Friday, January 8, 2016

Ex turpi doctrine does not shield auditor from claim for not uncovering fraud by corporate management brought by corporation seeking recovery

Livent Inc. v. Deloitte & Touche, 2016 ONCA 11:

[153]    The trial judge quoted with approval, at para. 272, Lord Mance's observation, made at para. 241 of Stone & Rolls in dissent, that the "very thing" an auditor undertakes is to exercise reasonable care in relation to the possibility of financial impropriety. Lord Mance said:  

Leaving aside situations in which the directing mind(s) is or are the sole beneficial shareholder(s), it is obvious ... that an auditor cannot, by reference to the maxim ex turpi causadefeat a claim for breach of duty in failing to detect managerial fraud at the company's highest level by attributing to the company the very fraud which the auditor should have detected. It would lame the very concept of an audit – a check on management for the benefit of shareholders – if the higher the level of managerial fraud, the lower the auditor's responsibility. When Lord Bridge noted in Caparo Industries plc v Dickman [1990] 2 AC 605, 626E that shareholders' remedy in the case of negligent failure by an auditor to discover and expose misappropriation of funds by a director consisted in a claim against the auditors in the name of the company, he cannot conceivably have had in mind that it would make all the difference to the availability of such a claim whether the director was or was not the company's directing mind. The fact that a "very thing" that an auditor undertakes is the exercise of reasonable care in relation to the possibility of financial impropriety at the highest level makes it impossible for the auditor to treat the company itself as personally involved in such fraud, or to invoke the maxim ex turpi causa in such a case. [Emphasis added.]

[154]    The policy underlying the ex turpi causa doctrine is, as I have discussed, to maintain the integrity of the justice system by preventing a wrongdoer from profiting from his or her wrongdoing or evading a criminal sanction. As noted above, there may be cases where the doctrine could be applied as a defence in a civil action brought by a corporate plaintiff and cases where the wrongdoing of the directing mind(s) of a plaintiff corporation could be attributed to the corporation for the purposes of invoking the ex turpi causa doctrine.

Of the Law Societies of Upper Canada and Nunavut 

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