Ultramares v Touche

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Ultramares v Touche is a famous case in negligence which placed bounds on the extent of neighbourliness, and who can claim damages for breach of duty of care.

The auditors Touche Niven gave Fred Stern & Co., a rubber importer, an unqualified audit certificate, negligently not noticing that it had falsified its accounts receivable. Touche knew that the audited accounts would be used to raise money. Relying on the accounts, Ultramares lent money to Fred Stern & Co.

You’ll not guess what happened next.

Stern declared bankruptcy the following year. Ultramares sued Touche for the debt, declaring that a careful audit would have shown Stern to be insolvent. The audit was found to be negligent, but not fraudulent. The case then went to the New York Court of Appeals, the great Judge Benjamin Cardozo presiding.

Cardozo J, holding that a claim in negligence failed because the auditors owed the plaintiff no duty of care, there being no sufficiently proximate relationship between them:

“If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class. The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences.”