Neutral Citation Number: [2007] EWCA Civ 910
Case No: A3/2005/2912
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
COMMERCIAL COURT
(LORD JUSTICE MOORE-BICK 
[2005] EWHC 2347 (Comm)
Royal Courts of Justice
Strand, London, WC2A 2LL

Date:  12th September 2007
Before :

LORD JUSTICE CHADWICK
LORD JUSTICE DYSON
and
LORD JUSTICE THOMAS 
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Between :

	              MAN NUTZFAHRZEUGE AG
          and another	Claimants/
Respondents	
	
           - and -		
	
              FREIGHTLINER LIMITED

            -and-

              ERNST & YOUNG (a firm)	
Defendant/ Part 20 Claimant/
Appellant

Part 20 Defendant/
Respondent	
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(Transcript of the Handed Down Judgment of
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No:  020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
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Mr Geoffrey Vos QC and Mr Andrew Twigger (instructed by Clifford Chance, 10 Upper Bank Street, Canary Wharf, London E14 5JJ) for the Defendant/Part 20 Claimant/Appellant, Freightliner Limited
Mr Justin Fenwick QC and Mr Simon Salzedo (instructed by Linklaters, One Silk Street, London EC2Y 8HQ) for the Part 20 Defendant/Respondent, Ernst & Young

Hearing dates: 19 and 20 March 2007
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Judgement
Lord Justice Chadwick:
1.	This is an appeal from an order made on 28 October 2005 by Lord Justice Moore-Bick, sitting as a Judge of the Commercial Court, in proceedings brought by MAN Nutzfahrzeuge AG (“MN”) and others against Freightliner Limited (“Freightliner”) and in related proceedings brought under CPR Pt 20 by Freightliner against Ernst & Young, a limited liability partnership practising as accountants in Canada (“E&Y (Canada)”), Ernst & Young, a firm practising in the United Kingdom (“E&Y (UK)”) and certain named individuals who were members of the Canadian partnership. The judge gave judgment for the claimants against Freightliner with damages to be assessed. The appeal from that part of his order has been compromised. He gave judgment for the Part 20 Defendants against Freightliner. It is Freightliner’s appeal from that part of his order which is now before this Court.
The underlying facts  
2.	The underlying facts are fully set out by the judge at paragraphs [1] to [55] of his judgment, [2005] EWHC 2347 (Comm). The following summary is, I think, sufficient to provide the context for the issues which this Court needs to decide:
(1)	MN is a subsidiary of MAN AG, the holding company of a large German industrial group.  MN has responsibility within the group for the operation of the commercial vehicle division. By a share purchase agreement dated 30 January 2000 MN agreed to purchase from Western Star Trucks Holdings Limited (“Western Star”), a Canadian truck manufacturer, the whole of the issued share capital of ERF (Holdings) Plc for the sum of £65.3 million, subject to certain adjustments. The sale was completed on 8 March 2000.
(2)	ERF (Holdings) Plc, through its subsidiary ERF Limited, (together “ERF”) was a manufacturer of trucks in the United Kingdom. ERF had been acquired by Western Star in June 1996. 
(3)	E&Y (Canada) had been appointed as auditors to the Western Star Group in March 1991. Following the acquisition of ERF Holdings Plc, E&Y (UK) were appointed auditors of that company and its subsidiary.
(4)	Western Star was acquired by Freightliner LLC in June 2000: that is to say, after the sale of ERF to MN had been completed. Freightliner LLC is a subsidiary of Daimler-Chrysler AG. Western Star’s Canadian operations were merged into Freightliner Limited. It was common ground in the proceedings that Freightliner was responsible for any liabilities incurred by Western Star: in particular, that Freightliner was responsible for any liabilities in connection with the sale of ERF to MN.
(5)	Mr Stephen Ellis had joined ERF in August 1976. He had been employed in various positions in the finance department throughout the period up to the acquisition of ERF by MN (and for some twelve months thereafter). By 1998 he had risen to a senior position in that department as deputy to the financial controller. In May 1998 he was appointed financial controller of ERF and thus became the most senior member of staff responsible for ERF’s financial affairs. 
(6)	As the judge observed (at paragraph [7] of his judgment) it was an unusual feature of the proceedings that it was common ground between the parties that, from about the middle of 1997, the accounts of ERF – both monthly management accounts and year-end statutory accounts – had been persistently manipulated by Mr Ellis. The judge explained the nature of Mr Ellis’ fraud at paragraphs [10], [11] and [13] of his judgment. I will return to his findings later in this judgment. For the present it is sufficient to note that the effect of the fraud was that neither the statutory accounts prepared by Mr Ellis and his staff as at 30 June 1998 (the end of ERF’s financial year) nor those prepared as at 30 June 1999 gave a true and fair view of its financial position and affairs. In particular, the accounts were founded on false journal entries in the purchase ledger control account. Those entries gave rise to a discrepancy between the purchase ledger itself and the purchase ledger control account; which Mr Ellis disguised by producing a false reconciliation between the two figures.   
(7)	ERF’s statutory accounts for the years ending 30 June 1998 and 1999 were the subject of audit by E&Y (UK). The partner responsible for the audit, in respect of both years, was Miss Alison Cunningham (later to become Mrs Sinderson). The accounts were signed off by the auditors, on 4 May 1999 and 4 November 1999 respectively, without qualification. It was accepted by E&Y (UK) that, had the audits been carried out with proper skill and care, defects in the accounts would have been identified. 
(8)	By July 1999 MN had expressed interest in acquiring ERF from Western Star and had been provided with copies of ERF’s audited accounts for the years ended 30 June 1997 and 30 June 1998. In August 1999 representatives of MN and Western Star met to open negotiations: in particular to discuss the method for establishing a price for ERF. Mr Ellis was present at that meeting. The judge found that the discussion proceeded on the basis of accounts prepared by Mr Ellis, including a profit and loss account for the year ended 30 June 1999 for ERF (Holdings) Plc, a balance sheet as at 30 June 1999 for that company, a comparison between ERF’s actual profit and loss figures for the year ended 30 June 1999 and its budget for the year ending 30 June 2000, and a comparison between ERF’s actual profit and loss figures for the year ended 30 June 1999 and the forecast figures for that year. The judge found that, during that meeting, MN representatives asked detailed questions about those documents; and that Mr Ellis provided answers to many of those questions. 
(9)	Shortly before the June 1999 accounts were signed off by the auditors, MN had instructed accountants, Deloitte & Touche (“D&T”), to conduct a due diligence investigation of ERF and its affairs.  D&T were given access to E&Y (UK)’s working papers on the terms of a “hold harmless” letter dated 19 October 1999. The due diligence exercise commenced on 2 November 1999 and continued until 19 November 1999. Mr Ellis was a key participant: his role was to respond to questions relating to the ERF accounts and other financial matters. As the judge found, throughout the course of the exercise:
“[31]   . . . Mr Ellis provided copies of financial documents to the MN representatives at their request and answered questions arising out of them. He did so without at any time informing the management of ERF or Western Star, much less those representing MN, that the accounts had been falsified in the manner described earlier.”
(10) Based on the information obtained in the course of the due diligence investigation, MN sought to renegotiate the proposed purchase price. On 2 and 3 December 1999 there was a meeting between representatives of MN and Western Star in London at which Mr Ellis was present. The judge found (at paragraph [81] of his judgment) that Mr Ellis took an active part in discussions and “by implication represented once again that the accounts and the budget had been prepared honestly”.
(11) On 9 December 1999 MN put forward a revised offer, on terms which Western Star found acceptable in principle. There was a further meeting in London on 20 December 1999 to resolve matters of detail, at which Mr Ellis was present. He took part in discussions relating to the accounting treatment of the pension fund. Negotiations continued into the New Year. The outstanding issues were finally resolved on 14 January 2000 in the course of a telephone conversation between the respective chairmen of MN and Western Star. Preparations were made for the signature of a formal agreement. 
(12)	 On 18 January 2000 Mr Ellis sent MN a copy of ERF's management accounts for the period ending 31 December 1999. The management accounts showed net assets of £26.3 million and earnings before interest, tax, depreciation and amortisation (“EBITDA”) of £4.834 million. Both figures were generally in line with earlier forecasts. As the judge found (at paragraph [36] of his judgment), although an analysis of the accounts suggested that ERF's financial position had deteriorated slightly since June 1999, the change was not regarded as significant in the context of the negotiations as a whole. 
(13)	 On 30 January 2000 a formal share purchase agreement was concluded by an exchange of faxes. MN agreed to purchase the whole of the share capital of ERF (Holdings) Plc for the sum of £65.3 million, subject to certain adjustments. MN also agreed to take over a number of guarantees that Western Star had given in support of ERF and to take over responsibility for ERF's bank overdraft. The share purchase agreement contained a large number of representations and warranties relating to the state of ERF’s business. As I have said, completion, or closing, took place on 8 March 2000.
(14)	 Following the acquisition by MN, the financial year-end of ERF was changed to 31 December and D&T were appointed auditors. The judge found (at paragraph [43] of his judgment) that Mr Ellis continued to report false figures to his own management and to MN and continued to manipulate the purchase ledger control account to ensure that the figures in the general ledger matched those he was reporting. He continued the fraud which the judge had described at paragraph [13] of his judgment. 
(15) D&T audited ERF's accounts, both for the year ending 30 June 2000 and, following the new year end, to 31 December 2000. In the course of their audit of the 31 December 2000 accounts, D&T identified the discrepancy between the purchase ledger and the purchase ledger control account; which then stood at about £19 million. That led to an investigation which revealed that, as at 30 June 2001, there was a deficiency of £100 million or thereabouts in the balance sheet of ERF.
Events following the discovery of the fraud are set out by the judge in paragraphs [46] to [55] of his judgment; but it is not, I think, necessary to rehearse them in this judgment. 
