UK's most expensive lawsuit goes to trial

On Monday, Equitable Life opens its case against Ernst & Young over the guaranteed annuities fiasco

The most expensive case in UK legal history - estimated to generate legal fees in excess of £100m - opens at the High Court in London on Monday, as Equitable Life sues its former auditors, Ernst & Young, and 15 of its former directors for negligence.

The most expensive case in UK legal history - estimated to generate legal fees in excess of £100m - opens at the High Court in London on Monday, as Equitable Life sues its former auditors, Ernst & Young, and 15 of its former directors for negligence.

The 16 cases, to be heard by Mr Justice Langley, will run concurrently, with the hearing expected to last at least until the end of this year. A judgment will follow next year, with subsequent inevitable appeals likely to take many more months and even years to be timetabled and heard.

Equitable, headed by its chairman Vanni Treves and its chief executive Charles Thomson, alleges that E&Y is guilty of negligence, due to its failure to identify that its accounts were deficient between 1997 and 1999 because of the large potential liabilities arising from its guaranteed annuity rate (GAR) pension policies.

These GAR policies first became an issue in the Nineties when interest rates began to fall, increasing the cost of honouring the guarantees. In an attempt to lower these costs, the insurer elected to pay lower terminal bonus rates to its GAR with-profits pension policyholders.

After protests from several GAR policyholders, the society launched a test case. Although the court initially said Equitable was within its rights to treat its GAR and non-GAR policyholders differently, the ruling was overturned in the appeal courts in January 2000. Six months later, it lost its second and final appeal in the House of Lords.

As part of its claim against E&Y, Equitable also alleges that its auditors were negligent for not including warnings, in the insurer's 1999 and 2000 accounts, of the risks of losing ongoing litigation.

E&Y, which is headed by its chairman Nick Land, insists it gave a true and fair reflection of the company's expected liabilities, and claims the directors were always well aware of the potential liabilities arising from the GAR issue. Equitable is suing E&Y for £2.05bn - reduced from £2.6bn after the courts struck off certain parts of its claim last year. About £1.3bn of its claim represents lost sale proceeds - which the society believes it would have realised had it been warned of its risks earlier.

Equitable sold its sales force and back-office operations to HBOS for £900m in 2001. However, it claims it could have raised about £2.2bn had it been warned about its "true" financial position. It also claims a further £700m was lost in bonus payments, which could have been cut had the society been aware of its financial situation.

E&Y says the claims figures are "fanciful". Mr Justice Langley originally upheld the auditor's request to strike off the "sale" part of the claim. However, the appeal court overturned the decision.

The auditor says its worst case scenario would be a claim in the "low hundreds of millions".

Equitable is collectively suing its former directors, including its former chief executive Christopher Headdon, for up to £1.7bn, claiming they were negligent for failing to take legal advice before deciding on the differential terminal bonus policy. It also alleges they failed to take steps to mitigate the financial risk of losing the GAR court case in 1999 and 2000.