Liabilities to 3rd parties

Topics: Common law, Audit, Donoghue v Stevenson Pages: 2 (466 words) Published: October 20, 2014

Donoghue vs Stevenson (1932) is the first case law relevant of liability to third party. However, in this case, the liability is only established if there are physical harms of loss by third parties (not economic losses)

Candler & Crane Chrismas (1951) is the next stage of development, where there is liability for financial loss if there is a contractual relationship, a fiduciary relationship or a fraud

Hedley Byrne & Co Ltd vs Heller & Parties Ltd (1963) is a significant point of development, where there is starting to be a potential legal liability for economic losses beyond contractual relationship.

In this case, liability is established if two conditions are satisfied: i) The party providing the statements are seen to be experts or persons of special skills ii) It’s foreseeable that the injured party might reasonably rely on the judgement or skills of such an expert. Foreseeability means that the expert (auditor) does not need to know the recipients. It is sufficient to prove that the person or class of persons exist and is likely relying on the experts’ statements.

Hedley emphasised the liability of auditors as the conditions are relatively easy to prove.

Caparo Industry Industries vs Dickman (1996)

Realizing that foreseeability alone will put very high exposure of the auditors to potential liability and legal proceedings, the court decision restricted the burden of proof for auditors’ liability by adding proximity relationship test.

In this case, three tests have to be satisfied to establish auditors’ duty to of care (thus resulting liability) to third parties:

Foreseeability test (described above)
Proximity of relationship
Imposition of the duty is fair and reasonable.

These tests are applied in Esanda Finance Corporation vs Peat Marrwick Hungerfords case.

From the development in Caparo case, the latest tests applied for auditors liability include:

i) Auditors owe a duty of care to the plaintiff (i.e a...
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