Equitable Life Assurance Society v Ernst & Young (a firm) [2003] EWHC 112 (Comm)

Case No 2002 Folio 339

[2003] EWHC 112 (Comm)

IN THE HIGH COURT OF JUSTICE

QUEEN’S BENCH DIVISION

COMMERCIAL COURT

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 10 th February 2003

Before

THE HONOURABLE MR JUSTICE LANGLEY

Between

The Equitable Life Assurance SocietyClaimant

Ernst & Young (a Firm)Defendant

Mr I. Milligan QC, Mr R. Miles QC and Mr G. Morpuss (instructed by Messrs Herbert Smith) for Claimant

Mr M. Hapgood QC, Mr C. Kinsky and Mr M. Simpson (instructed by Messrs Barlow Lyde & Gilbert) for Defendant

Hearing Hearing dates : 13 th 14 th, 15 th,16 th and 20th- January 2003

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

.............................

The Hon. Mr Justice Langley

INTRODUCTION

[1]The court has before it an application by Ernst & Young (“E&Y”) for an order striking out almost all of the claims made against E&Y by The Equitable Life Assurance Society (“Equitable”) in draft Re-Amended Particulars of Claim (“the RAPC”). In the alternative E&Y applies for an order granting summary judgment against Equitable on those claims. The only claim in the RAPC to which the application does not extend is a discrete and, in context, minor claim in respect of certain alleged tax liabilities about which nothing further need be said. Equitable’s claims in the RAPC are made against E&Y for alleged negligence as auditors to Equitable in the audits for the years ended 31 December 1997, 1998 and 1999.

THE RULES

[2]The application to strike out the claim is made pursuant to CPR rule 3.4(2)(a). The application for summary judgment is made pursuant to CPR rule 24.2. The attack on the claim is focussed on questions of scope of duty, causation and want of damage.

[3]CPR rule 3.4(2)(a). The court may strike out a statement of case if it appears to the court that it discloses “no reasonable grounds for bringing the claim”. The words of the rule do not, I think, require any amplification in this case. The focus is upon the claim as drafted, in this case the RAPC. There may of course be reasonable grounds for bringing a claim which depends upon the resolution of disputed issues of fact in favour of the claimant or which raises novel or complex issues of law which would better be decided in an established context of fact or which are fact sensitive.

[4]CPR rule 24.2. The court may give summary judgment against a claimant on the whole or part of a claim if it considers that the claimant “has no real prospect of succeeding on the claim” and “there is no other compelling reason why the case or issue should be disposed of at a trial”.

[5]Again, the words of the rule speak sufficiently for themselves. As Lord Hope said in Three Rivers District Council v Bank of England (No 3) [2001] UKHL16 at paragraph 92, the difference between the words of the rule and rule 3.4(2)(a) is elusive, but in many cases the practical effect of the two rules will be the same and, in more complex cases, attention to the overriding objective of dealing with the case justly is likely to be more important than a search for a precise meaning of the rules.

[6]Although Mr Milligan QC, for Equitable, submitted that, even if the court concluded that the claim had no real prospect of success, there were other compelling reasons why the case should still be tried, I do not think the discrete matters he relied upon for the submission justify it. The fact that there are also claims against the former directors of Equitable which must be taken as ones which will proceed in any event is in my judgment no reason of itself for permitting a claim to proceed against E&Y which has no prospect of success. If anything, to the contrary. There is much to be said in such a context for curtailing the length and expense involved in a trial. I should also record that directions have been given intended to secure that the present application does not affect the progress of all the claims to trial should that prove to be the appropriate outcome.

[7]Mr Milligan said, (correctly) that E&Y had not yet disclosed the working papers for the audits. It is also common ground that if the claim against E&Y is to proceed then it should do so together with the claims against the former directors which arise out of the same events. Mr Milligan said the court should take into account on these applications the possibility that Equitable might be able “to improve the claim” with disclosure or by cross-examination of the directors. Mr Hapgood QC, for E&Y, riposted by pointing to the lack of admissible evidence before the court and the difficulties Equitable faced in obtaining any admissible evidence on issues of causation because of the claims it had chosen to make against the directors. I do not consider that these considerations are of real significance on this application. It would be as inappropriate to take account of the mere possibility that something might turn up to improve Equitable’s case as it would be to strike out the claim or to give summary judgment for E&Y because Equitable might have difficulties in proving what otherwise appeared to be a case based on reasonable grounds or one with a realistic prospect of success. Moreover this is a claim where there is available a contemporary documentary record which the court can consider in seeking to form a view about what facts Equitable has or has not a realistic prospect of establishing at a trial. KEY FACTS

Equitable

[8]There is no significant dispute about the major events and circumstances which underlie the claims which Equitable make. Equitable was founded in 1762. It is an unlimited liability company. It has no share capital. It is a “mutual”. Its members (who share in the profits or losses) are its with-profits policyholders. The Articles of Association require the directors of Equitable to appoint an Actuary (Article 46), to prepare a revenue account and balance sheet (Article 64), to cause the Actuary to value the assets and liabilities (Article 65), and to appoint auditors whose duties are regulated by the Companies Act 1985 (Article 68). Article 65 also gave the directors power to distribute surplus to members of Equitable by way of bonus. The extent of those powers and their proper exercise was the subject of the decision of the House of Lords in Equitable Life Assurance Society v Hyman

[2002] 1 AC 408

which, as is well known, plays a major part in the story.

[9]Equitable’s principal activity was the transacting of life assurance, annuity and pensions business in the form of with-profits, without profits and unit-linked business. For many years, until June 1988, Equitable issued with-profits policies which provided for guaranteed annuity rates (“GARs”). A GAR policy contained a guaranteed annuity option (“GAO”) which permitted the policyholder on retirement to choose to receive an annuity at a guaranteed rate rather than the current annuity rate (“CAR”) prevailing at the date of retirement. Alternatively the policyholder could, on retirement, choose to take the benefits accrued to the policy as a cash sum up to a limit imposed by the Inland Revenue and/or as an annuity at CARs with Equitable or (from 1978) with another company. Equitable stopped issuing GAR policies in June 1988 but existing GAR policyholders remained entitled to pay recurrent single premiums into their policies and to obtain the benefit of the GAR in respect of those premiums.

[10]Equitable declared annually two forms of bonuses. Reversionary bonuses were irrevocable in the sense that once declared they vested on 1 April and a policyholder was contractually entitled to the benefit of them on the maturity of the policy. Terminal (or final) bonuses, although “announced” annually, in the sense of being notified to policyholders, were only allotted when benefits were taken under a policy and, as Equitable’s literature made clear, there was no contractual right to the bonuses until then.

[11]Reversionary bonuses are typically set at a rate referable to the expected return on medium or long dated gilts. Terminal bonuses were set at rates intended to ensure that the total benefits which a policyholder received on maturity reflected the smoothed value of the assets of Equitable attributable to the premiums paid by the policyholder. For the purposes of this judgment, even if inaccurately, I shall refer to a policyholder’s “asset share” as the sum assured together with the value of all bonuses both reversionary and terminal. The guaranteed fund value (“GFV”) was however only the sum assured and the value of reversionary bonuses.

[12]Between late October 1993 and mid-May 1994 GARs exceeded CARs for the first time. They did so again from and after mid-May 1995. Simply to illustrate the position with a crude example, if a policyholder’s “asset share” was £10,000 and the GAR was 10%, the annual pension would be £1000 whereas the CAR might be 8% giving an annual pension of £800.

[13]Equitable had an unusually high proportion of policies containing GAOs. When the Hyman litigation was commenced in January 1999 about 25% of the policies in force had GAOs.

The DTBP

[14]The Board of Equitable was alive to the potential problem created by GARs exceeding CARs. On 22 December 1993 the board resolved to address it by adopting a differential terminal bonus policy (“the DTBP”).

[15]In simple, but I think sufficient, terms the DTBP operated by adjusting terminal bonuses to equalise the annuities payable under GAR policies where the policyholder exercised the GAO with those payable under non-GAR policies and GAR policies where the policyholder chose not to exercise the GAO.

[16]Using the same crude example, if, before adjustment, a GAR policyholder’s asset share was £10,000 made up of the sum assured and reversionary bonuses of £7500 (the GFV) and terminal bonuses of £2500 then, if the GAO was exercised, the terminal bonus would be reduced from £2500 to £500 to give an annuity at the GAR of 10% on £8000 (£800) which would be the same as the annuity for other policyholders who would retain the full terminal bonus and so also receive £800 being 8% of £10,000.

[17]The DTBP was applied in each of the years 1993 to 1999. The directors of Equitable believed they were entitled to operate it because of the wide terms of the discretion provided for by Article 65 of Equitable’s Articles of Association. The House of Lords in Hyman decided that belief was wrong.

[18]Complaints were made to Equitable by a number of GAR policyholders in about September 1998. Equitable initiated a test case to determine whether it had the right to declare differential terminal bonuses. Mr Hyman was the chosen defendant to represent all GAR policyholders. The proceedings were begun on 15 January 1999. On 9 September 1999 the Vice-Chancellor gave judgment in favour of Equitable. On 21 January 2000 the Court of Appeal, by a majority (Lord Woolf MR and Waller LJ; Morritt LJ dissenting) allowed an appeal by Mr Hyman and held that Equitable was not entitled to declare differential terminal bonuses. The House of Lords decision, dismissing Equitable’s further appeal, was published on 20 July 2000. The House of Lords also decided that Equitable was not entitled to allot differential bonuses to GAR and non-GAR policyholders as separate classes (“ring fencing”) thereby closing off a potential solution for Equitable which had found favour with Waller LJ in the Court of Appeal. In commercial terms the decision of the Court of Appeal, unlike the House of Lords, had not been unfavourable to Equitable.

