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12 May 2020

A new duty of care emerges on unusual facts in an audit context

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In a recent High Court decision (Mr Amjad Rihan v Ernst & Young Global Limited & Others [2020] EWHC 901 (QB)), Mr Justice Kerr has ruled that, by analogy with previous case law and on the particular facts of the case, there was a duty of care owed by the defendant entities (which sat at the top of a global network) to the claimant (former audit engagement partner) to take reasonable steps to prevent the claimant from suffering financial loss by reason of the defendants’ failure to perform the audit in question in an ethical and professional manner (referred to in the case as the “Audit Duty”).

The Court went on to find that the defendants had breached the Audit Duty owed to the claimant, and awarded damages of US$10,843,941 in respect of the claimant’s loss of past and future earnings and work-related benefits.

The defendants are reported as intending to appeal.

Background

The claimant, Mr Amjad Rihan, worked for the Ernst & Young (EY) network from 2008 until early 2014. From July 2011 he was a partner in EY Middle East & North Africa Ltd, which was not a party to the claim. Nor was the EY entity that was engaged to perform the disputed audit. In fact, the defendants to the claim were the UK based companies within the EY network. At the top of the EY network sits the first defendant (EY Global), which is the coordinating body for member firms and which sets the regulations by which member firms agree to be bound.

In 2013, Mr Rihan was the audit engagement partner acting on behalf of Ernst & Young Middle East in Dubai. He was involved in an assurance audit of Kaloti Jewellery International DMCC (Kaloti), a precious metals dealer in Dubai, the purpose of which was to provide an independent written view on the quality and propriety of Kaloti’s business practices.

During the audit, Mr Rihan became aware of a number of serious irregularities at Kaloti. For example: Kaloti had knowingly dealt in gold which had been coated in silver in order to avoid restrictions in Morocco on the export of gold; and Kaloti had participated in cash transactions in gold in the sum of around US$5.2 billion.

Mr Rihan was concerned that Kaloti may have been trading in conflict materials and was being used as a vehicle for large scale money laundering. He reported these irregularities to the Dubai regulator (the DMCC, a Dubai government body), who in turn put pressure on EY Dubai to minimise the visibility of these issues in its reports. Mr Rihan escalated this at a regional and global level within the EY network and, for fear of his and his family’s safety, left Dubai for the UK in mid-2013.  

Mr Rihan was of the view that EY was obliged to report the findings to the LBMA, a UK company, international trade association and non-governmental regulator in the gold trade. This did not happen: instead, Mr Rihan was replaced by an accountant who (encouraged by regional and global leaders in the EY network) helped Kaloti and the DMCC to sanitise their findings.

Mr Rihan went on sick leave and instructed lawyers to warn the EY network that he would disclose the findings himself if they did not so. He subsequently resigned in 2014 and provided the findings to Global Witness and the media. His claim against the defendants was for economic loss following his resignation, which he alleged was caused as a result of breaches of duties of care in respect of the Kaloti audit (the “Audit Duty”) and his and his family’s safety (the “Safety Duty”).

Duty

The Court rejected the existence of any “safety duty” owed by the defendants to the claimant on the basis that it would be a step too far to extend an employer’s standard duty to safeguard its employees to a duty to safeguard them against economic loss as a result of a their need to stop working due to a threat to their physical safety.

The Court did however find that the Audit Duty existed on the facts of the case.

Mr Rihan’s position was that the defendants assumed responsibility to conduct the Kaloti audit in an ethical manner and to protect him from the financial loss he suffered; that the law should impose an Audit Duty under the three stage Caparo test; and that this would be a permissible incremental development of the law.

The defendants denied the existence of the Audit Duty. They submitted that the “assumption of responsibility” approach had no application in the present case; that none of the three Caparo criteria is met; and that analogies with previous cases pointed away from any such duty.

The key points of note in the judgment are as follows:

  • The Court agreed with the defendants that the case law does not support the existence of the Audit Duty as a result of a voluntary assumption of responsibility to protect Mr Rihan’s post-employment earning power by carrying out the Kaloti audit ethically and professionally. The present case was distinguished from the paradigm assumption of responsibility cases, which tend to involve a person providing services or advice to another in the absence of a contract, but where the provider knows or should know that the recipient will rely on their professional care, skill and judgment. The Court therefore had to consider whether the duty should exist by analogy to decided cases, adopting an incremental approach to the development of the law.
  • The Court identified nine legally significant features of the case law in this area: (1) there is no general duty (whether in negligence or the trust and confidence contractual term) to protect an employee against economic loss suffered after the end of their employment; (2) there is no sharp differentiation between employees and “quasi” employees; (3) employers may exceptionally have a limited duty (again, in tort or pursuant to the trust and confidence contractual term) to protect the post-employment economic interests of an employee; (4) where the parties are in a close relationship (so that the requirements of foreseeability of damage and proximity are met), the analysis does not depend on whether they have a contractual relationship of employment; (5) the outcome rarely depends on the presence or absence of a contract; (6) to win against a parent, the claimant must establish a duty of care which (if established) is effectively the same as or close to that of the subsidiary under the employment contract; (7) the law gives weight to the quality of the defendant’s conduct; (8) the Court may not allow the common law to cut across the content of a statutory scheme that occupies the same territory; and (9) the Court has, however, previously rejected the opportunity to deny recognition of a novel duty of care which overlapped with an/other tort(s).
  • Applying the three elements of the Caparo test – foreseeability, proximity and whether it is fair, just and reasonable to impose a duty – the Court held that the defendants owed the Audit Duty to Mr Rihan.