The nature of Mr Ellis’ fraud
3.	As I have said, the judge explained the nature of Mr Ellis’ fraud at paragraphs [10], [11] and [13] of his judgment. I gratefully adopt that explanation for the purposes of this judgment:  
 “[10]	In March 1996 Mr. Ellis falsified ERF's VAT return to show that the company was in a repayment position, that is, that it was entitled to claim repayment of VAT from H.M. Customs and Excise. The evidence suggests that at the time that may have been an isolated event, but by his own admission from the middle of 1997 onwards he falsified the VAT returns month by month, thereby enabling ERF to receive regular repayments of tax to which it was not entitled. He said that he did so in order to relieve the group's financial problems by obtaining regular injections of cash from Customs & Excise and I am satisfied that that was so. . . .
[11]	Following its take-over by Western Star ERF's financial year was changed to expire on 30th June instead of 31st March. Accordingly, a year-end balance was struck as at that date which was in turn adopted as the opening balance for the following year. Shortly afterwards the management of Western Star decided to introduce a new accounting and materials management system produced by BaaN Information Systems B.V. ("BaaN") throughout the group. . . . The introduction of the . . . BaaN system proved to be disastrous for ERF. . .  It produced endless headaches for the accounts staff who for many months were unable to obtain a trial balance from the system. Difficulties in operating the BaaN system meant, among other things, that it was not possible, as it had been in the past, to produce monthly management accounts based on recorded figures for the benefit of ERF's own managers and Western Star. To overcome the difficulty Mr. Ellis produced monthly profit and loss accounts which, instead of containing figures drawn directly from the financial records, contained estimated figures based on his assessment of the group's performance derived from conversations with the Sales, Costs, Payroll and other relevant departments. In the case of the balance sheet he obtained basic information on items such as fixed assets, stock, and debtors, but used trade creditors as a balancing figure. Mr. Ellis failed to inform Western Star or indeed the management of ERF that the figures he was reporting were estimates and had not been drawn directly from the records.
. . . 
[13]	Following the end of the financial year at 30th June 1998 Mr. Ellis and his staff began the preparation of the statutory accounts. By that time it was possible to transfer figures from the BaaN system to a spreadsheet which could be used to produce a profit and loss account and balance sheet. However, when he came to produce the balance sheet Mr. Ellis found that there was a discrepancy of about £18 million between the figures derived from the BaaN system and the figures he had reported in the monthly management accounts during the course of the year. In order to bring the general ledger into line with the figures he had previously reported, Mr. Ellis made a number of false journal entries in the purchase ledger control account, but these in turn gave rise to a discrepancy of about £18 million between the purchase ledger itself and the purchase ledger control account. In order to reconcile the two for the benefit of the auditors Mr. Ellis produced a reconciliation showing that various amounts totalling £18 million had been paid to suppliers before the end of the year but had not yet been entered into the purchase ledger. The payments to which he referred had indeed been made to suppliers, but in July 1998, the month following the year end. The reconciliation was therefore invalid and indeed false inasmuch as none of the payments was properly referable to the financial year ending 30th June 1998, as he was well aware. . . .” 
The judge observed (in the final sentence of paragraph [13] of his judgment) that: 
“	. . . Unfortunately, E&Y (UK) failed to verify the reconciliation by reference to the underlying documents and therefore failed to detect that it was invalid.”

4.	In fairness to Mr Ellis, it should be noted that, as the judge observed (at paragraph [9] of his judgment), there was nothing to suggest that he or anyone connected to him benefited financially from his activities. But the judge had no doubt that Mr Ellis knew that he had been “manipulating the accounts of ERF and systematically falsifying its VAT returns”. Three findings of fact are of importance in the context of the present appeal. First (at paragraph [77] of the judgment), that no-one other than Mr Ellis was aware that he had been falsifying the ERF accounts. Second (also at paragraph [77]), that no-one other than Mr Ellis made any representations to MN in the course of the negotiations for the sale of ERF which he did not believe to be true. Third (at paragraph [83]), that:
“[83]	Having regard to the nature and extent of his involvement in the discussions with MN . . . Mr Ellis did make false and dishonest representations to MN before, during and after the due diligence exercise that the accounts of ERF on which those discussions were based had been honestly drawn and that as far as he knew they gave a true and fair view of ERF’s financial position at the various times to which they related.”
The share purchase agreement
5.	As I have said, the share purchase agreement made on 30 January 2000 contained a large number of representations and warranties relating to the state of ERF’s business. Copies of ERF's audited accounts for the year ending 30 June 1999 (“the June accounts”) and management accounts for the six months ending 31 December 1999 (“the December accounts”) were annexed to the agreement and formed the basis for a number of those representations and warranties. For the purposes of this appeal it is necessary to note only the following:
“4.1 Representations and Warranties of WS Holdings
WS Holdings represents and warrants as follows to each of MAN and MAN AG and acknowledges and confirms that each of MAN and MAN AG is relying upon such representations and warranties in connection with the purchase by MAN of the ERF Shares:
. . . 
(cc) Books and records. All accounting and financial Books and Records have been fully, properly and accurately kept and completed in all material respects . . . . . ;
(dd) ERF Financial Statements. The ERF Financial Statements [the June accounts] . . . . . have been prepared in accordance with the provisions of the Companies Act 1985 . . . . . and give a true and fair view of
(i) the consolidated assets, liabilities . . . . . and financial position of ERF and the ERF Companies at the date of the ERF Financial Statements;
. . . 
(ee) ERF December Financial Statements. The ERF December Financial Statements [the December accounts] . . . . . have been prepared in accordance with the ERF Accounting Policies on a basis consistent with [the June accounts] and in accordance with such policies fairly represent:
(i) the consolidated assets, liabilities . . . . . and the financial position of ERF as at 31st December 1999;
. . . 
(oo) Taxes. The ERF Companies have filed or caused to be filed, within the times and in the manner prescribed by Law, all tax reports which are required to be filed by or with respect to the ERF Companies. . . . . . The information contained in such returns is correct and complete in all material respects. . . . . . and except as disclosed in Section (oo) of the ERF Disclosure Schedule; . . .
. . .”
6.	Some of the representations and warranties on which MN relied were qualified by Western Star's state of knowledge. In that context, it is relevant to note article 1.6: 
“1.6 Knowledge
Where any representation or warranty . . . . . is expressly qualified by reference to the knowledge of a Party, it shall be deemed to refer to the actual knowledge (without further enquiry) of those Persons listed in Section 1.6 of the ERF Disclosure Schedule in the case of WS Holdings . . . . ."
Mr Ellis was one of those listed in section 1.6 of the ERF Disclosure Schedule.
7.	Article 12 contained important limitations on the indemnity given by Western Star in respect of inaccuracy in the representations made or breach of the warranties given: 
“12.1 Indemnification in Favour of MAN
Subject to Section 12.3, Section 12.4 and Section 12.5, WS Holdings shall indemnify and hold each of MAN AG, its Affiliates, the ERF Companies and the Other ERF Subsidiaries (collectively, "MAN Indemnified Persons") harmless of and from any Damages suffered by, imposed or asserted against any of the MAN Indemnified Persons as a result of, in respect of, connected with, or arising out of, under or pursuant to:
(a) any failure of WS Holdings  . . .  to perform or fulfil any of their respective covenants under this agreement;
(b) any breach or inaccuracy of any representation or warranty given by WS Holdings . . . contained in this Agreement;
12.3 Time Limitations
. . .
(2) The representations and warranties of WS Holdings . . . contained in this Agreement . . . shall survive the Closing and . . . shall continue for a period of 12 months after the Closing Date, save for the representations and warranties relating to . . . taxation in Section 4.1(oo) (tax) [which] shall continue for a period of six years after Closing and any claim in respect thereof shall be made in writing during such time period.
. . . 
(5) For the avoidance of doubt the time limits referred to in this Section 12.3 shall not apply to any claim (whether made by way of representation, warranty or indemnity) in respect of fraud or fraudulent misrepresentation.
. . . 
12.7 Exclusion of Other Remedies
No Party shall have the right to bring any proceedings against any other Party for a breach of any representation, warranty, covenant or agreement contained in this Agreement, except for a proceeding brought in accordance with the provisions of this Article. This provision is not intended to preclude any proceeding by any Party against any other Party based on fraud or on a cause of action or right, including any statutory right, other than a cause of action in contract or tort for breach of a representation, warranty, covenant or agreement contained in this Agreement.”
The claims in the main proceedings 
8.	Proceedings were commenced against Freightliner in 2002: that is to say, after the period of twelve months from closing in relation to which article 12.3 imposed a limitation on claims for breach of warranty and non-fraudulent misrepresentation. The claimants were MN and MAN AG (“the MN claimants”), ERF Limited, ERF (Holdings) Plc and MAN ERF UK Limited (a successor to the business of ERF Limited) (together “the ERF claimants”). As the judge explained (at paragraph [65] of his judgment) the MN claimants sought to recover from Freightliner all the losses incurred arising out of the purchase of ERF on the basis that Western Star was liable in deceit at common law and liable for fraudulent misrepresentation under the share purchase agreement. The ERF claimants – or, more precisely,  MAN ERF UK Ltd to whom the claims of ERF (Holdings) Plc and ERF Limited had been assigned – sought to recover by way of an indemnity under article 12 of the share purchase agreement; but (as the judge noted at paragraph [74] of his judgment), after he had raised the question whether there were any circumstances in which ERF might be entitled to succeed in a claim against Freightliner if MN itself could not do so, the ERF claim was not pursued. 
9.	Although Freightliner does not, now, pursue an appeal against the judgment against it in the main proceedings, it is necessary – in order to address its appeal in the Pt 20 proceedings - to understand the basis upon which Freightliner was held liable to the MN claimants. At the risk of doing less than justice to the judge’s careful analysis of the issues before him in the main proceedings, the position can, I think, be summarised quite shortly.
10.	The judge explained (at paragraph [66] of his judgment) that MN's primary case was that it was induced to purchase ERF by false representations on the part of Mr Ellis that the June and December accounts provided a true and fair picture of ERF's financial position. It sought to hold Freightliner liable for that deception on the grounds that, from the time of his attendance at the meeting in August 1999, Mr Ellis was speaking on behalf of Western Star whenever he provided MN with information about ERF's accounts or its financial position generally. It contended that in the course of that meeting and the various meetings and discussions that followed (including the due diligence exercise) Mr. Ellis made a series of representations, both explicit and implicit, to the effect that the accounts of ERF which formed the basis for the parties' discussions had been prepared in good faith and that as far as he was aware they gave a true and fair picture of ERF's financial position, whereas to his knowledge that was far from the truth. It therefore sought to recover by way of damages for deceit at common law the whole of the amount that it paid to acquire ERF together with the amount that it had spent to keep it going until the completion of its ultimate reorganisation in April 2003, less its value as a going concern at that date. The total amount claimed was in the order of £350 million. 