[19]On 20 July itself, on the basis of advice that the decision in Hyman exposed Equitable to additional liabilities of some £1.5bn., the directors resolved that it was in the best interests of Equitable to put itself up for sale and to remove growth in policy values in respect of the first seven months of 2000.

[20]In the event no sale was achieved. Equitable stopped writing new business with effect from 8 December 2000. In February 2001 Equitable sold the Permanent Insurance Company Limited for £0.15bn.. In March 2001 it sold certain other assets to the Halifax Building Society for £0.75bn. with a further payment of £0.25bn. payable in 2005 on certain contingencies which it has recently been said are unlikely to be met.

[21]It will be necessary to re-visit in some detail the events surrounding and concerned in the foregoing summary of the key facts in order to address the submissions made to the court. I propose to do that in the course of setting out the duties which are alleged to have been owed by E&Y to Equitable, the respects in which in the three relevant audit years those duties are alleged to have been broken, and the loss alleged by Equitable. E & Y’s DUTIES

Generally

[22]The duties alleged and the basis of them is set out in Section C of the RAPC. Despite Mr Milligan’s submissions that what is there pleaded (relying on the engagement letters and other documents) provides or may provide for some more extended duty, I think the whole thrust of the allegations is that E&Y owed the undoubted and well recognised contractual duty of care which an auditor undertakes to his audit client in carrying out an audit of the client’s accounts for the purpose of the statutory accounts prepared under the Companies Act, 1985. That duty includes a duty (here expressly recognised) to report on any issues arising in the course of an audit as and when they arise but essentially it is to take care in reporting on the client’s historic accounts for the relevant year whether or not they have been prepared in accordance with statutory requirements and give a true and fair view of the client’s affairs at the date of the balance sheet and of the profit and loss for the period ending on that date.

[23]Although Mr Milligan placed some emphasis on statements by E&Y that they would “analyse audit and business risks” as part of the audit the RAPC does not allege any specific respects in which such an analysis (or lack of it) is relied upon apart from those reflected in the allegations of breach of duty. For example, it is not alleged that E&Y ought to have advised or warned Equitable that it needed to take any particular action as a consequence of the matters complained of beyond including the provisions and disclosures in the audited accounts which are relied upon.

[24]Mr Milligan also referred to paragraph 15 of the Reply in which it is alleged at (c) that:

“the scope of an auditor’s duty is capable of extending, and E&Y’s duties … did extend, to protecting the company from losses arising from decisions made (or not made) by the directors of the company based upon or in reliance on the audited accounts, including, for example, in the case of [Equitable] (i) considering the financial position of [Equitable] including whether its assets are sufficient to support its liabilities; and (ii) in the light of (i)… (1) deciding whether to declare bonuses, and the amount of such bonuses; and (2) deciding whether the business and assets of [Equitable] ought to be sold.” (i) considering the financial position of [Equitable] including whether its assets are sufficient to support its liabilities; and (ii) in the light of (i)… (1) deciding whether to declare bonuses, and the amount of such bonuses; and (2) deciding whether the business and assets of [Equitable] ought to be sold.”

[25]This plea was directed specifically to E&Y’s defence that the losses claimed did not fall within the scope of the duty owed by E&Y to Equitable. It does not purport to derive from any particular agreement or document but to represent the general consequence of an audit. It also recognises, of course, that decisions of the type referred to are decisions of and for the directors and again it is not alleged that E&Y either did or should have given any advice about them as such.

[26]It is alleged (paragraph 34 of the RAPC) and for present purposes to be assumed, that E&Y appreciated certain “unusual features” of Equitable including the “high proportion” of policies with GAOs, their flexibility, the policy to maximise bonuses and not to build up an orphan estate, and the fact that GAO liabilities were not matched by fixed interest investments. Paragraph 35 of the RAPC alleges that by reason of those features “E&Y either did or ought to have known that, within the insurance industry, [Equitable] had a particularly high risk exposure” and “E&Y’s auditing functions were carried out against the background of that knowledge”.

[27]In the case of Equitable the duty of E&Y as auditors expressly included, as significant items in the accounts, exercising due care to express an opinion on what are called the “long term business provision” (“LTBP”) and the “fund for future appropriations” (“FFA”). The LTBP is just that: a provision for the long term liabilities of Equitable. In Equitable’s case this was determined by the “Appointed Actuary” of Equitable (required by section 19 of the Insurance Companies Act 1982). It is of some importance that the valuation basis of the LTBP in the statutory accounts is not necessarily the same as the valuation basis for liabilities in regulatory returns which insurance companies such as Equitable also have to make to their regulator under the 1982 Act. Those returns will contain figures which will never be less than the LTBP but in certain circumstances may be more. For the purposes of this judgment the regulatory returns may be said to require conservative assumptions to be made (“a reasonably foreseeable worst case scenario”) whereas the statutory accounts use assumptions intended to reflect the most likely outcome to arrive at a realistically prudent best estimate. The regulatory returns refer to “reserves”, the statutory accounts to “provisions”.

[28]The FFA is a balancing figure which represents all funds in the statutory accounts which have not been allocated in the financial year. For a mutual company such as Equitable the FFA can only be allocated in future as bonus or retained to build up an “inherited” or “orphan” estate intended to insulate bonus prospects from future adverse experience. It is presented as a liability in the accounts. The effect of requiring further provisions in the LTBP would be to increase the LTBP and reduce the FFA by the same amount.

THE ALLEGED BREACHES OF DUTY

[29]Two types of breach are alleged. First, in each of the years 1997, 1998 and 1999 it is alleged the statutory accounts should have included very substantial technical provisions in relation to GAOs. In fact in 1997 the accounts only included provisions for the GFV for all policyholders and in 1998 and 1999 a further provision of only £200m. Second, for each of the years 1998 and 1999 it is also alleged that the accounts should have disclosed contingent liabilities and uncertainties in respect of the Hyman litigation.

[30]The 1998 and 1999 £200m provision which was made for GAOs was explained as “a prudent provision for any additional liabilities which may arise through clients choosing to exercise guaranteed annuity options under their policies”. The provision was directed only to those cases where the operation of a GAR to the GFV would produce an annuity which would exceed the CAR based on “asset share” and so it would be expected that the policyholder would exercise the guarantee. Such cases were (rightly) expected to be rare. They would in effect be cases in which the DTBP could not be operated to equalise benefits because there was insufficient “money” in the terminal bonuses to achieve it.

[31]The claim is that a provision for GAOs should have been made which assumed a take-up rate of 75%. The reason for 75% is that it is also assumed that policyholders would take 25% of their benefits as a tax-free lump sum but otherwise full provision should have been made for all GAOs to reflect “the most likely outcome” of the liability of Equitable which they represented. Paragraphs 45 and 46 of the RAPC set out the size of this provision (after credit for such provisions as were made) as follows: 1997: £0.9 bn. 1998: £1.4 bn. 1999: £1.1 bn.

[32]The relevant audit reports for those years were dated 25 March 1998, 24 March 1999 and 22 March 2000. For the purposes of these applications (albeit in fact disputed) it is to be assumed therefore that E&Y were in breach of their duty of care as auditors in each year in not advising Equitable of the need to include technical provisions of these amounts in the statutory accounts. It should be noted, as it forms an important part of E&Y’s submissions, that although the regulatory return for 1997 contained no reserves for GAOs, the returns for 1998 and 1999 did in the gross figures (i.e. before reinsurance) of £1.6bn. and £1.7bn. respectively.

[33]Equitable summarises the legal advice it received (and the decisions of the courts as they came to be made) concerning the Hyman litigation in Paragraph 60 of the RAPC. The advice received is said to have been such that “it could not properly be said that the possibility of a transfer of economic benefits … was remote” with the consequence that the statutory accounts for 1998 and 1999 should have disclosed (paragraph 61 of the RAPC) :

“(a) the risk that there could be a transfer of economic benefits from the non-GAR policyholders to the GAR policyholders; (b) the onerous commitments resulting from the open-ended nature of the GAR policies; (c) the possible need for a rectification scheme (such as that which was in fact implemented by the Society in December 2000), to give effect to the GAOs from 1994 onwards; and (d) the possibility of policyholders bringing claims against the Society in respect of alleged mis-selling.”

[34]The alleged want of disclosure, however, played no significant part in Equitable’s submissions on this application. Indeed if Equitable cannot show that it has reasonable grounds for bringing the claim and real prospects of success on the basis of the allegations concerning technical provisions it must, I think, be fanciful to suppose that it could show such grounds or prospects on this basis; nor does it add anything of significance to the provisions claim such as could tip the balance of the outcome. As will become apparent, moreover, the board of Equitable was well aware of the risks of losing the Hyman litigation. The board relied on legal advice to assess the likelihood of the risk materialising.

