Date: Tue, 20 Nov 2007 12:00

From: Louis Joseph

Subject: Alice in Wonderland (or how to extract millions from auditors)

On the reduction or apportionment of damages for contributory negligence point raised by Neil Foster, one Commonwealth case which held that such apportionment or reduction is available to “honest and reasonable” auditors, who did not even plead contributory negligence, by virtue of recourse to the exculpatory section of the Companies Act (see section 731 UK Companies Act 1985) is JSI Shipping (S) Pte Ltd v Teofoongwonglcloong (A Firm) [2007] SGCA 40, a judgment of the Singapore Court of Appeal (V K Rajah JA).

Very interesting, if misconceived!

Louis Joseph
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--------------------------------------------------------------------------------
From: Neil Foster
Sent: 20 November 2007 03:35
To: Andrew Tettenborn; Robert Stevens
Subject: Re: Alice in Wonderland (or how to extract millions from auditors)

Dear Colleagues

>>> Robert Stevens 19/11/07 10:36 >>> said

Well, it was only a strike out ...

That said, the claim should have failed on the basis that ex turpi causa non oritur actio. As far as I can see, SR needed to rely upon their own wrongdoing in order to make out their claim and that should have been the end of the matter. Having read it through twice I don't understand why the judge thinks differently ...

Yes, I agree that this is the really puzzling thing about the judgement. I can see an argument that if, say, SR had been a company with 5 shareholders and directors, with Mr Stojevic only one, and he had perpetrated the scam in the company's name, that the company as a separate entity should have an action in contract against the auditors for failing to notify anyone about the scam. So the main difference here is that Mr S was the only effective decision-maker. Once it is conceded that his fraud should be attributed to the company (and Langley J does this at [65](6)), then the real question is, why can the auditors not rely on ex turpi? The company's claim depends on them admitting and relying on their own fraud.

Langley J at [65] (7) says that the "key question" is the application of Reeves. Presumably the ratio of Reeves is that if you have a duty, the fulfilment of which requires you to take reasonable steps to someone else committing suicide, then it is no answer to the claim that they wrongfully committed suicide. But how does that apply here? One would have to formulate a duty owed by the auditors to the company, fulfilment of which required the auditors to (take reasonable steps to?) stop the company committing a fraud.

A duty with such content sounds unlikely. The duty only arose in Reeves, presumably, because of the special situation of the police force and the large degree of control they had over the prisoner. It doesn't sound plausible that such a duty should be imposed on auditors. Even Langley J says at 65(9) that a "duty to prevent fraud" is not present ("even if not owing ..."). It is a complete fudge to say then that there was some duty owing "which had it not been broken would have revealed the fraud". This may demonstrate causation, but it still does not identify the duty!

I am also intrigued by what seems to be a concession at [63] that "the court could reduce the claim for contributory fault on the part of S&R". If the whole claim arose from the fraud of the director who was the "governing mind" of the company, then what is left? Does this not sound like a 100% reduction?

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