SCENARIO 4 Ready and Co, a firm of accountants and auditors, were engaged to pre
ID: 350085 • Letter: S
Question
SCENARIO 4
Ready and Co, a firm of accountants and auditors, were engaged to prepare the accounts and balance sheet for Products for People plc, knowing the accounts were to be sent to Hind, a private investor, who was thinking of buying shares in Products for People plc. The accounts were negligently prepared and showed the company as financially stable, even though the opposite was true and the company had large unpaid debts. Hind showed the accounts to her friend Imran. Hind bought AED1 million worth of shares and Imran bought AED 500,000 worth of shares. Within 6 months, Products for People plc went into liquidation and both Hind and Imran lost their investments.
Advise (1) Hind, and (2) Imran whether they are likely to be successful in their claims in negligence against Ready and Co and what defences the company may have.
What are the 3 points to be proved in any claim based on negligence?
What does ‘pure economic loss’ mean and when can a claim be made for it?
What must be proved in a claim for ‘negligent misstatement?
Would Hind be successful in a claim for ‘negligent misstatement’ against Ready and Co?
Would Imran be successful in a claim for ‘negligent misstatement’ against Ready and Co?
Would Ready and Co have any defences?
SCENARIO 4
Ready and Co, a firm of accountants and auditors, were engaged to prepare the accounts and balance sheet for Products for People plc, knowing the accounts were to be sent to Hind, a private investor, who was thinking of buying shares in Products for People plc. The accounts were negligently prepared and showed the company as financially stable, even though the opposite was true and the company had large unpaid debts. Hind showed the accounts to her friend Imran. Hind bought AED1 million worth of shares and Imran bought AED 500,000 worth of shares. Within 6 months, Products for People plc went into liquidation and both Hind and Imran lost their investments.
Advise (1) Hind, and (2) Imran whether they are likely to be successful in their claims in negligence against Ready and Co and what defences the company may have.
1. What are the 3 points to be proved in any claim based on negligence?
2. What does ‘pure economic loss’ mean and when can a claim be made for it?
3. What must be proved in a claim for ‘negligent misstatement?
4. Would Hind be successful in a claim for ‘negligent misstatement’ against Ready and Co?
5. Would Imran be successful in a claim for ‘negligent misstatement’ against Ready and Co?
6. Would Ready and Co have any defences?
Explanation / Answer
1) The 3 points to be proved in any claim based on negligence are:
2) When negligent actions of defendant cause financial damage to plaintiff, it is called Pure Economic Loss (PEL). In these types of damages, only economic loss is considered, it does not include physical damage to property or person. PEL can be further expanded to cover profitability, profit or loss, expenditure or other sort of financial gain.
To claim PEL, it is important to establish legal breach of contractual terms by defendant. If a contract or agreement is not in place, it may become difficult for plaintiff to claim for loss.
3) To claim Negligent Misstatement, plaintiff is required to show to the court that defendant owes the plaintiff duty of care on balance of probabilities. The duty of care owed by defendant is not to cause harm which was caused due to negligent misstatement. Plaintiff needs to also establish that defendant breached duty of care and that plaintiff suffered damages because of it.
4) From the above scenario 4, it appears that Ready and co. and Hind were not a part of any agreement or contract which can make it difficult for Hind to get success in his claim. But there is a Special relationship provision in negligible misstatement - if Hind can establish special relationship with ready and co. If Hind can prove that ready and co. was aware that the actions taken by them will determine Hind's actions and that Hind may suffer damages if Hind invests in People and co. Using this provision, Hind may have a chance to succeed.
5) Imran may not be successful in a claim for negligent misstatement as there was neither any agreement or contract nor special relationship between Imran and Ready and co.
6) Since there was no contract or agreement between Hind and Ready and co., it may be possible for ready and co. to use it as there defense. Absence of contract or agreement means that ready and co. does not owe any duty of care to Hind and that Ready and co. cannot be held liable for negligence.
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