Benjamin v KPMG Bermuda (A Firm) and KPMG Barbados (A Firm)

JurisdictionBermuda
CourtSupreme Court
Judgment Date12 March 2007
Docket NumberCommercial Jurisdiction 2005 No. 52
Date12 March 2007

In The Supreme Court of Bermuda

Kawaley, J

Commercial Jurisdiction 2005 No. 52

BETWEEN:
Ann H Womer Benjamin Superintendent of the Ohio Department of Insurance and her successors in office in her capacity as Liquidator of Credit General Insurance and Credit General Indemnity Company (in Liquidation)
Plaintiff
and
KPMG Bermuda (A Firm)
First Defendant

and

KPMG Barbados (A Firm)
Second Defendant

Mr P Harshaw for the Plaintiff

Mr N Hargun for the Defendants

The following cases were referred to in the judgment:

Guang Xin Enterprises Ltd v Kwan Wong Tan & Fong [2002] 2 HKLRD 319

Lonrho plc v TebbitUNK [1991] 4 All ER 973

Electra Private Equity Partners v KPMG Peat MarwickUNK [2001] BCLC 589

Ultramares Corp v George A Touche (1931) 255 NY 170

Customs & Excise Commissioners v Barclays Bank plcUNK [2006] 4 All ER 256

Caparo plc v DicksonELR [1990] 2 AC 605

Smith v Eric S. BushELR [1990] 1 AC 831

Dutton v Bognor Regis UDCELR [1972] QB 374

Mutual Life and Citizens Assurance Co Ltd v EvattELR [1971] AC 793

Haig v BamfordUNK (1976) 72 DLR (3d) 68

Hercules Managements Ltd v Ernst & YoungUNK [1997] 2 SCR 165

Companies Act 1981, s. 90(3A)

Barbados Companies Act CAP 308, s. 154(1)

Application to strike out amended statement of claim — Causation of loss — Duty of care to persons other than clients — Tort — Judicial notice of captive insurance practice — Developing law — Auditor

RULING of Kawaley, J
Introductory

1. By Summons dated October 24, 2006, the Defendants applied to strike-out the Amended Statement of Claim (‘ASC’) herein on the following principal grounds: (a) there is no sustainable plea of duty of care, (b) breach of duty is not adequately pleaded, and (c) there is no sustainable plea on causation of loss.

2. The Plaintiff is the Liquidator of two insolvent Ohio insurers (‘the reinsureds’), who were reinsured by three captive insurers incorporated in Barbados, all of whom were audited by the Second Defendant with substantial assistance from the First Defendant.

3. The Plaintiff claims that because the Defendants knew or ought to have known that their clients would pass on their audit reports to the reinsureds who would rely upon them for regulatory and other purposes, the Defendants owed not only their clients but also the reinsureds a duty of care which was breached when they provided an unqualified report for the 1998 year when the captives were in fact insolvent.

4. The Defendants contend most importantly that the pleaded case discloses no reasonable cause of action because, assuming the pleaded allegations to be true, no duty of care in respect of negligent misstatements can be found to exist as a matter of law.

5. The Plaintiff invited the Court to decline to strike-out at this stage on the grounds that this area of the law was evolving and it was impossible to fairly assess the viability of the claim in isolation from the evidence. The Plaintiff's fall-back position was to ask the Court to grant leave to re-amend.

Strike-out principles

6. The Defendants relied on the case of Guang Xin Enterprises Ltd. v Kwan Wong Tan & Fong[2002] 2 HKLRD 319 in support of the approach to be taken in relation to their present application. I found particularly relevant paragraph 10 of the judgment of Deputy Judge Tong, who cited with approval the judgment of Browne-Wilkinson V-C (as he then was) in Lonrho Plc v TebbitUNK[1991] 4 All ER 973 at p. 979F. The fact that the Court should be cautious about striking-out a claim based on the pleadings and resolving complicated questions of law, in an area of the law which is developing, before the facts are known was, in reality, common ground. This same principle was also articulated, perhaps in slightly more strident terms, in the Plaintiff's authority of Electra Private Equity Partners et al v KPMG Peat MarwickUNK[2001] BCLC 589, per Auld LJ at 613–614.

7. Obviously, the dominant principle is that the Plaintiff's claim should only be struck-out altogether in plain and obvious cases, and all reasonable opportunities to cure what is merely a defectively drafted pleading ought to be afforded to the Plaintiff. I took the broad-brush approach that the application fundamentally turned on the merits of the duty of care issue, and that it was only if this fundamental element of the claim was shown to be legally untenable, and obviously so, that the strike-out application should be acceded to at this stage. The no actionable loss point was a related legal viability point, which on the facts of the present case stood or fell with the duty of care issue.

8. The breach of duty point was a pleadings point, which could potentially be cured by way of amendment. However, after hearing Mr. Harshaw and having regard to his proposed amendments, it seemed clear to me that, to some extent at least, the breach of duty defects complained of were curable. Mr. Hargun conceded that his limitation complaint was peripheral to the main grounds upon which the strike-out application was based.

