The steps taken by the respective parties after the making of the Morgan Crucible bid were taken against the background of the City Code, which is referred to in Morgan Crucible's statement of claim. Over the following weeks the Company, acting by its directors including Mr. Connor, sent to its shareholders a number of circulars respectively dated 19th December 1985, 31st December 1985, 8th January 1986, 17th January 1986 and 24th January 1986 (referred to in Morgan Crucible's pleadings and in this judgment as "defence documents"). These circulars were also issued as press releases by Hill Samuel. Copies of all these documents were supplied to Morgan Crucible's advisers pursuant to Rule 19.3 of the City Code.
The circular sent out on 19th December 1985 compared the profit record of Morgan Crucible unfavourably with that of the Company and recommended to the Company's shareholders that the offer be refused.
Subsequent circulars, sent out on 31st December 1985, 8th January 1986 and 17th January 1986, referred to the published financial statements. The circular of 31st December 1985 stated that they were available for inspection.
The circular of 24th January 1986 forecast a 38% increase in profits before tax in the year to 31st January 1986. This circular included
(a) a letter from Judkins stating that the profit forecast "for which the directors are solely responsible" had been properly compiled and on a basis consistent with the accounting policies normally adopted by the Group;
(b) a letter from Hill Samuel stating that in their opinion the profit forecast had been prepared after due and careful inquiry.
On 29th January 1986, when the level of acceptance by the Company's shareholders was about 4%, Morgan Crucible increased their bid. On 31st January 1986, the Company's board sent a further letter to its shareholders recommending that this bid be accepted. On 14th February 1986, when not less than 69% of the shareholders had accepted, the bid was declared unconditional. On 27th February 1986, a further recommendation of acceptance was sent by the board to shareholders who had not yet accepted. We will refer to the two last-mentioned letters as "the recommendation documents".
Morgan Crucible now assert that the financial statements (both audited and unaudited) issued by the Company prior to this bid, the profit forecast issued on 24th January 1986 and the financial matter contained in the Company's defence and recommendation documents were negligently prepared and were misleading and that, had they known the true facts, the bid would never have been made or recommended to or approved by the shareholders of Morgan Crucible, or continued with or improved in its terms or completed: (see paragraph 33 of the draft amended statement of claim).
On 6th May 1987, Morgan Crucible issued a writ joining as defendants (1) Hill Samuel, (2) Judkins, (3) Mr. Connor, (4) Mr. H.M. West, (5) Mr. J.L. Harris, (6) Mr. K.A. Broome, (7) Mr. j.w. Smith, and (8) Mr. J.V. Woollam. The 4th and 5th defendants were at the material time, together with Mr. Connor, the executive directors of the Company; the 6th, 7th and 8th defendants were its non-executive directors.
The gist of the statement of claim as originally pleaded (served in July 1987) was that the board of the Company and Judkins were responsible for putting the financial statements into circulation/ that they and Hill Samuel were responsible for the profit forecast, that all of them owed a duty of care to Morgan Crucible as persons who could foreseeably rely on them, that the statements and forecast were negligently prepared, that Morgan Crucible relied on them in making and subsequently increasing their offer and thereby suffered heavy loss (over 50 million pounds). All these allegations were put in issue by the defendants in their pleadings. There was massive discovery. The action was set down for trial in January 1991 with an estimated length of 10 weeks.
On 8th February 1990, the House of Lords delivered judgment in Caparo Industries PLC v. Dickman [1990] 2 W.L.R. 358, on the trial of a preliminary issue. In their statement of claim in that case, the plaintiffs alleged
(a) that they had begun purchasing shares in Fidelity PLC a few days before the annual accounts had been published to shareholders;
(b) that in reliance on those accounts, they made further purchases of shares so as to take over Fidelity PLC;
(c) that the auditors of Fidelity PLC owed both the shareholders and potential investors a duty of care in respect of the certification of the accounts;
(d) that the auditors should have known that as the profits of Fidelity PLC were not as high as projected and its share price had fallen significantly, it was susceptible to a take-over bid and reliance on the accuracy of the accounts would be placed by any potential bidder such as the plaintiffs.
The plaintiffs, having accomplished the take-over, sued (together with the directors) the auditors, claiming they were negligent in carrying out the audit and making their report which they were required to do under the Companies Act 1985. The trial of a preliminary issue relating to the claim against the auditors was ordered. On appeal from the trial judge, the Court of Appeal, by a majority, [1989] Q.B. 653, held that, whilst there was no relationship between an auditor and a potential investor sufficiently proximate to give rise to a duty of care at common law, there was such a relationship with individual shareholders, so that an individual shareholder, who suffered loss by acting in reliance on negligently prepared accounts, whether by selling or retaining his shares or by purchasing additional shares, was entitled to recover in tort. The House of Lords reversed this decision, holding in effect that in certifying a company's accounts for the purpose of the Companies Act 1985, an auditor owes no duty of care to a potential take-over bidder, whether or not he is already a shareholder of the company. It was held that foreseeability, no matter how high, that a potential bidder might rely on the audited accounts did not suffice to found a duty of care, since there was no sufficient relationship of proximity between auditor and potential bidder.
