SUPREME
COURT OF CANADA
Citation: Deloitte & Touche v. Livent Inc. (Receiver of),
2017 SCC 63
|
Appeal Heard:
February 15, 2017
Judgment Rendered:
December 20, 2017
Docket:
36875
|
Between:
Deloitte
& Touche (now continued as Deloitte LLP)
Appellant
and
Livent
Inc., through its special receiver and manager Roman Doroniuk
Respondent
-
and -
Canadian
Coalition for Good Governance and Chartered Professional Accountants of Canada
Interveners
Coram: McLachlin C.J. and Karakatsanis, Wagner, Gascon, Côté, Brown
and Rowe JJ.
Joint Reasons for
Judgment:
(paras. 1 to 115)
|
Gascon and Brown JJ. (Karakatsanis and Rowe JJ.
concurring)
|
Reasons
Dissenting in Part:
(paras. 116 to 178)
|
McLachlin C.J. (Wagner and Côté JJ. concurring)
|
Note: This document is subject to editorial revision before its
reproduction in final form in the Canada Supreme Court Reports.
deloitte & touche v. livent inc.
Deloitte & Touche (now
continued as Deloitte LLP) Appellant
v.
Livent Inc., through its special receiver
and
manager Roman Doroniuk Respondent
and
Canadian Coalition for Good Governance
and
Chartered Professional
Accountants of Canada Interveners
Indexed as: Deloitte &
Touche v. Livent Inc.
(Receiver of)
2017 SCC 63
File No.: 36875.
2017: February 15; 2017: December 20.
Present: McLachlin C.J. and Karakatsanis, Wagner, Gascon, Côté,
Brown and Rowe JJ.
on appeal from the court of appeal for ontario
Torts
— Duty of care — Negligence — Negligent misrepresentation — Auditor failing to
discover fraud by company’s directors and company incurring losses — Proper
application of analytical framework for establishing tort liability in cases of
negligent misrepresentation or performance of service by auditor — Whether
auditor breaching duty of care and therefore liable for company’s losses —
Appropriate date from which to calculate quantum of damages.
Livent
produced and staged performances in theatres that it owned in Canada and the
U.S., with its shares listed on Canadian and U.S. stock exchanges. To enhance
Livent’s success, its directors manipulated the company’s financial records. Deloitte
was Livent’s auditor. Deloitte never uncovered the fraud. In August 1997,
however, Deloitte identified irregularities in the reporting of profit from an
asset sale. Deloitte did not resign. Instead, for the purpose of helping Livent
to solicit investment, Deloitte helped prepare, and approved, a press release
issued in September 1997, which misrepresented the basis for the reporting of
the profit. In October 1997, Deloitte provided a comfort letter for a public
offering. It also prepared Livent’s 1997 audit, which it finalized in April
1998. New equity investors later discovered the fraud. A subsequent
investigation and re‑audit resulted in restated financial reports. Livent
filed for insolvency protection in November 1998. It sold its assets and went
into receivership in 1999. Livent sued Deloitte later in tort and contract.
The
trial judge held that Deloitte owed a duty of care to provide accurate
information to Livent’s shareholders. He held that Deloitte failed to meet the
standard of care under this duty, either when it failed to discover the fraud
and act on that discovery in August 1997, or when it signed off on Livent’s
1997 financial statements in April 1998. The trial judge held that the measure
of damages was the difference between Livent’s value on the date on which
Deloitte should have resigned and Livent’s value at the time of insolvency. He
reduced this by 25 percent to account for contingencies or trading losses,
which he held were too remote to make Deloitte liable. The trial judge
consequently awarded damages to Livent for breach of its duty of care, and
alternatively for breach of contract, in the amount of $84,750,000. The Court of Appeal upheld the trial judge’s award and dismissed
Deloitte’s appeal and Livent’s cross‑appeal.
Held
(McLachlin C.J. and Wagner and Côté JJ. dissenting in part): The
appeal should be allowed in part.
Per Karakatsanis,
Gascon, Brown and Rowe JJ.: The general framework set out in Anns v. London Borough of Merton, [1977] 2 All
E.R. 492 (H.L.), and later refined in Cooper v. Hobart, 2001 SCC 79,
[2001] 3 S.C.R. 537, applies in cases of pure economic loss arising from
an auditor’s negligent misrepresentation or performance of a service.
