28 April 2020
Introduction
Summary
In this case certain E&Y entities based in London were ordered to pay USD10.8 million for loss of earnings to a whistleblowing former auditor employed by an E&Y entity that was not based in the UK and not party to the proceedings. The case is significant because of (1) the extension of the duty of care owed to employees (2) imposition of liability on entities within the network who had responsibility for maintaining the reputation and value of the E&Y brand.
Background
The claimant was a partner and former auditor with a member firm in the Middle East of Ernst & Young, a global professional services business. The Judge found that the first defendant Ernst &Young Global Limited imposed certain obligations on member firms and the other defendants assisted in ensuring those obligations were complied with. The claimant had carried out an assurance audit of a Dubai gold dealer based in Dubai aimed at reporting on compliance with various internationally approved ethical standards relating to the trade of gold. During the audit, the claimant discovered significant non-compliance by the trader, specifically that the trader was involved in the trade of gold bullion which was coated in silver to get around restrictions on the export of gold. The trader and the Dubai based regulator objected to the claimant’s findings and pressurised the claimant and E&Y Dubai to water down the findings.
The claimant escalated his concerns about this pressure to senior individuals in the E&Y defendant entities. The claimant alleged that the defendants failed to support him in relation to his findings, and instead had pressurised him to agree a modified version of the report more favourable to the client. The claimant alleged that he was intimidated and, fearing for his safety, re-located with his family away from Dubai and requested that he be given a role in a different part of the E&Y network. He also stated that he would have to publish his findings and be forced to resign unless E&Y themselves fully reported on them.
The Court found that E&Y did not offer the claimant an alternative role and requested that he returned to work in Dubai. The claimant resigned, published his findings and brought claims against three entities in the E&Y network, but not E&Y Dubai nor E&Y MENA, the entity of which he was a partner, alleging that they owed him the following duties (which if breached would lead to economic harm):
1. To keep the claimant safe and mitigate the risk of him returning to work in Dubai, by making reasonable efforts to relocate him or provide him with alternative work outside of Dubai (“the Safety Duty”) and
2. To conduct the audit in an ethical and professional manner, irrespective of the objections of the client and the Dubai based regulator (“the Audit Duty”).
Findings
HHJ Kerr rejected the allegation that the defendants owed the Safety Duty, as the limit of the duty owed by employers was to keep employees safe from physical harm and loss of earnings consequent on such harm. It did not extend to protecting them from future economic loss absent physical injury.
However, the Court found that the Audit Duty contended for existed on the basis of three core principles set out in Caparo v Dickman, notwithstanding that there was no contractual relationship between the claimant and the E&Y defendants, as follows:
1. There was sufficient proximity to impose a duty because the entities which comprised the EY network were integrated to a large extent and the claimant had escalated his concerns to the three defendants in accordance with the network’s procedures, and the defendants had taken responsibility for investigating his concerns and managing the audit.
2. The Court found that it was foreseeable that, if an unvarnished version of the audit was not published, the claimant would publicise his findings as a whistle-blower and would suffer economic loss, being the loss of his career with E&Y and damage to his reputation.
3. It was fair, just and reasonable in all the circumstances to impose a duty. In this regard, the Court considered it relevant that it had found senior E&Y personnel had acted unethically in relation to the audit.
Comment and Practical Implications
The Audit Duty which the High Court found to exist on the facts is a novel duty, justified by the Judge on the basis of it being an incremental development of a duty which already exists. An employer does not usually owe an employee a duty to protect from purely economic loss save in certain limited cases such as when providing a reference. The decision extends the circumstances in which the Court will find a duty exists, even if no physical injury has been suffered.
Further, in this case the Court was prepared to look beyond the contractual relationships to find a duty by noncontracting E&Y entities. Whether such a duty exists is a fact sensitive analysis and was based on the active involvement by the E&Y defendants in the actions that led to the claimant’s loss.
E&Y have said they will appeal the decision but regardless of the outcome of an appeal, the recent trend of judicial authorities suggests:
1. Employers will, in certain situations, need to consider the impact of their actions on the future employment and earning prospects of employees who may leave their employment as a result of those actions.
2. Particular care needs to be taken in dealing with whistleblowers. Organisations must ensure they have appropriate whistleblowing policies in place and those policies are complied with.
3. Parent companies or entities within a network that have the ability to exercise control in relation to the activities of other entities within the group or network and do so need to be very mindful that they can subsequently be held liable to individuals or groups of individuals to whom they may never have intended to assume a responsibility to.
karimccormick@eversheds-sutherland.com
