British Court accepts duty of care to protect whistleblowers in novel circumstances
Mr Amjad Rihan v Ernst & Young Global Limited & Others [2020] EWHC 901 (QB)
In a potentially significant decision, the High Court of England and Wales has accepted the existence of a duty of care to protect a whistleblower and awarded damages of more than US$10 million. The case raises the intriguing possibility that a cognate duty might exist in Australian law.
Background
The claimant, Mr Amjad Rihan, worked for Ernst & Young (EY) from 2008 until 2014, based in the Middle East. In 2013, Mr Rihan was required to conduct an independent assurance audit into the business practices of Kaloti Jewellery International DMCC (Kaloti), a Dubai based precious metals dealer, on behalf of EY Dubai. Early on in the audit, Mr Rihan became aware of serious irregularities in Kaloti’s business practices that gave rise to a suspicion that Kaloti was involved in money laundering. For example, Kaloti was knowingly dealing in gold bullion smuggled out of Morocco coated in silver, deceiving Moroccan authorities thereby avoiding restrictions on the export of gold from Morocco, and taking part in cash transactions in gold involving about US$5.2 billion.
Mr Rihan reported the irregularities to the local regulatory body, a Dubai government body called the Dubai Metals and Commodities Centre (DMCC). The DMCC then pressured Mr Rihan and EY Dubai to reduce the visibility of these issues in its reports. Mr Rihan resisted this and escalated the matter to representatives of the EY network at the regional and global level. Mr Rihan left Dubai with his family and relocated to the UK, fearing for his and his family’s safety if he were to challenge the position of Kaloti and the DMCC from within Dubai. My Rihan refused to sign the assurance audit reports and was replaced by a new audit partner on the matter who allegedly helped conceal the irregularities.
Despite his request that he be relocated elsewhere in the EY network, Mr Rihan was told to return to his duties in Dubai. He refused citing safety concerns. During exchanges involving lawyers, Mr Rihan asked that the EY organisation publicly disclose the audit findings. While he was on sick leave and unfit for work, he was told he would be dismissed if he did not meet with representatives of EY network entities. Mr Rihan’s lawyers warned that if the EY organisation did not publicly disclose the audit findings, Mr Rihan would disclose the irregularities himself. After months of discussions and refusing his requests, Mr Rihan resigned in January 2014 and blew the whistle disclosing the wrongdoing he encountered to a non-governmental organisation, Global Witness, and the media.
Parties to the proceedings
Mr Rihan brought claims in the UK High Court against four UK based entities forming part of the global EY network. Mr Rihan was a partner in EY Middle East & North Africa Ltd, which was not a party to the claim. He contended, at [31], that the “EY organisation functions in practice as a global network with common policies, practices, a common code of conduct and a management structure that reports upwards to the first defendant (EY Global); which exerts decisive influence and de facto control over the activities of locally based EY organisation.”
The legal structures governing the relationship between entities in the EY organisation were derived from a series of interlocking written agreements. Under the joining agreements, they agree to submit to the disciplines of the EY organisation and to abide by the regulations of EY Global, as amended, and to incorporate them into their constitutional documents. Each of the defendants were bound by the Code of Ethics set by the International Federation of Accountants in England and Wales (IFAC Code), where all the defendants were based. The EY organisation also had a global code of conduct that set the standards the EY organisation required of everyone involved in it.
The Court found that the EY organisation at global, regional and local level act “in concert” with and through its various subordinate associated bodies in the manner envisaged in the written agreements constituting the EY network bodies, and that the Global Executives were required to resolve the issues Mr Rihan had raised in a manner satisfactory to EY at global, regional, sub-regional and local levels alike.
Claim
Because Mr Rihan was based in the Middle East during his tenure with EY, whistleblower protections available in British law were not applicable. Instead, Mr Rihan made a negligence claim to recover damages for economic loss, mainly in the form of loss of earnings. Mr Rihan alleged that the loss was a result of breaches of two duties of care owed by the defendants:
the first, a duty to take reasonable steps to keep Mr Rihan safe. Mr Rihan claimed that the defendants owed him a duty to take reasonable steps to prevent him from suffering loss of earnings as a result of reasonably apprehended concerns for his and his family’s safety if he were to return to Dubai after expressing his objections to the audit (Safety Duty).
The second, a duty in respect to appropriately addressing Mr Rihan’s concerns about the Kaloti audit. Mr Rihan claimed that a duty was owed by the defendants to take reasonable steps to prevent him from suffering loss of earnings by reason of the defendants’ failure to perform the Kaloti audit in an ethical and professional manner (Audit Duty).
