The Gaelic Inns and JSI Shipping cases

As mentioned in a previous posting, the 2 cases of

1. PlanAssure PAC v Gaelic Inn Pte Ltd and
   
2. JSI Shipping (S) Pte Ltd v Teofoongwonglcloong
   

are Court of of Appeal cases involving the liability of auditors. In both cases, the auditors failed to spot fraud committed by the officers of the respective plaintiff companies and were therefore found liable to some extent for the losses caused by the fraud.

It is of course impossible for auditors to stop the first act of fraud and it is normally impossible to blame them except in exceptional cases. For example, if the auditors were hired to suggest improvements in a company's internal control systems but failed to point out serious weaknesses, thus allowing fraud to occur.

The normal way in which auditors are to be blamed for fraud losses is that if the fraud was discovered earlier by the auditors, then either later fraudulent acts would have been stopped or that it might have been possible to recover more of the stolen monies before the criminals had disposed of it. Notice here that the plaintiffs are using arguments as to what might have happened and not on certainties. This is well accepted by the court. Few things in life can be predicted with 100% certainty. The courts adopt a realistic approach by working with probabilities of events happening where appropriate.

Auditors - duty of care

As is well known, in order to sue for professional negligence, it is necessary for the plaintiff to show that 3 things -

• a duty is owed by the defendant professional to the plaintiff;
• the defendant breached his duty of care; and
  
• damage or harm is caused to the plaintiff.

This post will examine the concept of duty of care being owed by auditors and accountants. A duty of care by a defendant to the plaintiff is owed when it is forseeable that harm may be caused to the plaintiff by the defendant's carelessness (what is sometimes called "the neighbour principle"). In plain English, this means that one can predict that if the professional is careless, the plaintiff might in some cases suffer harm. This area of law is complicated due to the courts also considering public policy and fairness, but that is a discussion for another day. In addition, suing for negligent words whether they are written or oral is also more complicated than suing for negligent actions.

What this post aims to do is to mention the leading case of Caparo Industries v Dickman [1990] 2 AC 605, a decision of the House of Lords, England's highest court. This case has been accepted by the Singapore courts. The court held in this case that auditors owe no duty of care to company shareholders in respect of the statutory audit. This means that any lawsuit brought by shareholders of a company against an auditor who is alleged to have performed a negligent audit of the company or given a negligently incorrect audit report is sure to fail. This only applies where the audit is the statutory audit required by the statutes relating to companies (the relevant statute in Singapore would be the Companies Act).

In the above case, the plaintiff was a shareholder who claimed that it had relied on the audit report relating to an investee company which it received, and based on this, proceeded to take over control of the company. The court dismissed the case on a preliminary issue without even deciding whether or not the auditors were careless, since the plaintiff had failed to establish duty of care, its lawsuit stood no chance of succeeding.

It should be noted that a shareholder could sue an auditor where the auditor is specially hired, eg for a due diligence audit - often used where the shareholder is planning to buy over the company. The shareholder could sue in contract law or in tort law.

Source of information about negligence claims

The Asian Casaulty Report is an annual on-line magazine published by Gen Re (an insurance company, which proudly announces that it is a Berkshire Hathaway company).

This magazine has short sniippets of insurance claims made in Asia. There is a listing by country and a division of reports by type of claims - eg product liability, construction liability, professional indemnity, medical malpractice, etc.

The most recent issue of this magazine is found at
http://www.genre.com/sharedfile/pdf/AsianCasReport2008-en.pdf.

Some previous issues - http://www.genre.com/sharedfile/pdf/AsianCasRep2007-en.pdf and http://www.genre.com/sharedfile/pdf/AsianCasRep2006-en.pdf.

Tort law - negligent misstatement

Many professionals are confused about their liability under the law of negligence. Generally, for most professionals, their liability is not so much for pure negligence but more likely for negligent misstatement.

The law of negligence (what I will refer to as "pure negligence") covers careless acts or omissions. This means that the person concerned did or did not do something physical - for example, a surgeon who operates on the wrong organ of a patient.

The bulk of professionals however, do not perform physical acts for their client. The expertise comes from their knowledge and skill. The product of this is information provided to the client. This information can be in many forms such as reports, recomendations, advice, etc. Where the information whether written or oral is incorrect, then there may be liability for negligent misstatement.

The client will have to prove 3 main requirements in court to sue -

• duty of care owed by the professional to the client,
• breach of duty by the professional, and
  
• damage or harm caused to the client by the professional's breach of duty.

The earlier posts about the Bolam and the Bolitho tests relate to the 2nd requirement of whether the professional has breached his duty of care.

There may sometimes be an overlap between pure negligence and negligent misstatement - for example, if a pharmacist gives the wrong pills to someone and says "take these for your illness"; but these situations are not common.

Partnerships and LLPs

Formerly, professionals were limited to using partnerships as their business vehicle. The problem with partnerships is that the partners face unlimited liability. This means that for partnership liability including claims of professional negligence, each partner was fully responsible for the liability. This was regardless of the individual partner's blameworthiness for the negligence and regardless of the size of the ownership of the partner in the partnership. In other words, a 5% partner in the partnership who never even met the complaining client could end up paying the entire claim against the partnership if he turned out to be the only person having the resources to pay the claim. Neither could partners protect their personal assets from their business liabilities.

