Moore Stephens v. Stone Rolls Ltd., (2009) 396 N.R. 203 (HL)

Case DateJuly 30, 2009
JurisdictionCanada (Federal)
Citations(2009), 396 N.R. 203 (HL)

Moore Stephens v. Stone Rolls Ltd. (2009), 396 N.R. 203 (HL)

MLB headnote and full text

Temp. Cite: [2009] N.R. TBEd. DE.012

Moore Stephens (a firm) (respondents) v. Stone Rolls Limited (in liquidation) (appellants)

([2009] UKHL 39)

Indexed As: Moore Stephens v. Stone Rolls Ltd.

House of Lords

London, England

Lord Phillips of Worth Matravers, Lord Scott of Foscote, Lord Walker of Gestingthorpe, Lord Brown of Eaton-under-Heywood and Lord Mance

July 30, 2009.

Summary:

Stojevic used his company (S&R) as a vehicle to defraud banks. Stojevic was the sole directing mind and will and the beneficial owner of S&R. As part of the plot to make his business appear respectable in the eyes of European banks, he persuaded the firm of Moore Stephens to become S&R's auditors. In doing so, he gave Moore Stephens a fictious account of the business that S&R had been doing and of the business whose accounts the firm would be auditing. The fraud was ultimately discovered and both Stojevic and S&R were successfully sued for deceit by the principal victim, Komercni Bank SA, which was awarded over $94 million. S&R (by its liquidator) subsequently sued Moore Stephens, in contract and tort, to recover losses caused by the auditors' alleged breach of duty for not exposing the fraudulent conduct earlier (i.e., to recover losses caused to S&R in consequence of the extension of the period of their fraudulent activity). The action was being pursued by the liquidators for the benefit of S&R's creditors (i.e., the banks). Moore Stephens applied to have S&R's claim struck, arguing that the claim could not succeed because it was founded on S&R's fraud and was met by the defence of "ex turpi causa non oritur actio". For purposes of that application Moore Stephens accepted that they owed S&R a duty to exercise reasonable skill and care in carrying out their duties as auditors, that they were in breach of that duty and that, but for their breach, the fraud that Stojevic was perpetrating through S&R would have ended earlier. A motions judge determined that S&R's claim should be struck and the Court of Appeal agreed. S&R appealed.

The House of Lords, Lord Scott of Foscote and Lord Mance dissenting, dismissed the appeal. The majority held that S&R's claim against the auditors was barred by the ex turpi causa principle.

Actions - Topic 1704

Cause of action - Bars - Ex turpi causa non oritur actio - The House of Lords discussed the principle of ex turpi causa non oritur actio which prevented a claimant from using the court to obtain benefits from his own illegal conduct - See paragraphs 20 to 28, 97, 98, 128 to 131, 201 to 203 and 226.

Actions - Topic 1704

Cause of action - Bars - Ex turpi causa non oritur actio - Stojevic used his company (S&R) as a vehicle to defraud banks - Stojevic was the sole directing mind and will and the beneficial owner of S&R - Stojevic and S&R were successfully sued for deceit by the principal victim - S&R (by its liquidator) subsequently sued Moore Stephens, in contract and tort, to recover losses caused by the auditors' alleged breach of duty for not exposing the fraudulent conduct earlier (i.e., to recover losses caused to S&R in consequence of the extension of the period of their fraudulent activity) - Moore Stephens sought to have S&R's claim struck, raising the defence of "ex turpi causa non oritur actio" - A motions judge held that S&R's claim should be struck and the Court of Appeal agreed - S&R appealed, seeking to insulate itself, for purposes of the ex turpi causa rule, from Stojevic's fraudulent conduct by relying on the agency principle in the Hampshire Land case (1896) - That principle being that where an agent was party or privy to the commission of a fraud upon or misfeasance against his principal, his knowledge of such fraud or misfeasance, and of the facts and circumstances connected therewith, would not be imputed to the principal - The House of Lords, per Lord Phillips of Worth Matravers, Lord Walker of Gestingthorpe, and Lord Brown of Eaton-under Heywood, for differing reasons, dismissed the appeal - The majority held that the ex turpi causa principle provided a complete defence to S&R's claim - The fraud and dishonesty of Stojevic was properly attributed to S&R - The exception established by the Hampshire Land case (1896), did not apply so as to prevent attribution in this case - See paragraphs 1 to 87 and 124 to 204.

