Interesting policy issues arise when auditors of corporations
whose management has fraudulently misrepresented the company's
financial statements find themselves defending claims brought on
behalf of the corporation by entities such as trustees, receivers,
and liquidators. The question then becomes: should the corporation,
or those standing in its shoes, be able to rely on the
company's own illegal conduct to recover damages? In the United
States (U.S.), such claims are often met with the defence of in
Because a corporation can only act through its officers and
directors, in pari delicto rests upon principles of agency
and corporate attribution. Where the actions of officers and
directors can be reasonably imputed or attributed to the
corporation, it is not necessary to precisely weigh culpability; if
the malfeasant acts of the officers and agents are equally or more
responsible than those of the defendant auditors for the wrong upon
which the claim is based, the defence of in pari delicto
will bar the plaintiff's claim. In certain U.S. jurisdictions,
this equitable defence is determined as a threshold issue and
thereby allows for summary dismissal of a claim.
There is a distinction between fraud committed on
behalf of a corporation and fraud committed against
it. Therefore, an important exception has developed to
this broad defence in the interests of fairness. Acts of officers
or agents which can be said to be wholly adverse to the interests
of the corporation are generally not attributed to it and in
pari delicto does not apply. This is known as the adverse
interest exception and is, itself, subject to certain exceptions.
The sole act or exception to the adverse exception operates to
attribute to the corporation the wrongful conduct of individuals
who exercise such dominion over the corporation that their conduct
can only be considered that of the corporation. The innocent
decision maker exception to the adverse interest exception provides
that the wrongful acts will not be attributed to the corporation
where there were other innocent stakeholders who were unaware of
the wrongdoing, since it would be unfair to punish them.
The in pari delicto defence is well-established in the
U.S. in cases involving auditors; however, it remains novel in
In the United Kingdom, a related doctrine, ex turpi
causa non oritur actio, has been recently invoked to provide
auditors with similar protection. Both doctrines stem from the
wider common law doctrine of illegality which, broadly speaking,
will not allow a wrongdoer to benefit from his or her own illegal
conduct. However, the doctrines are not identical. For example,
unlike in pari delicto, ex turpi causa does not
demand a prima facie weighing of the plaintiff's
culpability. Culpability of the plaintiff, to whatever degree, is
enough to bar a claim. By way of contrast, it is only where the
claimant is equally or more culpable than the defendant that in
pari delicto may provide a defence.
Although both in pari delicto and ex turpi
causa are concepts familiar to Canadian law, they have yet to
be applied meaningfully in the context of auditors' negligence
law. However, as we discuss in a later blog, the Canadian courts
are soon likely to articulate a position on in pari delicto/ex
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
It's not often that our little blog intersects with such titanic struggles as the U.S. presidential race – and by using the term "titanic" I certainly don't mean to suggest that anything disastrous is in the future.
J.J. v. C.C., is an interesting case in which the court held that an automotive garage owes a duty to minor children to secure the vehicles on the premises by locking the cars and safely storing the car keys...
In Irwin v. Alberta Veterinary Medical Association, 2015 ABCA 396, the Alberta Court of Appeal found that the "ABVMA" failed to afford procedural fairness to a veterinarian undergoing an incapacity assessment.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).