This decision placed what were at least formidable obstacles in the way of Morgan Crucible's case as originally pleaded in the context of duty of care. This case had in effect rested on the assertions that the financial statements and profit forecast had been published to the "world at large" and that Morgan Crucible were foreseeably persons who would rely upon the representations which they contained. However, the plaintiffs' legal advisers considered that, by amendment of their pleadings, it might be possible to draw relevant distinctions between the facts of the present case and the (assumed) facts of Caparo, so as to found the element of proximity between plaintiffs and defendants which was held to be lacking in the earlier case. In Caparo all the representations relied on had been made before an identified bidder had emerged. In the present case some of the relevant representations were made after a bidder had emerged in the shape of Morgan Crucible and as a direct outcome of their bid; they were therefore clearly made with that identified bidder in mind.
In these circumstances, Morgan Crucible applied for leave to amend their statement of claim, the principal purpose of their amendments being to restrict their claim to representations made to the respective defendants after Morgan Crucible's bid, i.e., during the course of the take-over battle. A draft amended statement of claim was served on 25th June 1990. Further proposed revisions to the drsft were submitted to Hoffmann J. during the course of the hearing below. Some of these have now been withdrawn. Morgan Crucible's proposed final version of the proposed amended pleading, covering nearly 120 pages, was served together with the notice of appeal. This is the version (with the addition of the words "and intended" after the words "must have known" in paragraph 26, and as amplified by amended draft further and better particulars covering about 220 pages) to which this present judgment is directed. It has not been suggested that the differences between it and the version which was before Hoffmann J. are of sufficient significance to lead to a different conclusion either way.
It has been common ground, both in the court below and in this court, that the proper test in considering whether Morgan Crucible's proposed amendments should be allowed is whether they would survive an application under R.S.C. 0.18, r.19(1)(a) to strike them out as disclosing "no reasonable cause of action".
Hoffmann J. decided (at p.11) that the present case cannot be distinguished from Caparo. In his judgment, despite the proposed amendments, the entire case based on negligence was bound to fail because of the absence of a duty of care owed by any of the defendants to the plaintiffs. He pointed out that, although a great deal had already been spent on legal costs before the decision in Caparo, it was still possible to save the huge costs of the preparation of expert and other evidence followed by a ten week trial. He therefore disallowed the amendments.
On an application to strike out a pleading under R.S.C. 0.18, r.19(1)(a), no evidence is admissible and since it is only the pleading itself which is being examined, the court is required to assume that each and every one of the facts pleaded (unless manifestly incapable of proof) is true and will be capable of proof at the trial. In some instances, the court may regard the assumption as somewhat unrealistic, but it nevertheless has to be made.
The court's function on this application by the plaintiffs to amend their pleadings is simply to decide whether, on the assumed facts, they would be bound to fail in establishing the existence of a duty of care owed to them by the respective defendants. In the end, we have come to the clear conclusion that Morgan Crucible would not be bound to fail and that their amended case should be permitted to go forward to trial.
In the circumstances, we do not think it appropriate to embark on a comprehensive summary of all the cogent submissions which have been made to us by six counsel over some three days, or of all the relevant authorities which have been cited to us. The trial judge, who will have the great advantage of operating by reference to known rather than assumed facts, as amplified and explained by evidence, will be in a much better position than we are to decide whether a duty of care was in truth owed by any of the defendants to Morgan Crucible. In this judgment, we propose to do no more than explain why we consider that the plaintiffs' case is arguable and why to this extent we respectfully differ from Hoffmann J. - and in particular from his view that Caparo would necessarily destroy their cause of action, even as now sought to be pleaded.
In the second sentence of his judgment, the judge described the point of law raised by this case as being whether "the directors and financial advisers of the target company in a contested take-over bid owe a duty of care to the bidder". At least in this court, this is not the point of law on which the plaintiffs have relied. Mr. Sumption Q.C., on their behalf, has expressly accepted that, in view of Caparo, in general terms the directors and financial advisers of a target company owe no duty of care to safeguard the interests of a potential bidder in their conduct of a contested take-over. The proposition of law on which they rely is a much narrower one. If during the conduct of a contested take-over/ after an identified bidder has emerged, the directors and financial advisers of a target company choose to make express representations with a view to influencing the conduct of the bidder, then, it is submitted, they owe him a duty not negligently to mislead him.