THE LOSS ALLEGED

[35]The claim is expressed in three albeit related ways. It also varies in amount according to which audit year is material. The focus of the attack on the claim is such that I must address this in some detail. The three ways in which the claim is expressed are loss by not selling the business and assets (either in September 1998 or 2000), loss of the chance of such sales, and loss by declaring bonuses which would not have been declared. 1997 AUDIT

[36]E&Y signed the audit opinion on 25 March 1998 and the Board of Directors approved the accounts that day. By that time GARs had consistently exceeded CARs for over 2 years. The Appointed Actuary prepared a number of papers for the Board on the valuation of Equitable’s assets and liabilities at the year end and making recommendations concerning the declaration of bonuses. The final paper was dated 10 February 1998. The paper records that :(i) bonus decisions were considered in the light of the statutory accounts (“the commercially realistic” presentation) not the regulatory returns;

(ii) terminal bonuses were not guaranteed and conferred no entitlement until the point of contractual termination of the policy and before then “could be adjusted retrospectively at anytime”;

(iii) the (then) unaudited accounts showed a surplus of assets over liabilities of £2663.1m from which it was recommended that £507.7m be declared as reversionary bonuses and the balance be carried forward as the FFA; and

(iv) various stated terminal bonus rates were to be announced. This paper was presented to and approved by the Board on 17th February.

[37]The statutory accounts differed only insignificantly from the figures on which the Appointed Actuary was working. Technical provisions were £21,500.1m. The market value of the assets supporting the provision was stated at £23,676.4m and the FFA was £2,162.9m. The accounts did not include (in any year) any figure for terminal bonuses save for those actually paid in the year (some £390m in 1997) because they were not a liability. Nor did the statutory accounts in any year include goodwill as an asset.

Claim (1): Lost Sale in September 1998

[38]The Thesis. Equitable claims that the 1997 statutory accounts should have included a technical provision of £0.9bn. in respect of GAO liabilities. The RAPC (Section G) allege that(i) the directors relied on the accounts when making decisions in relation to Equitable’s business including assessing its capital adequacy;

(ii) E&Y “appreciated that it was at least very likely” that the accounts would be relied upon in that way and

(iii) “had E&Y advised the directors of the need for a technical provision of £0.9bn. and ensured that such provision appeared in the statutory accounts” Equitable “would not have been in a position to declare or would not have declared the bonuses which it did in respect of that year” and “would have been in a position in which it was able to achieve a managed sale” of the business and assets at a time when it still had a substantial value to third parties. The RAPC aver that the directors would have concluded that Equitable “required substantial additional capital” and that the best option was a sale which would have been completed in about September 1998.

[39]It is right to note, as has been acknowledged in correspondence, that it is not and could not be Equitable’s case that the bonuses in fact declared could not properly have been declared even had the £0.9bn. provision been made. The allegation that Equitable “would not have been in a position” to declare the bonuses it did declare is therefore agreed to be wrong. Indeed, as Mr Hapgood emphasised, in each of the years on which Equitable relies, the FFA, even after transfer to the LTBP of the further provisions claimed (paragraph 31), would have been in an amount of £1.276bn (1997), £1.625bn (1998), £3.741bn (1999) and £2.311bn (2000).

[40]The Loss. On the basis of a sale in September 1998, the loss claimed is the difference between the alleged value of Equitable in September 1998 and the proceeds (0.9bn.) of the sale of the assets which were in fact sold in February/March 2001. The difference is alleged to have been £2.6bn. consisting of “the value of in-force business” (£1.3bn.), the value of “new business/goodwill” (£0.9bn.), certain other assets and £0.4bn. which it is said would have been “saved by reducing bonus payments without impairing policyholders’ reasonable expectations”. The reference to “policyholders’ reasonable expectations” (“PRE”) is a reference to a recognised concept to which the management of a with-profits business must have regard.

[41]In substance this claim is therefore a claim that had a provision for GAOs of £0.9bn. been made, the directors of Equitable would have decided to sell the business and assets and would have realised £2.6bn. more than was in fact realised some 2½ years later following the decision of the House of Lords in Hyman. The reduction in bonuses which it is said would have been determined upon by the directors in those circumstances would have been £0.4bn. That is a reduction in bonuses actually paid in 1998 on matured policies albeit the same level of reduction would have had to be applied to all policies to avoid discrimination between them.

Claim (2) Lost Sale in September 2000

[42]The Thesis. “Had the directors not resolved” to sell in 1998 “or been unable to achieve a sale at that time” it is alleged on the same basis as Claim (1) that they would have achieved a sale in September 2000. The explanation for the two-year gap appears in the RAPC and the evidence. The Hyman litigation began in mid-January 1999 and complaints from GAR policyholders about the DTBP began in about September 1998. The RAPC acknowledge that no sale would have been possible until the uncertainties created by the litigation were resolved in July 2000. It is, however, alleged that in the interim bonuses would have been reduced “to preserve and increase the value of” Equitable.

[43]The Loss. On the basis of a sale in September 2000 the loss claimed is £1.7bn. being a value of £2.6bn. less the realisation of £0.9bn. The £2.6bn. includes in-force business valued at £1.7bn, new business/goodwill valued at £0.3bn. (lower than 1998 by reason of the effect of the assumed cuts in bonuses) and bonus reductions of £1.6bn. It is also said that a purchaser would have deducted £1.1bn. for the cost of capping GAO liabilities and a further £0.4bn. for other costs which in fact arose in the context of the compromise scheme which Equitable adopted following the House of Lords decision.

[44]In substance therefore this claim has the same basis as Claim (1) but with the added features that it is recognised no sale could have been achieved whilst the litigation uncertainties existed and it is said that the directors would have taken steps by September 2000 to reduce bonuses paid by a total of £1.6bn. so that a much reduced but still a £1.7bn sales value could have been achieved in September 2000. 1998 AUDIT

[45]E&Y signed the audit opinion on 24 March 1999 and the Board approved the accounts on the same day. For some time before then the subject of GAOs had been under debate both within Equitable and E&Y and with the Regulator. On 29 July 1998 the Appointed Actuary had completed a questionnaire for the Government Actuary’s Department (GAD) which really encapsulated his view of the effect of the DTBP. He stated that “for all but a few small policies” the cost of annuity guarantees was “covered” by the reduction in the amount of terminal bonus and added that “as the business to which annuity guarantees apply ages the increasing terminal bonus cushion will make it increasingly unlikely that guarantees will actually bite”. This was a reference to the fact that no GAOs had been offered since 1988 and as time passed so the terminal bonus became a greater percentage of the total policy values. It also of course assumed the validity of the DTBP. By September/October 1998, however, the validity of the DTBP was being questioned publicly.

[46]On 9 September 1998 the Appointed Actuary informed the board that if Equitable was not entitled to adopt the DTBP, the maximum potential cost to Equitable was £1.5bn. On 19 November the Appointed Actuary wrote a paper with his initial considerations for the year end bonus declaration. He also debated with the GAD the need for reserves for GAOs. The GAD was contending GAOs should be reserved for in the regulatory returns at 100%. The Actuary (and, he said, E&Y) considered a much more realistic commercial (and lower) level of provision was appropriate in the statutory accounts. The Board discussed the issues at meetings on 25 November and 16 December and at the later meeting resolved to commence what became the Hyman litigation. The possibility that bonus rates might have to be adjusted to address the problem was discussed. The GAD stood its ground on the need for substantial reserves (in the event a gross figure of £1.6bn) in the regulatory returns.

[47]The documents (in particular the minutes of meetings on 15 and 27 January 1999) demonstrate that the directors were concerned that a predator might take the opportunity to approach Equitable but also determined, so long as Equitable could meet regulatory requirements, to remain a mutual and to prepare to resist any approach. The Appointed Actuary’s paper for the Board in the context of “the first draft results” for 31 December 1998 was dated 22 January 1999. It is a document on which Mr Hapgood placed considerable reliance. The paper demonstrated that the actual experience in 1998 of policyholders exercising GARs was, in context, minimal: 97 cases out of 11,000 retirements at an additional benefit cost of £245,000. The effect of the DTBP was that very few GAR policyholders exercised the GAO as there was nothing to be gained by doing so. Paragraphs 16 and 17 of the report contained (so far as material) the following:

“16.Reserving for GARs needs to be addressed at 3 levels: (i) A reserve within the long-term business provision in the Companies Act accounts which the auditors will accept as ‘true and fair’. Such a reserve can be characterised as a ‘cautious best estimate’. (ii) A reserve in the statutory returns which meets the regulatory requirement for prudence. Such a reserve will be at least as high as that in (i). Based on my own projections of future experience and views of what constitutes a suitable (but not excessive) degree of prudence, I feel that reserves based on the assumption that 25% of benefits are taken in GAR form under retirement annuities … should be satisfactory. (iii) A reserve at the level indicated in the recent guidance issued by the FSA and Government Actuary. The guidance represents a considerably greater, and, in my view, excessive, degree of prudence compared to the reserves in (ii) above. The guidance is not mandatory but there is a clear message that any office not complying with it risks regulatory action. The guidance leaves some limited room for discretion …. Compared to the assumptions described in (ii) above my current assessment is that the lowest proportions of benefits we could assume taken in GAR form without being held to contravene the guidance are … 75% in the case of individual pensions …. 17. Further discussions are needed with the auditors regarding the level of reserves needed in 16(i) above. For the purposes of this paper I have assumed that they are at the same level as at 16(ii), since that is the most cautious assumption (i.e. the one which produces the highest long-term business provision).”

[48]The paper addressed the reversionary bonus rates likely to be declared by competitors and “the PR concerns” of cuts in rates. The paper was considered by the Board at a meeting on 27 January. The Board approved a reversionary bonus of 5% noting that it was a reduction of 1½% on 1997 which should not be so out of line with competitors “to be perceived as a sign of difficulty”.

