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Esanda Finance Corporation Ltd v Peat Marwick Hungerfords
Course: Accounting (ACCT5602 )
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University: University of Western Australia
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Esanda Finance Corporation Ltd v Peat Marwick Hungerfords
[1997] HCA 8
Chapter 4 (page 189)
Relevant facts
Esanda Finance Corporation Ltd (Esanda) loaned money to various subsidiaries of
Excel Ltd (Excel), and in deciding to grant the loan relied upon financial records audited
by Peat Marwick Hungerfords (PMH). The audited financial records were negligently
prepared (they were in breach of certain mandatory accounting standards) and were
inaccurate. Excel defaulted, and Esanda sought to recover its economic loss from PMH.
Esanda argued that PMH owed it a duty of care: Esanda argued that PMH should have
known that lenders would be likely to rely upon the audited records, and insisted that it
would not have entered into the transaction with Excel were it not for the audited
records. PMH responded that it only owed a duty of care to its client Excel, and not to
Esanda.
Legal issue
Does an adviser such as an accountant or auditor owe a duty of care not only to the
client being advised but also to third parties such as creditors and financiers of the client
where it is reasonably foreseeable that the third parties may rely on the advice?
Decision
On 18 March 1997, the High Court of Australia decided in favour of PMH. The court
explained that the mere fact that it is reasonably foreseeable that a third party will rely
on the advice is not enough to make the adviser liable to that third party.
According to Brennan CJ:
The uniform course of authority shows that mere forseeability of the possibility that a statement
made or advice given by A to B might be communicated to a class of which C is a member and
that C might enter into some transactions the result thereof and suffer financial, loss in that
transaction is not sufficient to impose on A a duty of care owed to C in the making of the
statement or the giving of the advice. In some situations, a plaintiff who has suffered pure
economic loss by entering into a transaction in reliance on a statement made or advice given by
a defendant may be entitled to recover without proving that the plaintiff sought the information
or advice. But in every case, it is necessary for the plaintiff to allege and prove that the
defendant knew or ought reasonably to have known that the information or advice would be
communicated to the plaintiff, either individually or as a member of an identified class, that the
information or advice would be so communicated for a purpose that would be very likely to lead
the plaintiff to enter into a transaction of the kind that the plaintiff does enter into and that it
would be very likely that the plaintiff would enter into such a transaction in reliance on the
information or advice and thereby risk the incurring of economic loss if the statement should be
untrue or the advice should be unsound. If any of these elements be wanting, the plaintiff fails to
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