11.	The judge examined the claim in deceit at paragraphs [77] to [129] of his judgment. He held that MN were entitled to succeed in that claim. At paragraph [130] he expressed his conclusion:
“[130]	For those reasons I am satisfied that MN was induced to enter the Share Purchase Agreement by fraudulent statements made by Mr Ellis about ERF’s accounts and financial statements and that as a result it is entitled to recover from Freightliner damages for deceit at common law.”
12.	As an alternative to its claim in deceit MN had argued that it was entitled to recover damages in the same amount under one or more of the provisions of the share purchase agreement: on the grounds that the representations made by Western Star about the conduct of ERF's business, its accounts and its tax position had been false and that the warranties given in respect of them had been broken. Recognising that article 12 of the agreement imposed restrictions on the right to recover for simple misrepresentation or breach of warranty, MN asserted that its claim was a claim for fraudulent misrepresentation because, in each case, the knowledge of Mr Ellis was to be attributed to Western Star. In response to that claim (as the judge explained at paragraph [71] of his judgment) Freightliner accepted that there had been breaches of many (though not all) of the warranties on which MN relied; but it did not accept that it was affected by Mr Ellis' knowledge except in those cases where the agreement expressly so provided. In that context it is important to keep in mind that the circumstances in which knowledge held by one person (in this case, Mr Ellis) can be attributed to another (in this case, Western Star) are not the same (or not necessarily the same) as those in which a principal is held vicariously liable for the tort of deceit committed by his agent. As the judge put it:
“[143]	. . . the question as to the circumstances in which knowledge held by one person can properly be attributed to another, or in this case to a company, [is] a question which is governed by principles which are quite distinct from those which govern the vicarious liability of a principal for torts committed by his employee or agent.”
13.	The judge examined that question at paragraphs [142] to [167] of his judgment. He concluded, first as a matter of general principle, that the knowledge of Mr Ellis as to the falsity of the representations on which MN relied could not be treated as the knowledge of Western Star for the purposes of deciding whether the representations contained in the share purchase agreement were made fraudulently (paragraph [161]); and, second, that the provisions in article 1.6 of the agreement did not lead to a different conclusion in the present case. 
14.	The alternative claim, founded on the representations and warranties in the share purchase agreement, raised a number of other points. Freightliner argued (amongst other matters) that article 12 was intended to provide an exhaustive code regulating MN's right to recover for breaches of the agreement. Although it accepted that claims for fraud could be made outside the twelve month time limit, it contended that the remedy for a breach of any kind was limited to the indemnity provided in Article 12.1 which provided a more limited measure of recovery than that available at common law in respect of the tort of deceit. The judge addressed that question at paragraphs [182] to [197]. It is not, I think, necessary (in the context of this appeal) to set out his reasoning in relation that question – or in relation to each of the other contentions advanced before him in the main proceedings. It is sufficient to note his conclusions:   
“[210]	For the reasons given earlier I have reached the conclusion that although some of the representations made by Western Star in the Share Purchase Agreement were false, they were not made fraudulently and that therefore, apart from a claim under section 4.1(oo) [which contains tax warranties], it is now too late for MN to pursue a claim for an indemnity under Article 12. However, its right to pursue a claim in deceit in respect of statements made outside the Share Purchase Agreement is unaffected by the terms of the agreement.
[211]	Section 12.1 is limited in its application to breach of warranty and innocent or negligent misrepresentation; it has no application in the case of fraudulent misrepresentation. MN is entitled to pursue a claim for misrepresentation based on section 4.1(oo), but since the misrepresentation was not made fraudulently, it can only obtain an indemnity in accordance with the terms of section 12.1 which is limited to losses caused by the inaccuracy of the representation. ”
The claims in the Part 20 proceedings
15.	The Part 20 claim was commenced on 12 May 2003. The judge described Freightliner’s claim against E&Y (UK) at paragraph [75] of his judgment:
“[75]	. . . Freightliner sought to recover from E&Y (UK) an indemnity against any liability it might be held to have incurred to MN. The claim was put on four distinct grounds:
(i) 	breach of a common law duty of care owed to Western Star in carrying out the audits of ERF's accounts for the years ending 30th June 1998 and 30th June 1999;
(ii) 	breach of contractual and common law duties of care owed to Western Star in connection with the due diligence exercise;
(iii) 		the right to a contribution under section 1 of the Civil Liability (Contribution) Act 1978 on the grounds that if Freightliner was liable to MN, E&Y (UK) was also liable to MN at common law in respect of the same damage, having negligently provided misleading information to MN in connection with the purchase of ERF (this became known as the ‘MN contribution claim’); and
(iv) 	a similar right to a contribution under the 1978 Act on the grounds that if Freightliner was liable to ERF, E&Y (UK) was in breach of contractual and common law duties to ERF in auditing its accounts for the 1998 and 1999 financial years (the ‘ERF contribution claim’).
He observed that, since the claim by ERF was not pursued in the main proceedings, the ERF contribution claim fell away. He dismissed each of the other claims against E&Y (UK) for the reasons which he gave. He also dismissed Freightliner’s claims against E&Y (Canada); which he had described at paragraph [76] of his judgment. There is no appeal in relation to the claims against E&Y (Canada). 
The first direct claim: breach of duties of care in carrying out the audits of ERF's accounts 
16.	 The judge addressed the first of what may be described as the direct claims against E&Y (UK) – that is to say, the claim which he had identified under (i) of paragraph [75] – at paragraphs [323] to [411] of his judgment. He did so by posing five questions: (a) did E&Y (UK) owe Western Star a duty of care to ensure that the accounts of ERF gave a true and fair view of its financial position; (b) were E&Y (UK) in breach of duty; (c) what were the consequences of E&Y (UK)’s negligence; (d) what was the scope of E&Y (UK)’s liability; and (e) to what extent had E&Y (UK) limited their liability under the terms of their engagement letter. 
17.	Although the judge gave a definitive answer to each of those questions – other than the last, on which he preferred to express only a provisional view – he recognised that, having held (at paragraph [360]) that E&Y (UK) owed no duty of care to Western Star to protect it from a loss of the kind which it sought to recover in the present case, it was unnecessary to go on to consider whether E&Y (UK) were in breach of duty. But, nevertheless, he did so; on the basis (as he said at paragraph [361]) of an assumption that “in carrying out their audits of ERF's 1998 and 1999 annual accounts E&Y (UK) owed a duty of care to Western Star to protect it from such loss as it might suffer in connection with the sale of ERF to MN as a result of any material inaccuracy in the accounts”. He concluded that, in a number of respects (some of which were not contested), E&Y (UK) had been negligent. But, in the judge’s view (paragraph [395]), it was only the failures, when conducting the audit of each of the 1998 and 1999 financial years, to verify the purchase ledger control account reconciliation and properly to investigate the VAT position that were of any real significance. 
18.	It was on that basis that the judge went on to consider what consequences flowed from that negligence. He concluded (at paragraphs [400] to [402]) that, had E&Y (UK) identified the flaws in the 1998 or 1999 accounts the probable consequences would have been that Mr Ellis was dismissed, that Western Star put ERF into liquidation, and that the sale of ERF to MN did not proceed.
19.	It was submitted to the judge that, even if E&Y (UK) did owe a duty of care to Western Star in making its audit statement, the loss which Freightliner was seeking to recover did not fall within the scope of that duty. The judge observed (at paragraph [403] of his judgment) that that “was just another way of approaching the question whether E&Y (UK) owe a duty of care to Western Star at all”. He said this (ibid);
“[403]	. . . Once it is accepted that the existence of a duty of care cannot be determined without considering the nature of the harm against which it is said the defendant had a duty to protect the claimant, the scope of the alleged duty inevitably forms part of the enquiry. The kind of loss which falls within the duty of care will depend to a large extent on what is foreseeable as being the likely result of a failure to take care at the time when the duty arises. . . .”
20.	The judge accepted that, in the present case, it was foreseeable that Western Star would rely on the accuracy of the accounts in its dealings with MN and that, if a contract were concluded between them for the sale of ERF, it might contain warranties which would be broken if the accounts were inaccurate. Loss in the form of liability to MN for breach of warranty would, therefore, fall within the scope of the duty of care. But, in the light of his decision that Western Star (and Freightliner) was not liable for breach of warranty (save to the limited extent which he had identified at paragraph [211]), that was of little materiality.  
21.	The judge went on to say this:
“[405]	. . .  The one thing that was not foreseeable at the time when the audit statement was signed and the accounts of ERF delivered to Western Star was that the nature of [Mr Ellis’] participation in the negotiations coupled, perhaps, with the inclusion in the Share Purchase Agreement of section 1.6, would cause Western Star to incur a liability to MN for fraudulent misrepresentation. I am unable to accept that a loss of that kind fell within the scope of any duty of care that E&Y (UK) could have owed to Western Star.”
 
22.	The views which the judge expressed at paragraphs [403] and [405] reflect the basis upon which he had concluded (at paragraph [360]) that E&Y (UK) owed no duty of care to Western Star to protect it from a loss of the kind which it sought to recover. It is, I think, necessary (in the context of this appeal) to analyse the reasoning which led him to that conclusion: 
(1)	The judge identified (at paragraph [325] of his judgment) what had been described by counsel for Freightliner as the “general audit duty”: that is to say, “a duty to shareholders as a body who can be expected to exercise their rights and powers in a general meeting on the basis of audited accounts” as recognised in Caparo Industries Plc v Dickman [1990] 2 AC 605. It was not in dispute – and the judge accepted – that E&Y (UK) owed the general audit duty to Western Star, as the owner of all the shares in ERF. But he rejected the submission, made on behalf of Freightliner, that the loss which it sought to recover in these proceedings could be brought within the scope of a general audit duty of that kind. He said this (at paragraph [327]):
“[327]	. . . The loss is not one which arises out of the mismanagement of ERF but one which was caused by dishonest statements made by Mr. Ellis on behalf of Western Star in the course of negotiations for the sale of the company. It may be that if E&Y (UK) had carried out its audits of ERF's 1998 and 1999 statutory accounts with proper skill and care his actions would have come to the attention of Western Star, but it does not follow that the loss suffered by Western Star in this case was within the scope of the general audit duty. In my view it was not.”
