Moore Stephens (a firm) v Stone & Rolls Ltd (In Liquidation)

The Court of Appeal allowed the auditor's appeal and struck out the company’s claim. The court held that the claim by Stone & Rolls (brought by its liquidators) depended on illegality: the frauds carried out by the company’s sole directing mind and will, Mr Stojevic, were properly attributed to the company and therefore the claim was barred by the public policy maxim ex turpi causa non oritur actio (applying the reliance principle explained in Tinsley v Milligan).

The Hampshire Land non‑attribution exception (that the knowledge of an agent engaged in a fraud on his principal should not be imputed to the principal) did not apply: on the facts the company was the vehicle and perpetrator of the frauds, not their intended victim. The alternative “very thing” argument — that the auditors should not be able to rely on the illegality because detecting the fraud was the very thing for which they were retained — was rejected as conflating causation principles with the ex turpi causa rule and does not override the strict bar where the claimant must rely on its own illegality.

Background and parties: Stone & Rolls Limited (in liquidation) (the company) sued its auditors, Moore Stephens (the firm), for nearly US$174 million, alleging negligent failure in audits to detect frauds committed by Mr Zvonko Stojevic, who was the company’s sole directing mind and will. The company’s losses arose from letters of credit frauds perpetrated against banks, in particular Komercni Banka (KB). KB had successfully sued the company and Mr Stojevic in deceit; the company was subsequently placed in compulsory liquidation. The liquidators pursued the negligence claim against the auditors.

Procedural posture: The firm applied for summary judgment/striking out. Langley J in the Commercial Court ([2007] EWHC 1826 (Comm)) declined to strike the claim out. The firm appealed to the Court of Appeal.

Issues framed by the court:

• (i) Whether Mr Stojevic’s dishonest acts and knowledge could properly be attributed to the company (so that the company was tainted by the illegality);
• (ii) If attribution is established, whether the company’s claim is barred by the ex turpi causa principle as explained in Tinsley v Milligan and subsequent authorities;
• (iii) Whether the Hampshire Land non‑attribution principle (that an agent’s knowledge of his fraud on his principal is not attributed to a company that is the target of that fraud) applied; and
• (iv) Whether the “very thing” argument (that detection of the fraud was precisely what the auditors were retained to do and so public policy should not bar the claim) defeated the ex turpi defence.

Court’s reasoning:

• The court summarised the law on ex turpi causa, endorsing the reliance test from Tinsley v Milligan and the line of authorities limiting any discretionary ‘‘public conscience’’ approach.
• On attribution, the court applied established principles (Lennard’s, Meridian, Tesco Nattrass, El Ajou) and concluded that where an individual is the company’s directing mind and will for relevant purposes his dishonesty can be attributed to the company. On the facts, Mr Stojevic was the company’s directing mind and will and the company acted as the vehicle for the frauds; his knowledge was therefore imputable to the company.
• The Hampshire Land principle (and its later exposition in Belmont and related cases) was considered. The court held that the principle applies only where the agent’s misconduct was truly directed at the company so that the company can sensibly be regarded as the victim. Applying McNicholas and Bank of India the court concluded that being a mere consequential or secondary victim is insufficient; here the frauds were directed at the banks and the company was the vehicle of the fraud, not its intended victim, so the Hampshire Land exception did not apply.
• The court rejected the ‘‘very thing’’ argument. That argument conflated causation principles (novus actus/contributory fault/volenti and the idea that a defendant cannot rely on a break in causation if the loss is the very risk he was to guard against) with the independent, uncompromising operation of the ex turpi causa rule. The court held that where a claimant’s cause of action necessarily relies on its own illegality the Tinsley reliance rule bars the claim; Reeves was distinguished as applying an obsolete ‘‘public conscience’’ approach and cannot be read as overriding Tinsley.

Result: The Court of Appeal allowed the firm’s appeal, held that the company’s claim was barred by ex turpi causa, and struck out the claim.

Appeal allowed. The Court of Appeal held that (i) the dishonest acts and knowledge of the company’s sole directing mind and will, Mr Stojevic, were properly attributed to the company so that the company was not an innocent victim; (ii) the Hampshire Land non‑attribution exception did not apply because the fraud was not aimed at the company in a manner that made it a sensible victim; and (iii) the ‘‘very thing’’ argument did not override the strict application of the ex turpi causa doctrine (as explained in Tinsley). For those reasons the claim was barred by public policy and was properly struck out.

Appeal from the Commercial Court (Langley J) [2007] EWHC 1826 (Comm); judgment of the Court of Appeal in Moore Stephens (a firm) v Stone & Rolls Ltd (In Liquidation) [2008] EWCA Civ 644 (this judgment).