Esanda Finance Corporation Ltd v Peat Marwick Hungerfords PDF

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Esanda Finance Corporation Ltd v Peat Marwick Hungerfords [1997] HCA 8 Chapter 4 (page 189) Relevant facts Esanda Finance Corporation Ltd (Esanda) loaned money to various subsidiaries of Excel Ltd (Excel), and in deciding to grant the loan relied upon financial records audited by Peat Marwick Hungerfords (PMH). The audited financial records were negligently prepared (they were in breach of certain mandatory accounting standards) and were inaccurate. Excel defaulted, and Esanda sought to recover its economic loss from PMH. Esanda argued that PMH owed it a duty of care: Esanda argued that PMH should have known that lenders would be likely to rely upon the audited records, and insisted that it would not have entered into the transaction with Excel were it not for the audited records. PMH responded that it only owed a duty of care to its client Excel, and not to Esanda. Legal issue Does an adviser such as an accountant or auditor owe a duty of care not only to the client being advised but also to third parties such as creditors and financiers of the client where it is reasonably foreseeable that the third parties may rely on the advice? Decision On 18 March 1997, the High Court of Australia decided in favour of PMH. The court explained that the mere fact that it is reasonably foreseeable that a third party will rely on the advice is not enough to make the adviser liable to that third party. According to Brennan CJ: The uniform course of authority shows that mere forseeability of the possibility that a statement made or advice given by A to B might be communicated to a class of which C is a member and that C might enter into some transactions the result thereof and suffer financial, loss in that transaction is not sufficient to impose on A a duty of care owed to C in the making of the statement or the giving of the advice. In some situations, a plaintiff who has suffered pure economic loss by entering into a transaction in reliance on a statement made or advice given by a defendant may be entitled to recover without proving that the plaintiff sought the information or advice. But in every case, it is necessary for the plaintiff to allege and prove that the defendant knew or ought reasonably to have known that the information or advice would be communicated to the plaintiff, either individually or as a member of an identified class, that the information or advice would be so communicated for a purpose that would be very likely to lead the plaintiff to enter into a transaction of the kind that the plaintiff does enter into and that it would be very likely that the plaintiff would enter into such a transaction in reliance on the information or advice and thereby risk the incurring of economic loss if the statement should be untrue or the advice should be unsound. If any of these elements be wanting, the plaintiff fails to

establish that the defendant owed the plaintiff a duty to use reasonable care in making the statement or giving the advice.

Esanda should have made its own inquiries rather than rely upon the records audited by PMH and provided to Esanda by the borrower. PMH did not owe a duty of care to Esanda. Significance This case is authority for the proposition that a person giving advice – such as an accountant or auditor – will as a general rule not owe a duty of care to a third party who relies upon the advice except where the adviser is aware or should be aware that the third party will be relying upon the advice. It is advisable that a person giving advice who does not wish to be liable to third parties include in the advice a clear statement that the advice should only be relied upon by the person to whom the advice is directly provided....