	In reaching that conclusion the judge held that Freightliner could obtain no assistance from the decision of this Court in Sasea Finance Ltd v KPMG [2001] 1 All ER 676. He observed:
“[329]	. . . The auditors' duty is to take care to prevent the company suffering loss through frauds committed against it. The fact that the exercise of proper care would also have prevented harm of another kind being caused to an individual shareholder (or even all the shareholders in their individual capacities) does not mean that such loss falls within the scope of the auditors’ duty of care or that they can be held liable in respect of it.”
(2)	The judge’s conclusion that Freightliner could not rely on the general audit duty owed by E&Y (UK) to Western Star to recover loss in the  present proceedings led him to the further conclusion (at paragraph [331]) that, for Freightliner to succeed, it had to establish what its counsel had described as a “special audit duty”: that is to say, “a duty at common law to take reasonable care when carrying out their audit to protect Western Star from the kind of harm that it suffered in this case”.  On the basis of Lord Justice Denning’s well-known dissenting judgment in Candler v Crane Christmas & Co [1951] 2 KB 164, approved by the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd  [1964] AC 465, the judge noted that:  
“[332]	. . . the courts have recognised that a duty of care to prevent economic loss may arise when one person provides information or advice to another in circumstances where the relationship between them is sufficiently close, the purpose for which the information or advice is given is sufficiently clear and the risk of harm to the recipient if the information turns out to be wrong is sufficiently obvious for it to be fair and just to impose such a duty on the person giving the information or advice.”
	But he went on to observe that: 
“[332]	. . . However, although the general principle is now well established, its application in any given case is by no means free from difficulty, partly because the courts have remained very conscious of the dangers of imposing on professional advisers duties of care to persons other than their own clients.”

(3)	After referring to the facts in Candler, to the analysis of that case in the speech of Lord Oliver of Aylmerton in Caparo, and to two decisions in this Court – Galoo Ltd v Bright Graham Murray [1994] 1 WLR 1360 and Electra Private Equity Partners v KPMG Peat Marwick [2001] 1 BCLC 589 – the judge observed (at paragraph [339]) that he found it a matter of no surprise that it was common ground that “whether an auditor has assumed responsibility to someone other than his client is a matter to be determined objectively by reference to all the circumstances of the case”. He accepted the submission on behalf of E&Y (UK) that “when a claim is made by a third party against a company's auditors based on an alleged duty of care in relation to the statutory accounts, close attention must be paid to the particular statement on which the claimant seeks to rely, the circumstances in which and purpose for which that statement was made and the type of loss which the claimant is seeking to recover.” He went on to say this:
“[339]	. . .  The auditors will only be held to have incurred such a duty if it can be shown that they knew and intended that their statement as to the company's accounts would be communicated to and relied on by a particular person or class of persons for a particular purpose in connection with a particular transaction.”
The test of knowledge and intention had found expression in the concept of “assumption of responsibility”, to which Lord Devlin had referred in Hedley Byrne (ibid, 529) – in a passage described by Lord Goff of Chieveley in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, 178-9, as stating “the governing principles” - and which had been applied in this Court in Peach Publishing Ltd v Slater & Co, Slater & Co v Sheil & ors  [1998] PNLR 364 and in the Electra case (supra).  
(4)	The judge then went on to consider whether that test was satisfied on the facts in the present case. He said this:
“[342]	The transaction which gave rise to the loss in the present case was the sale of ERF by Western Star to MN. It is that transaction, therefore, to which attention must be directed when considering whether E&Y (UK) assumed a responsibility to Western Star or anyone else for the correctness of its audit statements. The loss suffered by Freightliner in this case takes the form of liability in damages for deceit arising from the statements made by Mr. Ellis in the course of the negotiations with MN. In order to succeed in its claim Freightliner must show, therefore, that E&Y (UK) owed Western Star a duty to take reasonable care to protect it from liabilities of that kind. . . .”  
	He continued:
“[343]	Given the nature of relationships between Western Star and ERF and between E&Y (UK) and E&Y Canada, E&Y (UK) must have realised that both the 1998 and 1999 audit reports would be passed to Western Star who could be expected to rely on them both for the purpose of producing consolidated accounts for the Western Star group as a whole and for the purposes of making decisions about the future conduct of ERF's business.”
(5)	Nevertheless, the judge held that knowledge that the 1998 audit reports would be relied upon by Western Star for the purposes of making decisions about the future conduct of ERF’s business did not lead to the conclusion that E&Y (UK) had assumed responsibility to Western Star, in respect of the 1998 audit reports, for the loss which Freightliner sought to recover in the present proceedings. He was not persuaded that:
“[343]	. . . at the time it produced its 1998 audit report E&Y (UK) can be taken to have known that Western Star would rely on it for any other purposes. At the time the audit certificate was given in May 1999 . . . there was no indication that Western Star was actively seeking . . . [a] purchaser for the ERF group. . . . The fact that E&Y (UK) may have recognised that Western Star might decide to dispose of ERF at some uncertain date in the future did not give rise to a relationship between them that would normally be regarded as sufficiently close to support a duty of care.
[344]	In the middle of November 1999, however, E&Y (UK) did undoubtedly become aware that Western Star intended to provide MN with a copy of the 1998 accounts when they were asked to make copies of their working papers for that year's audit available for review by Deloitte & Touche. They agreed to do so . . . However, that was not sufficient in my view to establish a duty of care in favour of Western Star. E&Y (UK) were not asked to, and did not, give any confirmation to Western Star at that time that the accounts were accurate and could safely be relied on for any particular purpose in connection with the sale of ERF to MN and in those circumstances it is difficult to see how they can be treated as having assumed any responsibility to Western Star for their accuracy.”
(6)	In this context there was a distinction to be drawn between the 1998 accounts and the 1999 accounts. As the judge pointed out:
“[345]	The position in relation to the 1999 accounts is rather different. Not only was E&Y (UK) aware by September 1999 of the existence of the current negotiations with MN, it was made clear before the audit certificate was signed that Western Star was anxious to obtain the audited accounts as soon as possible in order that they could be made available to MN for its consideration in connection with the purchase of ERF. The audit certificate was signed on 4th November 1999 shortly before Mr. Bryant and Mr. Ellis collected the audited accounts from E&Y (UK)'s offices in Manchester. They returned immediately to the Cottons hotel where Mr. Bryant gave a copy to Mr. Wagner for use in connection with the negotiations generally.”
(7) The judge rejected the submission that E&Y (UK) did not provide a copy of the June 1999 accounts to Western Star for any purpose relating to the sale of ERF and did not undertake any responsibility to Western Star for their accuracy in relation to any aspect of that transaction. He accepted that Mrs Sinderson (the partner at E&Y (UK) who had been responsible for the audit) did not regard herself as having given a copy of ERF's accounts to Western Star on 4 November 1999; but only to ERF. He accepted that Mr. Bryant and Mr. Ellis were the managing director and financial controller respectively of ERF and that they had collected the audited accounts from E&Y (UK) in that capacity. But he went on to say this: 
“[347]	It must have been obvious to Mrs. Sinderson, however, both from her knowledge of the fact that it was the parent company of ERF and from her knowledge of the negotiations, that copies of the accounts would be sent by ERF to Western Star as soon as possible, as indeed they were. She could certainly foresee, therefore, and in my view must be taken to have known, that Western Star would itself rely on the accounts in the negotiations with MN as presenting a true and fair view of ERF's financial position. . . .” 
(8) 	Nevertheless, foresight alone was not enough to give rise to a duty of care. It was also necessary for there to have been a relationship between the parties of such proximity as to support the conclusion that there was an assumption of responsibility. It was for Freightliner to show, in this case, that E&Y (UK) assumed responsibility to Western Star for the accuracy of its audit statement “so as to be under a duty to take care to protect it from the kind of loss which Freightliner seeks to recover.” After referring to observations of Lord Justice Denning in Candler v Crane Christmas (supra, 176, 183) and of Lord Justice Neill in James McNaughton Paper Group Ltd v Hicks Anderson & Co [1991] 2 QB 113, 125F-126A, the judge said this:
“[348]	. . . it becomes necessary to look carefully at the precise purpose for which the statement was communicated to the claimant. . . . [U]nless it can be shown that the statement was communicated to the claimant for a particular purpose relating to the harm he has suffered, he is unlikely to be able to show that the defendant assumed a responsibility to take care when making it to protect him from that harm. . . . [T]he maker must know that it is required for a particular purpose in order for him to be in a position to appreciate the risks involved and for it to be fair to treat him as having assumed a responsibility to the claimant or to impose on him a duty of care.”
(9)	With that principle in mind, the judge examined the facts in order to identify the purpose for which the 1999 audit statement (and the 1999 accounts) had been communicated to Western Star. He said this:
“[349]	In the present case one of the primary purposes for which the audit statement was made was to provide information to Western Star about ERF's financial position so that it could exercise its rights as shareholder to influence the way in which the company was run. . . . In order for Freightliner to succeed in this case, therefore, it must be able to show that the audit statement attached to ERF's accounts was communicated to Western Star not only for the recognised statutory purposes but also for the purposes of enabling it to rely on the accounts in the negotiations with MN.