The case against the directors
The plaintiffs' amended draft pleading has clearly been formulated with this proposition of law in mind. The pleaded case against the defendant directors in relation to duty of care may for present purposes be sufficiently summarised as follows:
(1) Before the bid, the directors of the Company were responsible for the publication of the published audited financial statements of the Company for the years ended 31st January 1984 and 31st January 1985 and thereby represented "on a continuing basis" that the accounts gave a true and fair view of the Company's affairs: (paragraph 3 of the amended draft pleading).
(2) The "said continuing representations" were never withdrawn or qualified by the directors before or during the Plaintiffs' take-over and in the premises "remained operative" at all material times during that period: (paragraph 4 ibid).
(3) During the take-over, the directors were responsible for the publication to the shareholders of the Company and to the plaintiffs of a series of representations contained in the defence documents referred to above dated 19th December 1985, 31st December 1985, 8th January 1986, 17th January 1986 and 24th January 1986, and the recommendation documents dated 31st January 1986 and 27th February 1986 (paragraph 5 ibid).
(4) We will quote paragraph 5A of the amended draft pleading in full because of its crucial importance:
"In support of their case that the representations made in the said documents were made inter alia to the Plaintiff company, the Plaintiff company will say that one of the ordinary purposes of such documents, and the purpose of these documents in particular, was to persuade an offeror in the position of the Plaintiff company to offer the best terms to the shareholders of the target company and/or terms which the directors of the target company could expect to recommend shareholders to accept. Such documents are in the ordinary course of events relied upon for that purpose by offerors in the position of the Plaintiff company. All of the said documents were supplied pursuant to Rule 19.3 of the City Code on Takeovers and Mergers to the Plaintiff company's advisers. The Plaintiff company will further rely upon sub-paragraphs (l)(b), (2)(b), (3)(b), (4)(b), (5),(b), (6)(b) and (7)(b) of Answer 6 of the Amended Further and Better Particulars hereto" (paragraph 5A ibid).
These amended further and better particulars (inter alia) quote extracts from a letter of 17th January 1986 written by Mr. Connor to the Company's shareholders and from a letter of 20th January 1986 written by him to Hill Samuel which, on the face of them, lend some support to an inference that a purpose of the defence documents was in truth to influence Morgan Crucible to increase their offer.
(5) By the defence document of 31st December 1985, the directors of the Company announced that the audited accounts °f the Company for the years ended 31st January 1984 and 1985 and its unaudited interim results for the half-year ended 31st July 1985 were available for inspection at the offices of Hill Samuel (paragraph 6 ibid).
(6) By the "cumulative effect" of the representations contained in the defence and recommendation documents and the last-mentioned announcement, the directors "repeated" to the plaintiffs as well as to the shareholders of the Company their "continuing representations" as to the accuracy of the accounts for the years ended 31st January 1984 and 1985 and of the unaudited interim results for the half-year ended 31st July 1985 (paragraph 7 ibid).
[We interpolate that, possibly, a detailed examination of all the defence and recommendation documents and the last-mentioned announcement would itself reveal whether or not they involved a "repetition" of the relevant previous representations. We were not, however, invited to embark on this exercise, and for present purposes must assume that the cumulative effect of these documents and announcement was as alleged.]
(7) It was reasonably foreseeable to the directors of the Company, and each of them "must have known and indeed intended", that the plaintiffs' directors and financial advisers would rely on, or were at least very likely to rely on, the pleaded representations in connection with Morgan Crucible's bid (paragraph 8 ibid).
(8) The plaintiffs' directors and financial advisers did so rely in making the plaintiffs' offer, in recommending it to their shareholders and obtaining approval to the acquisition on the terms of the offer and the increase for that purpose of the plaintiffs' share capital, in making the increased offer and in subsequently completing the acquisition of the Company's issued share capital (paragraph 8 ibid).
(9) "In the premises, the directors of [the Company] and each of them at all material times owed to the plaintiff Company separate duties of care in relation to the respective representations and each of them" (paragraph 8 ibid).
(10) In the defence document dated 24th January 1986, the directors of the Company made a profit forecast (paragraph 13 ibid). The representations contained in the profit forecast were made to Morgan Crucible as well as to the shareholders of the Company (paragraph 14). They were twice reaffirmed by the directors for the purposes of the recommendation on 31st January 1986 of Morgan Crucible's increased offer and in the recommendation document of 27th February 1986 (paragraph 14). At all material times the directors knew and intended that the directors and financial advisers of Morgan Crucible would rely on the representations contained in the profit forecast (paragraph 15). Morgan Crucible's directors and financial advisers did so rely (ibid). In the premises, the Company's directors owed to Morgan Crucible a duty of care in relation to those representations both as originally published and as reaffirmed (ibid).