    • First, it was readily foreseeable that Mr Rihan would suffer financial loss if the Kaloti audit was conducted in a manner he considered unethical because he made clear that he would disassociate himself from the audit and EY’s role, which would necessarily entail his resignation and the financial loss associated with this. The knowledge of the individuals at a global and regional level to whom Mr Rihan escalated his concerns was attributable to all of the defendants; the EY organisation at all levels was acting in concert with and through its various subordinate associated bodies in the manner envisaged by the written agreements constituting the EY network bodies.
    • Turning next to proximity, Kerr J reminded himself of the statement of Lord Oliver in Caparo ‘”proximity” in cases such as this is an expression used not necessarily as indicating literally ‘closeness’ in a physical or metaphorical sense but merely as a convenient label to describe circumstances from which the law will attribute a duty of care. It has to be borne in mind that the duty of care is inseparable from the damage which the plaintiff claims to have suffered from its breach. It is not a duty to take care in the abstract but a duty to avoid causing to the particular plaintiff damage of the particular kind which he has in fact sustained.’ The judge found the defendants had a sufficiently proximate relationship with Mr Rihan in relation to the Kaloti audit and audits of other Dubai gold refiners for which he was the engagement partner.
    • Third, it was fair, just and reasonable to impose the Audit Duty in view of the importance of upholding ethical standards, the lack of an international regime for disciplining accountants outside the UK and the fact that Mr Rihan did not have the protection of the UK statutory regime for whistleblowers.

Breach

Mr Rihan’s overarching position was that the defendants failed to act and accept his concerns and objections; they colluded with Kaloti and the DMCC to sanitise Kaloti’s wrongdoing and conceal grounds for reasonable suspicion that Kaloti was involved in money laundering.

Against this, the defendants’ primary argument was that they were not the entities that had the relevant dealings with Mr Rihan. Their position was that those entities were EY Dubai, EY MENA and EY EMEIA, none of which were sued by Mr Rihan. The defendants also argued that they had complied with the provisions of the IFAC Code of Ethics and that their actions in relation to the Kaloti audit were reasonable.

The Court rejected the submission that the defendants were not the actors who owed a duty to the claimant or committed breaches of any such duty. Whilst noting that he was ‘not especially concerned with the precise contractual position of the claimant within the EY organisation’, the judge found that the various EY entities were ‘acting in concert, jointly with each other and on behalf of the others as well as themselves.’

Using the IFAC Code as the measure of breach, the Court held that the defendants had committed numerous breaches of the Audit Duty, and also breached their professional duties of integrity, objectivity and professional behaviour. Examples of such breaches included: proposing that Kaloti’s audit period be amended in order to omit or dilute the damaging findings; and suggesting that the compliance report be drafted to conceal the reality of the Morroccan gold issue by removing reference to Morocco and changing the coating of gold bars with silver to documentary irregularities.

Loss

The defendants argued that the losses claimed were not foreseeable and too remote; that there was contributory negligence; and that Mr Rihan failed to take reasonable steps to mitigate his loss (for example, by failing to hide his identity from the media).

Mr Rihan’s case was simply that the disclosures to the media flowed from the defendants’ breach of duty and were not too remote.

The Court concluded that the loss was readily foreseeable and foreseen, and not too remote. The defendants were forewarned by the defendants’ lawyers that the disclosures would be made, and could have chosen to manage the situation themselves. The allegations of contributory negligence and failure to mitigate loss were both rejected by the Court. 

Analysis

It is important to remember that it was the unique facts of this particular case which led the Court to find that the imposition of the Audit Duty was fair, just and reasonable. In particular, the fact that Mr Rihan had worked outside the UK meant the imposition of the duty filled a gap – the lack of statutory protection available to him - which may not exist in other situations; the Court made clear that the duty is not likely to arise where (unlike Mr Rihan) someone is able to invoke statutory protection. The judge went so far as to say that the present case “should be regarded as an ‘outlier’, with a factual basis that will rarely if ever recur”.

Whilst the existence of the Audit Duty will depend on a narrow set of circumstances, one issue which may be of wider relevance is the finding, on the facts of this case, that the entities at the top of the global EY network were found liable for what took place in Dubai; despite the clear delineation of responsibilities in the corporate structure, the evidence of the involvement of individuals at a global level (including those whom Mr Rihan was directed to report to and those whom handled the resolution of the issue once raised) led the judge to view the various entities as acting in concert with each other at a local, regional and global level.

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