[49]An audit committee meeting was held on 24 February. Included in the Agenda paper for the meeting were two further papers prepared by the Appointed Actuary dated 18th February. The first was entitled “Guarantee Annuity Rate Options: Reserving and Disclosures”. This paper also addressed the possible levels “at which the additional liability arising from GARs can be assessed” including “the best estimate of the commercial cost” (said to be £50m on the basis of actual experience); “a cautious best estimate suitable for a true and fair view” of the LTBP (said to be £350m) and the level implied by the GAD guidance (said to be £1800m). The report addressed the question whether the statutory accounts “should include reference within the Notes … to any material contingent liability in respect of” the Hyman litigation. Referring to an Opinion of leading counsel that the DTBP was valid the report continued: “it is on that basis that the provision for GARs has been calculated and established within Technical Provisions …. Technical Provisions represent a reasonable and prudent estimate of [Equitable’s] liabilities in respect of GARs. Given the approach taken to provide for GARs, it is our opinion that there is no material contingent liability that has not been provided for at the balance sheet date” in the statutory accounts.

[50]The second paper, entitled “Valuation and Bonus Declaration at 31 December 1998” emphasised, as in 1997, that it was the statutory accounts not the regulatory returns which “can be regarded as commercially realistic” and that it was by reference to the statutory accounts that bonus decisions were to be addressed. The paper recommended that the “surplus” shown in the statutory accounts (£3242m) should be distributed by way of reversionary bonuses of £363m with the balance carried forward as the FFA.

[51]The Appointed Actuary also prepared a third paper dated 18 February entitled “GARs-Contingency Plan should [Equitable] lose the Court Case”. The paper acknowledged that “in the event of a requirement to equalise the proportionate final bonus on both GAR and non-GAR benefits, [Equitable] would need to reserve on the basis of close to a 100% take-up of GARs …. That would result in a substantially higher level of reserves and an unacceptably low margin of free assets”. Other than PR considerations, the paper merely flagged that if the case was lost Equitable would need to develop an approach which “maintained equity” between the different categories of business.

[52]The audit committee met on 24 February and noted that E&Y were still addressing the size of provision to be included in the statutory accounts and concluded that no disclosure was necessary in the light of “the strong legal opinion” which it considered meant that the technical provisions to be included in the accounts represented a reasonable and prudent estimate of any contingent liabilities. The Board meeting held on the same day noted that the proposed provision of £350m “was based on very conservative assumptions” (in the event it was reduced with E&Y’s agreement to £200m) and agreed no disclosure was required. The minutes also refer to consideration of the “contingency plan” to “enable the Board, prior to making the bonus declaration, to consider the implications” of losing the Hyman litigation. The bonus declarations were approved. The minutes also note the receipt of a letter from a competitor enquiring whether Equitable would be interested in a merger followed by a demutualisation of the merged company. It was agreed that a reply would be sent stating that the Board considered it was in Equitable’s best interests to remain both independent and mutual.

Claim (3) Lost Sale in September 2000

[53]The Thesis. Equitable claims that the 1998 statutory accounts should have included a technical provision of £1.6bn instead of £200m “or (my emphasis) disclosed related contingent liabilities in respect of the Hyman litigation”. Had the accounts done so, it is said, Equitable would not have declared the reversionary bonuses it did and would have concluded, once the Hyman litigation had been resolved, that the best option would be to sell the business and assets to a third party, whilst in the meantime reducing the bonuses declared.

[54]The Loss. On the basis of a breach of duty in 1998 (but not 1997) the loss is said to be £1.2bn being the value of Equitable (£2.1bn) less the realisations of £0.9bn. The difference between this figure and the figure for the loss claimed on a sale in 2000 based on the 1997 accounts (£1.7bn) is that the bonus saving of £400m in 1997 could not have been made and a lower investment return is claimed.

THE 1999 AUDIT

[55]E&Y signed the audit opinion on 22 March 2000. By that date the decision of the Court of Appeal in Hyman had been published. It was given on 21 January 2000. The approach to reporting on valuations and bonus declarations was substantially the same as for 1998. It is also recorded that despite some approaches Equitable had maintained its stance that it should remain a mutual. The provision for GARs remained at £200m.

[56]Claim (4) Lost Sale in September 2000

[57]The Thesis. Equitable claims that the 1999 Statutory accounts should have included a technical provision of £1.3bn instead of £200m “or” (again my emphasis) disclosed related contingent liabilities in respect of the Hyman litigation. Had the accounts done so it is said again that the directors would have reduced bonuses and sold the business and assets.

[58]The Loss. On the basis of a breach of duty in 1999 (but not 1997 or 1998) the loss is said to be £0.9bn (£1.8bn less 0.9bn). Again the difference is largely accounted for by the reduced savings claimed from bonus cuts.

CLAIM(5): LOSS OF CHANCE OF A SALE

[59]In each audit year Equitable claims in the alternative that by reason of E&Y’s alleged breaches of duty it “lost the chance of achieving” the sales of its business and assets which are the subject of Claims (1) to (4). CLAIM (6) THE BONUS DECLARATION CLAIMS

[60]If it fails to establish that it would have sold its business and assets Equitable claims that E&Y were aware that the directors relied upon the statutory accounts and the FFA when declaring bonuses and determining future bonus levels. It is also alleged that “one of the purposes” of the audit was for E&Y to satisfy itself that any distribution of surplus was properly made. It is alleged on this basis that had E&Y advised the directors of the need for provisions or disclosure in relation to GAOs the directors would not have declared the bonuses in fact declared for the years 1997 to 2000. Loss is claimed “in the amounts of the bonuses which it did declare”. The “savings estimated” from reducing bonuses are said to be: From 1997 onwards: £1.6bn From 1998 onwards: £1.2bn From 1999 onwards: £0.8bn Thus the Bonus claims are subsumed in the Sale claims but the latter are in larger amounts albeit it is not easy to discern from the pleadings what makes up the difference. Nor is it stated how the amounts of “saved” bonuses have been estimated. The significant difference between the sums claimed on a sale and for bonus savings alone arises only on the claim for the 1997 audit leading to a sale in 1998. The bonus saving is said to be £1.6bn. whereas the loss of the sale proceeds are claimed at £2.6bn. Sale in September 2000 and bonus savings produce figures which are substantially comparable. The figures are to be found in Section G5 (paragraph 98) of the RAPC.

[61]In their skeleton submissions counsel for E&Y characterised the lost sale claim as a complaint not that Equitable suffered loss by failing to sell its business but as one that the assets of Equitable became less valuable between September 1998 and February/March 2001. Counsel for Equitable in their skeleton argument accepted this description of the claim, but Mr Milligan qualified that in the course of submissions. He said it was Equitable’s case that it failed to sell the business because it did not receive the “warning” which the provision would have provided but the measure of damage was the subsequent fall in the value of the business. I think, and as Mr Hapgood submitted, that either way the claim seeks to hold E&Y responsible for the value of Equitable’s assets between those dates and in particular, as emerges from such elucidation as there has been of the difference between the value of the lost sale claims and the bonus claims, what is said to have been a massive loss in the value of the goodwill of the business of Equitable.

THE HYMAN DECISION AND SUBSEQUENT EVENTS

[62]The House of Lords’ decision in Hyman was available to the directors of Equitable on the morning of 20 July 2000. It was considered at a Board meeting that day. There was a need to adjust the benefits paid to policyholders with GAOs who had retired (and so been prejudiced by the DTBP) which was estimated to cost between £100m and £200m. The Board also recognised the need “to reduce bonuses over all classes of policy” and decided that in the meantime terminal bonuses should be suspended from midnight on 19 July. Finally it was concluded that it would be in the best interests of Equitable “to seek the sale of the business to an organisation capable of providing capital support and continued investment freedom”.

[63]A number of established companies expressed interest in acquiring the business and assets of Equitable. The Board met to review the position on 25 October 2000. It had before it a paper from the Appointed Actuary addressing “Final Bonus Rates 1.1.94 – 19.7.00”. That was the period in which the final bonus rates had been subject to the DTBP and so, as the House of Lords had decided, based on an incorrect exercise of the Board’s discretion. The purpose of the paper was to produce figures as if the discretion had been exercised afresh but on the proper basis. The starting point was to take the total policy values (that is sum assured plus reversionary and terminal bonuses) of both GAR and non-GAR policies which had in fact been notified to policyholders and to produce revised policy values by equalising the terminal bonuses and so reversing the DTBP. In money terms the result was to increase the value of GAR policies and to decrease the value of non-GAR policies but to leave Equitable’s total exposure unchanged. Mr Hapgood submitted that the consequence was that Equitable in fact suffered no loss (or actually mitigated its loss) in that way. Mr Milligan appeared to accept that was so as regards what he called the loss arising from the Hyman decision. The Board approved the proposal and the revised rates were adopted.

[64]By 8 December 2000 all those who had expressed interest in acquiring the business had withdrawn. On 8 December the Board announced that Equitable would stop writing new business. A further Board meeting on 14 February 2001 noted the agreement for the sale of certain assets to Halifax Group plc and a decision to go forward with a compromise scheme under Section 425 of the Companies Act 1985. The Board also determined that no reversionary bonus would be declared for the year 2000.

