Disclaiming Liability By Third Parties: When Words Are Not Enough

An explicit disclaimer of liability by a third party may not be sufficient by itself to protect it from liability. The award-winning commercial attorneys at ParrisWhittaker are highly experienced in advising clients on their potential liability – even if they are not a contractual party.

An important starting point on the liability issue is that under the doctrine of ‘privity of contract’, only those who are party to a contract can enforce its terms in the event of a breach. In other words, a third party who has not signed (or otherwise agreed to) a contract is not liable for a contractual breach. However, a third party who is found to be responsible for a party’s losses could be held liable at common law.

So where does that leave a business who suffers loss as a result of a third party’s actions or omissions? The factual background to a recent ruling¹ from the UK’s High Court in a professional negligence case is not particularly unusual: a professional services provider (here, accountants acting as auditors) allegedly caused loss to the buyers of a company.

The ruling involves disclaimer clauses and has persuasive authority on the courts in The Bahamas and should be noted.

What’s the background?

The claimants alleged that before a share and purchase agreement (SPA) was entered into, it was discovered the company had been defrauded. It was claimed that assets within the accounts had been double counted; cash receipts inflated; and false invoices created.

It was claimed that a result of this, the buyers paid around £480,000 more than they should have done.  A key question was how effective disclaimers of liability by the accountants to the buyers were, in relation to their auditing and preparation of completion accounts and their completion certificate.

The buyers had engaged the accountancy firm to conduct due diligence on the company. The terms of engagement included a disclaimer: “To the fullest extent permitted by law, we will not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for the audit report or for the opinions we form.”

The accountants applied for the claim to be struck out or summary judgment.

What did the court decide?

The decision was concerned with the question of whether the claimants had a realistic as opposed to a fanciful prospect of succeeding in their claim against the accountants at trial.  The court decided that there was a case to answer and refused the defendant’s application.

While there was no contractual relationship between the buyers and the accountants, there was potentially a duty of care in common law. The judge decided that the claimants did have an “entirely realistic prospect” of proving the accountants had assumed responsibility towards the buyers, despite the disclaimers.

A key factor for the court was what the judge described as the accountants’ continuing and direct commercial relationship with the buyers, but not the sellers. It suggested that the nature of the relationship could even convey a sense that the individual from the accountancy firm who had been communicating with the company saw himself as part of, or as a support to, the buyer’s professional team.

What does this mean?

It’s clear that explicit disclaimer clauses may not be sufficient, in and of themselves, to protect a third party from liability where another has allegedly suffered loss. Where a duty of care exists – or is actively assumed – towards the other party, it could effectively override such a disclaimer.

The judge observed that a claimant would have to prove the accountant was aware of the nature of the transaction in the claimant’s mind; and knew/ought to have known that their statement would be communicated to the claimant and the claimant was likely to rely on it in deciding whether or not to proceed with the transaction.

The claimant would then have to prove they did rely on the statement. If the substantive claim goes to trial, we’ll report on the outcome.

How can we help?

For expert advice and representation on any issues relating to liability to contractual or third parties, contact Jacy Whittaker at expert commercial litigation lawyers at ParrisWhittaker here or telephone +1.242.352.6112

¹Amathus Drinks Plc & Ors. v EAGK LLP & Ors [2023] EWHC 2312 (Ch)