Arrowhead Capital Finance Limited –v- KPMG LLP
KPMG was instructed on behalf of Dragon Futures Limited (“Dragon”). Dragon was a company which traded in the grey market in mobile phones (outside distribution channels authorised by the brand owners). Arrowhead was an investor into Dragon. Dragon’s business depended on it being able to recover VAT on the amounts it paid for the phones.
Dragon was concerned that Her Majesty’s Customs and Excise (HMCE) might prevent recovery. KPMG was therefore engaged to provide due diligence on the threat posed by HMCE to Dragon’s business. With KPMG’s knowledge, Arrowhead was made aware of KPMG’s involvement and advice. Matters progressed and after some trading had taken place, HMCE subsequently rejected Dragon’s VAT claims for a number of months in 2003/2004. Dragon ceased trading and Arrowhead was unable to recover its investment. Arrowhead therefore brought proceedings against KPMG arguing that KPMG had been negligent.
KPMG argued that the case had no real prospect of success on the basis that it owed no duty of care to Arrowhead. Arrowhead’s position was that a duty of care was owed because there had either been an assumption of responsibility by KPMG or because a test of proximity, foreseeability and “fairness justice and reasonableness” (the threefold test) had been met. Those are two of three tests which may be applied by the court in deciding whether a duty of care is owed. The third test is if the alleged duty would be “incremental” to previous case-law. That was not appropriate in this case.
Breach of duty of care
The court considered that KPMG had not assumed responsibility to Arrowhead. The court’s reasoning was that KPMG had an engagement letter with Dragon which limited its liability. It had no engagement letter with Arrowhead or any other investors, nor had KPMG had significant contact with them. In those circumstances, it would fly in the face of reasonable business expectations for KPMG to have accepted unlimited responsibility to Arrowhead.
In relation to the threefold test, the court considered that, for the same reasons as it had concluded that there was no assumption of responsibility, it would not be fair, just and reasonable for liability to be imposed upon KPMG. Doing so would give it unlimited liability to a chain of different investors. The area of business was high risk and, if KPMG had been asked, it would not have been prepared to accept liability to Arrowhead.
This case shows that the courts are reluctant to extend a duty of care too widely. However, if you do not have a contractual claim, there is always benefit in speaking to a solicitor to see whether you might have a claim in negligence. A duty of care can be found even if there is no contract.