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England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Man Nutzfahrzeuge Ag & Ors v Freightliner Ltd.  EWHC 2347 (Comm) (28 October 2005)
Cite as:  EWHC 2347 (Comm)
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QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| (1) MAN NUTZFAHRZEUGE AG
(2) MAN AG
(3) ERF LIMITED
(4) ERF (HOLDINGS) PLC
(5) MAN ERF UK LTD
|- and -
|- and -
|(1) ERNST & YOUNG
(a limited liability partnership practising in Canada)
(2) ERNST & YOUNG
(a firm practising in the United Kingdom)
(3) The individuals listed in Schedule A to the Pt.20 claim
Part 20 Defendants
Mr. Geoffrey Vos Q.C. and Mr. Andrew Twigger (instructed by Clifford Chance) for the defendant
Mr. Justin Fenwick Q.C. and Mr. Simon Salzedo (instructed by Linklaters) for the Part 20 defendants
Crown Copyright ©
|1. The parties||1|
|2. The origins of the dispute|
|(a) Fraudulent manipulation of ERF's accounts and false VAT claims||7|
|(b) Events leading to the purchase by MN of ERF||16|
|(c) Events following the purchase||39|
|(d) Developments following the discovery of the fraud||46|
|3. The Share Purchase Agreement||56|
|4. The claims and defences being advanced in these proceedings|
|(a) MN's claims against Freightliner||65|
|(b) ERF's claim against Freightliner||74|
|(c) Freightliner's claims against E&Y (UK)||75|
|(d) Freightliner's claims against E&Y (Canada)||76|
|B. MN's claims against Freightliner|
|1. MN's claim in deceit|
|(a) Did Mr. Ellis make false and dishonest representations?||78|
|(b) Is Freightliner liable for Mr. Ellis's false representations?||84|
|(c) Did Mr. Ellis's representations about ERF's accounts induce MN to enter into the Share Purchase Agreement?||118|
|(d) Section 14.10 of the Share Purchase Agreement||125|
|(e) Was MN fraudulently induced to retain the services of Mr. Ellis?||129|
|2. MN's claim under the Share Purchase Agreement|
|(a) The representations on which MN relied||132|
|(b) The nature of the representations||134|
|(c) The unqualified representations and warranties||142|
|(d) The qualified representations and warranties||168|
|(e) The representations relating to ERF's tax position – Section 4.1(oo)||171|
|(f) The construction of Article 12||182|
|(g) The Settlement Agreement||198|
|3. Causation and remoteness of damage|
|(a) The principles||213|
|(b) The facts||230|
|6. Summary of conclusions||322|
|C. Freightliner's claim against E&Y (UK)|
|1. Was E&Y (UK) in breach of a duty of care owed to Western Star in relation to the audit of ERF?|
|(a) Did E&Y (UK) owe Western Star a duty of care to ensure that the accounts of ERF gave a true and fair view of its financial position?||324|
|(b) Were E&Y (UK) in breach of duty?||361|
|(c) What were the consequences of E&Y(UK)'s negligence?||395|
|(d) The scope of E&Y (UK)'s liability||403|
|2. Were E&Y (UK) in breach of a duty of care owed to Western Star in relation to the conduct of the due diligence exercise?|
|(a) What duty did E&Y (UK) owe to Western Star in relation to the conduct of the due diligence exercise?||412|
|(b) Were E&Y (UK) in breach of duty?||413|
|3. Contributory fault|
|(a) Early invoicing||421|
|(b) Spanish invoicing||435|
|(c) Weakening of ERF's management||438|
|(d) Unreasonable pressure on ERF to produce results||442|
|(e) The introduction of BaaN Financial||446|
|(f) Accepting management reports based on estimates||451|
|(g) Failure to monitor and control ERF||454|
|(h) Failure to respond properly to the tip-off||458|
|(i) Failure to understand ERF's business||462|
|(j) The representations and warranties in the Share Purchase Agreement||465|
|4. The Contribution claim||469|
|(a) Did E&Y (UK) owe a duty of care to MN?||473|
|(b) Was there a breach of duty?||479|
|(c) For what damage might E&Y(UK) be held liable to MN?||480|
|(d) Apportionment of loss||486|
|D. Freightliner's claim against E&Y (Canada)|
|1. Breach of duty as auditor|
|(a) Failing to make appropriate reports to management||489|
|(b) Failing to respond adequately to the tip-off and the Misener rumour||507|
|2. Failing to act with reasonable skill and care in connection with the due diligence exercise||519|
|3. Contributory fault||521|
Lord Justice Moore-Bick:
A. Introduction and Background
1. The parties
2. The origins of the dispute
(a) Fraudulent manipulation of ERF's accounts and false VAT claims
(b) Events leading to the purchase of ERF by MN
(c) Events following the purchase
(d) Developments following the discovery of the fraud
3. The Share Purchase Agreement
"4.1 Representations and Warranties of WS Holdings
WS Holdings represents and warrants as follows to each of MAN and MAN AG and acknowledges and confirms that each of MAN and MAN AG is relying upon such representations and warranties in connection with the purchase by MAN of the ERF Shares:
(i) Conduct of Business in Ordinary Course. Except as disclosed in Section 4.1(i) of the ERF Disclosure Schedule, since the date of the ERF Financial Statements, the ERF Business has been carried on in the Ordinary Course.
