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    Hercules Management Ltd. v. Ernst & Young

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    Alice Jiang
    This document summarizes a court case between Hercules Management Ltd. and Ernst & Young regarding audit reports prepared by Ernst & Young for Hercules. The issues are whether Ernst & Young owed a duty of care to Hercules regarding investment losses and losses in share value resulting from reliance on the audit reports, and whether the rule that shareholders cannot sue on behalf of a corporation affects Hercules' action. The court found that while the auditors owed a duty of care to Hercules since it was foreseeable Hercules would rely on the audits, the auditors did not know Hercules would rely on the audits for personal investment decisions. Therefore, the auditors' duty of

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    Hercules Management Ltd. v. Ernst & Young

    Uploaded by

    Alice Jiang
    191 views1 page
    This document summarizes a court case between Hercules Management Ltd. and Ernst & Young regarding audit reports prepared by Ernst & Young for Hercules. The issues are whether Ernst & Young owed a duty of care to Hercules regarding investment losses and losses in share value resulting from reliance on the audit reports, and whether the rule that shareholders cannot sue on behalf of a corporation affects Hercules' action. The court found that while the auditors owed a duty of care to Hercules since it was foreseeable Hercules would rely on the audits, the auditors did not know Hercules would rely on the audits for personal investment decisions. Therefore, the auditors' duty of

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    This document summarizes a court case between Hercules Management Ltd. and Ernst & Young regarding audit reports prepared by Ernst & Young for Hercules. The issues are whether Ernst & Young owed a duty of care to Hercules regarding investment losses and losses in share value resulting from reliance on the audit reports, and whether the rule that shareholders cannot sue on behalf of a corporation affects Hercules' action. The court found that while the auditors owed a duty of care to Hercules since it was foreseeable Hercules would rely on the audits, the auditors did not know Hercules would rely on the audits for personal investment decisions. Therefore, the auditors' duty of

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    191 views1 page

    Hercules Management Ltd. v. Ernst & Young

    Uploaded by

    Alice Jiang
    This document summarizes a court case between Hercules Management Ltd. and Ernst & Young regarding audit reports prepared by Ernst & Young for Hercules. The issues are whether Ernst & Young owed a duty of care to Hercules regarding investment losses and losses in share value resulting from reliance on the audit reports, and whether the rule that shareholders cannot sue on behalf of a corporation affects Hercules' action. The court found that while the auditors owed a duty of care to Hercules since it was foreseeable Hercules would rely on the audits, the auditors did not know Hercules would rely on the audits for personal investment decisions. Therefore, the auditors' duty of

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    CASE TITLE Hercules Management Ltd. v.

    Ernst & Young


    (PARTIES
    INVOLVED)

    ISSUE 1. Whether the respondents(Ernst & Young) owe the


    appellants(Hercules) a duty of care with respect to (a) the
    investment losses they incurred allegedly as a result of reliance
    on the 1980-82 audit reports, and (b) the losses in the value of
    their existing shareholdings they incurred allegedly as a result of
    reliance on the 1980-82 audit reports
    2. Whether the rule in Foss v. Harbottle (which provides that
    individual shareholders have no cause of action in law for any
    wrongs done to the corporation) affects the appellants’ action

    LAW Anns v. Merton London Borough Council; Kamloops v. Nielsen


    • Whether the respondents owe the appellants a duty of care for
    their allegedly negligent preparation of the audit reports, therefore
    depends on (a) whether a prima facie duty of care is owed, and
    (b) whether that duty, if exists, is negated or limited by policy
    considerations

    Proximity in negligent misrepresentation cases pertains to some aspect


    of the relationship of reliance. It inheres when (a) the defendant ought
    reasonably to foresee that the plaintiff will rely on his/her representation,
    and (b) reliance by the plaintiff would, in the particular circumstances of
    the case, be reasonable

    APPLICATION • The auditors owed a duty of care to the plaintiffs because it was
    reasonably foreseeable that the plaintiffs would rely on the audit
    in conducting their affairs and that harm to them from a negligent
    audit was reasonably foreseeable.
    • The auditors knew the specific identity of the plaintiffs, having
    provided services for the 10 preceding years.
    • However, the auditors didn’t know the specific purpose for which
    the plaintiffs were to use the audit
    • The standard purpose of audits is to guide shareholders in
    making decisions as to how the corporation should be
    managed, to assess the performance of directors, and to
    decide whether or not to retain existing management
    • When shareholders use audits as guidance to make
    personal investment decision, they are using the audit for
    purpose for which it was not prepared
    • ⇒ the auditor’s duty of care does not extend to the plaintiffs’ use
    of the audits

    CONCLUSION Initial judgment is upheld and the appeal should be dismissed

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