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Extension of Duty of Care Owed to Employee where Audit Performed Unethically by Employer

The High Court has recently held in Rihan v Ernst and Young Global Ltd & Others [2020] EWHC 901 that four entities of the Ernst and Young global network (“EY“) were in breach of a duty to take reasonable steps to prevent a former EY partner, Mr Rihan, from suffering financial loss by reason of EY’s alleged failure to perform an assurance audit ethically and without professional misconduct.

Background

In 2013, Mr Rihan conducted an assurance audit of a Dubai-based precious metals dealer (“Client“). He found serious irregularities suggesting that the Client might be involved in money laundering. The local regulator, Dubai Multi Commodities Centre (“DMCC“) and the Client allegedly pressured him to conceal his findings. Mr Rihan escalated the issue to the highest levels at EY. However, EY proceeded to issue what Mr Rihan alleged were misleading final audit reports.

Mr Rihan argued that EY was required to disclose his findings to the relevant body in London and publicly, but EY refused.

In 2014, Mr Rihan resigned and made a disclosure. Mr Rihan asserted that EY had colluded with the Client and the DMCC thereby causing him to resign, publically disclose the wrongdoing and flee Dubai out of fear for his safety.

Mr Rihan sought damages for economic loss, mainly in the form of loss of earnings. It was alleged that he had been unable to secure alternative employment and his earning capacity was destroyed. Mr Rihan claimed that EY had breached two duties of care: a duty to take reasonable steps to keep him safe by relocating him outside Dubai (“Safety Duty“) and a duty to take reasonable steps to prevent him suffering financial loss by reason of the failure to conduct the audit ethically and without professional misconduct (“Audit Duty“).

High Court Judgment

HHJ Kerr held that although there is no general duty on employers to protect employees from future economic loss, this case formed one of the limited exceptions. There was no reason why Mr Rihan’s moral and professional integrity should not be protected by the Audit Duty. This duty also extended to protect Mr Rihan from having his career ruined by becoming “tainted with unemployability”. However, a tortious claim will not be available where the individual can rely on statutory whistleblowing protection. Mr Rihan could not rely on such protection, as he did not ordinarily work in Great Britain.

The Court found that the Audit Duty existed on the basis of three core principles extracted from long standing case law on duty of care.

Firstly, there was sufficient proximity to impose a duty between Mr Rihan and EY. That was because he had escalated his concerns to global-level individuals who had taken responsibility for investigating his concerns and this knowledge was attributable to EY as it acted in concert with its subordinate entities.

Secondly, the Court found that it was foreseeable that the unethical and unacceptable conduct of the audit would cause Mr Rihan to resign and suffer economic loss. It is generally known that whistle blowers often suffer damage to their reputation and consequent unemployability. Further, such public disclosure was not unreasonable and did not break the chain of causation.

Thirdly, it was fair, just and reasonable, on the unusual facts of this case, to impose the Audit Duty on EY.

HHJ Kerr dismissed the alleged Safety Duty. An employer’s duty to safeguard employees against personal injury could not be extended to a duty to safeguard them against pure economic loss incurred as a result of the need to cease working to avoid a threat to their physical safety.

Mr Rihan was awarded $11 million in damages for past and future loss of earnings.

Comment

The High Court accepted that this case was “an “outlier”, with a factual basis that will rarely if ever recur”. However, it does represent a significant extension of the duty of care owed by employers to their employees in certain unique circumstances, even where the loss is purely ecomomic, and no physical injury has been suffered.

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© Copyright 2021 Squire Patton Boggs (US) LLPNational Law Review, Volume X, Number 134
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About this Author

Garon Anthony Litigation Attorney Squire Patton Boggs Birmingham, UK
Partner

Garon is a partner in the Litigation Practice Group. He advises clients across the full range of commercial dispute issues, including cyber liability/data breach, professional negligence, banking, pensions and insurance.

Garon regularly acts for clients who are subject to investigations or disciplinary proceedings by national and international regulators, including most recently the Financial Conduct Authority, the Financial Reporting Council and the Dubai Financial Services Authority.

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Sarah Neill Commercial Litigation Attorney Squire Patton Boggs Birmingham, UK
Associate

Sarah Neill qualified into the Commercial Litigation team in September 2019 after completing her training contract with the firm. During her time in the team, Sarah has assisted on a wide variety of disputes, including breach of warranty, product liability, debt recovery and breach of contract. Sarah acts for a diverse client base, from individuals to PLCs.

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