Disclaimers for Non-Statutory Audit Work

Carmel Nye, Senior Associate, Smyth & Co in association with RPC

So-called “Bannerman” clauses are industry standard in the accountancy profession. They get their name from the case Royal Bank of Scotland PLC v Bannerman Johnstone Maclay (a firm) & Ors 2005 1 S.C. 579. Such a clause confirms that an accountant’s report is prepared for a designated contracting party and no liability is accepted to third parties with respect to their reliance on the information contained in the report.

The effectiveness of a Bannerman clause does not appear to have been tested in the Hong Kong courts; no doubt, in large part because it is well understood and industry standard. Of course, a company is not permitted to exempt an auditor for liability for statutory services in relation to the company: s. 415 of the Companies Ordinance (Cap. 622).

In Barclays Bank PLC v Grant Thornton UK LLP [2015] EWHC 320 (Comm), a Bannerman type disclaimer clause was tested for the first time in the English High Court. The case is of considerable persuasive force in Hong Kong.

The defendant accountants carried out non-statutory audit reports for a client, who provided the reports to the plaintiff bank to obtain a substantial loan facility. The client later became insolvent and unable to repay the loan. The report contained a Bannerman clause upfront. The bank did not have a claim in contract against the accountants so claimed that the accountants were negligent and that it suffered a loss as a result.

The accountants applied for summary judgment (in effect, dismissal of the action) on the basis that the disclaimer in the reports meant that the bank’s claim had no realistic prospect of success. The court agreed.

Given that such disclaimers are industry standard, it is interesting that the bank chose to litigate. A Bannerman clause operates to prevent a duty of care arising to a third party and, to that extent, the outcome in the case is no surprise.

The case is an interesting illustration of the criteria that a court can take into account in considering the reasonableness of such a disclaimer. However, in this respect, the court was dismissive of the bank’s argument that the disclaimer was unreasonable, particularly given the disclaimer was clear and the parties were commercial folk who could be expected to read the reports and be familiar with standard disclaimers.

Had the bank wanted to engage the accountants directly it could have done so. There is also the point that the accountants had capped their liability with clients and it seems a bit rich if the bank hoped to be better off suing in negligence for a purported uncapped liability.