Comprising two stages, the Anns/Cooper framework asks
whether a prima facie duty of care exists between the parties, and if
so, whether there are any residual policy considerations that may negate the
imposition of a duty of care. At the first stage, a prima facie duty of
care is recognized where proximity and reasonable foreseeability of injury are
established. When assessing proximity, if a relationship falls within a previously established category, or is
analogous to one, then the requisite close and direct relationship is shown. If
a risk of reasonably foreseeable injury can also be shown, the first stage of
the Anns/Cooper framework is complete and a duty of care may be
identified. In such circumstances, the second stage of the framework will
seldom be engaged because any residual policy considerations will have already
been taken into account when the proximate relationship was first identified.
Where
an established proximate relationship cannot be found, courts must undertake a
full proximity analysis. To determine whether the close and direct relationship
exists, courts must examine all relevant factors arising from the relationship.
In cases of pure economic loss arising from negligent misrepresentation or
performance of a service, two factors are determinative in the proximity
analysis: the defendant’s undertaking and the plaintiff’s reliance. Where the
defendant undertakes to provide a representation or service in circumstances
that invite the plaintiff’s reasonable reliance, the defendant becomes obligated
to take reasonable care and the plaintiff has a right to rely on the defendant’s
undertaking. These corollary rights
and obligations create a relationship of proximity. Any reliance on the part of
the plaintiff, which falls outside of the scope of the defendant’s undertaking, necessarily falls outside the scope of the
proximate relationship and, therefore, of the defendant’s duty of care. This
properly limits liability on the basis that the defendant cannot be liable for
a risk of injury against which he did not undertake to protect.
As for assessing reasonable foreseeability in the prima facie
duty of care analysis, this entails asking whether an injury to the plaintiff was a reasonably foreseeable
consequence of the defendant’s negligence. Reasonable foreseeability concerns
the likelihood of injury arising from the defendant’s negligence. In cases of
negligent misrepresentation or performance of a service, the proximate
relationship informs the foreseeability inquiry. The purpose underlying the
undertaking and the corresponding reliance limits the type of injury that could
be reasonably foreseen to result from the defendant’s negligence. An injury to
the plaintiff will be reasonably foreseeable if the defendant should have
reasonably foreseen that the plaintiff would rely on his or her representation
and such reliance would, in the particular circumstances of the case, be
reasonable. Both the reasonableness and the reasonable foreseeability of the
plaintiff’s reliance will be determined by the relationship of proximity
between the parties.
At the second stage of the Anns/Cooper framework, the question
is whether there are residual policy considerations outside the relationship of
the parties that may negate the imposition of a duty of care. This stage is not
concerned with the relationship between the parties, but with the effect of
recognizing a duty of care on other legal obligations, the legal system and
society more generally. Factors to be considered include whether the law
already provides a remedy, the spectre of unlimited liability to an unlimited
class and whether there are other reasons of broad policy that suggest that the
duty of care should not be recognized. The place within the Anns/Cooper
framework of this policy inquiry is significant. It follows the proximity and
foreseeability inquiries. The policy inquiry assesses whether, despite the
proximate relationship between the parties and the reasonably foreseeable
quality of the plaintiff’s injury, the defendant should nonetheless be
insulated from liability. That it would limit liability in the face of findings
of both proximity and reasonable foreseeability makes plain how narrowly it
should be relied upon.
No
proximate relationship has previously been established as between an auditor
and its client for the purposes of soliciting investment. This case therefore
requires a full proximity analysis. From August to October 1997, the services
which Deloitte provided to Livent — particularly its ongoing assistance in
relation to the press release and the provision of the comfort letter — were
undertaken for the purpose of helping Livent to solicit investment. Given this
undertaking, Livent was entitled to rely upon Deloitte to carry out these services
with reasonable care. It follows that a relationship of proximity arose but
only in respect of the content of Deloitte’s undertaking. Losses outside the
scope of this undertaking are not recoverable from Deloitte. With respect to
the press release and the comfort letter, Deloitte never undertook to assist
Livent’s shareholders in overseeing management; it cannot therefore be held
liable for failing to take reasonable care to assist such oversight. Given that
Livent had no right to rely on Deloitte’s representations for a purpose other
than that for which Deloitte undertook to act, Livent’s reliance was neither
reasonable nor reasonably foreseeable. Consequently, the increase in Livent’s
losses or liquidation deficit, which arose from that reliance, was not a reasonably
foreseeable injury. Because no prima facie duty of care arose, there is
no need to consider residual policy considerations.