[350]	One of the difficulties facing [Freightliner] in this case is that of identifying any purpose for which the audited accounts were communicated to Western Star beyond that contemplated by the statutory provisions. Mrs. Sinderson was aware in November 1999 of the negotiations for the sale of ERF and was aware that the accounts were required urgently so that copies could be given to MN and from her previous involvement in mergers and acquisitions she must have foreseen that both MN and Western Star would be likely to rely on the audited accounts as giving a true and fair picture of ERF's financial position. However, it is clear from what was said in Caparo v Dickman that by itself that is not enough. There is no evidence of anything passing between Western Star and E&Y (UK) to indicate that Western Star was intending to rely on the accounts for any particular purpose in its negotiations with MN or that it was seeking an assurance from her that it could safely do so, and although Mrs. Sinderson signed the audit certificate, she did nothing to indicate that E&Y (UK) were assuming responsibility for the accuracy of the accounts for any purposes of that kind. . . . ”
(10)	 In what, as it seems to me, are two crucial paragraphs of his judgment (in this context), the judge went on to identify a further difficulty with which (as he said) Freightliner was faced:
“[351]	The difficulties do not end there, however. The loss which Freightliner seeks to recover in the present case is a consequence of Western Star's liability for the fraudulent statements made by Mr. Ellis during the negotiations with MN, a liability which was the direct result of the dishonesty of Mr. Ellis rather than the inaccuracy of the accounts themselves. Similarly, if Western Star had been liable for fraudulent misrepresentation under the Share Purchase Agreement, it would have been the result of attributing to Western Star Mr. Ellis's knowledge of his own fraud rather than the existence of any inaccuracies in the accounts. In neither case could it be said that the loss was of a kind that might be expected to flow from the existence of inaccuracies in the accounts and it is difficult, therefore, to accept that E&Y (UK) assumed a responsibility to protect Western Star from it. Only in the case of the misrepresentation relating to ERF's tax position could it be said that liability was the direct result of a failure to carry out the audit carefully. 
[352]	One can see here a reflection of the principles governing the measure of damages recoverable in cases of this kind. As Lord Hoffmann pointed out in South Australia Asset Management Corporation v York Montague Ltd at page 214, [sc: [1997] AC 191, 213C-D] the law normally limits liability for wrongful acts to those consequences which are attributable to that which made the act wrongful, which in the case of liability in negligence for providing inaccurate information means liability for the consequences of the information being inaccurate. An auditor can reasonably expect, therefore, that if he negligently certifies that a company's accounts give a true and fair view of its financial position, the scope of his liability to anyone to whom he owes a duty of care in making that statement will be limited to the loss flowing from the inaccuracy of his audit certificate. If E&Y (UK) had undertaken a special audit duty to Western Star, the consequences of their negligence would no doubt extend to such loss as it might have incurred in respect of the difference between the true net asset value of the company and that shown in the accounts, for example, by reason of a breach of warranty. They would not extend, however, to losses caused by fraud on the part of a person for whom the Western Star was vicariously liable.”
(11) The judge was not persuaded that support for the conclusion that E&Y (UK) had assumed no responsibility of any kind over and above that which they were obliged to accept as statutory auditor was to be found in the terms of “hold harmless” letters which they had insisted on receiving from both Western Star and MN before releasing their audit working papers to D&T in connection with the due diligence exercise. 
23.	With this analysis in mind - and at the risk of over-simplification - the basis upon which the judge dismissed the claim that E&Y (UK) were liable for the loss sustained by Freightliner in the present case by reason of breaches of duty in carrying out the 1998 and 1999 audits may be summarised as follows: (i)  Freightliner could not rely on the general audit duty owed by E&Y (UK) to Western Star to recover loss in the  present proceedings; (ii) for Freightliner to succeed, it had to establish the existence of a “special audit duty”; (iii) to establish a special audit duty it was necessary to show that E&Y (UK) knew and intended that their statement as to the company's accounts would be communicated to and relied on by a particular person or class of persons for a particular purpose in connection with a particular transaction; (iv) the transaction which gave rise to the loss in the present case was the sale of ERF by Western Star to MN; (v) the loss suffered by Freightliner took the form of liability in damages for deceit arising from the statements made by Mr. Ellis in the course of the negotiations with MN; (vi) in order to succeed in its claim Freightliner must show that E&Y (UK) owed Western Star a duty to take reasonable care to protect it from liabilities of that kind; (vii) knowledge that the 1998 audit statement would be relied upon by Western Star for the purposes of making decisions about the future conduct of ERF’s business did not lead to the conclusion that E&Y (UK) had assumed liability to Western Star, in respect of the 1998 audit reports, for liabilities of that kind; (viii) nor was the knowledge (which E&Y (UK) had by the middle of November 1999) that Western Star intended to provide MN with a copy of the 1998 accounts sufficient to lead to that conclusion; (ix) there was a distinction to be drawn between the 1998 accounts and the 1999 accounts, because E&Y (UK) (through Mrs Sinderson) could foresee, and must be taken to have known, that Western Star would itself rely on the 1999 accounts in the negotiations with MN as presenting a true and fair view of ERF's financial position; (x) but that was not enough to give rise to a duty of care - it was necessary, also, for Freightliner to show that E&Y (UK) knew the particular purpose for which its audit statement was required; (xi) on the facts in the present case  Freightliner had not shown that E&Y (UK) knew that Western Star was intending (through Mr Ellis) to make representations as to the accuracy of 1999 accounts in its negotiations with MN; (xii) it could not be said that, in making the audit statement as to the 1999 accounts, E&Y (UK) was assuming responsibility to protect Western Star from liability for dishonest statements which  Mr Ellis might make as to the accuracy of those accounts. 
The second direct claim: breach of duties of care in connection with the due diligence exercise
24.	I turn now to the second of the direct claims against E&Y (UK) – that identified by the judge under (ii) of paragraph [75]. The judge addressed that claim at paragraphs [412] to [414] of his judgment. In the light of the conclusions which he had already reached on the first direct claim he was able to do so shortly. He observed that, although E&Y (UK) had agreed to provide Western Star with some assistance in connection with due diligence and (in so far as they did provide advice and assistance in that context) they were under a duty to act with reasonable skill and care, it had to be said that the part they played in the due diligence exercise was extremely limited. 
25.	At paragraph [413] the judge set out the four respects in which it had been alleged that E&Y (UK) were in breach of duty in connection with the due diligence exercise. The breaches alleged were: (i) failing to take reasonable care to ensure that the accounts provided to MN gave a true and fair picture of ERF's affairs; (ii) failing to inform Western Star about Mrs. Sinderson's concerns as to Mr. Ellis's competence and integrity; (iii) failing properly to respond to or investigate the tip-off and a related rumour that there was something wrong with ERF's accounts; and (iv) failing to inform Western Star that financial information being provided to MN was, or might be, inaccurate. He noted that the last of these complaints had not been pursued before him in evidence or argument and could be taken to have been abandoned. He went on to say this: 
“[414]	Perhaps the first point to make in relation to the remaining three allegations is that in reality they are all complaints about the conduct of the audit and if well-founded could be the subject of a claim by ERF itself. None of them relates to the services that E&Y (UK) were engaged by Western Star to perform in connection with MN's due diligence exercise.”
He explained that:  
“[414]	. . . E&Y (UK)'s sole function in that regard was to make working papers and explanations available to Deloitte & Touche. They were not engaged to act in a general supervisory capacity to ensure that information provided to MN was correct; nor was it part of their function to review and confirm the work that had previously been carried out for the purposes of the audit. They were not instructed by Western Star to investigate the tip-off or the [related] rumour as part of the due diligence exercise and insofar as either of them might be relevant to ERF's accounts their evaluation was a matter that was directly relevant to the performance of their duties as auditors. It was not the subject of a separate undertaking to Western Star. ”
In those circumstances the judge was unable to accept that E&Y (UK) owed Western Star any of the duties in connection with the due diligence exercise on which Freightliner sought to rely. 
The third claim: contribution under the Civil Liability (Contribution) Act 1978 
26.	Freightliner contended before the judge that it had acquired a right to contribution under section 1 of the Civil Liability (Contribution) Act 1978 on the grounds that if Freightliner was liable to MN, E&Y (UK) was also liable to MN at common law in respect of the same damage, having negligently provided misleading information to MN in connection with the purchase of ERF. The judge addressed that claim at paragraphs [469] to [487] of his judgment.
27.	After setting out the provisions of sections 1(1) and 6(1) of the 1978 Act the judge reminded himself that, in the present case, the damage suffered by MN was the loss it had sustained as a result of the purchase of ERF. Freightliner was liable in respect of that damage because it was vicariously liable for the fraud of Mr Ellis which had caused MN to enter into and complete the Share Purchase Agreement. He observed that:
“[472]	. . . If Freightliner is to obtain a contribution from E&Y (UK) it must show not only that E&Y (UK) are liable to MN but also that they are liable in respect of the same damage within the meaning of the Act.”
In that context the judge asked himself three questions: (i) Did E&Y (UK) owe a duty of care to MN; (ii) was there a breach of duty; and (iii) for what damage might E&Y (UK) be held liable to MN?
28.	In addressing the first of those questions the judge drew the same distinction between the position in relation to the 1998 accounts and that in relation to the 1999 accounts as he had drawn earlier in his judgment when considering  whether E&Y (UK) had owed duties of care to Western Star. It could not be said to have been in the reasonable contemplation of E&Y (UK) that any particular prospective purchaser would rely on the audit statement in respect of the 1998 accounts in connection with any particular transaction.  But, by the time the 1999 audit statement was issued, the position had changed. In a passage which echoes the views which he had already expressed at paragraphs [345] and [347], the judge said this: 
“[474]	. . . By the time the 1999 audit statement was issued the position had changed. E&Y (UK) were aware that Western Star was actively pursuing negotiations with MN for the sale of ERF and were also aware not only that MN wanted to see the audited accounts but that it had insisted on being provided with a copy of them before embarking on its due diligence. Mrs. Sinderson may not have known exactly what aspects of the accounts MN was mainly interested in, but I am satisfied that she must have known that MN would rely on them as providing a reliable statement of ERF's financial affairs as at 30th June 1999.”
