The duties of auditors

Moore Stephens v Stone & Rolls Ltd [2009] UKHL 39 is a lengthy and complex decision by the House of Lords. By a 3:2 majority their Lordships ruled that the auditors of a company were not liable to the company to compensate it for losses caused by the fraud of the company’s sole shareholder/controller which the auditors have failed to uncover. This would seem to be a commonsense proposition, but the disagreement amongst their Lordships demonstrates that matters are not that simple. The case is of course of major significance for professional indemnity insurers, but there are wider implications for insurance in general. The following paragraphs are primarily concerned with those implications.

Moore Stephens: the facts

S&R was controlled by an individual, Mr Stojevic. S&R obtained large sums of money under letters of credit by presenting false documents to banks in respect of fictitious commodity trading. Damages were awarded against S&R and Mr Stojevic in the sum of US$94m, but the sums obtained by S&R had all been paid away to the various participants in the fraud. S&R’s liquidators commenced proceedings against its auditors, MS, for breach of duty. MS accepted that they owed a duty of care to S&R, that they were in breach of that duty and that, but for their breach, the fraud would have been caught at an early stage. However, they argued that S&R was precluded from recovering damages because it was relying on its own fraud. The Court of Appeal struck out the claim as being contrary to common sense. The question for the House of Lords was whether the claim should be struck out.