However, the Court has already recognized that a duty is owed by an
auditor in preparing a statutory audit and that a claim by a corporation for losses resulting from a negligent
statutory audit could succeed. A statutory audit is prepared to allow shareholders to collectively supervise management and to take decisions with respect to the overall administration of the corporation.
This describes precisely the function which Livent’s shareholders were unable
to discharge by reason of Deloitte’s negligent 1997 audit. Deloitte did not alter the purpose for which it undertook to provide
the 1997 audit or disclaim liability in relation to that purpose. Therefore, proximity is established in relation to the statutory
audit, on the basis of the previously recognized proximate relationship. In
addition, the type of injury Livent suffered was a reasonably foreseeable
consequence of Deloitte’s negligence. Through the 1997 audit, Deloitte
undertook to assist Livent’s shareholders in scrutinizing
management conduct. By negligently conducting the
audit, and impairing Livent’s shareholders’ ability to oversee management,
Deloitte exposed Livent to reasonably foreseeable risks, including losses that
would have been avoided with a proper audit. Because proximity is based on a previously
recognized category, there is no need to consider residual policy
considerations. Deloitte owed Livent a duty of care, which it breached. Deloitte
cannot rely on either the defence of illegality or of contributory fault,
because the fraudulent acts of Livent’s directors cannot be attributed to the
corporation.
Remoteness
is not a bar to Livent’s recovery. Remoteness examines whether the harm is too
unrelated to the wrongful conduct to hold the defendant fairly liable. It
overlaps conceptually with the reasonable foreseeability analysis but the duty of
care analysis is concerned with the type of injury that is reasonably
foreseeable as flowing from the defendant’s conduct,
whereas the remoteness analysis is concerned with the actual injury suffered by
the plaintiff. However, the loss here — stemming from Deloitte’s failure to
fulfill the specific undertaking it made to Livent in relation to the 1997
audit — was reasonably foreseeable.
The trial
judge assessed Livent’s damages following the 1997 audit at $53.9 million.
Applying the trial judge’s 25 percent contingency reduction to this amount
results in a final damages assessment of $40,425,000. This is the amount
for which Deloitte is liable. At trial, Livent conceded that its losses for
negligent performance of a service or breach of contract would be identical. Therefore,
the same quantum of liability applies for Deloitte’s concurrent claim in breach
of contract.
Per McLachlin C.J. and Wagner and Côté JJ. (dissenting
in part): Deloitte owed a duty of care to Livent, which it breached when it
failed to discover and expose Livent’s fraud in the audited
statements. However, Deloitte is not liable for the loss that
befell Livent. The claim in tort must be dismissed. The result is the same with
respect to Livent’s action in contract.
Courts
have provided two doctrinal approaches for limiting recovery of pure economic
loss flowing from negligent misstatement. The first is to hold that the scope
of the duty of care of the advice‑giver does not cover the loss claimed.
The second is to hold that the loss is too remote from the negligent act and
thus was not legally caused by that act. Both inquiries invoke similar
considerations and arrive at the same point. The remoteness inquiry looks at
the wrongdoing and its proximity to the loss claimed. The factors to be
considered are not closed. The advice‑giver’s knowledge of the claimant’s
circumstances, the reasonable expectations arising from the relationship, and
the presence of intervening factors that led to the loss may figure in the
analysis. The scope of the duty of care inquiry looks to the relationship
between the defendant’s advice and the plaintiff’s loss. It asks if that
relationship was proximate. In cases of economic loss, it inquires into the
purpose for which the advice was given and asks whether a reasonable person
would have expected, or foreseen, that negligent advice would lead to the loss
in question by virtue of the plaintiff’s reliance on the advice.
The
duty of care inquiry leads to the two‑part test set out in Anns v.