29.	The judge reminded himself that, in Electra Private Equity Partners v KPMG Peat Marwick [2001] 1 BCLC 589, this Court had no difficulty accepting the concept that an auditor could incur liability to a potential investor in the company; and he expressed the view that no distinction could be drawn between a potential investor and a potential purchaser. He referred to the decision of Mr Justice May in ADT Ltd v Binder Hamlyn [1996] BCC 808; which (as he said) was an illustration of a case in which the purchaser of a company had succeeded in its claim against auditors after they had given the purchaser a direct confirmation that they stood by the audited accounts. He noted that, in that case (ibid, 834A-C), Mr Justice May had taken the view that, in doing so, the auditors had made an independent statement to the purchaser that the accounts were reliable. He went on to say this: 
“[476] The present case differs in certain important respects, however. In the first place, there was no direct communication of any kind between E&Y (UK) and MN. That is not necessarily fatal to the claim since it was recognised in Hedley Byrne v Heller itself (see per Lord Morris of Borth-y-Gest at pages 502-503 and Lord Hodson at page 514) that liability for negligent misstatement may arise in cases where the maker of the statement intends that the person to whom it was originally made will communicate it to another for him to rely on for a particular purpose in connection with a particular transaction. In order to hold the maker of the statement liable, therefore, the same requirements must be satisfied, albeit at one remove.
[477]	In this case Mrs. Sinderson was clearly aware that both Western Star and MN were likely to rely on the accuracy of the audited accounts in their negotiations for the sale and purchase of ERF. However, that by itself is not enough to give rise to liability in circumstances where the primary purpose of producing audited accounts is to enable the shareholders to exercise their collective powers of management. That much is clear from what was said in Caparo v Dickman. As in the case of Western Star, the critical question in my view is whether E&Y (UK) provided the audited accounts to MN through Western Star in such circumstances as make it fair to hold that they assumed a responsibility to MN for their material accuracy.  . . . The fact that MN was, and was known to be, receiving advice from Deloitte & Touche is a factor which tends to count against the existence of a duty of care since the very purpose of instructing them was to enable MN to obtain independent verification of the audit procedures implemented by E&Y (UK). The most important factor in my view, however, is the absence of any direct relationship between E&Y (UK) and MN. When considering the position of statutory auditors I think it is important to maintain a clear distinction between those cases in which all that can be said is that the auditors can foresee that a third party (perhaps even an identifiable third party) may make use of the company's accounts when deciding on a course of action and those cases in which the auditors have entered into a closer relationship with a third party of the kind necessary to give rise to an assumption of responsibility. A failure to observe such a distinction creates the risk of imposing a duty of care on auditors in favour of third parties in cases where they cannot fairly be said to have stepped outside their statutory function.
[478]	In the present case all that can be said is that Mrs. Sinderson knew that Western Star would provide copies of the audited accounts to MN and that MN might rely on them. She was not asked to agree to copies being provided to MN for any particular purpose, or indeed at all, because Western Star was entitled to make them available to anyone it chose without her agreement. In the circumstances it is difficult to see how the position of MN in this respect could be any stronger than that of Western Star. In neither case can it be said that E&Y (UK) provided the accounts for the purpose of the transaction or otherwise acted in such a way as to assume a responsibility for their accuracy. In these circumstances I am satisfied that E&Y (UK) did not owe a duty of care to MN and that Freightliner's claim to recover a contribution must therefore fail. . . .” 
30.	The judge observed that the conclusion that he had reached – that E&Y (UK) owed no duty of care to MN - made it unnecessary for him to consider the second and third of the questions which he had posed. Nevertheless, he did so (briefly) at paragraphs [479] and [480] to [485] of his judgment. For the purposes of this judgment it is sufficient to note that the judge held that the nature of any duty owed by E&Y (UK) to MN would have been the same as that which was said to have been owed to Western Star; and that (for the reasons which he had already given when addressing that issue earlier in his judgment) there would have been a breach of that duty. He held, also, that if E&Y (UK) had been liable to MN for negligent misstatement, they would have been liable in respect of the same damage as Freightliner, but to a limited extent.
The issues on this appeal
31.	In the circumstances that Freightliner had filed an appellant’s notice challenging the judge’s conclusion in the main proceedings as well as his conclusion in the Part 20 proceedings, it is no criticism of the elaborate skeleton arguments filed by the parties to the present appeal that they address a number of issues which no longer arise. By the time that the present appeal was opened before us it was accepted on behalf of Freightliner that it could not succeed in its claim against E&Y (UK) on the basis of what had been described by the judge as the general audit duty. It was necessary, in this case, for Freightliner to establish that E&Y (the abbreviated form by which, hereafter in this judgment, I shall refer to E&Y (UK), given that the claim against E&Y (Canada) is no longer pursued) owed a special audit duty to Western Star.
32.	It was accepted, also, that Freightliner could not succeed in its contribution claim against E&Y unless it could establish that E&Y owed a special audit duty to MN. But I should add that, for my part, I have found it impossible to envisage circumstances (on the facts in this case) in which it could be held that E&Y owed a special audit duty to MN if they did not also owe a parallel duty to Western Star. And, further, I have found it impossible to envisage circumstances in which, if E&Y did owe a special audit duty to Western Star (and were in beach of that duty), Freightliner would need to rely on a contribution claim based on breach of a special audit duty owed by E&Y to MN. 
33.	At the time when the parties filed a first round of skeleton arguments in preparation for this appeal the House of Lords had not heard and decided the appeal in Customs and Excise Commissioners v Barclays Bank plc [2006] UKHL 28; [2007] AC 181. The arguments to be advanced on this appeal were revised in the light of the guidance given in the Barclays Bank case. The revised skeleton arguments were set out, respectively, in two documents: Freightliner’s Supplemental Skeleton Argument (dated 28 November 2006) and Ernst & Young’s Revised Skeleton Argument (dated 16 February 2007).
34.	Part II of the Freightliner document (which related to the claim against E&Y) identified five issues:
(Issue 7):  “In order for a duty of care to arise in respect of a statutory auditor, is it necessary for a claimant to show ‘some kind of consent, permission, acceptance, agreement or objectively evinced intent’ on the part of the auditor that the audit report should be used for a particular purpose, or is knowledge of the kind found by the judge in the circumstances if this case (including knowledge that Western Star and MN would rely on the accounts in respect of a specific transaction) sufficient?”
(Issue 8):	“If ‘some kind of consent, permission, acceptance, agreement or objectively evinced consent’ is necessary, was it given in this case?”
(Issue 9):	  “Did the scope of E&Y’s duty extend to protecting Western Star from the kind of damage which Freightliner has suffered?”
(Issue 10): “Was E&Y’s engagement letter apt to limit any liability which it would otherwise have had?”
(Issue 11)	“Is the loss claimed by Freightliner merely a reflection of the loss suffered by ERF?”
35.	E&Y’s Revised Skeleton Argument did not respond to the issues identified by Freightliner – at least, not in quite those terms. In that document E&Y addressed the five relevant grounds of appeal (as set out in an attachment to the appellant’s notice); and, in addition, three further issues arising from the respondent’s notice. But it is convenient, having regard to the way in which the arguments developed up to and in the course of the hearing, to note the seven propositions of law advanced at paragraph 15:
“(a) In contrast to cases of physical damage to the property or person of another, in cases of economic loss, the mere fact that damage was reasonably foreseeable by the defendant is not sufficient to give rise to a duty of care to avoid such loss.
(b)	Three tests have been approved in the cases for the imposition of duties of care for economic loss. If properly applied, each test will often yield the same result, but need not necessarily do so.
i.	At the highest level of abstraction, the framework for considering the duty of care incorporates the ‘threefold test’: was there forseeability of damage, and a proximate relationship between the parties, and is it fair just and reasonable to impose the duty?
ii.	Especially in cases of economic loss, a core issue will be the assumption of responsibility test: did the defendant, viewed objectively, assume responsibility to the claimant for undertaking a particular task with care with a view to saving the claimant from the type of loss claimed? 
iii.	The ‘incremental’ approach may also be considered: is the precise duty contended for consistent with other duties which have been accepted by the courts?
(c)	In relation  to all of these tests, but perhaps particularly clearly present in the context of ‘assumption of responsibility’, one element which is invariably required is that, viewed objectively, the defendant’s statement was made or communicated to the claimant for the purpose of protecting the claimant from the type of loss which the claimant suffers. The defendant cannot have assumed responsibility to protect against that type of loss unless, objectively judged such protection was a purpose for which his statement was made or communicated to the claimant.
(d)	In some of the authorities, judges have spoken of the defendant ‘intending’ that reliance be placed on his statement. That is another way of putting the requirement that, viewed objectively, the statement was given for the purpose of such use being made of it. The language of intention can be less clear than the language of purpose because it is more easily confused with a subjective criterion, namely what the defendant actually, subjectively, intended.
(e)	In order to show that protection from the type of harm suffered by the claimant was a purpose for which the defendant made his statement or communicated it to the claimant, it will normally be necessary for the claimant to show some kind of consent, permission, acceptance, agreement or objectively evinced intent on the part of the defendant that the claimant should rely on his statement for such purpose. Such consent or intent cannot be implied simply from the carrying out of an act (such as the provision of an audit report to the company) pursuant to a separate duty. This is not a separate test or rule of law, but a practical, evidential consequence of the requirement for the claimant to show that protecting him from the relevant loss was a purpose for which the statement was made by the defendant or communicated to the claimant.
(f)	The requirement for some form of consent etc is particularly important where, as here, the statement relied upon is one that the defendant was obliged to make for another purpose, after which the defendant had no control over its further publication. Unless the defendant has a choice as to whether to make the initial statement, any assumption of responsibility would in effect be involuntary.
(g)	Contrary to Freightliner’s submissions, there is no question of distinguishing between ‘the defendant’s purpose’ and ‘the claimant’s purpose’. The purpose for which a statement is made or communicated is judged objectively. The question is whether a reasonable person in the position of the claimant would conclude from the circumstances in which the statement is made or communicated to him that the purposes for which the statement was made or communicated to him included protecting him from the type of loss which he suffered in reliance upon the statement.”
At paragraphs 17 to 27E of the Revised Skeleton Argument, E&Y set out the authorities on which they relied to support those propositions. Those authorities included the decisions of the House of Lords in Hedley Byrne, Caparo and Barclays Bank.   
