Proportionate liability in an accountants’ negligence case

Update, 4 May 2009: The costs decision (Sali v Metzke & Allen (No. 2) [2009]) is interesting.  I blogged about it here.

Original post: Sali v Metzke & Allen [2009] VSC 48 is a decision of Justice Whelan in an accountants’ negligence case.  It is an example of the proportionate liability scheme working as it was presumably intended. A professional firm sued for failing to detect wrongdoing was found liable, but instead of being liable for the victim’s entire loss (the deep pocket syndrome which proportionate liability is designed to avoid), it was found liable only for 30%.  Because the victim did not sue the wrongdoer (the wrongdoer having been joined as a defendant by the professional firm), the victim did not recover damages for 70% of its loss.The defendant firm were the accountants to S Sali & Sons Pty Ltd, a company controlled by its directors, the brothers Sali.  That company contracted to provide haulage to Universal Logistics Pty Ltd, a company of which S Sali & Sons was a shareholder, and the brothers Sali directors.  A third director of Universal Logistics was the Managing Director.  Of the three directors, the Managing Director was the hands-on director; the brothers Sali relied on him for information.
Universal Logistics went into liquidation.  S Sali & Sons was not paid for $900,000 worth of haulage services it had previously provided to Universal Logistics.  It had continued to provide those services on the strength of information about Universal Logistics’s financial position from its Managing Director which was rosier than was warranted.

It will be apparent that the most proximate cause of S Sali & Sons’s losses was the person who told its directors that the company was in a better financial position than it was in fact.  But it did not sue the Managing Director.  Rather it sued its accountants for not noticing promptly enough that the Managing Director’s figures were dodgy.

The accountants joined Universal Logistics’s Managing Director as a third defendant under the Victorian proportionate liability regime. They said that any judgment against them should be reduced by the proportion of S Sali & Sons’s losses for which the Managing Director was responsible.  Universal did not seek any relief against him, so he did not participate in the trial or give evidence.

Justice Whelan found that S Sali & Sons could only succeed in its apportionment argument if it established that the Managing Director had a legal liability to S Sali & Sons.  His Honour rejected S Sali & Sons’s argument that Universal Logistics’s Managing Director did not owe it a duty of care because it was a creditor of Universal Logistics, and directors of companies do not generally owe duties of care to company creditors.  His Honour said whereas it is no doubt the case that that relationship of itself is not a relationship that necessarily suggests the requisite proximity to establish a duty of care, that is not to say that if the elements of the tort of negligent misstatement are independently made out between persons who happen to be in such a relationship, the fact of the relationship defeats the claim.  Here, the Managing Director of Universal Logistics was making statements directly to the directors of S Sali & Sons, knowing that S Sali & Sons would rely on them in exactly the way it did, the tort was made out, and the Managing Director was legally liable to S Sali & Sons, just as the accountants were.
His Honour found that the Managing Director was 70% responsible for S Sali & Sons’s losses and so gave judgment against the accountants for 30% of those losses, with the result that 70% of S Sali & Sons’s losses were not compensated.

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