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West Wiltshire District Council v. Garland and Others, Cond and Others (Third Parties) Court of Appeal: CA Balcombe, Butler-Sloss and Leggatt L.JJ. BALCOMBE L.J. This appeal is from orders made by Morritt J. on 22 February 1993 when in substance he dismissed an application by third parties to strike out the third party notices. (I say in substance because he did strike out certain parts of the third party notices.) The judgment of Morritt J. is reported:  Ch. 409. In November 1990 the plaintiff district council started proceedings against a number of defendants. The second and third defendants, Mr. Pugh and Mr. White ("the officers") had been employed by the council in a variety of senior posts for 15 or more years. In the action the council claims that each of the officers acted in breach of contract and of fiduciary duties owed by the officers to the council, and in breach of the council's proper processes, and procured payments to be made by the council without proper authority. It claims damages and restitution accordingly. The allegations are denied by the officers. The third parties, Mr. Cond, Mr. Heppleston and Mr. Day, were at the relevant times employees of the Audit Commission constituted under the Local Government Finance Act 1982. Each, during the period to which the action relates, was successively the district auditor for the council, i.e. the person appointed to audit the annual accounts of the council. By their third party notices the officers claim contribution to, or indemnity against, any amount for which they may be found liable to the council. The issues before Morritt J. were (i) did the district auditors owe any duty, whether by statute or at common law, to the officers? The judge answered this question in the negative and against this part of his decision there is no appeal. (ii) Did the district auditors owe a statutory duty to the council and, if so, did a breach of that duty give the council a right of action against the district auditors? The judge answered both parts of this question in the affirmative and it was for this reason that he refused to strike out the third party notices, since on this basis the officers may have a right of contribution from the district auditors. The district auditors appeal against this part of the decision. (iii) Did the district auditors owe a common law duty to the council, the breach of which gave rise to an action in negligence? The judge, having held that there was a statutory duty whose breach gave rise to a cause of action, said that this issue did *305 not arise and he ordered that the relevant parts of the third party notices be struck out. The officers appeal against this part of the decision. Since the date of the judgment below two important decisions of the House of Lords have been reported: Spring v. Guardian Assurance Plc.  2 A.C. 296 and Henderson v. Merrett Syndicates Ltd.  2 A.C. 145. Emboldened by these decisions the officers have sought to amend their third party notices and statements of claim so as to allege certain claims against one only of the district auditors, Mr. Day. It was two reports made by Mr. Day, on 23 and 31 March 1990, that set in train the events leading to this action, and the officers now seek to allege that Mr. Day owed a duty of care at common law, both to the council and to the officers, in the making of these reports. Although these amendments so far exist only in draft, it was common ground that we should deal with the issues raised by the draft amendments at the same time as we dealt with the appeals by the district auditors and the officers. I bear in mind that this appeal arises in the context of an application to strike out and we should therefore approach our task in the light of what was said by Sir Thomas Bingham M.R. in E. (A Minor) v. Dorset County Council  2 A.C. 633, 694: "where the legal viability of a cause of action is unclear (perhaps because the law is in a state of transition), or in any way sensitive to the facts, an order to strike out should not be made. But if after argument the court can be properly persuaded that no matter what (within the reasonable bounds of the pleading) the actual facts the claim is bound to fail for want of a cause of action, I can see no reason why the parties should be required to prolong the proceedings before that decision is reached." With this approach in mind I turn to consider the issues which arise on this appeal. I. Statutory duty of the district auditors to the council enforceable by action 1. The test The judge held, and it was common ground before us, that this issue depends on the proper construction of the Local Government Finance Act 1982 and the answer to two questions: (i) whether the provision in question is intended to protect the interest of a class of which the council is a member; and (ii) did Parliament intend to confer on the council a cause of action for a breach of such duty? (See generally Reg. v. Deputy Governor of Parkhurst Prison, Ex parte Hague  1 A.C. 58, 158-159, 168-171.) 