London Borough of Merton, [1977] 2 All E.R. 492 (H.L.). The first part of
the test asks whether there is proximity, or a sufficiently close relationship,
between the parties. It focuses on the connection between the defendant’s
undertaking or statement and the loss claimed. The purpose for which the
statement was made is pivotal, and is a matter of fact to be determined on the
evidence adduced at trial.
In
this case, three purposes of Livent’s audit statements are discernable: (1) to
report accurately on Livent’s finances and provide it with audit opinions on
which it could rely for the purpose of attracting investment; (2) to
uncover errors or wrongdoing for the purpose of enabling Livent itself to
correct or otherwise respond to the misfeasance; and (3) to provide audit
reports on which Livent’s shareholders could rely to supervise Livent’s
management. The scope of Deloitte’s duty of care is defined solely by these
purposes.
Deloitte’s
wrongful act did not deprive Livent of the ability to attract investment capital. In
fact, Livent attracted a great deal of capital on the strength of Deloitte’s
statements. Likewise, Deloitte’s wrongful act did not prevent Livent from
detecting misfeasance in the company’s management, which Livent would have
corrected had it known. Finally, Livent did not prove that Deloitte’s
wrongdoing prevented its shareholders from exercising supervision in a manner
that would have ended the company’s loss‑creating activities at an
earlier date. The trial judge did not find that Livent’s shareholders relied on
Deloitte’s negligent audit statements, or that had they received and relied on
accurate statements, they would have acted in a way that would have prevented
Livent from carrying on business and diminishing its assets in the period
between the issuance of the relevant statements and Livent’s insolvency.
Crucially, the trial judge did not ask whether the shareholders had in fact
relied on the audits and he did not ask whether, if they had relied, this
reliance prevented them from taking steps to alter course. Finally, he did not
ask whether these actions, had they been taken, would have prevented the losses
that Livent built up during the seven‑month period in question. If the
trial judge had asked these questions, he would have been obliged to answer
them in the negative, since Livent offered no proof to support affirmative
answers. As a result, the factual basis for establishing loss on the basis of
shareholder supervision was entirely lacking.
The
majority suggests that, had Deloitte provided sound audit reports, Livent’s
shareholders and management may have made decisions that would have limited the
company’s losses. While this may be true, it is not enough to rely on unproven
assertions to define the scope of the duty of care and to subsequently
demonstrate causation. The majority’s approach suggests that an auditor will
generally become the underwriter for any losses suffered by a client following
a negligent audit report. This, notwithstanding subsequent decisions — reliant
or capricious — made by the client’s shareholders. However, reliance cannot be
presumed; it must be proved.
Because
the loss at issue has not been shown to fall within the scope of Deloitte’s
duty of care, the first step of the Anns test is not established. It is
therefore unnecessary to go on to ask whether prima facie liability is
negated by policy considerations unrelated to the relationship between the
parties. However, were it necessary to do so, the policy considerations of
unfair allocation of loss and indeterminacy would preclude imposing liability
on Deloitte.
Cases Cited
By Gascon and Brown JJ.
Applied:
Hercules Managements Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165; distinguished:
South Australia Asset Management Corp. v. York Montague Ltd.,
[1997] A.C. 191; Canadian Dredge & Dock Co. v. The Queen, [1985] 1
S.C.R. 662; Hart Building Supplies Ltd. v. Deloitte & Touche, 2004 BCSC
55, 41 C.C.L.T. (3d) 240; explained: Anns v. London Borough of Merton,
[1977] 2 All E.R. 492; Cooper v. Hobart, 2001 SCC 79, [2001] 3 S.C.R.
537; referred to: Bow Valley Husky (Bermuda) Ltd. v. Saint John
Shipbuilding Ltd., [1997] 3 S.C.R. 1210; Canadian National Railway Co.
v. Norsk Pacific Steamship Co., [1992] 1 S.C.R. 1021; Kamloops (City) v.
Nielsen, [1984] 2 S.C.R. 2; Haig v. Bamford, [1977] 1 S.C.R. 466; Edwards
v. Law Society of Upper Canada, 2001 SCC 80, [2001] 3 S.C.R. 562; Odhavji
Estate v. Woodhouse, 2003 SCC 69, [2003] 3 S.C.R. 263; Childs v.