(k) No Material Adverse Change. Except as disclosed in the ERF December Financial Statements, since the date of the ERF Financial Statements, there has not been any change in the affairs, prospects, operations or condition of the ERF Companies, the ERF Assets or the ERF Business which would have a Material Adverse Effect and to the knowledge of WS Holdings no event has occurred or circumstances exist which may have a Material Adverse Effect;
. . . . . . . . . . . . . . . . . . . .
(cc) Books and records. All accounting and financial Books and Records have been fully, properly and accurately kept and completed in all material respects . . . . . ;
(dd) ERF Financial Statements. The ERF Financial Statements [the June accounts] . . . . . have been prepared in accordance with the provisions of the Companies Act 1985 . . . . . and give a true and fair view of
(i) the consolidated assets, liabilities . . . . . and financial position of ERF and the ERF Companies at the date of the ERF Financial Statements;
(ee) ERF December Financial Statements. The ERF December Financial Statements [the December accounts] . . . . . have been prepared in accordance with the ERF Accounting Policies on a basis consistent with [the June accounts] and in accordance with such policies fairly represent:
(i) the consolidated assets, liabilities . . . . . and the financial position of ERF as at 31st December 1999;
. . . . . . . . . . . . . . . . . . . .
(oo) Taxes. The ERF Companies have filed or caused to be filed, within the times and in the manner prescribed by Law, all tax reports which are required to be filed by or with respect to the ERF Companies. . . . . . The information contained in such returns is correct and complete in all material respects. . . . . . and except as disclosed in Section (oo) of the ERF Disclosure Schedule:
. . . . . . . . . .
(ii) there has not been any transaction, arrangement, event or omission either occurring after 30th June 1999 or occurring before 30 June 1999 but relating to expenditure to be incurred after 30 June 1999 . . . .
(B) the taxation treatment of which is as far as WS Holdings are aware or may become the subject of any dispute with any taxation authority
. . . . . . . . . . . . . . . . . . . .
(xiii) the ERF Companies have properly and punctually paid all taxation which they have become liable to pay . . . . . . . . .;
(pp) Full Disclosure. Neither this Agreement nor any Ancillary Agreement to which WS Holdings is a party (i) contains any untrue statement of a material fact in respect of WS Holdings, the affairs, operations or condition of the ERF Companies, the ERF Assets or the ERF Business, or (ii) to the knowledge of WS Holdings omits any statement of a material fact necessary in order to make the statements in respect of WS Holdings, the affairs, operations or condition of the ERF Companies, the ERF Assets or the ERF Business contained herein or therein not misleading."
"(1) During the Interim Period, WS Holdings will cause the ERF Companies to conduct the ERF Business in the Ordinary Course or otherwise as specifically contemplated in this Agreement.
(3) . . . . . . WS Holdings shall . . . . . . cause the ERF Companies to:
(g) conduct the ERF Business in such a manner that on the Closing Date the representations and warranties of WS Holdings contained in this Agreement shall be true, correct and complete as if such representations and warranties were made on and as of such date."
"12.1 Indemnification in Favour of MAN
Subject to Section 12.3, Section 12.4 and Section 12.5, WS Holdings shall indemnify and hold each of MAN AG, its Affiliates, the ERF Companies and the Other ERF Subsidiaries (collectively, "MAN Indemnified Persons") harmless of and from any Damages suffered by, imposed or asserted against any of the MAN Indemnified Persons as a result of, in respect of, connected with, or arising out of, under or pursuant to:
(a) any failure of WS Holdings . . . . . to perform or fulfil any of their respective covenants under this agreement;
(b) any breach or inaccuracy of any representation or warranty given by WS Holdings . . . . . contained in this Agreement;
12.3 Time Limitations
. . . . . . . . . . . . . . . . . . . .
(2) The representations and warranties of WS Holdings . . . . . contained in this Agreement . . . . . shall survive the Closing and . . . . . shall continue for a period of 12 months after the Closing Date, save for the representations and warranties relating to . . . . . taxation in Section 4.1(oo) (tax) [which] shall continue for a period of six years after Closing and any claim in respect thereof shall be made in writing during such time period.
. . . . . . . . . . . . . . . . . . . .
(5) For the avoidance of doubt the time limits referred to in this Section 12.3 shall not apply to any claim (whether made by way of representation, warranty or indemnity) in respect of fraud or fraudulent misrepresentation.
. . . . . . . . . . . . . . . . . . . .
12.7 Exclusion of Other Remedies
No Party shall have the right to bring any proceedings against any other Party for a breach of any representation, warranty, covenant or agreement contained in this Agreement, except for a proceeding brought in accordance with the provisions of this Article. This provision is not intended to preclude any proceeding by any Party against any other Party based on fraud or on a cause of action or right, including any statutory right, other than a cause of action in contract or tort for breach of a representation, warranty, covenant or agreement contained in this Agreement."
Where any representation or warranty . . . . . is expressly qualified by reference to the knowledge of a Party, it shall be deemed to refer to the actual knowledge (without further enquiry) of those Persons listed in Section 1.6 of the ERF Disclosure Schedule in the case of WS Holdings . . . . ."
Mr. Ellis was one of the people listed in section 1.6 of the ERF Disclosure Schedule.
"any loss, liability, claim, damage (including incidental and consequential damage) or expense (whether or not involving a third party claim) including legal expenses."
"6.1 Conditions for the Benefit of MAN
The purchase and sale of the ERF Shares is subject to the following conditions to be fulfilled or performed prior to the Closing, . . . . .