2. The statutory provisions To adopt both the phraseology and procedure of Fullagar J. in the High Court of Australia in Shire of Frankston and Hastings v. Cohen (1960) 102 C.L.R. 607, it is tedious but, I think, necessary to set out the substance of the provisions of the Local Government Finance Act 1982 which deal with the accounts of local authorities and the auditing of *306 those accounts. The following summary is taken from the judgment of Morritt J.  Ch. 409, 416-418: "By section 11 and Schedule 3 a body was constituted as a body corporate to be known as the Audit Commission for Local Authorities in England and Wales. It is not be be regarded as acting on behalf of the Crown nor are its members, officers or servants to be regarded as Crown servants. It is required to appoint such servants or agents as it considers necessary for the discharge of its functions on such terms as to remuneration and otherwise as it thinks fit. Section 12 requires that all local authority accounts shall be audited in accordance with Part III of the Act by an auditor appointed by the Commission. Such an auditor may be an officer of the Commission, an individual who is not such an officer, or a firm of such individuals; but he, she or it must be professionally qualified and only appointed after consultation with the local authority concerned: see section 13(1), (3) and (5). The appointment of an auditor who is not an officer of the Commission is to be on such terms and for such period as the Commission may determine: section 13(7). Section 14 requires the Commission to prepare and keep under review a code of audit practice prescribing the way (embodying the best professional practice with respect to the standards, procedures and techniques to be adopted) in which auditors are to carry out their functions. Such a code was approved by each House of Parliament and came into effect on 7 November 1983. It emphasises the need for complete independence, the highest professional standards and recognition of the public interest. The duty of the auditor is imposed by section 15 in the following terms: '(1) In auditing any accounts required to be audited in accordance with this Part of this Act, an auditor shall by examination of the accounts and otherwise satisfy himself - (a) that the accounts are prepared in accordance with regulations made under section 23 below and comply with the requirements of all other statutory provisions applicable to the accounts; (b) that the proper practices have been observed in the compilation of the accounts; and (c) that the body whose accounts are being audited has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources. (2) The auditor shall comply with the code of audit practice as for the time being in force. (3) The auditor shall consider whether, in the public interest, he should make a report on any matter coming to his notice in the course of the audit in order that it may be considered by the body concerned or brought to the attention of the public, and shall consider whether the public interest requires any such matter to be made the subject of an immediate report rather than of a report to be made at the conclusion of the audit.' Section 16 gives the auditor a right to obtain documents and information requisite to the performance of his functions. But by section 17 any person interested may inspect the accounts to be audited and all documents relating to them and the auditor is bound to permit a local government elector for that area to question him about the accounts. Such local government elector is entitled, by subsection (3), to object to any matter in respect of which the auditor could take *307 action under section 19 or 20 or make a report under section 15(3). Section 19(1) provides: 'Where it appears to the auditor carrying out the audit of any accounts under this Part of this Act that any item of account is contrary to law he may apply to the court for a declaration that the item is contrary to law except when it is sanctioned by the Secretary of State.' By subsection (4) a local government elector may appeal to the court for such a declaration if the auditor declines to do so. Section 20(1) requires the auditor to surcharge any person who appears to him, in carrying out the audit of any accounts, to have failed to bring any sum into account which should have been included, or whose wilful misconduct has caused loss. By subsections (2) and (3) a local government elector may appeal to the court for such a surcharge if the auditor declines to make one. The fees for an audit in accordance with the Act are prescribed in a scale produced by the Commission. The fee so prescribed is payable by the local authority to the Commission. The fee is to be the same whether the audit is carried out by an office of the Commission or not. The Commission pays its servant his salary and is responsible for the payment of the fees of others. By section 22 the Commission may direct an extraordinary audit of its own motion or on the application of a local government elector. Section 23 authorises the Secretary of State to make regulations concerning the form and publication of accounts. Finally, so far as relevant, section 30 restricts the disclosure of information obtained by the