Desormeaux, 2006 SCC 18, [2006] 1 S.C.R. 643; Hill v. Hamilton‑Wentworth
Regional Police Services Board, 2007 SCC 41, [2007] 3 S.C.R. 129; Fullowka
v. Pinkerton’s of Canada Ltd., 2010 SCC 5, [2010] 1 S.C.R. 132; Saadati
v. Moorhead, 2017 SCC 28, [2017] 1 S.C.R. 543; Donoghue v. Stevenson,
[1932] A.C. 562; Caparo Industries plc. v. Dickman, [1990] 1 All E.R.
568; Glanzer v. Shepard, 135 N.E. 275 (1922); Ultramares Corp. v.
Touche, 174 N.E. 441 (1931); Yuen Kun Yeu v. Attorney‑General of
Hong Kong, [1988] 1 A.C. 175; Edgeworth Construction Ltd. v. N. D. Lea
& Associates Ltd., [1993] 3 S.C.R. 206; Gross v. Great‑West
Life Assurance Co., 2002 ABCA 37, 299 A.R. 142; Mustapha v. Culligan of
Canada Ltd., 2008 SCC 27, [2008] 2 S.C.R. 114; Overseas Tankship (U.K.)
Ltd. v. Morts Dock & Engineering Co., [1961] A.C. 388; Hughes‑Holland
v. BPE Solicitors, [2017] UKSC 21, [2017] 2 W.L.R. 1029; Nykredit
Mortgage Bank plc. v. Edward Erdman Group Ltd. (No. 2), [1997] 1 W.L.R.
1627; Platform Home Loans Ltd. v. Oyston Shipways Ltd., [2000] 2 A.C.
190; Clements v. Clements, 2012 SCC 32, [2012] 2 S.C.R. 181; Rainbow
Industrial Caterers Ltd. v. Canadian National Railway Co., [1991] 3 S.C.R.
3; Hall v. Hebert, [1993] 2 S.C.R. 159; British Columbia v. Zastowny,
2008 SCC 4, [2008] 1 S.C.R. 27; Stone & Rolls Ltd. (in liquidation) v.
Moore Stephens, [2009] UKHL 39, [2009] 1 A.C. 1391; 373409 Alberta Ltd.
(Receiver of) v. Bank of Montreal, 2002 SCC 81, [2002] 4 S.C.R. 312; Bilta
(U.K.) Ltd. (in liquidation) v. Nazir (No. 2), [2015] UKSC 23, [2016]
A.C. 1.
By McLachlin C.J. (dissenting in part)
Caparo
Industries plc. v. Dickman, [1990] 1 All E.R. 568; Ultramares Corp. v.
Touche, 174 N.E. 441 (1931); D’Amato v. Badger, [1996] 2 S.C.R.
1071; Hercules Managements Ltd. v. Ernst & Young, [1997] 2 S.C.R.
165; Canadian National Railway Co. v. Norsk Pacific Steamship Co.,
[1992] 1 S.C.R. 1021; R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42,
[2011] 3 S.C.R. 45; Cooper v. Hobart, 2001 SCC 79, [2001] 3 S.C.R. 537; BG
Checo International Ltd. v. British Columbia Hydro and Power Authority,
[1993] 1 S.C.R. 12; South Australia Asset Management Corp. v. York
Montague Ltd., [1996] 3 All E.R. 365; Hughes‑Holland v. BPE
Solicitors, [2017] UKSC 21, [2017] 2 W.L.R. 1029; Hogarth v. Rocky
Mountain Slate Inc., 2013 ABCA 57, 542 A.R. 289; Wightman v. Widdrington
(Succession), 2013 QCCA 1187; Platform Home Loans Ltd. v. Oyston
Shipways Ltd., [1999] 1 All E.R. 833; Mustapha v. Culligan of Canada
Ltd., 2008 SCC 27, [2008] 2 S.C.R. 114; Citadel General Assurance Co. v.