It is now common ground that, in view of Caparo, none of the defendants owed a relevant duty of care to Morgan Crucible before their initial bid was made. Nevertheless, at least on a first reading, the plaintiffs' amended draft pleading, with its reference to "continuing representations" and the failure to withdraw them, might be read as submitting (inter alia) that the directors of the Company became subject to a duty of care to the plaintiffs in relation to the Company's audited and unaudited financial statements as soon as the bid was made (on 6th December 1985). Mr. Kosmin, in his argument on behalf of Mr. Connor, in our opinion convincingly refuted the concept of a sudden and spontaneous emergence on 6th December 1985 of a duty of care owed to Morgan Crucible. Mr. Sumption in his reply, however, made it clear that the plaintiffs do not seek to make any such assertion against any of the defendants. He disclaimed the judge's description (page 4) of the essence of the plaintiffs' case as being that "what created a relationship of proximity was its actual materialisation as a bidder". Their case against the directors as regards a duty of care is based on the representations said to have been made in the defence and recommendation documents beginning with the defence document of 19th December 1985.
Since the decision in Hedley Byrne & Co. Ltd. v. Heller & Partners [1964] AC 465, it has been well established (a) that persons professing some special knowledge or expertise who make representations implicitly presented as having been carefully considered may, at least in some circumstances, be held to owe a duty of care in tort to a person to whom the representation is made and/or to a person to whom they know the representations will be passed on, not to mislead him, provided that the representation is made in circumstances in which the representor knows, or should know, that the other person will rely on what he says, and (b) that a breach of this duty may give rise to liability in negligence, even though loss suffered is only financial loss: (see for example Esso Petroleum Co. Ltd. v. Mardon [1976] QB 801; Yianni v. Edwin Evans & Sons [1982] Q.B. 438 and Smith v. Eric S. Bush [1990] A.C. 876).
In the Esso Petroleum case an oil company which, through one of its servants holding himself as having special expertise, had made negligent representations to a prospective tenant of a garage as to the estimated throughput of the garage, was held to have owed a duty to the tenant to take reasonable care to ensure that the representations were correct. So far as we are aware, the correctness of this decision has not been doubted in l&ter cases. For present purposes its particular significance lies in demonstrating that statements made in the course of pre-contractual negotiations are, in appropriate circumstances, quite capable of giving rise to a duty of care.
On the assumed facts of the present case, it was undoubtedly foreseeable by the defendants that the plaintiffs would or might suffer financial loss if the representations in question were inaccurate. However, recent decisions of the House of Lords even before Caparo had established that the mere fact that a defendant may foresee that his acts will cause the plaintiff loss will not by itself suffice to found tortious liability in negligence. There must also be a sufficient "relationship of proximity" between plaintiff and defendant. It must also be "just and reasonable" to impose liability on the defendant for what has occurred. Proximity is a somewhat uncertain concept, representing, as it does, no more than a description of the kind of relationship betweer the parties which the courts consider capable of giving rise to a duty of care. It is closely bound up with the no less uncertain concept of justice and reasonableness, and it may give rise to difficult problems in cases such as the present, where the facts are not precisely covered by previous authority.
In an unreported judgment delivered on 31st July 1990 in James McNaughton Paper Group Ltd. v. Hicks Anderson & Co., Neill L.J. helpfully identified six factors which are likely to be important in most cases in deciding whether a duty of care exists, namely (1) the purpose for which the statement was made, (2) the purpose for which the statement was communicated, (3) the relationship between the adviser, the advisee and the relevant third party, (4) the size of any class to which the advisee belongs, (5) the state of knowledge of the adviser, (6) reliance by the advisee.
In Caparo Lord Oliver of Aylmerton (at pp. 383-384) deduced from the Hedley Byrne case that the necessary relationship between the maker of a statement or giver of advice ("the adviser") and the recipient who acts in reliance upon it ("the advisee") may typically be held to exist where
"(1) the advice is required for a purpose, whether particularly specified or generally described, which is made known, either actually or inferentially, to the adviser at the time when the advice is given;
(2) the adviser knows, either actually or inferentially, that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose;
(3) it is known either actually or inferentially, that the advice so communicated is likely to be acted upon by the advisee for that purpose without independent inquiry;
(4) it is so acted upon by the advisee to his detriment."