(a) Truth of Representations and Warranties. Other than as required by any action specified in or as otherwise contemplated in Article 5, the representations and warranties of WS Holdings contained in Section 4.1 shall be true and correct in all material respects as of the Closing date with the same force and effect as if such representations and warranties had been made on and as of such date and WS Holdings shall have executed and delivered a certificate of a senior officer to that effect. Upon the delivery of such a certificate, the representations and warranties of the WS Holdings in Section 4.1 shall be deemed to have been made in all material respects on and as of the Closing Date with the same force and effect as if made on and as of such date."
4. The claims and defences being advanced in these proceedings
(a) MN's claims against Freightliner
(i) Claims in deceit
(ii) Claims under the Share Purchase Agreement
(b) ERF's claim against Freightliner
(c) Freightliner's claims against E&Y (UK)
(i) breach of a common law duty of care owed to Western Star in carrying out the audits of ERF's accounts for the years ending 30th June 1998 and 30th June 1999;
(ii) breach of contractual and common law duties of care owed to Western Star in connection with the due diligence exercise;
(iii) the right to a contribution under section 1 of the Civil Liability (Contribution) Act 1978 on the grounds that if Freightliner was liable to MN, E&Y (UK) was also liable to MN at common law in respect of the same damage, having negligently provided misleading information to MN in connection with the purchase of ERF (this became known as the "MN contribution claim"); and
(iv) a similar right to a contribution under the 1978 Act on the grounds that if Freightliner was liable to ERF, E&Y (UK) was in breach of contractual and common law duties to ERF in auditing its accounts for the 1998 and 1999 financial years (the "ERF contribution claim").
Since the claim by ERF was not pursued, the ERF contribution claim inevitably fell by the wayside. The other three heads of claim, however, gave rise to numerous issues of fact and law which are described in more detail at a later stage.
(d) Freightliner's claims against E&Y (Canada)
(i) breach of a contractual and a common law duty of care in carrying out the audits of the Western Star group's accounts for the years ending 30th June 1998 and 30th June 1999, in particular in failing to ensure that misleading management comments incorporated in the 1998 Audit Observations Report were not corrected and in failing properly to respond to the tip-off about ERF received from Mr. Pointon; and
(ii) breach of contractual and common law duties of care owed to Western Star in advising on and assisting in the sale of ERF to MN.
Again, each of these has given rise to issues of fact and law, both in relation to the nature and extent of an auditor's duty and the consequences of any breach of duty in the circumstances of this case.
B. MN's claims against Freightliner
1. MN's claim in deceit
(a) Did Mr. Ellis make false and dishonest representations about ERF's accounts and financial statements?
(b) Is Freightliner liable for Mr. Ellis's false representations?
"But with respect to the question, whether a principal is answerable for the act of his agent in the course of his master's business, and for his master's benefit, no sensible distinction can be drawn between the case of fraud and the case of any other wrong. The general rule is, that the master is answerable for every such wrong of the servant or agent as is committed in the course of the service and for the master's benefit, though no express command or privity of the master be proved. That principle is acted upon every day in running down cases. It has been applied also to direct trespass to goods, as in the case of holding the owners of ships liable for the act of masters abroad, improperly selling the cargo. It has been held applicable to actions of false imprisonment, in cases where officers of railway companies, intrusted with the execution of bye laws relating to imprisonment, and intending to act in the course of their duty, improperly imprison persons who are supposed to come within the terms of the bye laws. It has been acted upon where persons employed by the owners of boats to navigate them and to take fares, have committed an infringement of a ferry, or such like wrong. In all these cases it may be said, as it was said here, that the master has not authorized the act. It is true, he has not authorized the particular act, but he has put the agent in his place to do that class of acts, and he must be answerable for the manner in which the agent has conducted himself in doing the business which it was the act of his master to place him in."
"If the agent commits the fraud purporting to act in the course of business such as he was authorized, or held out as authorized, to transact on account of his principal, then the latter may be held liable for it."
Similar expressions of opinion can be found in the speeches of Lord Macnaghten at page 736 and Lord Shaw of Dunfermline at page 740.
"At the end of the day the question is whether the circumstances under which a servant has made the fraudulent misrepresentation which has caused loss to an innocent party contracting with him are such as to make it just for the employer to bear the loss. Such circumstances exist where the employer by words or conduct has induced the injured party to believe that the servant was acting in the lawful course of the employer's business. They do not exist where such belief, although it is present, has been brought about through misguided reliance on the servant himself, when the servant is not authorised to do what he is purporting to do, when what he is purporting to do is not within the class of acts that an employee in his position is usually authorised to do, and when the employer has done nothing to represent that he is authorised to do it."
"The conduct for which the servant is responsible must constitute an actionable tort and to make the employer responsible for that tort the conduct necessary to establish the employee's liability must have occurred within the course of the employment. If the tort is committed jointly, then it is conduct which is within the course of the employment sufficient to constitute the tort, irrespective of which tortfeasor performed the acts, which is necessary. As both tortfeasors are responsible for the tortious conduct as a whole in the case of joint torts it is not necessary to distinguish between the actions of the different tortfeasors. For vicarious liability what is critical, as long as one of the joint tortfeasors is an employee, is that the combined conduct of both tortfeasors is sufficient to constitute a tort in the course of the employee's employment.