Commission or its officers in the following terms: '(1) No information relating to a particular body or other person and obtained by the Commission or an auditor, or by a person acting on behalf of the Commission or an auditor, pursuant to any provision of this Part of this Act or in the course of any audit or study thereunder shall be disclosed except - (a) with the consent of the body or person to whom the information relates; or (b) for the purposes of any functions of the Commission or an auditor under this Part of this Act; or (c) for the purposes of any criminal proceedings.' " 3. The statutory duty The central core of the argument of Mr. George, on behalf of the district auditors, was that their primary duty was to local government electors or ratepayers (now including council taxpayers). That there is such a duty is clear from the statutory provisions which are summarised above: see also paragraphs 6 and 10 to 13 inclusive of the Code of Audit Practice for Local Authorities and the National Health Service for England and Wales (published by the Audit Commission, 7 November 1983) prepared under section 14. But I agree with the judge that there is nothing inconsistent with the existence of such a duty and a duty owed to the body whose accounts are being audited. In my judgment the very nature of the function of auditing indicates that the auditor owes a duty towards the body whose accounts are being audited. In Shire of Frankston and Hastings v. Cohen, 102 C.L.R. 607 the High Court of Australia had to consider a similar question to that which *308 arises in the present case in relation to the Local Government Act 1946 of Victoria. By a four to one majority the court held that a duty of care arose from the relationship created pursuant to the statute. In the course of his leading judgment Fullagar J. said, at p. 617: "the word 'audit' is a well-known English word, and the general nature of what constitutes an audit seems plain enough. The Oxford English Dictionary defines the noun 'audit' as an 'official examination of accounts with verification by reference to witnesses and vouchers.' Mr. R. A. Irish in his book 'Practical Auditing,' at p. 1, says: 'An audit may be said to be a skilled examination of such books, accounts and vouchers as will enable the auditor to verify the balance sheet. The main objects of any audit are: (a) To certify to the correctness of the financial position as shown in the balance sheet, and the accompanying revenue statements. (b) The detection of errors. (c) The detection of fraud. The detection of fraud is generally regarded as being of primary importance.' " This emphasis on the detection of errors and the detection of fraud is made express by paragraph 6(a) of the code of audit practice, which requires the auditor to "satisfy himself as to the legality of items of account. " Paragraph 9 of the code provides that "The auditor shall exercise due professional care in carrying out and reporting upon the audit" and then proceeds to give examples of what is reasonable care and skill in the context. In my judgment it is unrealistic to argue, as Mr. George did at considerable length, that these elaborate provisions are not intended to impose upon the auditor any duty towards the body primarily concerned with the efficacy of the audit, viz. the body whose accounts are being audited. I accept that the analogy between the audit of the accounts of a local authority and those of a company is by no means exact - there is no contractual relationship between the district auditor and the local authority and there are significant differences between the position of the shareholders of a company and the local government electors - but I agree with the judge (see  Ch. 409, 420D) that the respects in which the analogy is false point to the conclusion that the primary purpose of the legislation is to protect the local authority as well as the local government electors. At the end of the day the point is a short one. I cannot improve upon the way in which it was put by Morritt J., at p. 420: "The object of any audit is to ensure that the money of the body in question has been properly spent and accounted for. If the interest[s] of that body and some other class, for example its members, coincide it may be a question in the case of particular statutes whether the legislation exists for the protection of the body or that class. But where the interest[s] of the body and the class do not overlap the audit requirement must exist primarily for the benefit of the body even though it may also exist for the protection of the class." *309 4. Cause of action for breach of duty I approach this part of the case bearing in mind the words of Lord Simonds in Cutler v. Wandsworth Stadium Ltd.  