[65]Equitable’s accounts for 2000 were published on 11 April 2001. The new Chief Executive (appointed in March 2001) Mr Thomson made two statements in his Report referring to the previous events I have described to which Mr Hapgood referred in his submissions:(i) “the result (of the Hyman decision) was that the Society needed to increase benefits for some policies (i.e. those with GARs) with a corresponding reduction in the benefits for other with-profit policies. The value of GAR policies had effectively increased by approximately £1.5billion in total …. To allow for the costs of these increased benefits, the board decided that, for most classes of with-profits policies, no bonuses would be allotted for the first seven months of 2000 …. The growth in policy values held back matched closely the estimated additional cost of the GAR liabilities;”

(ii) “The House of Lords judgment diminished the Society’s capital strength and in consequence reduced its investment freedom”

[66]The accounts also contained a detailed explanation of the issues surrounding GARs which provides a helpful summary for addressing one of the, to my mind, more intractable matters which featured largely in the submissions of counsel. The point made was that the regulatory reserves which were required (£1.6bn at December 1998 and £1.7bn at December 1999) had “little or no connection” with “the impact on policyholder benefits of the House of Lords decision”, albeit the figures were similar as Equitable had estimated it would have to set aside £1.5bn to deal with the consequences of Hyman. It was said that the regulatory reserves were required to reflect the application of the GAR to guaranteed annuity benefits (i.e. the GFV or sum assured plus reversionary bonuses) on the assumption that the GAO would be exercised at a very high rate but had no reference to terminal bonuses at all as to which nothing was assumed because there was no commitment. In contrast, it was stated, the Hyman litigation was commenced to establish the lawfulness of the DTBP which did relate to the treatment of terminal bonuses not guaranteed benefits. In that regard the decision in Hyman had brought about “an economic transfer from non-GAR to GAR holders” within the single pot of money which made up the with-profits fund, assessed at £1.3bn “for the future best estimate commercial cost and £200m for rectification of those policies that had matured since January 1994”.

[67]I do not intend to question in any way these statements as such but it remains I think important to address what they really mean. Thus Mr Hapgood’s submission is that in money terms both cannot be required because they arise in mutually inconsistent situations but Mr Milligan’s submission is that the two are cumulative and so the size of the “black hole” in Equitable’s accounts was of the order of some £3bn. That submission was indeed at the forefront of Mr Milligan’s response to much of E&Y’s attack on the claims.

[68]Despite, on a number of occasions in the course of argument, seeking an explanation of Mr Milligan’s submission, I remain unable to follow it. The very point of the DTBP was to enable Equitable to equalise the benefits of GAR and non-GAR policyholders. The corollary was that terminal bonuses had to be offered at a level which would make it more beneficial not to exercise the GAO than to exercise it. If the DTBP had been held to be valid the existence of the GAO would in all probability not have cost Equitable more than it in fact had provided for in its statutory accounts. That would have been because any GAR policyholder exercising the guarantee would, in the great majority of cases, have received no more (and so cost Equitable no more) than a non-GAR holder. The fact that part of the GAR holder’s receipt would be referable to reversionary bonuses would be irrelevant in financial terms because some (albeit reduced compared to non-GAR holders) terminal bonus would also be included in the fund to which the GAR was applied. Yet Mr Milligan said that even if Equitable had won the Hyman litigation not only would the provisions still have been required but the terminal bonuses differential would not have been available to meet them and the present claim would still be pursued.

[69]On the other hand, and as of course happened, if the DTBP was invalid the major consequence was that GAR holders were entitled to the same terminal bonuses as non-GAR holders. The GAR would still be applied to the reversionary bonuses but again as part of a larger (indeed enhanced) fund. Thus in both cases Equitable was exposed to the application of the GAR to policy values and reversionary bonuses but if the DTBP was valid it had the cushion that policy created and if it was not valid it did not to an extent it estimated to be £1.5bn in September 1998 (paragraph 46). Indeed many of the documents to which I have referred appear to proceed on precisely this basis and are otherwise inexplicable. No one suggests that the statutory accounts should have shown a worse position than the regulatory returns.

[70]As Mr Hapgood submitted, the undoubted fact that terminal bonuses were not commitments gave Equitable the opportunity (which in the event it took) to adjust them even retrospectively. Once the DTBP had been declared invalid there was no need to provide or reserve for the future cost of terminal bonuses which were required to sustain it in operation, beyond the rare cases in fact provided for, but there was a need (on Equitable’s case) to provide for the future cost of the greater take-up of GAOs. The two figures are substantially the same. They apply to different exposures. But, as it seems to me, and as Mr Hapgood submitted, the two exposures cannot co-exist and so the figures are not cumulative. To put the point another way both figures represent the future cost to Equitable of GAR liabilities, but one on the basis the DTBP is valid, the other on the basis it is not.

[71]Finally it should be noted that Equitable has subsequently announced further reductions in terminal bonuses. But the major reason for this, as with others, has been the heavy falls in stock markets.

[72]In February 2002 the Companies Court sanctioned a Scheme of Arrangement proposed by Equitable. The details of the Scheme are complex but essentially it represented a compromise of the various claims of the various classes of policyholder in the context of Equitable’s then financial position. One of the results was that the rights of GAR holders were bought out and claims by non-GAR holders (on the basis that they were misled as to the rights of GAR holders) were compromised on the terms of the Scheme.

THE EVIDENCE

[73]As I have already indicated the witness statements filed on these applications (apart from producing documents) contain more argument or perhaps, with a certain generosity, expert opinion than fact. However, the following matters (some of which I have already noted) which emerge from them were relied upon and have some significance in my consideration of the issues: i) The cost of the reversionary bonuses in fact declared by Equitable in each relevant year left a substantial surplus represented by the FFA in those years. That would still have been so even if the extra provisions had been made. ii) Despite Mr Hapgood’s submission that bonus levels or at least terminal bonus levels, were determined only by commercial considerations, Equitable can reasonably contend that it did rely at least in part on the statutory accounts when making bonus decisions. Insofar as those decisions can be shown to have been made in any year before E&Y signed its report on the relevant accounts, Equitable also has a reasonable case for contending that it should have been alerted by E&Y to the need for the provision for which it contends prior to the bonus decisions. iii) Mr Plant (the partner in Herbert Smith having the principal conduct of the proceedings on behalf of Equitable) has stated that the bonus claim “is primarily concerned with overpayment of terminal bonuses not reversionary bonuses” (paragraphs 10 and 100). iv) The schedule to Mr Plant’s statement shows that the explanation for the difference of £1bn between the September 1998 sale claim and the bonus claim for the 1997 audit is substantially a figure for “goodwill”. v) In Mr Thomson’s opinion the magnitude of the additional GAR provisions “would have given the board serious cause for concern as such provisions would have significantly impaired the Society’s ability to continue declaring bonuses”, and would have “signalled a serious warning sign that the Society’s solvency was at risk”. Mr Thomson also expresses the opinion that bonus cuts alone would not have given “immediate or substantial enough relief” and that in all likelihood the board would have concluded that the only long-term solution would be a sale and cuts in bonuses in the meantime. vi) It is the opinion of Michael Arnold, a consulting actuary, that the provisions would have required immediate reductions in terminal bonus rates to meet the cost of GAR policies maturing in that year and (to meet the future costs) “an adjustment to terminal bonuses as the costs emerged or by adjusting reversionary bonuses”. Mr Arnold considers that raising fresh capital would have been an attractive option which should have been given serious consideration by the board and the only undervalued asset in the statutory accounts was goodwill. vii) The actual cost to Equitable in a given year of reversionary and terminal bonuses was only the cost of meeting annuities on the value of matured policies which included them. Otherwise, reversionary bonuses declared were a further liability as and when the relevant policies matured and terminal bonuses only became a liability at all at maturity and could be reduced at any time before then. viii) In Mr Thomson’s Second Witness Statement he says that “the technical provision claim” is “entirely independent of the DTBP”. But the substance of the detail behind that statement is that “the existence or non-existence of the DTBP has no effect on the cost to the Society of the guaranteed element of the GAO policy”. For the reasons I have sought to explain in paragraphs 67 to 70 I both understand and agree with the latter statement. What I do not understand and agree with is Mr Milligan’s conclusion that therefore the two are cumulative. Equitable are entitled to have these applications approached on the assumption that even with the DTBP in place the provisions they rely upon were required but not on the basis that a further provision was required if the DTBP was held to be invalid. If it was valid it could be used to meet the provision in the sense that the provision would largely not be required. If it was not valid the provision had to be met by other means. It follows that I do not think Mr Thomson’s Third Witness Statement (served during the hearing) affects the matter save to the extent that it acknowledges in terms that Equitable met the cost of the Hyman case “by reducing policy values for all with-profits policyholders”. ix) It is substantially agreed that the suggested bonus cut of £400m in 1998 which is a component of Equitable’s claim on the 1997 audit (see paragraph 40) would have represented a cut in terminal bonus rates for policyholders whose policies matured in 1998 of 80%. I was told that 80% of the terminal bonuses would have been about 20% or so of total policy values.

E & Y’s SUBMISSIONS

[74]Although the parties addressed submissions separately according to whether CPR rule 3.4(2)(a) or 24.2 was under consideration in the event, as the argument developed, and provided of course that it was recognised that negligence was to be assumed as alleged, the substance of the submissions was the same.

The Lost Sale Claims

[75]Mr Hapgood submitted that Equitable does not have reasonable grounds for bringing the lost sale claims or has no real prospect of succeeding in those claims because: i) Equitable suffered no loss in consequence of failing to effect a sale; ii) The lost sale claims are not within the scope of E&Y’s duty of care; iii) The alleged loss was not caused by E&Y; iv) Any amounts properly recoverable under the lost sale claims are claimed in the bonus declaration claims; v) The board would not have resolved to attempt a sale in 1998 or at any time before a final ruling in the Hyman litigation and after the decision of the House of Lords no one would have bought Equitable.

The Loss of Chance of a Sale Claims

[76]Mr Hapgood relies on the same submissions and also submits that such claims are unsustainable in principle.

