Final decision in Lords strikes a blow to litigation funding sector

The House of Lords marked its last day of existence yesterday by handing Barlow Lyde & Gilbert (BLG) a victory when it struck out a multi-million pound claim against its client Moore Stephens.

The eagerly awaited judgment in Stone & Rolls (in liquidation) v Moore Stephens (auditors) was handed down by Lord Phillips of Worth Matravers late yesterday afternoon.

While the decision marks a victory for BLG partner Julian Randall and his instructed counsel, Brick Court Chambers’ Jonathan Sumption QC, it is a blow for the third party litigation funding market. Stone & Rolls had secured independent funding for the case, but will now have to pay the full cost of both sides’ legal fees.

Reynolds Porter Chamberlain partner Nick Bird commented: “The claim was funded by third party funders at very considerable expense and will cause concern to those in that business at a time when the future of all litigation funding is being weighed up carefully in Lord Justice Jackson’s review of civil costs.”

In the original High Court case Stone & Rolls brought a £90m claim against auditors Moore Stephens in January 2007 (5 January 2007). The case had its origins in a major credit fraud committed by Stone & Rolls’ sole director Zvonko Stojevic against Czech bank Komercni Banka. The bank sued the company, forcing it into liquidation (21 July 2008).

Stone & Rolls instructed Norton Rose litigation partner Sam Eastwood to seek damages from Moore Stephens, alleging that the auditor negligently failed to detect Stojevic’s dishonest behaviour and therefore should be held liable.

In court Sumption used the ex turpi causa defence to argue that the claim was illegal because the claimants sought to recoup losses made by their own fraud. The main battleground was whether the defence could be applied by the auditor because the fraud was the very thing it had been paid to detect.

The High Court found in Stone & Rolls’ favour, but Moore Stephens appealed.

Last year the Court of Appeal found in favour of Moore Stephens with Lord Justices Mummery, Keene and Rimer describing Stone & Rolls’ claim as “astounding” when striking it out.

Although Stone & Rolls pursued the case to the House of Lords, the Law Lords upheld the appeal court’s decision by a three-two majority.

Eastwood instructed Fountain Court Chambers’ Michael Brindle QC and Mark Simpson QC to act for Stone & Rolls.