Vytlingam, 2007 SCC 46, [2007] 3 S.C.R. 373; Westmount (City) v. Rossy,
2012 SCC 30, [2012] 2 S.C.R. 136; Anns v. London Borough of Merton,
[1977] 2 All E.R. 492; Sutherland Shire Council v. Heyman (1985), 60
A.L.R. 1; Overseas Tankship (U.K.) Ltd. v. Morts Dock & Engineering Co.,
[1961] A.C. 388; Candler v. Crane Christmas & Co., [1951] 1 All E.R.
426; Burns v. Homer Street Development Limited Partnership, 2016 BCCA
371, 91 B.C.L.R. (5th) 383; Aneco Reinsurance Underwriting Ltd. (in
liquidation) v. Johnson & Higgins Ltd., [2001] UKHL 51, [2001] 2 All
E.R. (Comm.) 929; Canadian Imperial Bank of Commerce v. Deloitte &
Touche, 2016 ONCA 922, 133 O.R. (3d) 561; Temseel Holdings Ltd. v.
Beaumonts Chartered Accountants, [2002] EWHC 2642 (Comm.), [2003] P.N.L.R.
27; B.D.C. Ltd. v. Hofstrand Farms Ltd., [1986] 1 S.C.R. 228; Asamera
Oil Corp. v. Sea Oil & General Corp., [1979] 1 S.C.R. 633.
Statutes and Regulations Cited
Business Corporations Act, R.S.O. 1990,
c. B.16, Part XII, ss. 153, 154.
Companies’ Creditors Arrangement Act, R.S.C.
1985, c. C‑36 .
Corporations Act, R.S.M. 1987, c. C225.
Negligence Act, R.S.O. 1990, c. N.1,
s. 3.
Authors Cited
Beever, Allan. Rediscovering the Law of Negligence. Oxford:
Hart, 2007.
Black’s Law Dictionary, 10th ed. by
Bryan A. Garner, ed. St. Paul, Minn.: Thomson Reuters, 2014, “indeterminate”.
Blom, Joost. “Do We Really Need the Anns Test for Duty of
Care in Negligence?” (2016), 53 Alta. L. Rev. 895.
Hohfeld, Wesley Newcomb. “Some Fundamental Legal Conceptions as
Applied in Judicial Reasoning” (1913), 23 Yale L.J. 16.
Jutras, Daniel. “Civil Law and Pure Economic Loss: What Are We
Missing?” (1987), 12 Can. Bus. L.J. 295.
Klar, Lewis N., and Cameron S. G. Jefferies. Tort Law,
6th ed. Toronto: Thomson Reuters, 2017.
Linden, Allen M., and Bruce Feldthusen. Canadian Tort Law,
8th ed. Markham, Ont.: LexisNexis, 2006.
MacPherson, Darcy L. “Emaciating the Statutory Audit — A
Comment on Hart Building Supplies Ltd. v. Deloitte & Touche” (2005),
41 Can. Bus. L.J. 471.
Tushnet, Mark V. “Defending the Indeterminacy Thesis”, in Brian
Bix, ed., Analyzing Law: New Essays in Legal Theory. Oxford: Clarendon
Press, 1998, 223.
Waddams, S. M. The Law of Damages, 5th ed. Toronto:
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APPEAL
from a judgment of the Ontario Court of Appeal (Strathy C.J. and Blair and
Lauwers JJ.A.), 2016 ONCA 11, 128 O.R. (3d) 225, 393 D.L.R. (4th) 1, 342
O.A.C. 201, 52 B.L.R. (5th) 225, 31 C.B.R. (6th) 205, 24 C.C.L.T. (4th) 177,
[2016] O.J. No. 51 (QL), 2016 CarswellOnt 122 (WL Can.), affirming a
decision of Gans J., 2014 ONSC 2176, 11 C.B.R. (6th) 12, 10 C.C.L.T. (4th)
182, 26 B.L.R. (5th) 15, [2014] O.J. No. 1635 (QL), 2014 CarswellOnt 4365
(WL Can.). Appeal allowed in part, McLachlin C.J. and Wagner and Côté JJ.
dissenting in part.
Peter H. Griffin, Matthew Fleming, Scott Rollwagen and Nina
Bombier, for
the appellant.
Peter F. C. Howard, Patrick O’Kelly, Nicholas McHaffie and Aaron Kreaden, for the respondent.
