One for the good guys!

18 Jun 2015 4 min read Dispute Resolution Matters Article

There has been an unfortunate tendency, over the past several years, for clients to sue their professional advisers, in an effort to recover damages brought about, more often than not, by the client's own inadequacies. Claims against audit firms have become all the more prevalent, and it was one such claim which recently enjoyed the scrutiny of the Supreme Court of Appeal ('SCA') in the matter of Pricewaterhouse Coopers Inc & Others vs National Potato Co-operative Limited & Another, in a judgment delivered on 4 March 2015.

The judgment in this matter is of interest for various reasons, most of which have little to do with the auditing profession itself.

In this matter, a claim was pursued against PwC on the basis of losses allegedly suffered by the plaintiff co-op ('NPC') in consequence of a failure on the part of PwC to have identified, in its audit process, material irregularities in the management, control and administration of credit.

One of the unusual features of this litigation is that the plaintiff's claim was in fact being pursued at the instance of an unrelated third party, IMF (Australia Limited) ('IMF'), an Australian entity which carries on business as a 'litigation funder'. IMF, in that capacity, provided NPC with funding to pursue the action against its erstwhile auditors (PwC) on the basis that, if the litigation succeeded, IMF would be fully reimbursed for its costs and paid a management fee for its services in regard to the conduct of the litigation. In addition, it would receive a proportion, exceeding 55%, of the gross proceeds of the litigation. Potentially, depending upon the gross amount recovered, IMF stood to be the sole beneficiary of any judgment procured in favour of the plaintiff.

PwC, wisely, joined IMF as a party to the action, with a view to obtaining a costs order against that entity, were its defence to the plaintiff's claim to succeed.

Although the trial court found in favour of the plaintiff, the SCA took a very different view of the matter, dismissing the claim and awarding costs in favour of PwC.

Although it made no finding on this issue, the SCA expressed reservations regarding the role played by IMF, in funding the litigation pursued by the plaintiff. Wallis J A had the following to say in this regard:

"It is one thing to enable an impecunious litigant to obtain legal relief to which that litigant is entitled. It is another matter altogether to have a situation where an outsider to a dispute, motivated solely by considerations of profit, may be the sole beneficiary of a judgment….Litigation exists for the proper settlement of disputes in society in the interests of the parties to those disputes. It comes at a social cost. It is undesirable that outsiders driven purely by commercial motives should be able to take over these disputes for their own benefit. When that occurs it is difficult to see how the constitutional guarantee of access to courts is engaged".

A separate but important feature of the judgment in this matter, is the criticism of the SCA relevant to the manner in which the proceedings were conducted, and the approach adopted by the plaintiff's legal team in presenting so called expert evidence in support of the plaintiff's claim. Expert opinions, not founded on fact or proper evidence, are of little value to court proceedings (and serve no proper purpose). In this regard the SCA approved of the approach adopted by the Canadian courts in the Widdrington case, stated as follows:

"Before any weight can be given to an expert's opinion, the facts upon which the opinion is based must be found to exist.

As long as there is some admissible evidence on which the expert's testimony is based it cannot be ignored; but it follows that the more an expert relies on facts not in evidence, the weight given to his opinion will diminish."

The SCA was highly critical of the manner in which the plaintiff had sought to present its expert testimony (which had resulted in the inordinate length of the litigation). The SCA pointed out that there was a complete failure, in the proceedings before the trial court, to have recognised that:

"The expert may be tendered for cross-examination upon his report alone, without additional oral examination, or after only limited questioning.

As a general rule the report of an expert witness can be read as his evidence in chief, subject only to supplementary questions necessary for explanation or amplification of the report."

The unsatisfactory manner in which the matter had been conducted, in the court of first instance, had led to a hearing on the merits, alone, which endured for some 264 days (the duration of which could, by and large, have been avoided had a different approach been adopted in relation to the proceedings, generally, and the relevance of expert evidence, in particular.

One can but hope that the criticisms of the SCA will serve to dissuade parties from approaching litigation in the manner which had been adopted in the court of first instance, in this matter!

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