Accountants ordered to pay $11m damages to developer

An accountancy firm has been ordered to pay more than $11m damages to a developer because of the flawed advice it provided on a major project.

The case involved the developers of a large holiday resort. It hired a firm of accountants to provide business advice and ensure the project progressed on a sound financial basis.

The developers paid the contractor about $52m without any written contract and without any detailed agreement about the scope or valuation of the work carried out. They said they entered into that loose arrangement following advice from their accountants.

Some of the work was then delayed or not carried out at all. The developers felt they had been grossly overcharged and terminated their arrangements with the contractor. They then sought compensation from the accountants.

The court found in favour of the developers. It held that the accountants were in breach of contract and/or negligent in advising the developers not to enter into a formal legal arrangement with the contractor. The need for a proper contract should have been apparent as the only way of obtaining security in relation to the scope of the work, the timescale and the cost.

The accountants should also have been aware that the absence of any contract was going to make it difficult to raise loans to finance the project. At the very least, they should have pointed out that the claimants needed to know that the sums they were paying related to the value of the works being carried out. It should have advised them to have a contractually binding valuation mechanism.

The court estimated that the developers had overpaid by $23m and were entitled to compensation. However, it reduced that sum by 50% to reflect the developers’ contributory negligence and management failures.

Please contact Simon Porter if you would like more information about the issues raised in this article or any matter relating to professional negligence or breach of contract.