The Bonus Declaration Claims

[77]Mr Hapgood submitted that Equitable does not have reasonable grounds for bringing the bonus declaration claims or has no real prospect of succeeding in those claims because: i) The amount claimed is “utterly unrealistic” in two respects a) There can be no claim in respect of reversionary bonuses declared or terminal bonuses announced after 20 July 2000 (the date of the decision of the House or Lords) because Equitable then knew the DTBP could not be used to depress demand for GARs; and b) There can be no claim in respect of policies which had not matured before 20 July 2000 as regards reversionary bonuses because the Hyman decision entitled Equitable to re-address them and as regards terminal bonuses because they could be withdrawn at any time. ii) The decisions as to the amount of bonuses were beyond the scope of E&Y’s duty of care; iii) The loss alleged was not caused by E&Y; iv) Equitable has not suffered the loss claimed or has in fact mitigated that loss.

THE LAW

[78]At the heart of Mr Hapgood’s submissions on “scope of duty” and causation are the decisions of the House of Lords in South Australia Asset Management Corporation v York Montague Ltd

[1997] AC 191

(to which I shall refer as SAAMCO) and the Court of Appeal in Galoo Ltd v Bright Graham Murray

[1994] 1 WLR 1360

(to which I shall refer as Galoo). I was also referred to many other authorities. The other question on which a reference to authority is required is “loss of a chance”.

Scope of duty and SAAMCO

[79]The development of the concept of the “Scope of duty” as a control mechanism which limits the liability of advisers came to an important point in SAAMCO where it was applied to the duty of care arising in contract as well as tort and so to a contractual relationship which undoubtedly gave rise to a duty of care as well as to non-contractual relationships in which it was an established factor in addressing issues of whether and if so to what extent any duty of care arose at all.

[80]The decision in SAAMCO was that a property valuer engaged to value a property on which the client was considering advancing money on mortgage who negligently overvalued the property was liable only for the difference between his valuation and a proper valuation and not for all the losses suffered by the client as a result of making a mortgage advance which he would not otherwise have made at all. The valuer was not liable for losses attributable to the fall in the property market even though “but for” the negligence that loss would not have been suffered by the client.

[81]Lord Hoffmann gave the only reasoned speech in the House of Lords. The other members of the House agreed with him. With some diffidence, I shall seek to summarise what Lord Hoffmann said: i) The starting point is to analyse what it is that the “adviser” is required to do under the relevant contract; ii) The second stage is to enquire what was the purpose of that obligation; and iii) The obligation or duty must be one in respect of the kind of loss which the client has suffered if the adviser is to be liable for that loss.

[82]In particular at page 212E-F, Lord Hoffmann I think encapsulated the relationship of these factors in a case of contractual duty:

“The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought that he was undertaking.”

[83]In this case, I think it is legitimate to substitute “auditor” for “valuer” in the quotation. Lord Hoffmann was plainly addressing matters of principle not confined to valuers. The principle at least applies to those who provide information in the form of expressing opinions. An example where the principle has been addressed in the case of auditors is Coulthard v Neville Russell

[1998] 1 BCLC 143

to which Mr Milligan referred me for the cautionary words to be found in the judgment of Chadwick LJ at page 155:

“In my view the liability of professional advisers, including auditors, for failure to provide accurate information or correct advice can, truly, be said to be in a state of transition or development. As the House of Lords has pointed out, repeatedly, this is an area in which the law is developing pragmatically and incrementally. It is pre-eminently an area in which the legal result is sensitive to the facts. I am very far from persuaded that the claim in the present case is bound to fail whatever, within the reasonable confines of the pleaded case, the facts turn out to be. That is not to be taken as an expression of view that the claim will succeed; only as an expression of view that this is not one of those plain and obvious cases in which it could be right to deny the plaintiffs the opportunity to attempt to establish their claim at a trial.”

[84]The duties of an auditor were of course considered by the House of Lords in Caparo Industries Plc v Dickman

[1990] 2 AC 605

. The House decided that the auditors did not owe a duty of care to the plaintiffs either as a shareholder or a potential purchaser of a company in certifying the accounts of that company even when the affairs of the company were known to be such as to render it susceptible to an attempted take-over. The focus of the decision was however not on the scope of the duty owed by an auditor to the company audited. Nonetheless, in the circumstances of this case, the decision in Caparo, and assuming no basis in fact for a special duty, would mean that E&Y would owe no duty as auditor to a potential purchaser of Equitable yet it is said to owe a duty to Equitable itself which extends to taking care to protect Equitable from loss by not “selling itself”. There is a further curiosity. In circumstances in which audited accounts understate liabilities or overstate profits in the context of a sale any loss in terms of price or value is probably going to fall on the purchaser not the company. Indeed the company may receive a windfall. There may of course be other losses for which the company might have a claim but that is not the way in which the present claim is advanced.

[85]The question can, I think, be further illustrated by cases in which the relevant company is in fact insolvent but the audited accounts fail to reveal the insolvency. Galoo is an example of such a case. So, too, is Alexander v Cambridge Credit Corporation (1987) 9 NSWLR 310. In both cases the decision was that the auditor was not liable for the increase in the company’s deficiency arising after the date when a careful audit should have led to the appointment of a receiver or liquidation. The decisions were based on want of causation but as Lord Hoffmann himself has pointed out (lecture to the Chancery Bar Association 15 June 1999) the same result might (even might better) have been reached by application of the “scope of duty” concept. In both Cambridge Credit (the majority) and Galoo the courts applied an ultimate test of whether “as a matter of commonsense” the relevant act or omission was a cause. “Commonsense” is, however, an uncertain guide. One person’s commonsense may be another’s nonsense. But if an auditor simply as such is not to be liable for losses arising from the audited company’s continued existence (which as the law stands is, I think, undoubtedly the case) I find it difficult to discern any distinction of substance which could justify liability for a failure to sell itself and so to realise the then value of whatever assets a company had.

[86]There are, as Mr Hapgood noted, a number of authorities which may be said to fall on the other side of the line, in which it is well established that an auditor may be liable for losses suffered by the audited company. One category is cases which may be called specific transaction cases in which an auditor knows that audited accounts will be relied upon for a specific transaction such as an acquisition or indeed a sale. All of the authorities in this category to which I was referred involved tortious not contractual duties but I see no reason in principle why the answer should differ albeit in practice I think the probability would be that an auditor would be advising his audit client for reward on the transaction in question and would owe a duty of care as regards that advice rather than as an adjunct or incident of his duty as auditor.

[87]Another category of cases is those where an auditor negligently fails to detect fraud and may be held liable for losses caused by the fraud continuing. An illustration may be found in Sasea Finance Ltd v KPMG

[2000] 1 All ER 676

. The basis of the decision was, I think, a matter of concession (rightly made) that “if … auditors discover that a senior employee of a company has been defrauding the company on a grand scale, and is in a position to go on doing so, then it will normally be the duty of the auditors to report what has been discovered to the management of the company at once ….” at page 681c/d. The concession in effect also answered the question of the scope of the duty as appears at page 682d/e.

[88]The third category of case to which Mr Hapgood referred is of more direct relevance. As he put it “claims in respect of overpaid dividends are in a somewhat special category”. That, I think, was an unexpressed recognition of the analogy which could in my judgment readily be drawn between overpayment of dividends and overpayment of bonuses. It was Mr Hapgood’s first submission that the dividend cases drew the line at liability for dividends unlawfully paid in reliance on audited accounts. A company may not make a distribution except out of profits available for that purpose (section 263(1) of the Companies Act 1985), and the amount of any distribution has to be determined by reference to audited accounts: Section 270(2). But I do not see why in the context of a negligent audit the law should in principle draw so radical a distinction between payment of unlawful dividends and lawful dividends which would not have been declared had the accounts shown a correct profit figure. Profits usually do not have to be distributed either at all or at any particular date or rate. They may of course be seen as a source of capital to invest in profit-earning assets or to discharge onerous liabilities. More importantly I do not think Mr Hapgood’s submission is established by the authorities to which I was referred. They are cases where the claim made was in fact only for unlawful dividends and the wider issue did not need to be addressed. But they also serve to establish, as Mr Milligan submitted, that other payments such as tax or bonuses made on the basis of falsely stated profits, albeit lawful, may be recovered from a negligent auditor. Leeds Estate Building and Investment Company v Shepherd (1887) 36 Ch. D 787 concerned both dividends and bonuses as appears from page 809. In re London and General Bank (No 2)

[1895] 2 Ch 673

concerned a claim which was only for an unlawful dividend. In re The Westminster Road Construction & Engineering Co Ltd (1932) Acct LR 38 concerned the recovery of both an unlawful dividend and sums lawfully paid as commission on the basis of a false profit figure. In In re Thomas Gerrard & Son Ltd

[1968] 1 Ch 455

a Company paid tax on an inflated profit figure in audited accounts as well as dividends. It was held that the auditors were liable to the company both for the amount of the dividends and the costs of recovering the excessive tax and any tax not recovered.

[89]I hope I do not do Mr Hapgood an injustice in saying that the focus of his submissions on this aspect of an auditor’s duty became more “No loss” or at least “not the pleaded loss” than “not within the scope of duty”.

