The appellant accountants (M) appealed against a decision ([2007] EWHC 1826 (Comm), [2008] Bus LR 304) refusing to strike out the claim against them. The respondent company (R) had commenced proceedings against M claiming that M negligently failed in the course of various audits to detect the dishonest behaviour of the individual (S) who was at the relevant time the sole directing mind and will of R. The nature of S’s dishonesty was to procure R to engage in a letter of credit fraud on banks which enabled substantial sums of money to be channelled through R and applied elsewhere for the benefit of S and others also party to the fraud. The frauds gave rise to liabilities by R to the banks, in particular to a Czech bank. That bank sued R and S in deceit and was awarded substantial damages against both. R could not pay and went into liquidation. Its claim against M, brought by its liquidators, was for just under US$174 million. M denied negligence and applied to strike out the claim or for summary judgment contending that R was seeking an indemnity against liabilities it had incurred by its own fraud and that such a claim was barred by the principle of public policy expressed in the maxim ex turpi causa non oritur actio. The judge declined to strike out the claim. R submitted that (1) the ex turpi causa maxim did not prevent it from suing for recovery in respect of its own losses caused by the individual who was its directing mind and will in relation to the frauds because R was itself a victim of the frauds and should not have any knowledge of them attributed to it; (2) the ex turpi causa maxim did not provide a defence to M when the detection of dishonesty in the operation of R’s affairs was the “very thing” that M, as auditors, was retained to do.


ISSUES


(1) Whether the ex turpi causa maxim did not prevent R from suing for recovery in respect of its own losses caused by the individual who was its directing mind and will in relation to the frauds.


(2) Whether the ex turpi causa maxim did not provide a defence to M when the detection of dishonesty in the operation of R’s affairs was the very thing that M, as auditors, was retained to do.


HELD (appeal allowed)


(1) If, in order to advance a claim, it was necessary for the claimant to plead or rely on illegality, the claim was automatically barred, however good it might otherwise be, and the court had no discretion in the matter, Tinsley v Milligan [1994] 1 AC 340 applied. In the instant case, R’s claim relied upon, was based substantially on, arose out of and was inextricably linked with the fraud that was perpetrated on the banks. That fraud was actually perpetrated by S, who was R’s sole directing mind and will.


(2) A company would not have attributed to it knowledge of a fraud when that fraud was being practised on the company itself, Hampshire Land Co (No2), Re (1896) 2 Ch 743 Ch D and JC Houghton & Co v Nothard Lowe & Wills Ltd [1928] AC 1 applied. The Hampshire Land principle would ordinarily only apply in circumstances in which the agent intended to harm the company or it was the target of the agent’s acts, McNicholas Construction Co Ltd v Customs and Excise Commissioners [2000] STC 553 QBD and Morris v Bank of India [2005] EWCA Civ 693, [2005] BCC 739 applied. It was not enough to engage the principle that an agent’s acts might result in harm to the company, Arab Bank Plc v Zurich Insurance Co [1999] 1 Lloyd’s Rep 262 QBD (Comm) doubted. In the circumstances the instant case was not one in which the Hampshire Land principle had any application. S as the sole directing mind and will of R procured R to enter into fraudulent transactions with banks. It was R that dealt with the banks and, as between R and the banks, the principles of attribution required S’s dishonesty to be imputed to R, which should therefore itself be liable for the frauds. R was neither the target nor the victim of its agent’s dishonesty. It was itself the fraudster, and it made no difference that its frauds were likely, when and if found out, to result in the incurring of liabilities by R.


(3) There was no support in the authorities for the proposition that if the very thing from which the defendant owed a duty to save the claimant harmless was, or included, the commission of a criminal offence, the public policy defence based on the ex turpi causa principle would be overridden so as to enable the bringing of the claim that relied on the claimant’s illegality, Reeves v Commissioner of Police of the Metropolis [1999] QB 169 CA (Civ Div) and Clunis v Camden and Islington HA [1998] QB 978 considered.


(4) R’s claim relied upon its own illegality. It therefore had to fail by application of the ex turpi causa principle, which was not trumped by the “very thing” argument.


Jonathan Sumption QC and Tom Adam (instructed by Barlow Lyde & Gilbert LLP) for the appellant. Michael Brindle QC, Mark Simpson and David Murray (instructed by Norton Rose LLP) for the respondent.


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