Lord Oliver, however, immediately proceeded to disclaim any suggestion that these conditions were either conclusive or exclusive, and we have no doubt that his (1) was not intended to rule out the existence of a duty of care where the advice is volunteered by the giver, as opposed to being requested. As we read the decision in Caparo, what their Lordships regarded as the crucial? fatal weakness in the plaintiff's case, which negatived the existence of a relationship of proximity, was the fact that the relevant statement by the auditors had not been given for the purpose for which the plaintiff had relied on it. Thus, Lord Bridge of Harwich, distinguishing that case from a number of earlier cases including Smith, where plaintiffs had established liability for negligent misstatement, said (at pp. 367-368):
"The salient feature of all these cases is that the defendant giving advice or information was fully aware of the nature of the transaction which the plaintiff had in contemplation, knew that the advice or information would be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely on that advice or information in deciding whether or not to engage in the transaction in contemplation. In these circumstances the defendant could clearly be expected, subject always to the effect of any disclaimer of responsibility, specifically to anticipate that the plaintiff would rely on the advice or information given by the defendant for the very purpose for which he did in the event rely on it. So also the plaintiff, subject again to the effect of any disclaimer, would in that situation reasonably suppose that he was entitled to rely on the advice or information communicated to him for the very purpose for which he required it. The situation is entirely different where a statement is put into more or less general circulation and may foreseeably be relied on by strangers to the maker of the statement for any one of a variety of different purposes which the maker of the statement has no specific reason to anticipate. To hold the maker of the statement to be under a duty of care in respect of the accuracy of the statement to all and sundry for any purpose for which they may choose to rely on it is not only to subject him, in the classic words of Card°zo C.J., 'to liability in an indeterminate amount for an indeterminate time to an indeterminate class.'"
Lord Roskill said (at p. 375):
"I think that before the existence and scope of any liability can be determined, it is necessary first to determine for what purposes and in what circumstances the information in question is to be given."
Lord Oliver said (at p. 388):
"My Lords, no decision of this House has gone further than Smith v. Eric S. Bush, but your Lordships are asked by the respondents to widen the area of responsibility even beyond the limits to which it was extended by the Court of Appeal in this case and to find a relationship of proximity between the adviser and third parties to whose attention the advice may come in circumstances in which the reliance said to have given rise to the loss is strictly unrelated either to the intended recipient or to the purpose for which the advice was required. My Lords, I discern no pressing reason of policy which would require such an extension and there seems to me to be powerful reasons against it."
Lord Jauncey said (at pp. 402-403):
"The crucial issue is the purpose for which the report was made. To quote the words of Denning L.J. in the Candler case [1951] 2 K.B. 164, 183, what was the 'very transaction' for which it was provided?"
In the Smith case, the House of Lords had held that a valuer instructed by a prospective mortgagee to carry out a valuation of a house owed a duty of care to the mortgagor to exercise reasonable skill and care in carrying out the valuation, if he knew that the mortgagee would probably purchase the house in reliance on the valuation without an independent survey.
However, Lord Oliver pointed out in Caparo (at p. 387) that the Smith decision
"provides no support for the proposition that the relationship of proximity is to be extended beyond circumstances in which advice is tendered for the purpose of the particular transaction or type of transaction and the adviser knows or ought to know that it will be relied upon by a particular person or class of person in connection with that transaction".
Their Lordships in Caparo regarded the purpose of the statutory requirement for an audit of public companies under the Act of 1985 as the making of a report to enable shareholders to exercise their class rights in general meeting - not as extending to the provision of information to assist shareholders or others as to the making of decisions as to the future investment in the company. These, as we read the decision in Caparo, were the essential elements of its ratio by which the plaintiff's claim on the facts of that case were held to be untenable.
In these circumstances, we are of the opinion that it is at least arguable that the present case can be distinguished from Caparo on its assumed facts. On such facts, each of the directors, in making the relevant representations, was aware that Morgan Crucible would rely on them for the purpose of deciding whether or not to make an increased bid, and intended that they should; this was one of the purposes of the defence documents and the representations contained therein. Morgan Crucible duly did rely on them for this purpose. In these circumstances, subject to questions of justice and reasonableness, we think it plainly arguable that there was a relationship of proximity between the directors and Morgan Crucible sufficient to give rise to a duty of care - particularly bearing in mind that, while Morgan Crucible had their own independent advisers, much of the information on which the accounts and profit forecast was based was presumably available to the defendants alone.
The learned judge said (p.5) that for the purpose of determining whether or not a duty of care exists in the case of a negligent statement, "the knowledge, intentions and purposes" of the parties are "an impoverished set of concepts". We are not sure what he meant by this. However, he rightly went on to say that they are very important, though by no means the only, factors. in considering proximity, justice and reasonableness, the judge attached great importance to the City Code. Having referred to some of the Rules set out above, he said (at p.9):
"It is in my judgment clear from the tenor of these rules that the purpose of all the defence documents is to advise the shareholders as to whether or not to accept the bid and there is nothing to suggest that they are meant for the guidance of the bidder."