. . . . . before there can be vicarious liability, all the features of the wrong which are necessary to make the employee liable have to have occurred in the course of the employment. Otherwise there is no liability. You cannot therefore combine the actions of Mr. Pillai in the course of his employment with actions of Mr. Chong, which if done by Mr. Pillai would be outside the course of Mr. Pillai's employment, and say E.C.G.D. is vicariously liable for the consequence of Mr. Pillai's and Mr. Chong's combined conduct."
"28. Employing the traditional methodology of English law, I am satisfied that in the case of the appeals under consideration the evidence showed that the employers entrusted the care of the children in Axeholme House to the warden. The question is whether the warden's torts were so closely connected with his employment that it would be fair and just to hold the employers vicariously liable. "
(i) Representations about ERF's accounts
"When a goods vehicle is being used on a road for the carriage of goods, . . . . . the person whose agent or servant the driver is, shall, for the purposes of this Part of this Act, be deemed to be the person by whom the vehicle is being used."
"With all respect to the justices, a man cannot be the servant of A and the agent of B in performing the same piece of work. He is either the servant of A or the servant of B."
"For the purposes of the Act, the driver of a vehicle, if it belongs to him or is in his possession under an agreement for hire, hire-purchase or loan, and in any other case the person whose servant or agent the driver is, shall be deemed to be the person using the vehicle; and references to using a vehicle shall be construed accordingly."
Night Trunkers did not hold the appropriate licence, but Interlink did, so again the question arose whether the drivers of the lorries were to be regarded as the servants of Night Trunkers.
(ii) Representations about his own honesty
(c) Did Mr. Ellis's representations about ERF's accounts induce MN to enter into the Share Purchase Agreement?
(d) Section 14.10 of the Share Purchase Agreement
"This Agreement together with the Ancillary Agreements constitutes the entire agreement between the Parties and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties. There are no representations, warranties, covenants, conditions or other agreements, express or implied, collateral, statutory or otherwise, between the Parties in connection with the subject matter of this Agreement except as specifically set forth herein and none of the Parties has relied or is relying on any other information, discussion or understanding in entering into and completing the transactions contemplated in this Agreement and the Ancillary Agreements. . . . . . . . Nothing in this Section 14.10 shall affect any Party's liability for fraud or fraudulent misrepresentation."
(e) Was MN fraudulently induced to retain the services of Mr. Ellis?
2. MN's claim under the Share Purchase Agreement
(a) The representations on which MN relied
(b) The nature of Article 4
". . . . . . WS Holdings shall indemnify and hold [MN] harmless of and from any loss . . . . . suffered by . . . . . . [MN] as a result of, in respect of, connected with, or arising out of, under or pursuant to any breach or inaccuracy of any representation or warranty . . . . contained in this Agreement."
(c) The unqualified representations and warranties
" . . . . . the knowledge which has been acquired by the officer of one company will not be imputed to the other company, unless the common officer had some duty imposed upon him to communicate that knowledge to the other company, and had some duty imposed on him by the company which is alleged to be affected by the notice to receive the notice."
"The case is very much more like the one which both Mr Bramwell Davis and Mr Jenkins had to admit was an exception to the general rule that they sought to lay down, for they admitted that if Wills had been guilty of a fraud, the personal knowledge of Wills of the fraud that he had committed upon the company would not have been knowledge of the society of the facts constituting that fraud; because common sense at once leads one to the conclusion that it would be impossible to infer that the duty, either of giving or receiving notice, will be fulfilled where the common agent is himself guilty of fraud. It seems to me that if you assume here that Mr Wills was guilty of irregularity – a breach of duty in respect of these transactions, the same inference is to be drawn as if he had been guilty of fraud. I do not know, I am sure, whether he was guilty of actual fraud; but whether his conduct amounted to fraud or breach of duty, I decline to hold that his knowledge of his own fraud or of his own breach of duty is, under the circumstances, the knowledge of the company."
". . . . . if the allegations in the statement of claim are made good, the directors of the plaintiff company must then have known that the transaction was an illegal transaction.
But in my view such knowledge should not be imputed to the company, for the essence of the arrangement was to deprive the company improperly of a large part of its assets. As I have said, the company was a victim of the conspiracy. I think it would be irrational to treat the directors, who were allegedly parties to the conspiracy, notionally as having transmitted this knowledge to the company; and indeed it is a well-recognised exception from the general rule that a principal is affected by notice received by his agent that, if the agent is acting in fraud of his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal."
"The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations. In exceptional cases, however, they will not provide an answer. This will be the case when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability. For example, a rule may be stated in language primarily applicable to a natural person and require some act or state of mind on the part of that person "himself," as opposed to his servants or agents. This is generally true of rules of the criminal law, which ordinarily impose liability only for the actus reus and mens rea of the defendant himself. How is such a rule to be applied to a company?
One possibility is that the court may come to the conclusion that the rule was not intended to apply to companies at all; for example, a law which created an offence for which the only penalty was community service. Another possibility is that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of attribution, i.e. if the act giving rise to liability was specifically authorised by a resolution of the board or an unanimous agreement of the shareholders. But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy."
"It is a question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company. Sometimes, as in In re Supply of Ready Mixed Concrete (No. 2)  1 A.C. 456 and this case, it will be appropriate. Likewise in a case in which a company was required to make a return for revenue purposes and the statute made it an offence to make a false return with intent to deceive, the Divisional Court held that the mens rea of the servant authorised to discharge the duty to make the return should be attributed to the company: see Moore v. I. Bresler Ltd.  2 All E.R. 515. On the other hand, the fact that a company's employee is authorised to drive a lorry does not in itself lead to the conclusion that if he kills someone by reckless driving, the company will be guilty of manslaughter. There is no inconsistency. Each is an example of an attribution rule for a particular purpose, tailored as it always must be to the terms and policies of the substantive rule."