However, now that the law allows partners to set up limited liability partnerships (LLPs), many professional firms have now converted to this form of business vehicle. For example the big 4 audit firms in Singapore are now all LLPs.

It should be noted however, that using an LLP may not shield the negligent professional from unlimited liability. Limited liability is important in contract law situations but it is possible that an unhappy client could sue the partner concerned in tort law, using the concept of negligent misstatment perhaps, which is likely to circumvent any limited liability protection. In Singapore, this area has not yet been tested in court.

Medical negligence - the Bolitho case

The case of Bolitho v. City and Hackney Health Authority [1997] 4 All ER 771 is a test applied in medical negligence lawsuits.

The Singapore Court of Appeal, Singapore's highest court, in Dr James Khoo v Gunapathy [2002] 2 SLR 414; [2002] SGCA 25, accepted the Bolam test (please see a previous post) as modified by the Bolitho case.

The qualification added by the Bolitho case is the practice accepted by a responsible body of medical men must be logical. If there is no logical basis for the practice, then the practice will not be defensible in court. This is the limited extent to which the courts will examine medical procedures.

Gunapathy v Dr James Khoo (post 2)

On appeal, the case was titled as

Dr Khoo James and Another v Gunapathy d/o Muniandy and another appeal
[2002] 2 SLR 414; [2002] SGCA 25.

The Court of Appeal severely criticized the trial judge and overturned his findings. Applying the Bolam and Bolitho tests (see a previous post on this), the court concluded that there was no negligence on the defendants' part.

The penultimate paragraph of the court's decision (which summarises the law on medical negligence in Singapore) reads :

"144 At the heart of the Bolam test is the recognition that judicial wisdom has its limits. A judge, unschooled and unskilled in the art of medicine, has no business adjudicating matters over which medical experts themselves cannot come to agreement. This is especially where, as in this case, the medical dispute is complex and resolvable only by long-term research and empirical observation. Furthermore, the lawyer-judge in ‘playing doctor’ at the frontiers of medical science might distort or even hamper its proper development. Excessive judicial interference raises the spectre of defensive medicine, with the attendant evils of higher medical costs and wastage of precious medical resources."

The expert witnesses for the parties were -

for Plaintiff - two neurosurgeons (Dr Prem Pillay and Dr Gopal Baratham), a radiation oncologist (Dr Tsao Shiu Ying), and a neuropathologist (Dr Jennifer Teo). The trial judge additionally called Dr Tan, the radiologist who took both MRI scans, to present herself as the plaintiff’s witness.

for the Defendants - three neurosurgeons (Prof Bengt Karlsson, Dr Ho Kee Hang, and Dr Yeo Tseng Tsai), two radiation oncologists (Dr Robert Smee and Dr Chua Eu Tiong), and a neuroradiologist (Dr Francis Hui).

Bolam Test

The Bolam Test is a well-known test applied primarily in medical negligence lawsuits. It is sometimes applied in other areas of professional negligence although this should only be done with caution.

The Bolam test takes its name from Bolam v Friern Hospital ([1957] 1 WLR 583) where the judge held that a professional is not guilty of negligence if he has acted in accordance with a practice accepted as proper by a responsible body of medical men skilled in that particular art. In other words, even if some other medical professionals disagree with what was done, the defendant doctor can still win the lawsuit even some responsible doctors agree with this actions.

There are some who take the view that this approach unduly protects the medical profession. In Singapore, the Bolam test was accepted by the Singapore Court of Appeal in Dr James Khoo v Gunapathy [2002] 2 SLR 414; [2002] SGCA 25, subject to the constraints laid down in the later case of Bolitho v City and Hackney Health Authority [1998] AC 232; [1997] 4 All ER 771 . This later case will be discussed in a later posting

[The letters and numbers appearing after the name of a case are its citation. This is useful for lawyers when it comes to finding the case in the library. For instance, [2002] 2 SLR 414 means that the case is in the Singapore Law Reports volume 2 for the year 2002 at page 414.]

Gunapathy v Dr James Khoo (post 1)

In this case, the parties were -

Plaintiff - Gunapathy d/o Muniandy (Ms)

Defendants - Dr James Khoo, Dr Khor Tong Hong, and the Neurological Surgery Pte Ltd (which was Dr Khoo's clinic).

The defendants were sued for professional negligence in the diagnosis, treatment and advice given to the plaintiff in relation to her brain tumour. She claimed that the doctors had unnecessarily advised her to undergo radiosurgery treatment which unfortunately resulted in serious disability to her after the treatment. She suffered from among other symptoms, partial paralysis and from severe speech defects and was wheelchair bound. She was unable to run her family business and needed permanent medical care for the rest of her life.

At the High Court, Selvam J. in his 354 page judgment, awarded her damages which were over $2.5 million, taking into account her loss salary of $12,000 a month. This was perhaps the largest damages award for a personal injury claim and for a medical negligence case.

There were rumours that the defendants and their insurers offered to settle the case for about $2 million in damages but this was rejected. Regardless of whether this was accurate. the case went to the Court of Appeal.