Date: Wed, 21 Nov 2007 00:41

From: Neil Foster

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

Dear David

I shouldn't be taken as agreeing with you that Australian law "equates material contribution and but-for". In my view they are two different things. The "material contribution" doctrine does not in any way water down the "but for" test. All "material contribution" says is that for A to be a cause of B, all you have to show is that it was one of a number of actual events that actually led to B happening. In other words, the court has to be satisfied on the balance of probabilities that A made a more than minimal contribution to the occurrence of B. The purpose of the doctrine is to counter a possible argument that A must be a "major" or "substantial" cause. As I've said before on this forum, that is what Bonnington Castings v Wardlaw stands for.

The "but for" test still has to be satisfied by A. In other words, the court has to be satisfied on the balance of probabilities that "but for" A, B would not have happened. (I exclude from discussion here the rare cases of multiple sufficient causes where we may have to invoke the NESS test or something similar.)

So - my view that causation might be established in the Stone & Rolls case is quite orthodox. (There has been no trial of the facts, of course, so the issue may or may not ever come up.) One would simply have to show that on the balance of probabilities if the auditors had reported the fraud when they spotted it, then the scam would not have succeeded. I say "simply" but of course any causation discussion like this involves a number of hypothetical paths that might have flowed from the decision to report. But that will be up to the fact-finder at the time. There is nothing impossible in principle about finding causation established here.

On this point the case is similar to the High Court of Australia decision in Tambree v TCF from a few years ago, where the failure of the auditor to report properly on the accounts of a travel agent led to the compensation fund having to pay out to defrauded customers.

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 10:40 >>>

Dear Neil,

You're welcome.

But ... but-for requires a more likely than not level of confidence that the act would have made a difference. Would your "plausible claim" require that level of confidence or are you falling back on what you're entitled to do, under Australian law as I understand it - through the March v Stramere fudge - to the equation of material contribution and but-for? Are you suggesting that some level of possibility below whatever level of confidence you think is needed for likelihood is nonetheless sufficient?

Assuming the auditors had reported SR to somebody what level of confidence is there that the person (police?) would have acted in a way that makes a difference? Can we say more likely than not? How do we decide if it would it have made a difference? This triggers the discussion that Vaughan covers in his decision-causation paper, no?

I suppose one issue depends what the police would and could have done, legally. In that vein, consider what happened in Mooney v British Columbia. There's no doubt the police were negligent but on the evidence the majority found there was nothing the police could have done legally that probably would have made a difference.

That's the substance of the Mooney dissent. What more could victim have done?

Analyzing these cases in terms of causation does send us chasing our tails, doesn't ?

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