Part B The law of obligations 7: The law of torts and professional negligence 117
ADT Ltd v BDO Binder Hamlyn 1995
The facts: Binder Hamlyn was the joint auditor of BSG. In October 1989, BSG's audited accounts for the
year to 30 June 1989 were published. Binder Hamlyn signed off the audit as showing a true and fair view
of BSG's position. ADT was thinking of buying BSG and, as a potential buyer, sought Binder Hamlyn's
confirmation of the audited results. In January 1990, the Binder Hamlyn audit partner attended a meeting
with a director of ADT. This meeting was described by the judge as the 'final hurdle' before ADT finalised
its bid for BSG. At the meeting, the audit partner specifically confirmed that he 'stood by' the audit of
October 1989. ADT proceeded to purchase BSG for £105m. It was subsequently alleged that BSG's true
value was only £40m. ADT therefore sued Binder Hamlyn for the difference, £65m plus interest.
Decision: Binder Hamlyn assumed a responsibility for the statement that the audited accounts showed a
true and fair view of BSG which ADT relied on to its detriment. Since the underlying audit work had been
carried out negligently, Binder Hamlyn was held liable for £65m. The courts expect a higher standard of
care from accountants when giving advice on company acquisitions since the losses can be so much
greater.
This situation was different from Caparo since the court was specifically concerned with the purpose of
the statement made at the meeting. Did Binder Hamlyn assume any responsibility as a result of the
partner's comments? The court decided that it did. The court did not need to consider the question of duty
to individual shareholders, because Caparo had already decided that there was none.
Following the ADT case, another case tested the court's interpretation.
NRG v Bacon and Woodrow and Ernst & Young 1996
The facts: NRG alleged that the defendants had failed to suggest the possibility that certain companies it
was targeting might suffer huge reinsurance losses. They had also failed to assess properly whether these
losses could be protected against, because defective actuarial methods had been used. As a result, it
overpaid for these companies by £255m.
Decision: The judge observed that accountants owe a higher standard of care when advising on company
purchases, because the potential losses are so much greater, following ADT. However, applying this
higher standard of care to the facts, it was decided that NRG had received the advice that any competent
professional would have given, because the complex nature of the losses that the companies were
exposed to were not fully understood at the time. In addition, the use of defective actuarial methods had
not led directly to the losses, because NRG would have bought the companies anyway.
There have been some other important clarifications of the law affecting accountants' liability in the area
of responsibility towards non-clients. The following two cases both concern auditors' liability to group
companies.
Barings plc v Coopers & Lybrand 1997
The facts: Barings collapsed in 1995 after loss-making trading by the general manager of its Singapore
subsidiary, BFS. BFS was audited by the defendant's Singapore firm, which provided Barings directors
with consolidation schedules and a copy of the BFS audit report. The defendant tried to argue that there
was no duty of care owed to Barings, only to BFS.
Decision: A duty of care was owed to Barings, as the defendants must have known that their audit report
and consolidation schedules would be relied upon at group level.