A.C. 398, 407: "if a statutory duty is prescribed but no remedy by way of penalty or otherwise for its breach is imposed, it can be assumed that a right of civil action accrues to the person who is damnified by the breach. For, if it were not so, the statute would be but a pious aspiration." Mr. George submitted that there was a number of pointers to the absence of such a right, of which I need only refer to the following. (i) Although the professional local government auditor has been in existence since the Poor Law Amendment Act 1834 (4 & 5 Will. 4, c. 76), there is no record in the United Kingdom of any action having been brought against an auditor for breach of statutory duty for negligence. There are, however, cases in Australia and New Zealand where a right of action for damages by a local authority against its statutory auditors was held established. I accept that some of these cases are distinguishable; thus Tumbarumba Shire Council v. S. (1916) 3 L.G.R.(N.S.W.) 162 appears to have been based on an implied contract by the auditor, while New Plymouth Borough v. The King  N.Z.L.R. 49 appears to have proceeded upon a concession: see p. 63. However, the decision of the High Court of Australia in Shire of Frankston and Hastings v. Cohen, 102 C.L.R. 607 is not in my view so obviously distinguishable, although I accept that the provisions of the statute there in question were different from those of the Local Government Finance Act 1982. Nevertheless the two leading judgments of Fullagar and Menzies JJ. merit careful study and I am encouraged that my approach to this issue is fully in accordance with the principles to be found in those judgments. In particular, I agree with Fullagar J., at pp. 607, 620, that the dictum of Farwell J. in Attorney-General v. De Winton  2 Ch. 106, 119 that the duty of a municipal auditor was one "of imperfect obligation" is inconsistent with the earlier dictum of Lord Russell of Killowen C.J. in Thomas v. Devonport Corporation  1 Q.B. 16, 21 and in the present context is of no significance. (ii) Section 15(2) of the Act of 1982 and the code of audit practice are explicable as mandatory directions for the guidance of auditors, enforceable by judicial review or dismissal or non-reappointment. Judicial review at the instance of the local authority would be an inappropriate remedy for securing damages following the breach of the auditors' duties - see Thornton v. Kirklees Metropolitan Borough Council  Q.B. 626, 641, 643 - and dismissal or non-reappointment would be wholly inadequate for that purpose. (iii) The provisions of section 30 of the Act of 1982 restricting the disclosure of information. Mr. George submitted that the fact that there is no provision for disclosure of information obtained by an auditor in civil proceedings, in the absence of the consent of the body or person to whom the information relates - see Bookbinder v. Tebbit (No. 2)  1 W.L.R. 217, 222-223 - indicates an intention by Parliament that an auditor should not be liable in damages. I am by no means certain that Mr. George is right in this primary submission; it may well be that *310 compliance with an order for discovery made in civil proceedings would be for the purposes of the functions of the auditor under section 30(1)(b). But, however that may be, I agree with the judge  Ch. 409, 421 that a restriction on the disclosure of certain information cannot confer, or have been intended to confer, immunity from suit. (iv) As the auditor has functions of a quasi-judicial nature to perform he cannot be made liable in damages: see Everett v. Griffiths  1 A.C. 631. Undoubtedly, the district auditor does have some quasi-judicial functions - see e.g., his powers under sections 19 and 20 of the Act of 1982. But the fact that, in the absence of misfeasance, he may not be liable for an action in respect of the exercise of his quasi-judicial functions cannot, in my judgment, preclude his liability for damages for breach of his other statutory duties. I find support for this view by the rejection of similar arguments in Shire of Frankston and Hastings v. Cohen, 102 C.L.R. 607, per Fullagar J. at p. 616 and per Menzies J. at pp. 626-627. In my judgment, therefore, the judge was wholly correct in his decision on the second issue before him. II. Common law duty of the district auditors to the council enforceable by an action for negligence Fortunately I can treat this issue quite shortly. The judge said that in the circumstances of his decision on issue I above, this issue did not arise, and it was apparently for this reason that he ordered that those parts of the third party notices which relied on any cause of action in negligence or negligent misrepresentation at the suit of the council against the auditors be struck out. Because a plaintiff has an action for breach of statutory duty in respect of a negligent performance of the statutory duties it does not follow that he therefore cannot have an action at common law in respect of the same negligence. Thus in Henderson v. Merrett Syndicates Ltd.  2 A.C. 145 it was held that there may legitimately be coexistent remedies for negligence in contract and in tort. In my judgment it is equally true that there may be coexistent remedies for negligence in breach of a statutory duty and in tort. Certainly is it not so clear and obvious that the two causes of action cannot coexist as to justify striking out on that ground alone the claims sounding in tort as disclosing no cause of action. Equally, I do not find it necessary to consider the many cases to which we were referred on