[90]Mr Milligan referred me to the decision of the House of Lords in Aneco Re v Johnson & Higgins

[2001] UKHL 51

. Aneco claimed damages from insurance brokers for breach of a contractual duty of care and negligence in relation to the placement of certain excess of loss reinsurance contracts which resulted in the reinsurance being avoided. The claim was for the losses incurred by Aneco on the underlying insurance on the basis that Aneco had relied upon the advice of the brokers that the reinsurance was both available and had been placed before committing to the insurance. In the alternative the claim was for the smaller sums which Aneco were unable to recover under the avoided reinsurance. The majority decision on the question of the scope of the brokers duty is, I think, well summarised in the headnote to the report: “the duty of the brokers was not confined to the obtaining of excess of loss protection for Aneco and informing Aneco that they had done so; at the very least they owed a duty to inform Aneco whether or not reinsurance was available; if they had told Aneco that reinsurance was not available, it would have been obvious to Aneco that the unavailability was due to the current market assessment of the risks” and the width of this duty determined that the larger measure of damages was the correct one.

[91]Mr Milligan was, I think, on occasion inclined to submit that Aneco was a qualification upon SAAMCO. I do not accept that. I think the key is to be found in the fact that the brokers knew “the whole thing would have collapsed” had reinsurance not been available (the speech of Lord Lloyd at paragraph 16) and the conclusion (also of fact) that the brokers undertook a duty to advise Aneco as to the course of action it should undertake (the speech of Lord Steyn at paragraph 40).

Causation and Galoo

[92]The claim in Galoo alleged that negligent audits were carried out in the years 1985 to 1990; non-negligent audits would have revealed insolvency; the company would have ceased to trade, and so subsequent trading losses would not have occurred. The court of appeal distinguished between a breach of contract which was the dominant or effective cause of a loss and one which had “merely given the opportunity for the loss to be sustained” and said the answer to which it was depended on the court applying commonsense to the facts of each case. The claim for trading losses was struck out.

[93]As I have already indicated, I find it easier to analyse Galoo in terms of scope of duty. But it also serves to demonstrate that to establish causation a claimant must establish some feature beyond “but for”. It also follows, in my judgment, that it is at least necessary for a claimant to identify the losses claimed and attribute a cause to them which can then be assessed by the application of the scope of duty and commonsense.

Loss of a Chance

[94]Those few circumstances in which the law has recognised a claim for the loss of a chance are, I think, ones where the relevant duty has been one the purpose of which was to provide the claimant with the chance or opportunity lost. The lawyer who negligently permits a limitation period to defeat the client’s claim; the organiser of a competition who wrongly excludes a potential competitor; the legal draughtsman who negligently fails to seek agreement on a clause in a commercial contract which is concluded without it (Allied Maples Group v Simmons & Simmons

[1995] 1 WLR 1602

). I do not think, in agreement with Mr Hapgood’s submission, that the present circumstances are ones which can sensibly be analysed in that way. The predicate of the “loss of chance” claim must be that Equitable fails to establish on the balance of probability that it would have sold its business and assets at either of the dates relied upon. I do not think the claim can be sustained or improved by seeking compensation for loss of the chance to try to effect a sale which probably would not have been achieved. In reality, if Equitable’s “value” was injured by E&Y’s conduct that injury is either provable or it is not as was the current market value of the property under consideration in Skipton Building Society v Stott

[2001] QB 261

CLAIMS (1) to (4) THE LOST SALE CLAIMS

[95]I will address Mr Hapgood’s submissions which I have summarised in paragraph 75. (1) No Loss.

[96]Much of Mr Hapgood’s submissions under this heading was aimed at seeking to flush out some indication of the way in which Equitable was putting these claims. The target was hit to the extent that it is now clear that, whilst it remains Equitable’s case that on the balance of probabilities the board would have decided to put Equitable up for sale and sold it by September 1998 had E&Y required a provision of £0.9bn in the 1997 accounts (or sold it by September 2000 either in that event or in the event of provisions in the 1998 accounts of £1.4bn and the 1999 accounts of £1.1bn), the case is that the loss to which the claims give rise (in addition to the bonus declaration reductions) is the loss of value of goodwill (on a sale in 1998 of approaching £1bn) which was an asset which in the event by February/March 2001 had been lost. Save for that loss, Mr Hapgood is right that the lost sale claims add nothing to the bonus declaration claims. The sale in September 1998 claim therefore depends on a goodwill value of about £1bn existing at that time, notwithstanding a provision of £0.9bn and a £0.4bn bonus “saving”, but the loss of that value by early 2001.

[97]On that basis the loss is at least intelligible. It is recognised, of course, that Equitable cannot recover for something it never had in the sense that it must be assumed that any purchaser would only pay the true value of the assets of Equitable and it is only that value which can be the basis of the lost sale claims. (ii). Scope of Duty

[98]Identification of the loss claimed as the loss in value of Equitable’s goodwill, is essential to consideration of the scope of E&Y’s duty. It is the consequences for which an auditor is responsible by reason of the obligations he has assumed which sets the limit to liability. Nor, in my judgment, is it sufficient for a claimant to show that some part of the loss claimed may properly fall within those obligations if the claim is expressed in a way which includes other losses which do not.

[99]In my judgment a fall in the value of Equitable’s assets and in particular goodwill even if proved is not a consequence which properly falls within the general scope of an auditor’s duty the breach of which has led to a failure to require provisions to be made in the accounts, however large. A failure to require provisions may, I think, properly give rise to losses arising from having to meet the exposures not provided for or from irrecoverable payments made on the basis that profits or surplus were greater than in fact they were, but liability for loss in the value of goodwill or the proceeds of a sale of the business would I think impose on an auditor a liability greater than he could reasonably have thought he was undertaking: see SAAMCO and the passage in the speech of Lord Hoffmann quoted in paragraph 82 of this judgment.

[100]Mr Milligan sought to express the loss of sale claim in a number of ways (not all of them pleaded) in an attempt to address this issue. He said that E&Y owed a duty to warn Equitable of the error in the accounts by way of the provisions so that the management of Equitable could take appropriate remedial steps to meet the problem. He said the provisions would have revealed a shortage of working capital which the management of Equitable would have had to address. I do not think this assists Equitable. The scope of the duty addresses the consequences in terms of the loss claimed not the process of corporate management.

[101]It should be noted that: i) It is not alleged that Equitable contemplated a sale or that E&Y knew that a sale was in contemplation or would have been had the provisions been made; ii) It is not alleged that E&Y owed a duty to protect Equitable from an erosion in the value of goodwill. Goodwill was not even included in the audited accounts as an asset. iii) It is not alleged that the purpose or one of the purposes of the provisions was in any way related to whether or not the business and assets should be sold or goodwill preserved. iv) It is not alleged that E&Y did or should have given any advice on sale or raising capital or preserving goodwill or how otherwise to address the provisions; v) Mr Milligan was concerned not to identify (and it is not pleaded) what it was that did cause the alleged loss in the value of goodwill between September 1998 and early 2001. Mr Hapgood submitted that the causes were not difficult to identify: the Hyman decision; falls in interest rates and equity values. None of those are matters for which E&Y bears any responsibility, nor were any of them caused by a want of provision.

[102]The lost sale claims are therefore not expressed in terms of the specific transaction cases. Moreover on analysis they are in my judgment analogous to claims for the type of loss which SAAMCO and Galoo determined to be irrecoverable. In effect the claims are for all the losses which it is said Equitable suffered for whatever reason after the dates when the supposed sales would have been effected. That is (at most) “but for” and no more. It is also (at most) foreseeability and no more. As I understand the law such a claim is unsustainable and should not be permitted to proceed. (iii). Causation

[103]I think the result is the same if the submissions are approached as a matter of causation. The causal link between a loss of goodwill and the want of provisions is said to be that the provisions would have shown (not caused) a lack of working capital and so led to a decision to sell. But the loss claimed is not a lack of working capital but a loss of the value of goodwill in an amount approaching £1bn over the period between September 1998 and February/March 2001. As I have said, the causes of that loss are not identified by Equitable but must include matters for which E&Y could only be responsible if at all on a “but for” basis such as both SAAMCO and Galoo outlaw. (iv). No recovery beyond the bonus declaration claims.

[104]For the reasons I have given I accept the submission that the lost sale claims cannot succeed in an amount greater than the bonus declaration claims. There is a further reason, however, why I also think the “goodwill” claim is fanciful which can sensibly be addressed under this heading (albeit it could equally be considered under the next as well). It also impacts on the bonus declaration claims.

[105]The predicate of the lost sale claims is of course that the provisions relied upon by Equitable would indeed have appeared in the statutory accounts and that Equitable would have reduced bonuses by £0.4bn in 1998 (for a sale in September 1998) and a total of £1.6bn for a sale in September 2000.

[106]It became clear in the course of submissions that (taking 1998) the £0.4bn was advanced as an actual reduction in terminal bonuses to be paid to policyholders whose policies matured in 1998. It was to be a real “saving” in that year so preserving working capital. But: i) Such a cut would have had to be applied to all policies, maturing or not. There could be no discrimination against only those unfortunates whose policies happened to mature in 1998. ii) The evidence is that a cut of £0.4bn in terminal bonuses “accrued” on maturing policies would represent about 80% of the value of terminal bonuses announced over the lifetime of the policies and about 20% of total policy values (sum assured plus reversionary and terminal bonuses): paragraph 73(ix). iii) Further the effect of such a cut would have been to destroy the DTBP which the directors, on advice, not only believed to be valid but also to be the answer to GAOs. An 80% reduction in terminal bonuses would have removed the cushion which the DTBP was thought to create because there would be insufficient amounts to balance the value of GAR funds and non-GAR funds. All policyholders with GAOs might then be expected to exercise them. Such a decision to cut would in effect have been to assume defeat in Hyman when victory was expected. iv) Mr Hapgood submitted that after an announcement of such a bonus cut any goodwill that existed in Equitable would have been irretrievably destroyed. Policyholders reasonable expectations (PRE) would have been violated. Indeed he pointed out that nothing so dramatic was adopted even after the House of Lords decision in Hyman (see paragraphs 62 and 63) and, he submitted, in 1998 the directors could not conceivably have seen it as either necessary or sensible to address a provision of £0.9bn with such a disproportionate response. The Board would also have known that, if sensible, a sale could be considered in future and terminal bonuses could be adjusted retrospectively.