A little later (at p.10) he asked:
"Why then should the Court be willing, any more than in Caparo, to extend the duty of care to a person relying upon the documents for a purpose beyond that contemplated by the Code?"
The City Code will require further analysis at the trial, but, without embarking on such analysis, we are prepared to assume that it does not explicitly envisage that persons concerned in preparing defence documents will owe a duty of care to potential or actual bidders. (Neither, we might add, does it impose any obligations on such persons to volunteer profit forecasts.) On the present application, however, the short answer to the judge's question is, in our judgment, that on the assumed facts the defendants intended that the defence documents should be relied on for the specific purposes alleged in paragraph 5A of the amended draft pleading, and Morgan Crucible did so rely on them. Morgan Crucible, in referring to the City Code in their pleadings, have not invoked it as the source of the alleged duty of care. It imposes no legal obligation on anyone. It merely forms an important part of the background against which defence documents are circulated and may reasonably be understood. It may be that Morgan Crucible at the trial will wholly fail to prove the allegation (paragraph 5A) that "one of the ordinary purposes of such documents" is to "persuade" an offeror to offer the best terms to the shareholders of the target company. This, however, will be a matter for evidence at the trial. The City Code read in isolation does not prove that this allegation is ill-founded.
The judge (at p.7) considered that the reason why the House of Lords had been willing to find the existence of a duty of care in Smith, but not in Caparo, stemmed from the "different economic relationships between the parties and the nature of the markets". In this context, he drew attention to some of the differences in the economic relationship of the parties in those two cases and of the parties in the present case. These differences he regarded as supporting his view that it would not be "just and reasonable" to hold that a duty of care existed in the present case.
We accept that, so far as it is possible to do so, it will be right for the court at the trial not to close its eyes to the possible economic consequences of its decision as to the existence of a duty of care. Its decision may have very wide implications for many classes of persons - directors of public companies, bankers and accountants. Nevertheless, as Hoffmann J. recognised, even the trial judge will not be in a position to form more than a very broad view of the economic consequences of his decision. Looking at this case without evidence, simply on the basis of the pleadings and the City Code, we would not think it right by reference to economic considerations to dismiss as unarguable an otherwise arguable case.
For present purposes we attach greater significance to another point to which the judge drew attention. During a bid there is always the possibility that another previously unidentified bidder (a "white knight") may intervene with a higher bid. If the persons concerned with the preparation of defence documents owed the original bidder a duty of care/ it could perhaps follow that they would owe a similar duty to the white knight. In deciding whether or not to make a higher bid, he, like the original bidder, might be expected to read the defence documents, including any profit forecast. To hold that no duty of care was owed to him might be said to involve an anomaly and to subvert equality in the market. On the other hand, to hold that persons concerned with the preparation of defence documents did owe the white knight, as well as the original bidder, a duty of care might expose them to even more formidable potential liabilities of a wholly indeterminate amount. Thus, it could be argued, (a) the duty of care must be owed either to both the original bidder and the white knight or to neither of them; (b) the proper conclusion is that it is owed to neither. No doubt an argument on these lines will be canvassed at the trial in the context of justice and reasonableness. Its correctness, however, is not sufficiently clear to us to justify the dismissal in limine of Morgan Crucible's newly formulated claims against the directors. It occurs to us that possibly the position of the white knight could be distinguished from that of the actual bidder on the grounds that at the time when the relevant representations are made the white knight, unlike the original bidder, is merely a member of an indeterminate class and cannot properly be treated as a person to whom the relevant representations are directly or indirectly addressed.
For the reasons stated, we conclude that Morgan Crucible's new claims against the defendant directors are not bound to fail at the trial. As with the other defendants, the alleged absence of a duty of care is the only ground on which it is sought to disallow the amendments.
The case against Hill Samuel
We can deal with the case against Hill Samuel much more shortly. The case against them in relation to duty of care as now sought to be pleaded may for present purposes be sufficiently summarised as follows:-
(1) On 24th January 1986, they sent to the directors of the Company for inclusion in the defence document of 24th January 1986 which contained the profit forecast, a letter in which they represented that they considered that the forecast had been made "after due and careful inquiry": (paragraph 17 of the draft amended pleading).
(2) This representation was made to Morgan Crucible as well as to the directors and shareholders of the Company by reason of the facts and matters pleaded in paragraph 5A (mutatis mutandis) and in Answers 15(3) to (5) of the amended further and better particulars (paragraph 8 ibid).