the substantive question whether there exists a common law duty of care on the part of the district auditors towards the council. It is sufficient to say that in my judgment the existence of such a duty enforceable by an action for negligence is clearly arguable and a pleading making such a claim should not be struck out in limine. III. Common law duty of care of Mr. Day to the council in the preparation, compiling, drafting and issuing of his reports I can see no reason for treating the claims sought to be raised under this head in a manner different to the claims considered under issue II above. At one time I had considered that the making of these reports might be covered by the quasi-judicial exemption of Everett v. Griffiths 1 A.C. 631 *311 to which I have referred above. However, while I accept that the decision whether or not to make a report under section 15(3) is a quasi-judicial function which, in the absence of bad faith, cannot give rise to a liability in damages, once Mr. Day had taken the decision to make his reports it is at least arguable that in relation to them he owed to the council a duty of care of the kind considered in Spring v. Guardian Assurance Plc.  2 A.C. 296 and Henderson v. Merrett Syndicates Ltd.  2 A.C. 145. Accordingly I see no reason why, as a matter of principle, the officers should not be allowed to amend their third party notices and consequent pleadings to raise this issue. IV. Common law duty of care of Mr. Day to the officers in the preparationcompiling, drafting and issuing of his reports The judge dealt with the original claim by the officers to be entitled to sue the district auditors for negligence in the following passage from his judgment  Ch. 409, 423-424: "This claim has to be approached on the basis that there is no decided case demonstrating that such a cause of action will lie. Thus it is for the officers to establish one. To do so they must demonstrate that there is between them and the auditors a relationship characterised by the law as one of proximity or neighbourhood and that the situation should be one in which the court considers it fair, just and reasonable that the law should impose a duty of a given scope upon the one party for the benefit of the other: see Caparo Industries Plc. v. Dickman  2 A.C. 605, 617-618. . . . The fact is that the proximity between the officers and the auditors arises solely from the operation of the Act, but, as I have already held, the purpose of the Act was not to protect the officers. In these circumstances I do not think that it would be fair, just or reasonable that a duty of care should be imposed on the auditors for the benefit of the officers by the common law when Parliament in enacting the Act chose not to do so." As I have said, the officers do not appeal from this part of the judgment. I accept that the claim that they now seek to raise does not arise solely from the operation of the Act, but from the making of the reports by Mr. Day under the Act. I accept also that, if the reports had not been made in the exercise of his statutory power, it might well be arguable that a duty of care existed by Mr. Day towards the officers under the principles enunciated by the House of Lords in Spring v. Guardian Assurance Plc.  2 A.C. 296 and Henderson v. Merrett Syndicates Ltd.  2 A.C. 145. However, the fact is that these reports were made by Mr. Day under section 15(3), i.e. because he believed it to be in the public interest that he should do so. Furthermore, paragraph 26 of the code of audit practice provides that "The auditor should not be deflected from making a report because its subject matter is critical or unwelcome, if he considers it in the public interest to do so." In my judgment it would not, in these circumstances, be fair, just or reasonable that the law should impose a duty on the district auditor for the benefit of the officers whom he feels that he must, in the public *312 interest, criticise in the report or reports he makes under section 15(3). The same result can be achieved by saying that in the circumstances in which the reports are made there does not exist between Mr. Day and the officers a relationship characterised by the law as one of "proximity. " Whichever test be adopted, in the last resort it is a question of policy, and I am confident that the provisions of section 15(3) of the Act and paragraph 6 of the code of audit practice make it clear that Parliament intended that the district auditor should be free to make his report whenever he considered it to be in the public interest to do so. Short of bad faith he must be free to criticise an officer of the local authority without fear of exposing himself to an action for negligence at the suit of that officer. Accordingly, I would hold that Mr. Day owed no common law duty of care to the officers in relation to his reports. Conclusions In relation to issues III and IV I have expressed my opinion for the guidance of the parties as we were invited to do so. On issue I, I would dismiss the appeal. On issue II, I would allow the appeal. BUTLER-SLOSS L.J. I agree. LEGGATT L.J. I agree.
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