Accountant Liability to Third Parties in Georgia
| Citation | Vol. 20 No. 2 Pg. 0010 |
| Pages | 0010 |
| Publication year | 2014 |
by Teresa E. Adams and J. Marbury Rainer
Traditionally, an accountant could not be liable for negligence to a third party not in privity with the accountant. However, most courts now generally agree that, in appropriate cases, a claim for negligent misrepresentation can be brought by some third parties to recover for damages allegedly caused by reliance upon the accountant's work.
The Traditional "Privity" Rule
The traditional "privity" rule in Georgia as expressed by the Court of Appeals of Georgia in the 1973 case of MacNerland v. Barnes was that, "in the absence of intentional misrepresentation or fraud, an accountant is not liable for negligence to a third party who is not in privity with the accountant."[1] In MacNerland, a purchaser of a company brought suit against the seller and the seller's accountant after discovering that the financial statements it had received from the seller were incorrect and that the company was insolvent and unmarketable. The issue on appeal was "whether an accountant, as a matter of law, is liable for negligence in the preparation and issuance of an uncertified financial statement to parties not in privity but whose reliance is known to or foreseen by the accountant."[2] The Court of Appeals of Georgia reversed, in part because the parties may have been in privity as to certain special
procedures the plaintiff had asked the accountant to perform specifically for the plaintiff.[3] However, the general rule requiring privity to bring a negligence action remained the law in Georgia. The underlying policy for the privity rule, as expressed by a New York court in Ultramares v. Touche, Niven & Co. and relied on by the MacNerland Court, was that if liability for negligence to third parties was allowed, it "may expose accountants to liability in an indeterminate amount for an indeterminate time to an indeterminate class."[4]
The Restatement Rule Adopted and Applied
Foreseeability or Duty Analysis Under the Restatement of Torts 2d
In 1983, Georgia moved away from the old privity rule in cases involving third party claims against professionals when the Supreme Court of Georgia affirmed the Court of Appeals of Georgia decision in Robert & Co. Assoc. v. Rhodes-Haverty Partnership.[5] In Robert & Co., the court abandoned the privity requirement for third party negligence claims against "one who supplies information during the course of his business, profession, employment, or in any transaction in which he has a pecuniary interest."[
6
] Although the Robert & Co case addressed claims against engineers, it opened the door for third parties to seek liability against all professional service providers even though there was no privity between them by adopting and applying for the first time the Restatement of Torts 2d, §552 (1977).In Robert & Co., a partnership purchasing a building in Atlanta brought suit against a firm hired by the real estate broker "to make a ˜general evaluation' of the subject building."[7] The engineers conducted a "walk-through" inspection "to ascertain the condition of the building as far as could be determined by visual observation." The inspection report noted that there were cracks in the building, so there was notice regarding a possible structural issue. However, several months after the sale, extensive repairs to the exterior of the building were required. The partnership which had purchased the building was comprised of individuals who were either initially employed by the real estate broker or its parent corporation, but the partnership itself was not a party to the contract with the inspection company. Moreover, while the inspection company admitted "that it "˜understood that its report could be utilized, in connection with a possible purchase of the . . . building, by the [real estate broker] and perhaps other unidentified persons or entities . . .,'" it was never specifically advised that the partnership would utilize or rely on its report.[8]
The trial court granted the inspection company's motion for summary judgment because it lacked privity with the partnership and because the court found that use or reliance on the inspection report by the partnership was not foreseeable to the inspection company. The Court of Appeals of Georgia reviewed the case framing the issue as one of duty, i.e., "whether [the company] owed any duty to the partnership to exercise ordinary care in the preparation of the inspection report."[9] In reversing the trial court's holding, the Court of Appeals found there was something akin to a public duty involved, quoting a 1955 inspectors' case that "[t]he law imposes upon persons performing architectural, engineering, and other professional and skilled services the obligation to exercise a reasonable degree of care, skill and ability, which generally is taken and considered to be such a degree of care and skill as, under similar conditions and like surrounding circumstances, is ordinarily employed by their respective professions."[10]
In reaching the decision to allow liability against the inspection company despite the lack of privity, the Court of Appeals held that the inspection company owed a duty to the partnership to exercise ordinary care in the preparation of the inspection report even though the purchasers were not specifically identified to the inspection company. The Court based its decision on the theory that the inspection company knew that potential purchasers could rely upon its inspection report, i.e., that the report was "intended to affect a limited class of third parties such as the [purchasers] and that such third parties might foreseeably have sustained damages attributable to the negligent performance of its services."[11] Notably, in his dissent, Judge Deen pointed out that the "walk-through" inspection resembled an unaudited or non-certified report of an accountant, and that this fact along with the fact that the report had noted the cracks in the building should have been enough to put the purchasers on notice that only a limited review had been done and if they wanted a more comprehensive inspection, they should have done so.[12] In effect, it appears Judge Deen believed that whether or not the partnership could bring a claim against the inspection company, its reliance on the inspection report was not justifiable.
The Supreme Court of Georgia affirmed based on the affirmative adoption and application of the Restatement 2d of Torts §552 to these types of cases. The Court reasoned:
Under this standard, one who supplies information during the course of his business, profession, employment, or in any transaction in which he has a pecuniary interest has a duty of reasonable care and competence to parties who rely upon the information in circumstances in which the maker was manifestly aware of the use to which the information was to be put and intended that it be so used. This liability is limited to a foreseeable person or limited class of persons for whom the information was intended, either directly or indirectly. In making a determination of whether the reliance by the third party is justifiable, we will look to the purpose for which the report or representation was made. If it can be shown that the representation was made for the purpose of inducing third parties to rely and act upon the reliance, then liability to the third party can attach. If such cannot be shown there will be no liability in the absence of privity, wilfulness or physical harm or property damage. The additional duty that this rule imposes may be, of course, limited by appropriate disclaimers which would alert those not in privity with the supplier of information that they may rely upon it only at their peril.[13]
Despite the fact that the Court acknowledged that the "particular party which ultimately relied on the representation was not known [to the inspection company] at the time the representation was made," the fact that the inspection company "was aware that the report would be utilized to encourage prospective purchasers to buy the building" was found to be enough. Stated differently, "the fact that the report would be used by a limited class was known," and this was enough to allow liability without privity.[14]
Robert & Co. opened the door wide for third-party liability claims against all professionals by any foreseeable user. The one noted exception and possible avenue for professionals to limit their liability was to include a disclaimer in their report to place others on notice that they were not entitled to rely on the report or the information provided therein.
Acknowledging that Robert & Co. had clearly expanded the accountant's duty of care, and recognizing the real potential for...
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