Causation and scope of duty in auditor’s negligence case

​In AssetCo PLC v Grant Thornton UK LLP the court looked at questions of legal and factual causation, contributory negligence, and calculation of loss, in circumstances where a negligent audit had failed to uncover fraudulent activity.
  • Contact


This professional negligence claim by AssetCo Plc (AssetCo) against Grant Thornton UK LLP (GT) arose from GT’s allegedly negligent audits of Assetco’s accounts in 2009 and 2010. In particular, the audits failed to uncover the fraudulent activities of two of AssetCo’s directors. AssetCo eventually discovered the fraudulent activity in 2011, when it also uncovered the true (dire) financial position of the company. However, AssetCo claimed that, had it been aware of the true position in 2009/10, it would have rectified matters then, thereby avoiding large amounts of wasted expenditure.

The judgment considered issues such as loss of chance, causation, and contributory negligence. In particular, the Court confirmed that:

  • loss of chance principles apply when the counterfactual depends on the actions of a third party, and
  • a defendant’s admission of negligence will not absolve a claimant from having to establish every element of the cause of action on which it relies, including causation and loss.

The Decision

The Court largely found in AssetCo’s favour, awarding it substantial damages of around £21m. The quantum calculations are more fully set out in the subsequent judgment - AssetCo Plc v Grant Thornton UK LLP.

As GT had admitted most of its breaches of duty early in the proceedings, the case focused on loss of chance and causation (factual and legal).

Loss of a chance:

The Court confirmed that it would assess the following questions of fact on the balance of probabilities:

  • whether or not something happened in the past, and
  • what the claimant would have done had there been no negligence.

However, where the claimant’s loss depends on the hypothetical acts of a third party, the claimant is required to show that there is a real or substantial chance that a third party would have acted in a certain way. The loss of chance approach is mandatory and a claimant cannot elect to prove its claim on the balance of probabilities.

In the present case, the Court found that, on the balance of probabilities, AssetCo would have entered into the scheme of arrangement (and on the terms envisaged) much sooner had it not been for GT’s negligence. Furthermore, it was a near certainty (ie a 100% probability) that third parties would have acted in the way asserted by AssetCo in its counterfactual.

Legal causation/scope of duty:

In respect of each head of loss, the Court had to determine (applying Equitable Life Assurance Society v Ernst & Young) whether:

  • the loss would have been avoided but for GT’s breach (ie factual causation)
  • the loss fell within the scope of GT’s duty of care
  • GT’s breach of duty was the substantial cause of the loss (ie legal causation), and
  • whether the loss was too remote to be recoverable.

It was held that three of the four heads of loss claimed did fall within the scope of GT’s duty, but that with respect to the payment of dividends (the fourth head of loss), “the sole effective cause of the loss” was the “highly unreasonable” decision of the directors to declare and pay a dividend, rather than the prior negligent audit.

Contributory negligence:

Particular regard should be had for the relative “blameworthiness of parties and the causative potency of their acts”. Here, this required an assessment of AssetCo’s management responsibilities and the scope of Grant Thornton’s duties, with the Court concluding that certain deductions on the recoverable damages would be appropriate (ranging from 25% to 100%).


The Assetco judgment was largely concerned with the application of well-established legal principles to a factually complex situation. However, the Court’s clarification on the application of loss of chance principles when the counterfactual depends on the actions of a third party was instructive.

Furthermore, even where the Court is critical of the defendant’s breaches of duty it will not simply find a remedy for a claimant; in all cases, a claimant is required to establish every element of the cause of action on which it relies, including causation (both in law and in fact) and loss. In the present case, no damages were awarded to AssetCo under the fourth head of loss (the payment of dividends) despite this arising from the same factual cause as the other heads. No doubt considerable time and effort was spent by AssetCo’s counsel arguing for the opposite result. Accordingly (and even though) the temptation may be to claim for all losses which arise from a common factual cause (such as a defendant’s breach of duty) it is essential that careful consideration is given to all aspects of a cause of action at the outset of a dispute, so that arguments which are unlikely to succeed are flushed out.

Finally, directors and senior management of companies (including and possibly in particular NEDs) should remind themselves of their duties. Directors and senior management of a company will do well to remember that although delegation of certain workstreams is common in day to day business practices (and often necessary), it does not absolve a director from the duty to exercise appropriate oversight of those delegated activities. Directors should always challenge the information that is provided to them, satisfying themselves that they are confident in its veracity and integrity. Assetco’s management were criticised by the Court for having failed to act “in accordance with the standards to be expected of management and directors of a listed company, and there were also failings on the part of the [Non-Executive Directors], who could fairly be described as supine”.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.