36.	In the course of his opening – and in the light of E&Y’s Revised Skeleton Argument - Mr Vos QC (on behalf of Freightliner) identified what, as he suggested, were the five points of difference which remained between the parties to this appeal. Those points of difference did not include the propositions made at (a) and (b) in paragraph 15 of E&Y’s Revised Skeleton Argument: those propositions were accepted as common ground. Mr Vos took issue with the propositions at paragraphs (c) and (d) in paragraph 15 in so far as it might be said that the relevant purpose was the purpose for which the defendant intended the statement should be used. But, as it seems to me, when paragraphs (c) and (d) are read with paragraph (g), it is clear that E&Y do not intend to suggest that the subjective intention of the maker of the statement is a material consideration. It is accepted that the purpose for which the statement is made or communicated is to be judged objectively. As it is put, at paragraph (g): The question is whether a reasonable person in the position of the claimant would conclude from the circumstances in which the statement is made or communicated to him that the purposes for which the statement was made or communicated to him included protecting him from the type of loss which he suffered in reliance upon the statement”. That, as it seems to me, is uncontroversial: it accords with the approach indicated by Lord Hoffmann in the Barclays Bank case (ibid [35]; 199C-D) which Freightliner accepts. 
37.	 The five points of difference identified by Mr Vos in the course of his opening may, I think, fairly be summarised as follows:
(1)	Whether the knowledge of E&Y (as found by the judge) was sufficient to found a duty of care: in particular, was it sufficient that the knowledge as found gave E&Y the opportunity to make a disclaimer (which was not made) or was it necessary to establish something more than that.
(2)	Whether the judge had been in error in considering only E&Y’s purpose in providing the information contained in the audit statements: in particular, whether the judge overlooked the importance of E&Y’s knowledge of the purpose for which the recipient of the information (Western Star or MN, as the case might be) required it.
(3)	Whether it was necessary for the judge to find some form of objectively evinced consent.
(4)	Whether, having found (at paragraph [403] of his judgment) that it was foreseeable that Western Star would rely on the accuracy of the (1999) accounts  in its dealings with MN – so that loss in the form of liability to MN for breach of warranty would fall within the scope of the special audit duty - the judge was wrong to go on (at paragraph [405]) to hold that it was not foreseeable that the nature of Mr Ellis’ participation in the negotiations would give rise to a vicarious liability to MN for fraudulent misrepresentation.  
(5)	Whether the judge was correct to hold (at paragraph [352] of his judgment) that if E&Y had undertaken a special audit duty to Western Star, the amount of the loss recoverable for breach of that duty would have been limited to the true net asset value of ERF.  
It can be seen, therefore, that Issue 11 – as identified in Freightliner’s Supplemental Skeleton Argument – is not included in those five points of difference. It was recognised, I think, that neither that issue, nor Issue 10, could arise unless the existence (and breach) of some special audit duty were established; and little time was spent on addressing those issues in argument. 
38.	The proposition – identified under Issue 7 and which Freightliner seeks to rebut - that it is necessary, before a special audit duty can arise in respect of a statutory auditor, to establish “some kind of consent, permission, acceptance, agreement or objectively evinced intent” is not found (at least, in those terms) in any passage in the judgment of Lord Justice Moore-Bick in this case. Its origin, I think, is to be found in paragraph 15(e) of E&Y’s first skeleton argument (dated 28 March 2006). That paragraph is repeated in the same terms in the corresponding paragraph of the Revised Skeleton Argument of 16 February 2007, which I have already set out. It may be seen as a gloss on the judge’s own formulation (at paragraph [339] of his judgment): that it is necessary to show that the auditors “knew and intended” that their statement as to the company’s accounts would be communicated to and relied on by a particular person or class of persons for a particular purpose in connection with a particular transaction. But, as E&Y accept in the proposition as stated, the need for some kind of consent, permission, acceptance, agreement or objectively evinced intent on the part of the defendant that the claimant should rely on his statement for the particular purpose – protection from the type of harm which the claimant has suffered – is not “a separate test or rule of law”. Rather, it is “a practical evidential consequence” of the requirement for the claimant to show that protecting him from relevant loss was a purpose for which the statement was made by the defendant or communicated to the claimant.
39.	I have analysed the development of the issues at some length. That analysis leads me to think that the careful and elaborate arguments addressed to this Court suffer, in some degree, from a lack of focus. Properly understood, as it seems to me, the real issue on this appeal is whether the knowledge of E&Y (as found by the judge) was sufficient to found a duty of care to Western Star (and, so far as relevant, to MN) in relation to the loss which was actually suffered. 
40.	It is, I think, essential, to keep in mind the nature of the loss for which Freightliner seeks to hold E&Y liable. That loss is the loss which Freightliner has suffered as a result of the judge’s conclusion that Western Star incurred a liability in damages to MN in connection with the sale of ERF. The judge held that liability arose because “MN was induced by fraudulent statements made by Mr Ellis about ERF’s accounts and financial statements” (paragraph [130] of his judgment). Although, in other circumstances, Western Star (and so Freightliner) might have been liable for breach of representations and warranties made in the share purchase agreement – including, in particular, the representations and warranties as to the accuracy of the ERF Financial Statements and the ERF December Financial Statements contained in article 4.1 of that agreement – the judge held that that was not a basis upon which to hold Freightliner liable to MN in the present case. 
41.	As I have sought to explain earlier in this judgment, the judge held that Freightliner was not liable for breach of representations and warranties made by Western Star in the share purchase agreement for two reasons: each peculiar to this case in that they turned on the particular terms of the share purchase agreement. First, he recognised that the effect of article 12.3 was to impose a time limit of twelve months for bringing claims in respect of non-fraudulent representations and warranties; and MN’s claims in the main proceedings were brought outside that time limit. Second, he held (at paragraph [161] of his judgment) that the knowledge of Mr Ellis as to the falsity of the representations and warranties on which MN relied was not to be treated as the knowledge of Western Star for the purposes of deciding whether the representations and warranties in the share purchase agreement were made fraudulently; and that the provisions in article 1.6 of the agreement did not lead to a different conclusion in the present case.
42.	It follows, as it seems to me, that the relevant question, in this case, is not whether E&Y undertook a special audit duty to Western Star (or, so far as relevant, to MN) in respect of the use which they could foresee would be made of their (1999) audit statement as a basis for representations and warranties in the share purchase agreement. Although, on the facts found by the judge, E&Y might well have been found to have undertaken a special audit duty in that respect – and to have been in breach of that duty – it was not breach of that duty which gave rise to the loss which Freightliner has suffered and for which it seeks to hold E&Y liable. As the judge put it (at paragraph [351] of his judgment) that loss was “the direct result of the dishonesty of Mr Ellis rather than the inaccuracy of the accounts themselves”. The relevant question, in the present case is whether E&Y undertook a special audit duty to Western Star (or, so far as relevant, to MN) in respect of representations which might be made by Mr Ellis as to the accuracy of the ERF accounts to which their audit statements related.   
43.	In that context, it may be said that the determinative issue is that raised as point (4) of the five points of difference which Mr Vos identified in the course of his opening: whether, having found that it was foreseeable that Western Star would rely on the accuracy of the accounts in its dealings with MN, the judge was wrong to hold that it was not foreseeable that the nature of Mr Ellis’ participation in the negotiations would give rise to Western Star incurring a liability to MN for fraudulent misrepresentation.  
The authorities
44.	Although we were taken by Mr Vos through no less than eighteen decided cases to make good the propositions of law on which he sought to rely, I do not think it necessary or useful to attempt an analysis of each of them. I take comfort from the speech of Lord Bingham of Cornhill in Customs and Excise Commissioners v Barclays Bank plc [2006] UKHL 28; [2007] AC 181. After noting (ibid, [4]; 5H) that counsel had referred to the leading authorities in the House of Lords – which included Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, Smith v Eric S Bush [1990] 1 AC 831, Caparo Industries Plc v Dickman and others [1990] 2 AC 605, Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, White v Jones [1995] 2 AC 207, Spring v Guardian Assurance Plc [1995] 2 AC 296, Williams v Natural Life Health Foods Ltd [1998] AC 830 and Phelps v Hillingdon London Borough Council [2001] 2 AC 619 – Lord Bingham observed that, although they yielded many valuable insights, they contained statements which could not easily be reconciled. He declined to embark “on yet another exegesis of these well-known texts”.  I think I should exercise the same restraint. 
45.	Lord Bingham confined himself to five general observations. First, there were cases in which one party could accurately be said to have assumed responsibility for what was said or done to another. It was, he said, “correct to regard an assumption of responsibility as a sufficient but not a necessary condition of liability, a first test which, if answered positively, may obviate the need for further enquiry”. Second, it was clear that the assumption of responsibility test was to be applied objectively and was not answered by consideration of what the defendant thought or intended. Third, the threefold test itself provided no straightforward answer to “the vexed question” whether or not in a novel situation, a party owes a duty of care. Fourth, the incremental test was of little value as a test in itself, and was only helpful when used in combination with a test or principle which identified the legally significant features of a situation. As he said (ibid [7], 192D-E): “The closer the facts of the case in issue to those of a case in which a duty of care has been held to exist, the readier a court will be, on the approach of Brennan J [in Sutherland Shire Council v Heyman 60 ALR 1, 48] adopted in Caparo v Dickman, to find that there has been an assumption of responsibility or that the proximity and policy conditions of the threefold test are satisfied. The converse is also true”. Fifth (ibid, [8]; 192 E-F):
“[8]	. . .[The]outcomes (or majority outcomes) of the leading cases cited above are in every or almost every instance sensible and just, irrespective of the test applied to achieve that outcome. This is not to disparage the value of and need for a test of liability in tortious negligence, which any law of tort must propound if it is not to become a morass of single instances. But it does in my opinion concentrate attention on the detailed circumstances of the particular case and the particular relationship between the parties in the context of their legal and factual situation as a whole.” 
