Question

What is the first factual question that must be answered before the court proceeds to the legal test for a duty of care? Is this first question fulfilled in Delia's case? How?

Reading Passage

Ace Pte. Ltd. ("the company") is in the furniture business. The company approached Bank B for a loan of $500,000, which the bank agrees to lend on the condition of a guarantee from a third party. The company then approached Cain, a savvy and experienced investor, who is keen to act as guarantor for the loan on the condition of satisfactory 'true and fair' audited accounts for the last three years. The company then appointed Delia and instructed her to audit three sets of accounts for the company for the years 2016, 2017, and 2018 (hereafter the audit report). The audit report which Delia finally prepared for 2016 and 2017 showed a loss of ($100,000) and ($50,000), respectively, but a profit of $150,000 for 2018. Delia knew that Cain would read her audit report and find it useful in helping him reach a decision on whether to act as the company's guarantor. Due to Delia's lack of diligence in considering many unpaid invoices from bad debtors (now bankrupt), she concluded that the company had made a turnaround in 2018 when, in fact, it was spiraling into inevitable liquidation. Cain, who had many other ventures to manage, felt that it was quite okay for him to depend on Delia since she had a sterling reputation as an auditor in the industry. After Cain had read Delia's audit report, he unhesitatingly agreed to act as the company's guarantor. Unfortunately, the company defaulted on its loan payments shortly after and the bank had no choice but to hold the guarantor, Cain, liable for the company's debts. Delia's audit report contained the following notice: "DISCLAIMER to third parties: No free riders! I am engaged and paid by Ace Pte. Ltd. to prepare this audit report for the company. No duty of care is owed to any third party who relies on my report but did not pay or contribute to my professional fees in preparing this report." [Assume that Ace Pte. Ltd. is a "small company" and is exempted from the statutory audit requirements under the Companies Act]. Confine your advice to the duty of care only by placing your discussion of the relevant factors within the framework of the Spandex test.