Agency - Topic 3005

Relations between principal and agent - Agent's knowledge deemed knowledge of principal - [See second Actions - Topic 1704 and first Agency - Topic 4284 ].

Agency - Topic 4284

Relations between principal and third parties - Notice - Notice to agent imputed to principal - The House of Lords discussed the principle of agency established in the Hampshire Land Co. case in 1896 - That principle being that where an agent was party or privy to the commission of a fraud upon or misfeasance against his principal, his knowledge of such fraud or misfeasance, and of the facts and circumstances connected therewith, would not be imputed to the principal - Lord Phillips of Worth Matravers noted that Hampshire Land was an exception to the normal rules for the attribution of an agent's knowledge to his principal - It was not a rule about the attribution of conduct - Hampshire Land applied where an agent had knowledge which his principal did not in fact share but which under normal principles of attribution would be deemed to be the knowledge of the principal - The effect of Hampshire Land was that knowledge of the agent would not be attributed to the principal when the knowledge related to the agent's own breach of duty to his principal - See paragraphs 43 to 48, 106 to110, 137 to 145, 198 to 200 and 227 to 234.

Agency - Topic 4284

Relations between principal and third parties - Notice - Notice to agent imputed to principal - [See second Actions - Topic 1704 ].

Company Law - Topic 8

General - Knowledge or notice to company - [See second Actions - Topic 1704 and first Agency - Topic 4284 ].

Torts - Topic 6995

Defences - Ex turpi causa non oritur actio - [See second Actions - Topic 1704 ].

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Hall v. Hebert (1993), 152 N.R. 321; 26 B.C.A.C. 161; 44 W.A.C. 161; 101 D.L.R.(4th) 129 (S.C.C.), refd to. [paras. 7, 128, 226].

Hampshire Land Co., Re, [1896] 2 Ch. 743, refd to. [paras. 9, 106, 132, 198, 219].

Meridian Global Funds Management Asia Ltd. v. Securities Commission, [1995] 2 A.C. 500 (P.C.), refd to. [paras. 9, 104, 134, 221, Annex].

Caparo Industries v. Dickman et al., [1990] 2 A.C. 605; 108 N.R. 81 (H.L.), refd to. [paras. 19, 119, 168, 202, 211].

Al Saudi Banque v. Clarke Pixley, [1990] Ch. 313, refd to. [paras. 19, 168, 202, 211].

Thackwell v. Barclays Bank plc, [1986] 1 All E.R. 676, refd to. [para. 20].

Gray v. Barr, [1971] 2 Q.B. 554, refd to. [para. 20].

Bowmakers Ltd. v. Barnet Instruments Ltd., [1945] K.B. 65 (H.L.), refd to. [para. 21].

Alexander v. Rayson, [1936] 1 K.B. 169, refd to. [para. 21].

Hewison v. Meridian Shipping Services Pte Ltd., [2002] EWCA Civ. 1821; [2003] P.I.Q.R. P252, refd to. [para. 22].

Cross v. Kirby (CA 18.2.2000), refd to. [para. 23].

United Project Consultants Pte Ltd. v. Leong Kwok Onn, [2005] 4 S.L.R. 214; [2005] SGCA 38 (Singapore C.A.), refd to. [paras. 24, 180, 219].

Marles v. Trant (Philip) & Sons Ltd., [1954] 1 Q.B. 29, refd to. [para. 25].

Archbolds (Freightage) Ltd. v. S. Spanglet Ltd., [1961] 1 Q.B. 374, refd to. [para. 25].

Gray v. Thames Trains et al., [2009] 3 W.L.R. 167; [2009] UKHL 33; 398 N.R. 157, refd to. [para. 25].

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Hardy v. Motor Insurers' Bureau, [1964] 2 Q.B. 745, refd to. [para. 27].

Lancashire County Council v. Municipal Mutual Insurance Ltd., [1997] Q.B. 897, refd to. [para. 27].

