to security
systems company ADT as a result of its claim against BDO Binder Hamlyn. Interest
and costs take the final judgment debt to over £105 million, thought to be the highest
award ever made by the High Court against a firm of auditors.

The potential impact of this case on the partners, on whom liability may rest, has been
well covered by the press. But what about the far reaching implications of the decision
itself?

The claim arose out of ADT's acquisition of Britannia Security Group in 1990. In
making the acquisition, ADT claimed it had relied on the accuracy of Britannia's latest
accounts for the year ended 30 June 1989 which were signed by Binders as joint
auditors of Britannia. More importantly, ADT said it had also relied on oral
representations made by Binders partner Martyn Bishop to a director of ADT, John
Jermine, as to the accuracy of the accounts. Bishop confirmed to Jermine at a meeting
on 5 January 1990 that the latest set of accounts showed a true and fair view of
Britannia's financial position for the date they were drawn up. ADT announced its
decision to bid for Britannia on 9 January, with the public offer document issued a
week later.

ADT's case was that the representations made at the 5 January meeting were wrong
and that Binders, through Bishop, had been negligent in making them. Further, ADT
said it had relied on the direct affirmation of the accuracy of the accounts in deciding
to proceed with the offer. The price paid by ADT for Britannia was around £105
million ('paper rather than cash'). The £65 million damages figure represented the
court's assessment of the difference between this price and Britannia's real value when
the offer went unconditional.

The House of Lords decision in Caparo Industries v Dickman & ors (1990)
established that, in giving an audit certificate, the auditors assume a duty only to the
company to whom it is given, not to individual shareholders or – more relevant in this
case – third parties who may buy the company's shares on the strength of the accounts.

However, Caparo (and the cases decided since, including Morgan Crucible, James
McNaughton and Henderson as well as Peach Publishing v Slater 12/4/95 unreported)
clearly envisage that such a duty may arise in specific circumstances, where it could
be shown there had been an assumption of responsibility on the part of the auditors to
the third party in question.
The key question for Mr Justice May was whether, in providing specific assurances to
ADT about the accuracy of the accounts, Binders had assumed a responsibility to
ADT for the accuracy of the statements it made, such that a duty of care arose in law.

ADT argued that:

Binders possessed a special skill and knowledge as auditors of Britannia;

the firm made statements and provided advice directly to ADT at a serious business
meeting convened solely for that purpose;

Binders knew that its audit work, statements and any advice and information it gave
would be relied upon by ADT and that ADT would have no opportunity to
independently verify those statements;

Binders knew the above would be relied upon for the purpose of a specific transaction,
namely ADT's proposed acquisition of Britannia;

Binders did not suggest any disclaimer of responsibility.

Critical to Mr Justice May's judgment was the serious business nature of the meeting,
Bishop's knowledge of ADT's reasons for requesting it be held and the imminence of a
possible bid. However, most striking was the fact that Bishop did not have to attend
the meeting or answer the specific question put and it was open to him to disclaim any
liability of his firm to ADT.

Mr Justice May said: “He did not have to say yes. He could have declined to answer.
He could have given a disclaimer. He could have said that, if ADT were to rely on his
answers, he would need to take advice…Rather than doing any of these, he undertook
to answer the question posed.”

Mr Justice May found when making the representations to ADT, that Binders owed
ADT a duty of care for the accuracy of the representations. He found the
representations to have been false and negligently made (founded upon Binders'
seriously negligent performance of the Britannia audit for the year ended 30 June
1989) and that ADT relied upon the representations in deciding to proceed with the
deal.

At a practical level, Mr Justice May was not prepared to accept that either the size of
the potential liability or the difficulty of obtaining adequate insurance cover should
affect this finding. He said: “If for commercial reasons those who give advice do not
want to give disclaimers or otherwise limit their liability, then I see no reason why
they should not have to live with the consequences.

“It is not, in my view, sensible that the law should say that Mr Bishop is not to be
taken to have assumed responsibility in this case because the potential liability was
enormous and difficult to insure against…That could only, in my view, be a tenable
legal result if the law, as a matter of policy, were to decide that certain classes of
advisers (or all advisers for whom it could be proved or suggested that insurance was
difficult) should be accorded a degree of legal immunity or limitation of liability. Such
a policy would, I think, need legislation.'

Freshfields represented ADT, with Peter Goldsmith QC and Philip Brook Smith as
Counsel and Price Waterhouse as expert accountants. Binders was represented by
Herbert Smith, with Jonathan Sumption QC, David Unwin QC and Edmund Cullen as
Counsel and Touche Ross (now Deloitte & Touche) as expert accountants.

Binders has recently lodged an appeal to the ruling.

The case has lessons for all professional advisers asked to confirm advice previously
given, possibly in different circumstances, either to their client or a third party.

The status of the confirmation should be made absolutely clear, in particular whether
or not the recipient is to rely on it. Where this is the case, the adviser providing the
confirmation should ensure the extent to which it will be liable to the recipient is
understood by both sides. Regardless of the recipient's insistence, the adviser should
not comply with an unqualified confirmation until it has had a chance to consider
whether any extra work is required or has agreed an indemnity with its own client,
where the confirmation is to be given to a third party.

Shortly before the acquisition, a representative of ADT met the BDO audit partner
who had signed off Britannia's accounts eleven weeks earlier. The audit partner
confirmed at the meeting that he stood by the audited accounts. The Court found
that by giving this confirmation the auditor assumed responsibility for the reliability of
the accounts to ADT. (There was no dispute that the accounts had been audited
negligently).
The auditor had received little notice of the meeting and claimed that he was
unaware of the progress of the bid. But on an important finding of fact, the judge
considered that even though the auditor was "neutral" as to the persuasive value of
his confirmation, he was aware that ADT were relying on the accuracy of the
accounts to go ahead with the bid. Mr Justice May considered that the size of
potential liability and the commercial problems over insurance did not outweigh other
relevant factors in determining liability and stressed that the auditor failed to make
any disclaimer or qualification to his remarks.