"WS Holdings represents and warrants that
. . . . . . since the date of the ERF Financial Statements, there has not been any change in the affairs, prospects, operations or condition of the ERF Companies, the ERF Assets or the ERF Business which would have a Material Adverse Effect and to the knowledge of [Stephen Ellis] no event has occurred or circumstances exist which may have a Material Adverse Effect;"
There are minor differences in the wording of the various qualified representations, but they do not materially affect matters for this purpose.
(d) The qualified representations and warranties
"(ii) . . . . . there has not been any transaction . . . . . (B) the taxation treatment of which is, as far as Mr. Ellis is aware, or may become the subject of any dispute with any taxation authority."
That representation on the part of Western Star was undoubtedly false, but it was not made dishonestly since none of those who represented Western Star for the purposes of making it was aware of the fact.
(e) The representations relating to ERF's tax position – Section 4.1(oo)
2. The representations and warranties contained in Section 4.1 of the Agreement are made and given subject to the disclosures in this ERF Disclosure Schedule. Neither WS Holdings nor any of the ERF Companies shall be or be deemed to be in breach of any such representations and warranties in respect of matters disclosed in this ERF Disclosure Schedule.
5. The following are also disclosed:
. . . . . . . . . .
(e) any matter which is or should be revealed by inspection of the statutory registers and books and minutes of each of the ERF Companies which would have been revealed by the making of such inspection as would have been made by a prudent purchaser and its professional advisers."
"Mere reference in a disclosure letter to a source of information, which is itself a complex document, within which a diligent enquirer might find relevant information will not satisfy the requirements of a clause providing for fair disclosure with sufficient details to identify the nature and scope of the matter disclosed" (page 259c).
(f) The construction of Article 12
"proceedings . . . . . . based on fraud or on a cause of action or right, including any statutory right, other than a cause of action in contract or tort for breach of a representation, warranty, covenant or agreement contained in this Agreement."
"other than a cause of action in contract or tort for breach of a representation, warranty, covenant or agreement contained in this Agreement"
at the end of the last sentence of section 12.7 refer only to the preceding expression ("a cause of action or right") or are intended to refer to "fraud" as well so as to prevent any claim for fraud based on a representation contained in the agreement from being pursued otherwise than in accordance with, and subject to any restrictions contained in, Article 12. In my view the former construction is clearly to be preferred, both because it better reflects the natural meaning of the language used in the sentence as a whole (the words "or on" in the expression "based on fraud or on a cause of action" are naturally disjunctive and tend to limit the scope of the later reference to a cause of action) and because it is supported by indications elsewhere in the same Article, for example in sections 12.3(5) and 12.4(5), that the parties intended to treat fraud as an exceptional case. The scheme of section 12.7 seems to me reasonably clear: it is intended to limit the parties' remedies for breaches of the agreement to those provided in Article 12, but it expressly excludes from that limitation claims based on fraud generally and claims arising outside the terms of the agreement. In my view, therefore, Mr. Kendrick was right in saying that a claim for fraudulent misrepresentation based on the representations contained in the agreement is not subject to any limitations imposed by Article 12. However, MN's claim under section 4.1(oo) is not one for fraudulent misrepresentation and therefore it is restricted to obtaining an indemnity in accordance with the terms of section 12.1
". . . . . . indemnify [MN] against and hold it harmless of and from any loss . . . . . damage (including incidental and consequential damage) or expense . . . . . . suffered by . . . . . . [MN] as a result of or arising out of or under or pursuant to . . . . . . any breach or inaccuracy of any representation or warranty given by WS Holdings . . . . . . contained in this agreement."
(g) The Settlement Agreement
"In consideration of the payment in the aggregate amount of £1,450,000 by Western Star to MAN or MAN designee MAN and Western Star agree
. . . . . . . . . .
2. MAN's outstanding claims against Western Star are satisfied in full.
3. MAN waives and will not assert any further claim against Western Star based on the covenants, representations and warranties under the Share Purchase Agreement.
. . . . . . . . . .
6. This memorandum is not legally binding and is subject to a definitive agreement which must provide for the payment of £1,450,000."
"2. Subject to paragraph 4 below, all current, past and future claims including claims for interest and/or costs that MAN may have, or may otherwise have had, against Western Star in connection with (whether directly or indirectly) the indemnities, the covenants, representations and warranties of Western Star Trucks Holdings Ltd in the Share Purchase Agreement and any Ancillary Agreement will be fully and finally settled, waived and discharged.
. . . . . . . . . .
4. This agreement does not apply to any claims that MAN may have against Western Star arising out of the environmental and taxation representations and warranties . . . . . . . ."
3. Causation and remoteness of damage
(a) The relevant principles
(i) The measure of damages for fraud
". . . . . even if the maker of the fraudulent misrepresentation is liable for all the consequences of the plaintiff having entered into the transaction, the identification of those consequences may involve difficult questions of causation. The defendant is clearly not liable for losses which the plaintiff would have suffered even if he had not entered into the transaction or for losses attributable to causes which negative the causal effect of the misrepresentation."