The Amended Statement of Claim and the Existence of a Duty of Care Issue

9. The case against the First Defendant is pleaded in the ASC as follows. The Second Defendant was contracted by the captives as auditor under Barbados law governed agreements (‘the Agreements’) and the First Defendant performed most of the audit work, being engaged so to do by the captives under Bermuda law (paragraph 12). It is then alleged that the Defendants reported on the captives' financial statements and/or gave consulting advice (paragraphs 14, 31).

10. The duty of care to the Plaintiffs is pleaded almost nonchalantly in paragraph 12 as follows:

‘Nevertheless, the Second Defendant owed all of the duties and obligations to the Captives and others, including CGIC and/or CGIND [i.e. the Plaintiffs], that an auditor owes to such people by virtue of the Agreements, as a matter of Barbados law. The First Defendant owed a duty of care in carrying out the audit work to the Captives and others, including CGIC and/or CGIND [i.e. the Plaintiffs] that a person doing such work and holding themselves out as competent to do so owes to such people, as a matter of Bermuda law.

11. So the dominant double-barrelled assertion is that the Second Defendant owes a duty of care not just to the captives by virtue of being engaged by them as their auditor, but also to the Plaintiffs as well. The same plea is made as regards the First Defendant in respect of the work done in Bermuda in substantial fulfilment of the Second Defendant's contractual audit obligations. The scope of the duty of care is also said to be the same as regards both the captives and the Plaintiffs (paragraphs 19, 33). But what is controversial is whether a sustainable case on the existence of a duty is pleaded. So what other matters are relied upon as giving rise to this duty of care to the Plaintiffs? The following central allegations are made as regards the First Defendant in paragraphs 24–26, and substantially repeated as regards the Second Defendant in paragraphs 41–43 of the ASC:

‘24. The First Defendant was aware or ought to have been aware, and it was foreseeable by it, that the Audited Financial Statements it prepared were to be provided to other companies such as CGIC and CGIND (as counterparties) within the PIGI group of companies. Moreover, the First Defendant was or ought to have been aware, and it was foreseeable by it, that the audits were in fact performed for the benefit (among others) of CGIC and/ or CGIND as the primary counterparties to the Reinsurance Agreements issued by the Captives.

25. The First Defendant was aware or ought to have been aware, and it was foreseeable by it, that the Captives intended to supply the Audited Financial Statements opined on and certified as fair and prepared in accordance with GAAP by the Second Defendant to CGIC and CGIND for their use, including the filing of required audited financial information with the Ohio Department of Insurance. The First Defendant knew or ought to have known that CGIC and/ or CGIND would rely on the Audited Financial Statements to continue the Reinsurance Agreements and relationships with the Captives.

26. The First Defendant also foresaw or ought to have foreseen that the Ohio Department of Insurance would directly or indirectly rely upon the Audited Financial Statements in the course of its regulation of CGIC and CGIND.’

12. The duty of care on the part of the captives' auditors to the reinsureds is said to arise because (a) they were or ought to have been aware that the audited financial statements would be supplied to the Plaintiffs for their use, including for filing with the Ohio Department of Insurance, and (b) the Defendants knew or ought to have known that the Plaintiffs (and the Department) would rely on the audited financial statements in deciding on whether to continue the Reinsurance Agreements. In addition it is averred that (c) the Defendants were aware or ought to have been aware ‘that the audits were in fact performed for the benefit (among others) of CGIC and/ or CGIND as the primary counterparties to the Reinsurance Agreements issued by the Captives.’

13. This third averment is perhaps the only allegation which appears to make a case that the Defendants in carrying out the audit work for their paying and contracted clients was also providing a gratuitous service of ‘benefit’ to the Plaintiff companies. But it is neither expressly nor impliedly alleged that either (i) the Plaintiff companies did not have recourse to independent financial advice of their own in assessing the veracity of the captives' financial position, or (ii) that the Defendants knew or ought to have known that their audit work product prepared on behalf of their clients was going to be relied on by the Plaintiff companies without independent verification. It is not even alleged that in performing the audits additional work not required by their auditing...

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3 cases
  • Raymond Davis v The Minister of Finance and The Attorney General
    • Bermuda
    • Court of Appeal
    • 14 Agosto 2018
    ...Lord Bingham's speech from Custom and Excise was broadly followed and applied by Kawaley J. (as he then was) in Benjamin v KPMG Bermuda [2007] Bda L.R. 22in striking out a claim for breach of duty of care brought against auditors by reinsurers on the basis that they knew or ought to have kn......
  • Raymond Davis v Minister of Finance and Attorney-General
    • Bermuda
    • Court of Appeal
    • 14 Agosto 2018
    ...Lord Bingham's speech from Custom and Excise was broadly followed and applied by Kawaley J (as he then was) in Benjamin v KPMG Bermuda[2007] Bda LR 22 in striking out a claim for breach of duty of care brought against auditors by reinsurers on the basis that they knew or ought to have known......
  • Raymond Davis v The Minister of Finance The Attorney General
    • Bermuda
    • Supreme Court
    • 5 Septiembre 2017
    ...of Companies [1988] Ch 229 Al-Kandari v JR Brown & Co [1988] QB 665 Horner v WD Irwin & Sons Ltd [1972] NI 202 Benjamin v KPMG Bermuda [2007] Bda LR 22 Trial of preliminary issue — Negligence — Economic loss — Duty of care to take reasonable steps to have Cause Book amended to record satisf......

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