Did the defendants owe a duty of care?
The Court rejected the existence of a Safety Duty. The Court held that if an employee refuses to expose themselves to a risk of injury which the employer seeks to subject them to, their remedies are confined to the conventional ones available in employment law and that they do not extend to a claim for financial loss. Justice Kerr stated at [476] that “it would be an illegitimate extension of the law to make the leap from the standard employer’s duty to safeguard its employees against personal injury, to a broad duty to safeguard them against pure economic loss incurred as a result of the claimant’s need to cease working to avoid a threat to his physical safety.”
The Court did, however, find that the defendants owed an an Audit Duty to Mr Rihan. The Court considered that the duty of care was novel in that it had not already been established through decided cases. It was therefore required to consider the three elements of the Caparo[1] test: foreseeability, proximity and whether it is fair, just and reasonable for the duty to be imposed.
In applying the Caparo test, the Court found that:
it was reasonably foreseeable that Mr Rihan would suffer financial loss if the Kaloti audit was concluded in a manner that he considered to be unethical because he had made it clear during the discussions with the defendants’ representatives leading up to his disclosure that he would feel bound to dissociate himself from the audit and the EY organisation’s role in it if his protests went unheeded. The Court also found that it is generally known by professional persons, such as accountants, that becoming a whistleblower often involves a major risk of financial loss through subsequent unemployability. The defendants’ threats of dismissal to Mr Rihan, as well as the fact that EY Global was committed to having a whistleblowing policy, showed that Mr Rihan’s stance on the matter could impact his partnership and that financial consequences could flow from this.
The defendants had a sufficiently proximate relationship to the audit of Kaloti and the other Dubai gold refiners, where the claimant was the responsible engagement partner. The Court found that it was irrelevant that the different EY entities were not part of a unified corporate structure or that they charged each other for accounting services rendered to one another.
It was just and reasonable for the law to impose the Audit Duty on the defendants because Mr Rihan was not protected by statutory safeguards under the UK whistleblower regime, and given the importance of upholding professional ethical standards, including those set out in the IFAC Code and the defendants’ own code of conduct.
The Court likened the defendants’ Audit Duty – to impose a duty of care to protect against economic loss, in the form of loss of future employment opportunity, by providing an ethically safe work environment, free from misconduct – to the existing duty of care to protect employees against physical injury and consequent financial loss by providing a physically safe work environment.
Breach of the Audit Duty
In considering whether the defendants’ conduct was ethical, proper and professional, the Court used IFAC Code as a yardstick – an external objective source of acceptable standards which the defendants were bound by.
The Court found that there had been multiple breaches of the Audit Duty by the defendants, and that their behaviour amounted to professional misconduct in breach of the IFAC Code principles of integrity and objectivity. For example, the Court found that the defendants were responsible for the following conduct:
agreeing to, or causing or permitting EY Dubai to agree to, changes to the DMCC’s review protocol which were highly likely to lead to misleading concealment or dilution of Kaloti’s wrongdoing;
suggesting to Kaloti that it should draft its compliance report in a manner that masked the reality of the irregularities;
improperly diluting the seriousness of the findings made against Kaloti in the assurance report;
exerting improper pressure on Mr Rihan by intimidating and threatening him with adverse career consequences, and unjustly accusing him of lacking professionalism; and
instructing Mr Rihan to return to Dubai instead of helping him to find a different job elsewhere within the organisation.
The defendants were ordered to pay Mr Rihan past loss of earnings, interest of past loss of earnings and future loss of earnings, totalling US$10,843,941.
Commentary
The Audit Duty found by the High Court is a novel duty, which will only apply in very narrow circumstances. The Court stated that it is unlikely that the Audit Duty will be found to exist where the situation falls within the scope of a statutory whistleblower regime. However, that is not to say that a similar duty could not arise from a different set of facts in Australia. This case is a reminder that a duty of care can arise against a parent company in relation to the activities of its subsidiaries. Multinational organisations are not immune from liability in respect to its overseas operations where they are embroiled in unethical conduct. Organisations part of a wide or international network should be aware that a Court may be prepared to look beyond the typical contractual relationship of employee and employer and impose duties of care on non-contracting entities, including for liability in cases of pure economic loss.
EY initially sought to appeal the decision, but were refused leave to appeal the underlying findings of fact, and subsequently discontinued the appeal.
The full text of the decision can be found here.
Harriet Forster is a Secondee Lawyer at the Human Rights Law Centre.
[1] Caparo Industries plc v Dickman [1980] 2 AC 605.