"First, that the measure of damages where a contract has been induced by fraudulent misrepresentation is reparation for all the actual damage directly flowing from (i.e. caused by) entering into the transaction. Second, that in assessing such damages it is not an inflexible rule that the plaintiff must bring into account the value as at the transaction date of the asset acquired: although the point is not adverted to in the judgments, the basis on which the damages were computed shows that there can be circumstances in which it is proper to require a defendant only to bring into account the actual proceeds of the asset provided that he has acted reasonably in retaining it. Third, damages for deceit are not limited to those which were reasonably foreseeable. Fourth, the damages recoverable can include consequential loss suffered by reason of having acquired the asset."
Moreover, in the next paragraph he recognised that the defendant's fraud may continue to have an effect after the transaction has been completed and that the acquisition of an asset may itself lock the purchaser into continuing to hold it until an opportunity to sell it arises. In a later passage, however, he confirmed that the claimant is under a duty to mitigate his loss once he is aware of the fraud.
"In sum, in my judgment the following principles apply in assessing the damages payable where the plaintiff has been induced by a fraudulent misrepresentation to buy property: (1) the defendant is bound to make reparation for all the damage directly flowing from the transaction; (2) although such damage need not have been foreseeable, it must have been directly caused by the transaction; (3) is assessing such damage, the plaintiff is entitled to recover by way of damages the full price paid by him, but he must give credit for any benefits which he has received as a result of the transaction; (4) as a general rule, the benefits received by him include the market value of the property acquired as at the date of acquisition; but such general rule is not to be inflexibly applied where to do so would prevent him obtaining full compensation for the wrong suffered; (5) although the circumstances in which the general rule should not apply cannot be comprehensively stated, it will normally not apply where either (a) the misrepresentation has continued to operate after the date of the acquisition of the asset so as to induce the plaintiff to retain the asset or (b) the circumstances of the case are such that the plaintiff is, by reason of the fraud, locked into the property. (6) In addition, the plaintiff is entitled to recover consequential losses caused by the transaction; (7) the plaintiff must take all reasonable steps to mitigate his loss once he has discovered the fraud."
"the orthodox and settled rule that the plaintiff is entitled to all losses directly flowing from the transaction caused by the deceit does not require revision."
"If a man buys a horse, as a racehorse, on the false representation that it has won some great race, while in reality it is a horse of very inferior speed, and he pays ten or twenty times as much as the horse is worth, and after the buyer has got the animal home it dies of some latent disease inherent in its system at the time he bought it, he may claim the entire price he gave; the horse was by reason of the latent mischief worthless when he bought; but if it catches some disease and dies, the buyer cannot claim the entire value of the horse, which he is no longer in a condition to restore, but only the difference between the price he gave and the real value at the time he bought."
(ii) The effect of fraudulent statements
"It is true that if he had not supposed he would have a charge he would not have taken the debentures; but if he also relied on the misstatement in the prospectus, his loss none the less resulted from that misstatement. It is not necessary to show that the misstatement was the sole cause of his acting as he did. If he acted on that misstatement, though he was also influenced by an erroneous supposition, the defendants will still be liable."
"Then this question has been raised: the Plaintiff admits that he was induced to make the advance not merely by this false statement, but by the belief that the debentures would give him a charge on the company's property, and it is admitted that this was a mistake of the Plaintiff. Therefore it is said that the Plaintiff was the author of his own injury. It is quite true that the Plaintiff was influenced by his own mistake, but that does not benefit the Defendants' case. The Plaintiff says: I had two inducements, one my own mistake, the other the false statement of the Defendants. The two together induced me to advance the money. But in my opinion if the false statement of fact actually influenced the Plaintiff, the Defendants are liable, even though the Plaintiff may have been also influenced by other motives."
"This case seems to me to show that if a fraudulent representation is relied upon, in the sense that the claimant would not have parted with his money if he had known it was false, it does not matter that he also held some other negligent or irrational belief about another matter and, but for that belief, would not have parted with his money either. The law simply ignores the other reasons why he paid."
He considered the rule to be based upon sound policy because it would not be just for a fraudulent defendant's liability to be reduced on the grounds that the victim should not have made the payment which the defendant successfully induced him to make.
(iii) New intervening events
(b) The facts
(i) Mr. Ellis's continuing dishonesty
"In these circumstances Smith was truly locked into the transaction by reason of the fraud perpetrated on it. And the causative influence of the fraud is not significantly attenuated or diluted by other causative factors acting simultaneously with or subsequent to the fraud. The position would have been different if the loss suffered by Smith arose from a subsequent fraud. That would be a case like the misrepresented horse in Cockburn C.J.'s example in Twycross v. Grant, 2 C.P.D. 469, 544-545, where the buyer plainly cannot recover the entire value of the horse if it subsequently catches a disease and dies."
(ii) Mr. Ellis as the 'bad apple'.
(iii) MN's response to ERF's use of cash
(A) Recklessness, irresponsibility and commercial irrationality
(B) The background to the acquisition
(C) The integration of ERF into the MAN group
(D) The ERF Holdings board meeting on 2nd May 2000
(E) The MN executive board meeting on 27th June 2000
(F) The MN executive board meeting on 19th September 2000
(G) The MN executive board meeting on 28th November 2000
"It is often easy after an emergency has passed to criticise the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken."
(A) Announcements to the market
"The company has announced the creation of a task force to implement faster integration of the manufacturing and administration processes – to speed up new model introductions at Middlewich and to boost 'back office' efficiencies, including the sales and marketing operations of both ERF and MAN UK."