(3) Hill Samuel twice reaffirmed this representation (a) for the purposes of the recommendation on 31st January 1986 of Morgan Crucible's increased offer, and (b) in support of the letter issued by the directors of the Company on 27th February 1986 (paragraph 18 ibid).
(4) At all material times, Hill Samuel must have known and intended that Morgan Crucible's directors and financial advisers would rely on, or were at least very likely to rely on, the representations referred to in (2) and (3) above in deciding whether to continue with and/or increase the terms of the offer to acquire the shares of the Company (paragraph 19 ibid).
(5) Morgan Crucible's directors and financial advisers did so rely (paragraph 19 ibid).
(6) "In the premises Hill Samuel owed to [Morgan Crucible] a duty of care in relation to its review of the profit forecast and the representations contained in the said letter (both as originally published and as reaffirmed)" (paragraph 19 ibid).
In their skeleton argument, counsel for Hill Samuel submitted that "nothwithstanding paragraph 5A of the amended statement of claim" the purpose of the representations relied on "was to advise the directors and shareholders of the Company on the merits of the offer which Hill Samuel were obliged to do". For present purposes, however, the form of the amended draft pleading obliges us to assume that at the trial Morgan Crucible will be able to prove that
(a) one of the ordinary purposes of defence documents is to influence bidders in the manner alleged in paragraph 5A;
(b) Hill Samuel intended that its statement relating to the profit forecast would be included in the defence document of 24th January 1986;
(c) Hill Samuel knew and intended that the Company's directors and financial advisers would rely on that forecast in the manner alleged.
On the assumed facts, we think it must be arguable that Hill Samuel owed to Morgan Crucible a duty of care in making their representations concerning the profit forecast, for the same reasons (mutatis mutandis) as those which we have given concerning the directors. In one respect the case against Hill Samuel is arguably stronger in that they were giving their advice as experts.
We should, however, refer to two particular points relied on (among others) by Mr. Langley Q.C. for Hill Samuel. First, he pointed out that there had been no direct contact between his clients and the Company's directors and financial advisers and no request by those persons for Hill Samuel's advice. This is no doubt a factor which will be taken into account by the trial judge in considering questions of proximity, but we do not regard it as by itself conclusively negativing a duty of care.
We make the like comment in relation to another point particularly stressed by Mr. Langley, namely that there was an obvious conflict of interest between the directors of the Company, to whom the relevant representations were directly addressed (and who were obliged to communicate that advice to the Company's shareholders), and Morgan Crucible. It was submitted in effect that in endorsing a profit forecast, a bank can never be held to owe duties to parties with conflicting interests. We were not wholly convinced by this submission, if only because the obligation resting upon financial advisers as formulated in Rule 28.1 of the city Code is an obligation to satisfy themselves that the profit forecast has been prepared by the directors "with scrupulous objectivity". At first sight the conflict of interest referred to above would appear to involve no potential embarrassment to banks which are discharging this particular function, even if they were to owe the alleged duty of care to Morgan Crucible. It should be stressed that this is not a general duty of care; it is simply a duty to take care in making representations of the relevant nature.
We are therefore not persuaded that the pleaded case against Hill Samuel is bound to fail.
The case against Judkins
The allegation that Judkins owed a duty of care to Morgan Crucible is based on alleged representations concerning the Company's audited accounts (paragraphs 9 to 12D of the draft amended pleading) and representations concerning the profit forecast (paragraphs 24 to 27).
As to the audited accounts, it is pleaded (inter alia)
(1) by its letter of 24th January 1986 addressed to the directors of the Company and Hill Samuel, Judkins "impliedly represented to the Plaintiff Company"
(a) that the balance sheet as at 31st January 1985 reflected a true and fair view of the Company's state of affairs as at 31st January 1985;
(b) that the accounting policies adopted in compiling the profit forecast and the unaudited interim results were in accordance with U.K. generally accepted accounting practices;
(c) that in so far as the information given about the Company by the directors in the defence documents was extracted from the Company's previously published audited accounts or from the unaudited interim results, it was not misleading as at the date of the defence documents (paragraph 12B);
(2) that "Judkins subsequently twice reaffirmed...the said representations...by consenting to the issue of" the recommended increased offer document of 31st January 1986 and the directors' letter of 27th February 1986 (paragraph 12C);
(3) that "it was reasonably foreseeable to Judkins and Judkins must have known and intended that the directors and financial advisers of [Morgan Crucible] would rely...upon the representations and each of them pleaded in paragraph 12B both as originally published and as reaffirmed" (paragraph 12D);
(4) that the directors and financial advisers of Morgan Crucible did so rely (paragraph 12D);
(5) that accordingly a duty of care arose "in relation to the said representations and each of them both as originally published and as reaffirmed" (paragraph 12D).
