Question

Certain legal principles and specific factual situations are provided in each of the following questions. Apply the principles to the given facts and select the most appropriate answer.
LEGAL PRINCIPLE :
1. Negligence is a legal wrong that is suffered by someone at the hands of another who has a duty to take care but fails to take proper care to avoid what a reasonable person would regard as a foreseeable risk.
2. The test of liability requires that the harm must be a reasonably foreseeable result of the defendant’s conduct, a relationship of proximity must exist and it must be fair, just and reasonable to impose liability.
3. The claimant must prove that harm would not have occurred, ‘but for’ the negligence of the defendant.
4. Duty of care is a legal obligation which is imposed on an individual requiring adherence to a standard of reasonable care while performing any acts that could foreseeably harm others.
5. Conversations between a doctor and patient are generally confidential but there are few exceptions.
FACTUAL SITUATION : KLM, a firm that manufactures electrical equipments, was the target of a takeover by ABS Industries. KLM was not doing well. In March 2019, KLM had issued a profit warning, which had halved its share price. In May 2019, KLM’s directors made a preliminary announcement in its annual profits for the year up to March. This confirmed that the position was bad. The share price fell again. At this point, ABS had begun buying up shares in large numbers. In June 2019, the annual accounts, which were done with the help of the accountant Dinesh, were issued to the shareholders, which now included ABS. ABS reached a shareholding of 29.9% of the company, at which point it made a general offer for the remaining shares, as the City Code’s rules on takeovers required. But once it had control, ABS found that KLM’s accounts were in an even worse state than had been revealed by the directors or the auditors. It sued Dinesh for negligence in preparing the accounts and sought to recover its losses. This was the difference in value between the company as it had and what it would have had if the accounts had been accurate. Which of the following answers is incorrect ?

• A. No duty of care had arisen in relation to existing or potential shareholders. The only duty of care the auditor’s owed was to the governance of the firm.
• B. Dinesh is not liable as it is a case of pure economic loss in the absence of contractual agreements between parties.
• C. There are circumstances where an auditor will owe a duty of care in respect of reports produced. These are conditional that at the time the report is prepared it is known by the auditors that the results are for a specific class and for a specific purpose.
• D. An ability to foresee indirect or economic loss to another person as the result of a defendant’s conduct automatically impose on the defendant a duty to take care to avoid that loss.

Answer 1

The Correct Option is D

The correct option is (D): An ability to foresee indirect or economic loss to another person as the result of a defendant’s conduct automatically impose on the defendant a duty to take care to avoid that loss.