Carillion loses preliminary skirmish in planned KPMG negligence case

Bankrupt construction giant Carillion has lost a preliminary skirmish in its planned lawsuit against KPMG, the company’s auditors. Lawyers for the company, which is now being run by its liquidators, are putting together a lawsuit alleging that KPMG’s audits failed to reflect the true position of Carillion before its collapse. Although the case yet to be filed, according to a judgment today, lawyers for KPMG and Carillion have been exchanging “pre-action” letters since October. Carillion may be seeking more than £200m from the accounting firm, according to some reports. In a hearing last month before High Court Judge Mr Justice Jacobs, Carillion asked for an order forcing KPMG to hand over a swathe of documents relating to the 2014, 2015 and 2016 audits to help it build its case. This, according to the judge, was unusual. “Applications for pre-action disclosure in the Commercial Court are relatively rare, and the authorities to which I was referred contain no recent examples of successful applications,”  he said in today’s ruling. Even so, “Carillion contends that the disclosure is necessary because KPMG has refused to provide any of its working papers voluntarily, despite requests dating back to 1 October 2019,” the judge said. “It argues (correctly in my view) that KPMG’s working papers will be core documents in any future case. It also says that they are essential to proper pre-action consideration and pleading of a claim against KPMG.” KPMG disagrees. And in his ruling, the judge backed KPMG and refused Carillon’s disclosure request. “Carillion’s own documents should enable it to say why, on the material available to KPMG, it acted negligently in relation to the company’s figures,” he said. And in addition, at this point, before the claim has even been filed, “Carillion is seeking a level of assurance and certainty which is inappropriate and does not justify the application which is made,” he said. “It would be possible to say, in every professional negligence case in the Commercial Court, that pre-action disclosure would assist the claimant’s expert in coming to a fully informed or concluded view on the issue of negligence.” The judge drew attention to how much expensive legal work has been done on this request from Carillion, saying it could amount to more than £1m in legal fees. “The application has generated a significant amount of correspondence and witness statement evidence, as well as cost,” he said in the ruling. “This includes a 38-page letter sent by Carillion’s solicitors in November 2019, and a 67-page witness statement in support of the application in February 2020. KPMG’s costs of resisting the application amount to in excess of £500,000. I do not have figures for Carillion’s costs, but it is certainly possible that they are in the same order of magnitude.” He Sid that the application has “on any view given rise to ‘elaborate and expensive pre-action procedures’ which are discouraged by … the current edition of the Commercial Court Guide.” He said that he was inclined to think that Carillion should simply get on with the case in the usual way, by setting out the case in a pleading. Lawyers will then be able to seek disclosure in case management hearings. That disclosure is “likely to be substantial”. “If this usual course is followed, it will put an end to expensive and undesirable ‘shadow boxing’, as [KPMG’s lawyer] described it, in a case where it is clear that substantial litigation against KPMG will be started.” “Accordingly, Carillion’s application is dismissed.” Carillion plc (in liquidation) v (1) KPMG LLP (2) KPMG Audit plc Commercial Court, QBD (Jacobs J) 3 June 2020 Rebecca Sabben-Clare QC, Timothy Kenefick and Andrew Fenn (instructed by Quinn Emanuel Urquhart & Sullivan UK LLP) for the applicant Jonathan Gaisman QC, James Brocklebank QC and Ralph (instructed by Orrick Herrington & Sutcliffe (UK) LLP) for the respondents