As to the profit forecast, the draft amended pleading asserts (inter alia) that
(1) Judkins' letter of 24th January 1986 was intended for inclusion in the defence document of 24th January 1986, which contained the profit forecast (paragraph 24);
(2) the representations contained in that letter were made to Morgan Crucible as well as to the directors and shareholders of the Company/ by reason of the facts and matters pleaded in paragraph 5A and in Answers 15(3) to (5) of the amended further and better particulars and were twice reaffirmed by Judkins in the recommendation of 31st January 1986 and the directors' letter of 27th February 1986 (paragraph 25);
(3) Judkins must have known and intended that directors and financial advisers of [Morgan Crucible] would rely upon the said representations (paragraph 26);
(4) the directors and financial advisers of Morgan Crucible did so rely (paragraph 26);
(5) in the premises/ Judkins owed a duty of care in relation to the representations contained in the letter of 24th January 1986 both as originally published and as reaffirmed (paragraph 26).
Among other cogent points made by Mr. Bratza Q.C. on behalf of Judkins was the submission that, if the court were to hold that Judkins owed Morgan Crucible the alleged duty of care, it would be going further than the court did in Smith v. Bush or in any other reported case in that
(a) the information in question had neither been requested nor required of Judkins by Morgan Crucible for any purpose;
(b) the statements which gave the information had not in terms been directed to Morgan Crucible but to the directors and shareholders of the Company;
(c) the interests of the shareholders of the Company were in conflict with those of Morgan Crucible;
(d) there was no financial or other connection between Judkins and Morgan Crucible, which had not paid for Judkins' services;
(e) Judkins at all material times had the assistance of separate advisers of their own.
We take these and the other points made on behalf of Judkins. Once again, it may be of critical importance for the trial judge to consider in the context of duty of care and proximity whether Morgan Crucible could reasonably have regarded themselves as persons to whom the relevant representations were directly or indirectly addressed. For present purposes, however, we think it will suffice to say that in our judgment Morgan Crucible, on their proposed pleadings and the assumed facts, have established an arguable case as to duty of care for the same reasons (mutatis mutandis) as those relating to the directors in the case of the financial statements and the same reasons (mutatis mutandis) in relating to the directors and Hill Samuel in the case of the profit forecast.
Conclusions
Counsel for the respective defendants fairly stressed the novelty of the claims against them now under consideration and the far-reaching consequences in the commercial world which might ensue if they gave rise to causes of action. We particularly appreciate the concern eloquently expressed by Mr. Kosmin, Mr. Davis and Mr. McLaren on behalf of the individual directors. The prospect of the anxiety and expense of a trial extending over several weeks is daunting. The possibility of liability on their part being established at the trial is even more daunting for those of them (perhaps the majority or all) who have no relevant insurance cover. We can understand why they should wish if possible to dispose of the claim against them in negligence on a striking out application. We bear in mind all these considerations/ which appear to have carried weight with the learned judge. However, in case the point is not fully appreciated, we emphasize that the whole essence of the claim against the several directors is that the representations relied on were made negligently by each of them. We should record that Mr. Sumption expressly accepted that if Morgan Crucible are to establish liability against any director at the trial, they will have to prove personal negligence against him. Even if he owed the duty of care alleged, and even if the accounts or the profit forecast were highly misleading, it would not necessarily follow that he was in breach of that duty. This might partly depend on what advice he took and what advice he followed. It is not suggested that any of the defendants should be treated as if they had warranted the accuracy of the profit forecast or the financial statements. All that is suggested is that they should not have published or circulated the representations made in these documents without due care.
For the reasons stated, we conclude that the draft amended pleading discloses an arguable case against each of the defendants, based on the existence and breach of a duty of care, which amounts to a "reasonable cause of action" within the meaning of R.S.C. 0.18, r.19(1)(a). We think that Morgan Crucible's newly formulated case should be allowed to go to trial where in the context of duty of care, questions of proximity and justice and reasonableness can be considered by reference to the evidence. We therefore propose to allow the appeal and, subject to any further submissions as to the form of the order, to give Morgan Crucible leave to amend their statement of claim and the further and better particulars thereof in accordance with the draft served with the notice of appeal, and the further small amendment to paragraph 26 of the statement of claim already mentioned.
(Order: Appeal allowed with costs; plaintiffs to have leave to amend statement of claim and further and better particulars thereof in accordance with draft served with notice of appeal; paragraph 26 of statement of claim to be amended by addition of the words "and intended" after the words "must have known", and as amplified by amended draft further and better particulars; defences to be delivered within 14 days of today's date; application for leave to appeal to House of Lords refused).
