The Supreme Court has just delivered its judgment in the case of Jetivia SA v Bilta (UK) Limited. The seven Supreme Court justices unanimously held that the appellants could not rely on an ex turpi causa (illegality) defence. In this article we consider the implications for professionals and their insurers.
In our February 2015 article, we wrote about the upcoming judgment of the Supreme Court in the case of Jetivia SA v Bilta (UK) Limited (Bilta), which sets out the background to the claim and the doctrine of ex turpi causa. The Supreme Court has now delivered its unanimous judgment, to the effect that fraudulent directors (and their accessories) cannot rely upon an ex turpi causa defence to defeat a claim by their company’s liquidator.
On the face of it, this is an unfavourable decision for professionals and their insurers, as it suggests a limit on the application of the ex turpi causa defence, which can be critical to negligent professionals caught up in the fraud of others. Potentially the situation is made worse by continued uncertainty: there was a lack of consensus between the Supreme Court justices about the general principles to be applied in respect of an ex turpi causa defence, leading Lord Neuberger to comment that “the proper approach to the defence of illegality needs to be addressed by this court…as soon as appropriately possible…” This suggests the possibility of yet further inroads being made to the ex turpi causa defence in the near future.
However, there are a number of comments within the Supreme Court judgment which support the concept that a negligent professional (as opposed to a fraudulent director) may still rely on an ex turpi causa defence in the context of insolvency litigation. In this connection, the 2009 case of Stone & Rolls Limited v Moore Stephens (Stone & Rolls), in which negligent auditors were permitted to rely on such a defence, received some negative comment from the Supreme Court justices but it was not overturned; rather, it was confined to its particular facts.
Attribution is an essential aspect of these cases – in other words, whether the actions of fraudulent directors can be “attributed” to the company they were controlling. On this issue, the Supreme Court justices drew a clear distinction between, firstly, the situation where the company itself claims against a fraudulent director and, secondly, the situation where the company claims against a third party (which, in our view, ought to include a negligent professional). In the first, it would be manifestly unjust if the director’s dishonesty was attributed to the company so as to provide him with an ex turpi causa defence. In the second, it would still be possible for the director’s fraud to be attributed to the company so as to provide the third party with an ex turpi causa defence. In the words of Lord Sumption, “for a person, whether natural or corporate, who is culpable of fraud to say to an innocent but negligent outsider that he should have stopped him in his dishonest enterprise is as clear a case for the application of the illegality defence as one could have.”
Arguably, a third party could not rely on an ex turpi causa defence if they were complicit in the fraud, but in that case they would nonetheless be entitled to seek a contribution from the director under the Civil Liability (Contribution) Act 1978.
At the end of the day, the Supreme Court judgment in Bilta has gone only some of the way in clarifying the scope of the ex turpi causa defence. Pending further Supreme Court comment, this remains a highly uncertain area of law, and the defence’s application in any given case will be largely fact dependent. Nonetheless, ex turpi causa continues to represent a potentially crucial defence for negligent professionals facing claims arising from the fraud of others