The German version referred to the possibility of introducing new products and emphasised the continued existence of ERF in the UK market.
(B) Continuing production of existing models
(v) Losses flowing from the transaction
6. Summary of conclusions
C. Freightliner's claim against E&Y (UK)
1. Was E&Y (UK) in breach of a duty of care owed to Western Star in relation to the audit of ERF?
(a) Did E&Y (UK) owe Western Star a duty of care to ensure that the accounts of ERF gave a true and fair view of its financial position?
"It is the auditors' function to ensure, so far as possible, that the financial information as to the company's affairs prepared by the directors accurately reflects the company's position in order, first, to protect the company itself from the consequences of undetected errors or, possibly, wrongdoing (by, for instance, declaring dividends out of capital) and, secondly, to provide shareholders with reliable intelligence for the purpose of enabling them to scrutinise the conduct of the company's affairs and to exercise their collective powers to reward or control or remove those to whom that conduct has been confided."
"The point that is, as it seems to me, significant in the present context, is the unanimous approval in this House of the judgment of Denning L.J. in Candler's case  2 K.B. 164, 181 in which he expressed the test of proximity in these words: "did the accountants know that the accounts were required for submission to the plaintiff and use by him?" In so far as this might be said to imply that the plaintiff must be specifically identified as the ultimate recipient and that the precise purpose for which the accounts were required must be known to the defendant before the necessary relationship can be created, Denning L.J.'s formulation was expanded in the Hedley Byrne case, where it is clear that, but for an effective disclaimer, liability would have attached. The respondents there were not aware of the actual identity of the advertising firm for which the credit reference was required nor of its precise purpose, save that it was required in anticipation of the placing of advertising contracts. Furthermore, it is clear that "knowledge" on the part of the respondents embraced not only actual knowledge but such knowledge as would be attributed to a reasonable person placed as the respondents were placed. What can be deduced from the Hedley Byrne case, therefore, is that the necessary relationship between the maker of a statement or giver of advice ("the adviser") and the recipient who acts in reliance upon it ("the advisee") may typically be held to exist where (1) the advice is required for a purpose, whether particularly specified or generally described, which is made known, either actually or inferentially, to the adviser at the time when the advice is given; (2) the adviser knows, either actually or inferentially, that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose; (3) it is known either actually or inferentially, that the advice so communicated is likely to be acted upon by the advisee for that purpose without independent inquiry, and (4) it is so acted upon by the advisee to his detriment. That is not, of course, to suggest that these conditions are either conclusive or exclusive, but merely that the actual decision in the case does not warrant any broader propositions."
"Mere foreseeability that a potential bidder may rely on the audited accounts does not impose on the auditor a duty of care to the bidder, but if the auditor is expressly made aware that a particular identified bidder will rely on the audited accounts or other statements approved by the auditor, and intends that the bidder should so rely, the auditor will be under a duty of care to the bidder for the breach of which he may be liable."
". . . . . whether having regard to all the circumstances of the case and looking at the matter objectively it can be said that [the accountant] undertook responsibility to [the potential investor] for the substantial accuracy of the . . . . . accounts."
"As you will appreciate, our working papers were created for the particular purpose of our audit of the Company's statutory financial statements and not for the purpose of the proposed sale of the Company, or indeed for any other purpose. Consequently, the working papers and the information in them may not be suitable for the purposes of the proposed transaction. However, you and the Company will accept the risk and not hold Ernst & Young responsible, if the Purchaser's and/or the Accountants' review of our working papers or our explanations or representations made orally to them results
(a) in the termination of, or alteration to, the proposed transaction; or
(b) in any action at any time against you or [ERF] respectively, if the Purchaser, the Accountants or any of the other parties involved with this proposed transaction misuse any confidential information obtained from a review of our working papers or by way of explanation from us.
For the avoidance of doubt, nothing in this letter is intended to affect any rights the Company may have against Ernst & Young as auditor of the Company."
"6. . . . . . we are prepared to grant the accountants access to the Working Papers and at our discretion give explanations in relation thereto or other information or representations relating to or arising from our work (all information derived from any of these sources being referred to in this letter as "Information") only on condition that the Purchaser and the Accountants acknowledge the foregoing and agree to the following conditions:
. . . . . . . . . .
(2) The Purchaser and the Accountants accept that Ernst & Young neither owe nor accept any duty to the Purchaser or the Accountants whether in contract or in tort or howsoever arising, in relation to the Information or any part of it. In these circumstances, if the Purchaser and the Accountants wish to rely upon any part of the Information, they each accept that they do so entirely at their own risk."
(b) Were E&Y (UK) in breach of duty?
(i) Reconciliation of the purchase ledger and the purchase ledger control account
(ii) Understatement of VAT liability
(iii) Discrepancy between cash balances and trade creditors
(iv) Provision for warranties
(v) Failure to report concerns about ERF
(vi) Failure to respond adequately to the tip-off
(c) What were the consequences of E&Y (UK)'s negligence?
(i) The 1998 audit
(ii) The 1999 audit
(d) The scope of E&Y (UK)'s liability
"LIMITATION OF LIABILITY
I would draw your attention to section 11 of Part III of the terms of business headed "Limitation of Liability". We fully realise that it is not possible to limit the firm's liability to shareholders arising from its role as auditor under the Companies Act 1985, and we do not seek to do so. . . . . . However, to the extent that we may provide other services to you which are not covered by a separate letter of engagement, our liability to each company listed on the attached schedule in respect of those services will be limited to £2 million in accordance with that section."
