Date: Tue, 20 Nov 2007 22:45

From: Neil Foster

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

Dear David

Thanks for the reference to BSA, it is an interesting case. For a NSW case where a solicitor was sued for negligence in assisting a fraudster to get a registered mortgage, see Chandra v Perpetual Trustees Vic Ltd [2007] NSWSC 694 - since the fraudster had disappeared, the solicitor would have had to pay the full value of the stolen property, except for the fact that in NSW now we have a "proportionate liability" regime for economic loss cases, which was applied to Chandra.

On the issue of causation in Stone & Rolls, however, I beg to differ. What the auditors should have done (and there were a series of audits over 3 years) was to have reported their suspicions to some appropriate authority - see para [18] of Langley J's judgment. Presumably the argument is that this would have stopped or at least limited the scam. I agree that there are many questions as to whether a private auditor's duty extends as far as "dobbing in" their client (to use the Australian term) simply on the basis of suspicion. And one could argue that the client in that case would simply have got rid of the auditor and got another one. But there is at least a plausible claim that "but for" the failure of the auditor the full extent of the harm, at least, would not have been suffered.

Regards
Neil F

Neil Foster
Newcastle Law School
Faculty of Business & Law
MC159c, McMullin Building
University of Newcastle
Callaghan NSW 2308
AUSTRALIA
ph 02 4921 7430
fax 02 4921 6931

>>> David Cheifetz 21/11/07 12:13 >>>

Perhaps I'm being overly simplistic (something I'm rarely accused of) but ...

Leaving aside ex turpi, shouldn't this be seen as a straight-forward, (ahem) common-sense, causation issue? Isn't the better conclusion that by no reasonable stretch can it be said that the auditor's negligence, even if they owed a duty, even if they were negligent, made a difference? The better conclusion is that SR would have done the scam no matter what, so that on a proper analysis the auditor's conduct isn't even a NESS-analysis contributory factor; heck, not even a Canadian Athey de minimis. Or, if one wishes to say there's at least some basis for assigning historical causation, then fall back on ex turpi and say it's not a legal factual cause.

For comparison, see, B.S.A. Investors Ltd. v. DSB, 2007 BCCA 94.

I understand leave to appeal is being sought in BSA.

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