Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360 is the leading authority on causation in claims against auditors. The companies alleged that, but for the auditors' negligence in certifying inaccurate accounts, they would have ceased trading earlier and avoided further trading losses. The Court of Appeal held that this was not enough to establish liability.
The court drew a distinction between a breach that gives the claimant the opportunity to sustain a loss and a breach that is the effective or dominant cause of that loss. The negligent audit allowed the companies to continue trading, but the trading losses were caused by the companies' own decisions to keep trading and by market conditions, not by the audit itself. Providing the occasion for a loss is not the same as causing it.
The Court of Appeal endorsed a common-sense assessment of causation rather than a mechanical but-for test. Whether a breach is the effective cause of a loss is a question of fact, answered by the standards of the reasonable person, not by philosophical analysis of necessary conditions.
Galoo addresses factual causation - did the breach cause the loss at all - while SAAMCO and Manchester Building Society address scope of duty - is the loss one the defendant is responsible for. A claim against an accountant must clear both hurdles. A firm defending a claim will often argue that continued trading losses, like those in Galoo, were caused by management decisions rather than by the audit.
Galoo is a reminder that a large headline loss does not automatically translate into a large recovery against an accountant. Causation frequently narrows or defeats claims. That said, the cost of contesting causation - forensic accounting, expert evidence, extended litigation - is itself substantial, and defence costs are a core reason to hold adequate cover. Apex explains how defence costs sit within a limit on the accountants PI guide, and causation disputes routinely draw in expert witnesses.
The claimant carries the burden of proving that the breach caused the loss, and in accountant claims this often requires reconstructing what would have happened had the work been done competently. That counterfactual - would the company have stopped trading, would the lender have withheld funds, would the board have acted differently - is contested with detailed factual and expert evidence. Where the counterfactual is genuinely uncertain the courts sometimes assess damages on a loss-of-a-chance basis, valuing the lost opportunity rather than awarding the full loss or nothing.
For a firm facing a claim, causation is frequently the strongest line of defence, but it is also the most resource-intensive to run. Contemporaneous records that show what the firm reported and when, and how the client responded, are invaluable in demonstrating that later losses were driven by the client's own choices. Keeping such records is both good practice and a way of protecting the position a PI insurer will later have to defend.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 724952. This entry is general information, not advice on any particular policy.