Be wary of situations that may give rise to joint liability in due diligence work. If the other party can't pay its part, you could be landed with the whole lot
THOSE buying A property or a businesses often engage professionals to assist in the investigations made before purchase as part of the process of due diligence. The Court of Appeal's judgment in Eastgate Group Limited vs Lindsey Morden Group Inc has confirmed that it is possible for the buyer's advisers to become liable to make a contribution to damages payable by the seller to the purchaser for a breach of warranty. It follows that the engineer, surveyor, solicitor, accountant or valuer may become liable.

The liability arises because of the provision of the Civil Liability (Contribution) Act 1978: "… any person liable in respect of any damages suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)."

Professionals will already be aware of the possibility that they could become liable with others – for example, with a contractor where they fail to notice its defective work, or with another professional whose designs they failed to check correctly. Each person in such circumstances is 100% liable to the claimant, and even if the court were to find that the professional's contribution was, say, 40%, they would have to pay the full amount of the claim if the other party could not pay their contribution because of insolvency or insufficient assets. Eastgate illustrates another circumstance where this could happen.

In this case, accountants (Smith & Williamson) had been engaged on behalf of the purchaser (Eastgate) to investigate the accounts of the company whose share capital was being sold. The purchaser paid £51m to the seller (Lindsey Morden). As is usual, the seller warranted the accuracy of both the management and audited accounts. Subsequently, the purchaser brought a claim against the seller for breach of these warranties, seeking the difference between the value of the company as warranted and the actual value of the company. The seller claimed it was entitled to a contribution from the purchaser's accountants for any damages it might have to pay to the purchaser, on the basis that if the accountant had acted with due care, the purchaser would have been better informed about the business. The case proceeded on the assumption that both the seller and the purchaser's accountants were liable to the purchaser – the seller for a breach of the warranties and the accountants for negligence. Whether they were so liable is yet to be decided.

Those carrying out due diligence work need to include a net contribution clause in their contracts to restrict their liability

Any damages recovered from the seller would be based on a contractual claim for the difference in value of the company as it actually was and what it would have been if the accounts had been accurate. Any damages recovered from the accountants would be based on the difference between the price paid for the company and what the purchaser would have paid on receipt of proper and careful advice.

The Court of Appeal considered that even though the damages recoverable may be different, the damage in this case was the loss arising from the fact that the purchaser had bought a company worth less than the purchaser had reasonably expected it to be worth. The seller, if liable, had sold a company worth substantially less than the value it contracted it to have. The accountant, if liable, had caused the purchaser to buy a company worth substantially less than the price it paid. It was thus the "same damage". The wording in the act had to be given a wide interpretation.

Finally, the Court of Appeal said that any recovery from the accountants should not entitle the seller to receive more for the company than its true value, as this could result in "unjust enrichment" of the seller. This question was left to be decided by the trial judge.