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Saunders v. Edwards, [1987] 1 W.L.R. 116 (C.A.), refd to. [para. 129].

Euro-Diam Ltd. v. Bathurst, [1990] 1 Q.B. 1 (C.A.), refd to. [para. 129].

Howard v. Shirlstar Container Transport Ltd., [1990] 1 W.L.R. 1292 (C.A.), refd to. [para. 129].

Citizens' Life Assurance Co. v. Brown, [1904] A.C. 423, refd to. [para. 133].

Abrath v. North Eastern Railway Co. (1886), 11 App. Cas. 247, refd to. [paras. 133, 196, 220].

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Trevor v. Whitworth (1887), 12 Ch. App. 409, refd to. [para. 141].

Wallersteiner v. Moir, [1974] 1 W.L.R. 991, refd to. [para. 143].

Attorney General's Reference (No. 2 of 1982), [1984] Q.B. 624 (C.A.), refd to. [paras. 148, 219].

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Barings plc v. Coopers & Lybrand, [2003] 1 Lloyd's Rep. I.R. 566, refd to. [para. 175].

Sasea Finance Ltd. (in liquidation) v. KPMG, [2000] 1 All E.R. 676 (C.A.), refd to. [paras. 175, 244].

Bank of Credit and Commerce International S.A. (in liquidation) v. Ali (No. 2), [2000] I.C.R. 1354; [1999] 4 All E.R. 83, refd to. [para. 175].

Stansbie v. Troman, [1948] 2 K.B. 48 (C.A.), refd to. [para. 177].

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Everet v. Williams (1893), 9 L.Q.R. 197, refd to. [para. 187].

Sykes v. Beadon (1877), 11 Ch. D. 170, refd to. [para. 187].

London and General Bank, Re, [1895] 2 Ch. 166 (C.A.), refd to. [para. 190].

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West Mercia Safetywear Ltd. (in liquidation) v. Dodd, [1988] B.C.L.C. 250; 4 B.C.C. 30 (C.A.), refd to. [para. 232].

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Barings plc v. Coopers & Lybrand, [2003] EWHC 1319 (Ch. D.), refd to. [para. 246].

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Dairy Containers Ltd. v. NZI Bank Ltd. and Auditor-General, [1995] 2 N.Z.L.R. 30 (H.C.), refd to. [para. 247].

Daniels v. Anderson (1995), 16 A.C.S.R. 607, refd to. [para. 247].

Segenhoe v. Atkins (1990), 1 A.C.S.R. 697 (N.S.W.S.C.), refd to. [para. 253].

Exchange Banking Co. (Flitcroft's case), Re (1882), 21 Ch. D. 519, refd to. [para. 253].

VGM Holdings Ltd., Re, [1942] Ch. 235, refd to. [para. 254].

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Federal Deposit Insurance Corp. v. Ernst & Young (1992), 967 F.2d 166, refd to. [para. 261].

Duke Group Ltd. v. Pilmer (1999), 73 S.A.S.R. 180 (S. Aust. Full Ct.), revd. in part [2001] B.C.L.C. 773, refd to. [para. 274, Annex].

Hart Building Supplies Ltd. v. Deloitte & Touche et al., [2004] B.C.T.C. 55; 2004 BCSC 55, refd to. [Annex].

Cenco Inc. v. Seidman & Seidman (1982), 686 F.2d 449 (U.S.C.A., 7th Cir.), refd to. [Annex].

Schacht v. Brown (1983), 711 F.2d 1343 (U.S.C.A., 7th Cir.), refd to. [Annex].

Greenberg (Jack) Inc., Re; Waslow (Trustee) v. Grant Thornton LLP (1999), 240 B.R. 486 (U.S. Bktcy. Ct., E.D. Penn., Phil. Div.), refd to. [Annex].

NCP Litigation Trust v. KPMG LLP (2006), 901 A.2d 871 (N.J.S.C.), refd to. [Annex].

Sunpoint Securities Inc., Re (2007), 377 B.R. 513 (U.S. Bktcy. Ct., E.D. Texas, Tyler Div.), refd to. [Annex].