"LIMITATION OF LIABILITY
For all causes of action accruing in any 12 month period, commencing on the date of our engagement letter, the liability of our firm (including its partners, staff and associated entities) to each company listed in the schedule to our engagement letter in respect of breach of contract or breach of duty or fault or negligence or otherwise whatsoever arising out of or in connection with this engagement shall be limited in total to £2 million to cover claims of any sort whatsoever (including interest and costs) arising out of or in connection with this engagement. . . . . . . "
"Indeed the case can be simplified into one in which A breaks his duty to B, and the question is whether a third party, C, can proceed directly against A in respect of damage thereby suffered by him. In such circumstances (and in this I find myself differing from Lloyd J. in The Irene's Success  Q.B. 461) it seems to me unthinkable that, if C is to have a direct cause of action against A, that right of action should be uncontrolled by those provisions which regulate A's liability to B."
2. Were E&Y (UK) in breach of a duty of care owed to Western Star in relation to the conduct of the due diligence exercise?
(a) What duty did E&Y (UK) owe to Western Star in relation to the conduct of the due diligence exercise?
(b) Were E&Y (UK) in breach of duty?
3. Contributory fault
"Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant's share in the responsibility for the damage".
"Fault" is defined in section 4 as meaning
"negligence, breach of statutory duty or other act or omission which gives rise to liability in tort or would, apart from this Act, give rise to the defence of contributory negligence."
(a) Early invoicing
(b) Spanish invoicing
(c) Weakening of ERF's management
(d) Unreasonable pressure on ERF to produce results
(e) The introduction of BaaN Financial
(f) Accepting management reports based on estimates
(g) Failure to monitor and control ERF
(h) Failure to respond properly to the tip-off
". . . . . in the context of the "deep throat" red flag it is particularly incumbent upon both E&Y and management to be diligent, full and frank as we go forward through to the completion of both the statutory audit and the due diligence process. Based on our conversations and John Bryant's conversation with Alison [Sinderson], I don't believe this will or should be an issue."
(i) Failure to understand ERF's business
(j) The representations and warranties in the Share Purchase Agreement
4. The contribution claim
"Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)."
"A person is liable in respect of any damage for the purposes of this Act if the person who suffered it (or anyone representing his estate or dependants) is entitled to recover compensation from him in respect of that damage (whatever the legal basis of his liability, whether tort, breach of contract, breach of trust or otherwise)."
(a) Did E&Y (UK) owe a duty of care to MN?
(b) Was there a breach of duty?
(c) For what damage might E&Y (UK) be held liable to MN?
"5. It is plain beyond argument that one important object of the 1978 Act was to widen the classes of person between whom claims for contribution would lie and to enlarge the hitherto restricted category of causes of action capable of giving rise to such a claim. It is, however, as I understand, a constant theme of the law of contribution from the beginning that B's claim to share with others his liability to A rests upon the fact that they (whether equally with B or not) are subject to a common liability to A. I find nothing in section 6(1)(c) of the 1935 Act or in section 1(1) of the 1978 Act, or in the reports which preceded those Acts, which in any way weakens that requirement. Indeed both sections, by using the words "in respect of the same damage", emphasise the need for one loss to be apportioned among those liable.
6. When any claim for contribution falls to be decided the following questions in my opinion arise. (1) What damage has A suffered? (2) Is B liable to A in respect of that damage? (3) Is C also liable to A in respect of that damage or some of it? . . . . . I do not think it matters greatly whether, in phrasing these questions, one speaks (as the 1978 Act does) of "damage" or of "loss" or "harm", provided it is borne in mind that "damage" does not mean "damages" (as pointed out by Roch LJ in Birse Construction Ltd v Haiste Ltd  1 WLR 675, 682) and that B's right to contribution by C depends on the damage, loss or harm for which B is liable to A corresponding (even if in part only) with the damage, loss or harm for which C is liable to A. This seems to me to accord with the underlying equity of the situation: it is obviously fair that C contributes to B a fair share of what both B and C owe in law to A, but obviously unfair that C should contribute to B any share of what B may owe in law to A but C does not."
(d) Apportionment of loss
D. Freightliner's claim against E&Y (Canada)
1. Breach of duty as auditors
(a) Failing to make appropriate reports to management
(i) Failing to report the contents of the 'ERF Concerns' memorandum
(ii) The Audit Observations
"Although we would agree that there was no trial balance available at each month end, the figures provided on a monthly basis were generated from reports produced by the other systems in place within ERF, i.e. MACPAC, Motis and the warranty contract maintenance systems. These are proven systems from which accurate information has been obtained in the past which was reconciled to the previous financial systems J.D. Edwards.
To ensure that a full and accurate trial balance was available at the year end every line item was reconciled to give both ERF and E&Y total comfort in the year end result produced."
"ERF accepts that during the year a number of estimates were put forward in the production of the monthly accounts. However, at the year end, a complete and accurate trial balance was made available where every line item was reconciled, therefore, giving both ERF and Ernst & Young complete comfort in the year end result produced."
The draft Audit Observations report presented to Western Star's Audit Committee on 25th January differed in some respects from the earlier versions, but this passage remained unchanged.
(b) Failing to respond adequately to the tip-off and the Misener rumour
2. Failing to act with reasonable skill and care in connection with the due diligence exercise
3. Contributory fault