46.	Lord Hoffmann’s observations in the Barclays Bank case were to same effect. He said this (ibid, [35]; 14D-15B):  
“[35]	There is a tendency, which has been remarked upon by many judges, for phrases like ‘proximate’, ‘fair, just and reasonable’ and ‘assumption of responsibility’ to be used as slogans rather than practical guides to whether a duty should exist or not. These phrases are often illuminating but discrimination is needed to identify the factual situations in which they provide useful guidance. For example, in a case in which A provides information to C which he knows will be relied upon by D, it is useful to ask whether A assumed responsibility to D: Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465: Smith v Eric S Bush [1990] 1 AC 831. Likewise, in a case in which A provides information on behalf of B to C for the purpose of being relied upon by C, it is useful to ask whether A assumed responsibility to C for the information or was only discharging his duty to B: Williams v Natural Life Health Foods Ltd [1998] AC 830. Or in a case in which A provided information to B for the purpose of enabling him to make one kind of decision, it may be useful to ask whether he assumed responsibility for its use for a different kind of decision: Caparo Industries plc v Dickman [1990] 2 AC 605. In these cases in which the loss has been caused by the claimant's reliance on information provided by the defendant, it is critical to decide whether the defendant (rather than someone else) assumed responsibility for the accuracy of the information to the claimant (rather than to someone else) or for its use by the claimant for one purpose (rather than another). The answer does not depend upon what the defendant intended but, as in the case of contractual liability, upon what would reasonably be inferred from his conduct against the background of all the circumstances of the case. The purpose of the inquiry is to establish whether there was, in relation to the loss in question, the necessary relationship (or ‘proximity’) between the parties and, as Lord Goff of Chieveley pointed out in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, 181, the existence of that relationship and the foreseeability of economic loss will make it unnecessary to undertake any further inquiry into whether it would be fair, just and reasonable to impose liability. In truth, the case is one in which, but for the alleged absence of the necessary relationship, there would be no dispute that a duty to take care existed and the relationship is what makes it fair, just and reasonable to impose the duty. ”
And he went on (ibid [36]; 15 B-C):
“[36]  It is equally true to say that a sufficient relationship will be held to exist when it is fair, just and reasonable to do so. Because the question of whether a defendant has assumed responsibility is a legal inference to be drawn from his conduct against the background of all the circumstances of the case, it is by no means a simple question of fact. Questions of fairness and policy will enter into the decision and it may be more useful to try to identify these questions than simply to bandy terms like ‘assumption of responsibility’ and ‘fair, just and reasonable.’ In Morgan Crucible Co plc v Hill Samuel & Co Ltd [1991] Ch 295, 300-303 I tried to identify some of these considerations in order to encourage the evolution of lower-level principles which could be more useful than the high abstractions commonly used in such debates”
His observations (as the trial judge) in Morgan Crucible ([1991] Ch 295, 302F) – in explaining why the House of Lords was willing to extend the duty of care to the statement in Smith v Bush but was unwilling to do so in Caparo - emphasise the readiness of the courts to have regard to the reality of the economic relationships between the parties and the nature of the markets in which they were operating.  
47.	We were told that it was common ground that the existence (or otherwise) of a special audit duty in this case could be determined by the application of an assumption of responsibility test. In applying that test we were invited to adopt the approach indicated by Lord Hoffmann in the Barclays Bank case: 
“[34]      . . . it is critical to decide whether the defendant (rather than someone else) assumed responsibility for the accuracy of the information to the claimant (rather than to someone else) or for its use by the claimant for one purpose (rather than another).” 
As I have said, it is common ground that, in determining whether the defendant assumed responsibility to the claimant for the use to which his statement was put, the enquiry is as to “what would reasonably be inferred from his conduct against the background of all the circumstances of the case”.
48.	Lord Hoffmann’s guidance in the Barclays Bank case as to the approach to the assumption of responsibility test must, I think, be read with the observations of Lord Bridge of Harwich in Caparo Industries Plc v Dickman and others [1990] 2 AC 605, 627D-E in mind:
“. . . It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless. ‘The question is always whether the defendant was under a duty to avoid or prevent that damage, but the actual nature of the damage suffered is relevant to the existence and extent of any duty to avoid or prevent it’: see Sutherland Shire Council v Heyman, 60 ALR 1, 48, per Brennan J .”
49.	The importance of that principle was emphasised by Lord Hoffmann in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1996] UKHL 10 (reported sub nom. South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191). He said this (ibid, [14]; 211G-212C):
“[14]   A duty of care such as the valuer owes does not however exist in the abstract. A plaintiff who sues for breach of a duty imposed by the law (whether in contract or tort or under statute) must do more than prove that the defendant has failed to comply. He must show that the duty was owed to him and that it was a duty in respect of the kind of loss which he has suffered. Both of these requirements are illustrated by Caparo Industries Plc. v. Dickman [1990] 2 AC 605http://www.bailii.org/uk/cases/UKHL/1990/2.html. The auditors’ failure to use reasonable care in auditing the company’s statutory accounts was a breach of their duty of care. But they were not liable to an outside take-over bidder because the duty was not owed to him. Nor were they liable to shareholders who had bought more shares in reliance on the accounts because, although they were owed a duty of care, it was in their capacity as members of the company and not in the capacity (which they shared with everyone else) of potential buyers of its shares. Accordingly, the duty which they were owed was not in respect of loss which they might suffer by buying its shares. As Lord Bridge of Harwich said, at p. 627: 
‘It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless’
In the present case, there is no dispute that the duty was owed to the lenders. The real question in this case is the kind of loss in respect of which the duty was owed.”
50.	Lord Hoffmann went on to consider, in the Banque Bruxelles case, how the scope of the duty was to be determined. He observed (ibid, [15]; 212E-F) that:
“[15]	. . . The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking.”
He acknowledged (ibid [17; 212G) that: “There is no reason in principle why the law should not penalise wrongful conduct by consequences which would not have happened but for the wrongful act” but pointed out that that was not the normal rule. Rules which make the wrongdoer liable for all the consequences of his wrongful conduct were exceptional and needed to be justified by some special policy. As he put it (ibid [18]; 213C-D) in a passage to which the judge referred at paragraph [352] of his judgment in the present case:
“[18]	. . . Normally the law limits liability to those consequences which are attributable to that which made the act wrongful. In the case of liability in negligence for providing inaccurate information, this would mean liability for the consequences of the information being inaccurate.”
51.	I am conscious that I have not referred to all – or even most – of the authorities to which we were taken by counsel. I intend no discourtesy to the careful arguments addressed to us when I say that – on the basis that it is common ground that this is a case in which we should adopt an assumption of responsibility test - I do not think that the law is in doubt. We have the advantage, which was not available to the judge, of the guidance given by the House of Lords in the Barclays Bank case. The task, in this case, is to apply that guidance to the facts which the judge found.
This appeal
52.	I have suggested, earlier in this judgment, that a determinative issue in reaching a decision whether E&Y assumed responsibility to Western Star for liability to MN arising from fraudulent statements made by Mr Ellis in the course of negotiations is that raised as point (4) of the five points of difference which Mr Vos identified in the course of his opening: whether the judge was wrong to hold (as he did, at paragraph [405] of his judgment) that it was not foreseeable by E&Y that the nature of Mr Ellis’ participation in the negotiations would give rise to Western Star incurring a liability to MN for fraudulent misrepresentation.  
53.	Freightliner had relied, at trial, on the terms of the audit certificate, which included the following statement:
“We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the accounts are free from material misstatement whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the accounts.”
So, it was submitted to the judge, “there is a specific representation made to Western Star that the accounts are free from fraud”; and, on that basis, it could be said that it was within the scope of E&Y’s duty of care to protect Western Star from fraud.
54.	For my part, I would accept that it was within the scope of E&Y’s general audit duty to protect ERF from the consequences of decisions taken by ERF (or by its shareholders in relation to the affairs of ERF) on the basis that the accounts were free from material misstatement, including misstatement caused by fraud. If it were necessary to decide the point, I would accept that, in the present case, it was within a special audit duty owed by E&Y to Western Star to protect Western Star from the consequences of representations and warranties made in the share purchase agreement, including representations and warranties which, for the purposes of article 12.3(5) of that agreement, had been made fraudulently. But, as I have said, that is not the relevant question in this case. The relevant question is whether E&Y undertook a special audit duty to Western Star in respect of representations made by Mr Ellis to MN as to the accuracy of the ERF accounts to which their audit statements related. To put the point another way: did E&Y assume responsibility to Western Star for the use which Mr Ellis made of the ERF accounts in the context of his dishonest assurance to MN that the information on which those accounts were based was accurate? 
55.	In my view the judge was correct to answer that question in the negative. I reach that conclusion for two reasons. First, as it seems to me, there is no factual basis for a challenge to the judge’s finding that it was not foreseeable by E&Y that Western Star – and, in particular, Mr Ellis on behalf of Western Star – would make any representations as to the accuracy of ERF’s accounts which went beyond, or were outside, those contained in the share purchase agreement. It was foreseeable, as the judge held, that the share purchase agreement would contain representations and warranties. But it would also have been expected, as it seems to me, that Western Star, as seller, would be concerned to limit its exposure to those representations and warranties which were contained in the share purchase agreement. Mr Ellis was an employee of ERF: he was not an officer or employee of Western Star. There was no reason for E&Y to think that Western Star would allow a position to arise in which it was exposed to liability for extra-contractual representations made by Mr Ellis.
56.	Second, mere foresight is not enough, as Freightliner accepts. If authority be needed, it may be found in Caparo ([1990] 2 AC 605, 617G-618B, 628H-629A, 633F, 655C). Something more is required. In this case (as Freightliner accepts) that additional element is identified by Lord Hoffmann’s guidance in relation to assumption of responsibility. Even if (contrary to the judge’s finding) E&Y could have foreseen that Western Star might allow a position to arise in which it was exposed to liability for extra-contractual representations made by Mr Ellis, it is impossible to conclude that the judge was wrong to hold that (viewed objectively) E&Y did not provide their audit statement with the intention that the accounts to which that statement related would be used in that context. To hold that the auditors assumed responsibility for the use which a dishonest employee of the audited company might make of the accounts in the context of the parent company’s negotiations for the sale of the company would, I think, be to impose on them a liability greater than they could reasonably have thought they were undertaking. To adapt and apply the test posed by Lord Hoffmann in the Barclays Bank case, it is impossible to hold that E&Y (rather than Western Star) assumed responsibility for the use by Mr Ellis, on behalf of Western Star, of the information which E&Y had provided to Western Star.
Conclusion
57.	For those reasons I would dismiss this appeal.    

Lord Justice Dyson:
58.	I agree.

Lord Justice Thomas:
59.	I also agree.