Federal Deposit Insurance Corp. v. O'Melveny & Myers (1995), 61 F.3d 17, refd to. [Annex].

Scholes v. Lehmann (1995), 56 F.3d 750, refd to. [Annex].

Knauer v. Roberts (Jonathon) Financial Group Inc. (2003), 348 F.3d 230 (7th Cir., D.C. Cir.), refd to. [Annex].

Bily v. Young (Arthur) & Co. (1992), 3 Cal.4th 370, refd to. [Annex].

Authors and Works Noticed:

Bowstead and Reynolds on Agency (18th Ed. 2006), pp. 8-188 [paras. 44, 50]; 8-213 [para. 44].

Bowstead on Agency (15th Ed. 1985), art. 102 [para. 79].

Gower, Laurence Cecil Bartlett, and Davies, Paul L., The Principles of Modern Company Law (8th Ed. 1008), para. 7-29 [para. 134].

Institute of Chartered Accountants, Auditing Guidelines (1990 Ed.), generally [para. 244].

Jackson, Rupert M., and Powell, John L., Professional Negligence (6th Ed. 2006) (1st Cum. Supp. 2007), c. 17 [para. 273].

MacPherson, Darcy, Emaciating the statutory audit - a comment on Hart Building Supplies Ltd. v. Deloitte & Touche (2005), 41 Can. Bus. L.J. 471, generally [Annex].

Palmer's Company Law Annotated Guide to the Companies Act 2006 (2007), p. 169 [para. 237].

Rudolph, Amelia T., and Tanis, Elizabeth V., Invoking In Pari Delicto to Bar Accountant Liability Actions Brought by Trustees and Receivers (2008), ALI-ABA Study Materials, generally [paras. 45, 144].

Watts, Imputed Knowledge in Agency Law - Excising the Fraud Exception (2001), 117 L.Q.R. 300, pp. 319, 320 [para. 44].

Counsel:

Michael Brindle, Q.C., Mark Simpson, Q.C., and David Murray (Instructed by Norton Rose LLP), for the appellant;

Jonathan Sumption, Q.C., and Tom Adam, Q.C., (Instructed by Barlow Lyde & Gilbert LLP), for the respondent.

Agents:

[Not disclosed.]

This appeal was heard on February 10-12, 2009, by Lord Phillips of Worth Matravers, Lord Scott of Foscote, Lord Walker of Gestingthorpe, Lord Brown of Eaton-under-Heywood and Lord Mance, of the House of Lords. The decision of the House was delivered on July 30, 2009, when the following opinions were filed:

Lord Phillips of Worth Matravers - see paragraphs 1 to 87;

Lord Scott of Foscote, dissenting - see paragraphs 88 to 123;

Lord Walker of Gestingthorpe - see paragraphs 124 to 194;

Lord Brown of Eaton-under-Heywood - see paragraphs 195 to 205;

Lord Mance, dissenting - see paragraphs 206 to 277.

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1 practice notes
  • Livent Inc. v. Deloitte & Touche et al., (2016) 342 O.A.C. 201 (CA)
    • Canada
    • Ontario Court of Appeal (Ontario)
    • January 8, 2016
    ...al., [2004] B.C.T.C. 55; 41 C.C.L.T.(3d) 240; 2004 BCSC 55, not folld. [para. 117]. Moore Stephens v. Stone Rolls Ltd., [2009] A.C. 1391; 396 N.R. 203; [2009] UKHL 39, dist. [para. Madoff Securities International Ltd. v. Raven & Ors, [2013] EWHC 3147 (Comm.), refd to. [para. 137]. Jetiv......
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    • Ontario Court of Appeal (Ontario)
    • January 8, 2016
    ...al., [2004] B.C.T.C. 55; 41 C.C.L.T.(3d) 240; 2004 BCSC 55, not folld. [para. 117]. Moore Stephens v. Stone Rolls Ltd., [2009] A.C. 1391; 396 N.R. 203; [2009] UKHL 39, dist. [para. Madoff Securities International Ltd. v. Raven & Ors, [2013] EWHC 3147 (Comm.), refd to. [para. 137]. Jetiv......

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