[107]Mr Milligan’s response to these submissions was to point to the statements of Mr Thomson and Mr Arnold and to submit that it would be wrong to conclude on issues of fact necessarily addressing a hypothetical situation that Equitable had no real prospect of success in the claim. But neither Mr Thomson nor Mr Arnold have provided any detail to support their views nor have they even sought to address the points made by Mr Hapgood.

[108]In my judgment it is indeed fanciful to suppose both that the directors would have taken such a drastic step and that if they had the goodwill of Equitable would not in any event have been destroyed. (v). No sale in fact.

[109]Mr Hapgood submitted that the commitment of Equitable to “mutuality” and the recorded reaction to “predators” and mergers (paragraphs 47 and 52) in a context in which the GAD was insisting on substantial reserves and the Hyman litigation was under way were such that the directors would never have resolved to sell the business unless and until the Hyman case was lost, and Equitable had no real prospect of establishing otherwise. Whilst I think there is considerable force in this submission it would not of itself in my judgment be a sufficient basis for granting the orders E&Y seeks.

CLAIM (5) LOSS OF CHANCE OF SALES

[110]I agree with Mr Hapgood’s submission that these claims are unsustainable substantially for the reasons I have expressed in respect of the lost sales claims. It was no part of E&Y’s duty either to protect Equitable against the loss of such a chance or to provide it with such a chance.

[111]The principles which in my judgment are involved in claims of this kind are those I have stated in paragraph 94. These claims do not satisfy them and E&Y is again entitled to the orders it seeks in respect of them.

CLAIM (6) THE BONUS DECLARATION CLAIMS

[112]I will address Mr Hapgood’s submissions, which I have summarised in paragraph 77. It should, however, be noted that the claims are in effect for the same “savings” which form part of the lost sale claims. They are therefore in any event open to the same objections I have addressed in paragraphs 105 to 107. (i). The amount claimed. (a). No claim after 20 July 2000.

[113]The calculation of the bonus savings claims remains a matter of some obscurity. However Mr Plant says in the schedule to his witness statement that the sum claimed has been calculated up to 31 March 2002. There is no apparent magic in that date nor rationale for it.

[114]Mr Hapgood’s short point is that the last impugned audit was signed off in March 2000. On 20 July Equitable was made painfully aware that the DTBP was invalid. It was, however, at least in the position that it could change retrospectively in the case of all non-matured policies the terminal bonuses which had been notified over the years and it could decline to notify any reversionary or terminal bonuses in subsequent years. Anything declared or announced after 20 July was done in full knowledge of the matters which are the subject of the claim against E&Y.

[115]The only answer Mr Milligan offered to this submission was that the consequence of Hyman and the lack of the provisions complained of were separate matters and cumulative in amount and, he said, the directors remained in ignorance of the need for provisions. I have considered this in paragraphs 67 to 69 of this judgment and rejected it.

[116]If this point stood alone, I would consider it right to give Equitable a limited opportunity to spell out the calculation of the bonus declaration claims in sufficient detail to enable it to be addressed properly. (b). No claim for policies not matured before 20 July 2000.

[117]In the course of his submissions, Mr Hapgood (rightly in my judgment) acknowledged that this submission could not be sustained (at least on applications of the present type) as regards reversionary bonuses already declared. That was because, contrary to his written submissions, there was nothing in the decisions of the Court of Appeal or House of Lords in Hyman which addressed reversionary bonuses and indeed no suggestion that they had been subject to any “differential”. Once declared, reversionary bonuses became binding on the following 1 April. However, as Mr Plant has said (paragraph 73 iii) the bonus declaration claim is primarily concerned with terminal bonuses not reversionary bonuses.

[118]Again, Mr Hapgood’s point is a short one. Save for matured policies, Equitable could have changed and even withdrawn entirely all notified terminal bonuses, just as the claim in fact alleges a reduction in them would have been made of some 80%. So, in and after July 2000, once the House of Lords has exposed the problem, as regards terminal bonuses Equitable was in a position to do exactly what it says it would have done between 1998 and 2000 had it been revealed then. Moreover even if it could be argued that the point is one of mitigation of damage and so to be considered in the context of reasonableness, in fact Equitable: i) Removed growth in policy values for the first seven months of 2000 which it calculated “matched closely the estimated additional cost of the GAR liabilities”: paragraphs 19 and 65; ii) Adjusted terminal bonuses for the period the DTBP had been in operation between GAR and Non-GAR policyholders such as not to increase the total sum notified to all policyholders in that period: paragraph 63; iii) Decided not to declare any reversionary bonuses for 2000: paragraph 64; iv) Entered into a compromise scheme which compromised all claims by both GAR and Non-GAR policyholders: paragraph 72.

[119]Mr Hapgood submitted that by these steps Equitable had in fact mitigated the loss or at least a substantial part of the loss for which it claims and in effect achieved later what it alleges it would have done earlier had the provisions been made.

[120]Again, insofar as Equitable had a response to these points, it lay in the submission that Hyman and provisions were different and cumulative. Mr Milligan also referred to the fact that different policyholders would be affected according to the timing of the bonus cuts and adjustments. That no doubt is true but I do not see how it can affect the loss to Equitable itself.

[121]Again, I would consider it right to give Equitable an opportunity to address these issues in a proper pleading or claim. But I think, the present claim has been starkly exposed as seriously flawed and one which as it stands is both not based on reasonable grounds and does not have a real prospect of success. (ii). Scope of Duty

[122]In contrast to the lost sale claims I do think it is open to Equitable to pursue with some real prospect of success a claim that the decisions as to the level of bonuses fell within the scope of E&Y duties. The analogy with dividends, tax and commissions payable out of or by reference to profits seems to me to be a real one (paragraph 88). There is evidence that the DTBP and FFA in the statutory accounts played a real part in the decisions. There is also evidence that E&Y understood and appreciated as much in carrying out their audits. The potential or arguable rationale, as it seems to me, is that the scope of duty of an auditor whose duty includes a duty to report on a statement of surplus (or profit) may extend to the usual consequences of the surplus being paid away to members in reliance on the accuracy of the amount reported upon.

[123]I decline therefore to strike out the claims or to give judgment for E&Y on this basis. (iii). No causation

[124]I see nothing in principle to justify a different answer to the question of causation from my answer to the submission that the claim is not within the scope of E&Y’s duty.

[125]Mr Hapgood’s further submission was that Equitable had no real prospect of establishing that the directors would have declared and allotted lower bonuses if E&Y had insisted on the technical provisions or disclosure in the accounts. The basis for this submission (in addition to the matters I have set out in paragraph 106) is that in fact the directors were already aware of everything which the provisions or disclosure would have recorded or revealed, believed in the DTBP, and would not have abandoned it short of a decision of the House of Lords. As Mr Hapgood put it “they would have regarded the provision as a technicality which did not reflect the realities of the situation”. Mr Hapgood also pointed to the fact that in 1998 and 1999 (but not in 1997) the regulatory returns actually contained the substantial reserves they did yet the bonuses were declared and announced as they were.

[126]These were powerful submissions but I was not persuaded that they justified the conclusion that Equitable had no real prospect of establishing that some loss was suffered in respect of bonus declarations or the want of provisions. I think there is force in Mr Milligan’s submission that, whatever the views of the directors of the commercial reality, insistence by auditors that the realistically prudent best estimate of exposure to GARs required provision in the accounts of the amounts relied upon would have required or at least reasonably might be shown to have required the directors to re-think the level of bonuses or to address the level in a different way. Indeed had they decided that the level of bonuses should bear the same relationship to the size of the FFA as it in fact did before the provisions were made by definition the total level of bonuses would have been less. Again, therefore, whilst I would not now strike out the claims or give judgment for E&Y on this basis, I would give Equitable an opportunity to consider if it wished to present the claim differently.

No Loss

[127]In addition to the matters I have already addressed Mr Hapgood submitted that as the bonuses were in fact lawfully paid and they discharged a liability of Equitable so there could be no loss. But I think the contrary argument has some real prospect of success. The “liability” represented by the FFA was not a liability in the same sense as a commercial debt. It was a balancing figure. Equitable was entitled to declare and announce bonuses in such amounts and at such times as it chose and they only became commitments on 1 April or policy maturity as the case might be.

[128]In my judgment, Equitable should not be permitted to pursue the lost sale claims and the loss of chance of sales claims. I also think that the bonus declaration claims as pleaded and explained for the purposes of these applications can fairly be described as fanciful in approach and amount. There may be proper claims which could be advanced on this or a related basis but not, I think, those which are made, and I do not think it is right or consistent with the CPR that defendants such as E&Y should face claims of the magnitude of these bonus declaration claims which can be shown to have so many basic flaws.

[129]Equitable should be given an opportunity albeit within a defined timescale to consider the bonus declaration claims and decide whether or not it wishes to present them in any way differently. In my judgment if they are to be pursued E&Y is entitled to have them presented with a rigour and reality which is presently lacking. If Equitable declines to accept that invitation, I will grant E&Y’s application in respect of those claims also. In any event I will hear the parties on the terms of the order to be made and any ancillary matters after this judgment is handed down.