The Dutch Supreme Court recently ruled on a case concerning liability of an audit firm towards its client for non-performance of an assignment to provide what is termed a 'contribution statement' (ECLI:NL:HR:2019:1447).
The outcome was determined by the specific circumstances of the case, and the Supreme Court did not see cause to answer legal questions in view of the uniformity and development of the law. Yet the case and in particular the advisory opinion of the Advocate General deserve attention, showing that the scope and extent of audit firms' contractual liability has still not been completely crystallised.
Background and claim
An audit firm was engaged to provide what is termed a 'contribution statement' (inbrengverklaring) on the value of three companies that were brought into a new company (Quarz Holding) as part of a merger. Party A brought in one company (C) and De Salaire brought in two companies. The purpose of such statement (in the sense of Article 2:204a(2) Dutch Civil Code (old)) is to ascertain whether the value of the assets was sufficient to pay up the shares of the new holding company. After the audit firm had provided the contribution statement and the merger had taken place, C ran into financial difficulties. When De Salaire asked for an explanation, the audit firm indicated that it had received two different trial balances from C, the second containing certain corrections of the first. The audit firm had taken the corrected balance as a basis for the contribution statement. Subsequently, it was established that the books of C were not kept properly. If these had been kept properly, the value of this company would have been only 7 percent of the value indicated on the balance.
De Salaire held the audit firm liable and demanded compensation on the basis of non-performance of the assignment. According to De Salaire, the audit firm should have looked into the differences between the two balances and should have consulted De Salaire on this matter. De Salaire claimed that if the audit firm had done so, it would not have proceeded with the merger process. In response the audit firm argued that there was no non-performance: the contribution statement was not incorrect. The total value of the companies brought in was sufficient to meet the obligation to pay up the shares in Quarz Holding.
Court of Appeal
The District Court rejected De Salaire's claims. However, the Court of Appeal decided differently. It held that De Salaire had orally entered into an agreement with the audit firm. Furthermore, the Court of Appeal considered that an accountant has to observe the standard of the “reasonably competent and reasonably acting accountant” towards clients. In this respect, the following circumstances may be relevant: (i) whether the accountant has acted in accordance with the standards and values generally accepted among his peers, (ii) whether his acts have created a misleading view, (iii) the extent to which losses of his client were reasonably foreseeable for the accountant, and (iv) whether he has taken reasonable measures and has warned his client to prevent these losses.
The Court of Appeal held that in this case the audit firm knew that parties involved in the merger would rely on the contribution statement to allocate the shares in the new company Quarz Holding. In addition, the audit firm knew that its affirmative contribution statement would convince parties to continue with the merger. Knowing these two things, the audit firm should have looked into the differences between the two balances and should have consulted with De Salaire instead of just accepting the corrected balance as the basis for the contribution statement. This in fact favoured Party A because this resulted in a higher appreciated value of the company it brought in. Party A therefore received a relatively large number of shares in Quarz Holding. The Court of Appeal's reasoning was in line with a previous decision of the Accountants' Court of Discipline.
The Court of Appeal also decided that the audit firm had deprived De Salaire of the opportunity to decide not to continue with the merger. Furthermore, it held that De Salaire would in fact have decided not to continue with the merger if the audit firm had investigated the differences between the balances. The audit firm was therefore liable for De Salaire's losses.
Our colleague Prof. Steven Hijink annotated this judgment (JOR 2018/146). He made some critical comments, including that the Court of Appeal did not appreciate that the contribution statement was an "at least" statement, indicating that the total value of the companies brought in was at least sufficient to pay up the shares. Such statement does not require by definition to look into the value of all individual assets. In general, therefore, it goes too far to assume that the mere fact that an audit firm has used a corrected balance without having consulted with the client results in non-performance.
Conclusion of the Advocate General
The audit firm turned to the Dutch Supreme Court, arguing (among other things) that the assignment did not include obligations to share information and conduct further research. According to the Advocate General, the Court of Appeal had rightfully reasoned that such obligations do not necessarily have to follow from the assignment itself (in the "strict" sense that these are explicitly agreed upon) but may – under Dutch law – also follow from a written engagement letter or an (additional) oral agreement, parties' behaviour or business practices.
According to the Advocate General, such obligations may also arise from the accountants' general duty of care as a party accepting the assignment (Article 7:401 Dutch Civil Code) and in view of their expertise and role in society. This warrants the "objective" standard, whereby accountants are supposed to act as a “reasonably competent and reasonably acting accountant”. In a case like this, an audit firm could be obliged to look into the differences between the balances and consult with its client, even though it did not (subjectively) know about the relevance of the balances for the client. It is sufficient that the audit firm should have known about this relevance because this was foreseeable for a reasonably competent and reasonably acting accountant, so the Advocate General argued.
However, in the case at hand, the Court of Appeal established that the audit firm in fact knew that De Salaire would distribute the shares of Quarz Holding, and make its decision to continue with the merger, on the basis of the contribution statement. Given this subjective knowledge of the audit firm, the question whether it should have known about this does not come into play. The Advocate General appears to have left open the possibility that, even if the audit firm had not possessed such subjective knowledge, it should still have consulted with De Salaire because it should have known that De Salaire may deem this information relevant for the distribution of shares and for the decision to proceed with the merger.
As said, the Supreme Court did not give a detailed judgment. It dismissed the case with a standard reasoning, rejecting the appeal by the audit firm because it did not prompt new legal questions in view of the uniformity and development of the law (Article 81 Dutch Judiciary Act). For more guidance from the Supreme Court on the questions raised by the Advocate General and the critical comments on the Court of Appeal's decision from our colleague Prof. Hijink, it will be necessary to wait for another case on these issues to arise.