Markus Koehnen, David Kent and Jeffrey Levine, for the intervener the Canadian
Coalition for Good Governance.
Guy J. Pratte, Nadia Effendi and Duncan
A. W. Ault, for the intervener Chartered Professional Accountants of Canada.
The judgment of Karakatsanis, Gascon, Brown and Rowe JJ. was delivered by
Gascon and Brown JJ.
—
I.
Introduction
[1]
This appeal provides the Court with an
opportunity to affirm the analytical framework by which liability may be
imposed in cases of negligent misrepresentation or performance of a service by
an auditor.
[2]
There is substantial agreement between us and
the Chief Justice. We agree on the general analytical framework governing
negligent misrepresentation claims (Chief Justice’s reasons, at paras.
146-147). And we agree that Deloitte & Touche (now Deloitte LLP) should not
be liable for its corporate client Livent Inc.’s increase in liquidation
deficit which followed Deloitte’s provision of negligent services in relation
to the solicitation of investment.
[3]
We conclude, however, that Deloitte should be
liable for the increase in Livent’s liquidation deficit which followed the
statutory audit. In Hercules Managements Ltd.
v. Ernst & Young, [1997] 2 S.C.R. 165, this
Court recognized that a statutory audit is prepared to allow shareholders to
collectively “supervise management and to take
decisions with respect to matters concerning the proper overall administration
of the corporatio[n]” which permits “the shareholders, acting as a group, to
safeguard the interests of the corporatio[n]” (para. 56 (emphasis deleted)).
This describes precisely the function which Livent’s shareholders were unable
to discharge by reason of Deloitte’s negligence. As a consequence, Livent’s
corporate life was artificially prolonged, resulting in the interim
deterioration of its finances. There was a sufficient evidentiary basis for
liability based on impaired shareholder supervision. Application of the Anns/Cooper
framework, coupled with the basis for auditor liability specifically
identified by this Court in Hercules, would lead us to uphold the trial
judge’s finding of liability in relation to the negligently prepared statutory
audit.
[4]
As a result, we would allow the appeal from the
decision of the Ontario Court of Appeal, 2016 ONCA 11, 128 O.R. (3d) 225, but
only in part.
II.
Facts and Judicial History
[5]
We generally agree with the facts and judicial
history set out by the Chief Justice in her reasons. In particular, she
correctly identifies the trial judge’s core finding that Deloitte’s conduct
fell below the standard of care on two occasions: “. . . either when it failed
to discover the fraud and act on that discovery in August 1997, or when it
signed off on Livent’s 1997 financial statements in April 1998” (Chief
Justice’s reasons, at para. 127; trial reasons, 2014 ONSC 2176, 10 C.C.L.T.
(4th) 182, at paras. 241-42). We, like the Chief Justice, do not dispute these
core findings. Some further elaboration upon them is, however, helpful.
[6]
The trial judge’s findings of negligence can be
divided into two separate events: (1) Deloitte’s approval of a 1997 press
release (“Press Release”) and provision of a comfort letter (“Comfort Letter”);
and (2) Deloitte’s preparation and approval of the 1997 clean audit opinion
(“1997 Audit”). We would not label all of these documents “audit statements”.
Indeed, collapsing the distinctions between these documents obfuscates a proper
duty of care analysis.
[7]
Livent asserts that it detrimentally relied on
Deloitte in each of these events, which impaired its ability to oversee its
operations. Specifically, Livent says that, had Deloitte been prudent in
relation to these representations, Livent’s life would not have been
artificially extended and that, in turn, it would have suffered less corporate
loss (calculated as the increase in the deficit between its liabilities and
assets at the time of its liquidation): trial reasons, at paras. 23-25, citing
Livent’s amended statement of claim, at paras. 210 and 212. A detailed
recounting of the events pertaining to these two representations is, therefore,
critical to the negligence analysis in this case.
A.
Primary Negligence Finding: The Press Release
and Comfort Letter (August to October 1997)
[8]
Chronologically, the first representations found
by the trial judge to be negligence causing compensable harm were the Press
Release and Comfort Letter.
[9]
The Comfort Letter pertains to an agreement
whereby Dundee Realty Corp. sought to purchase the air rights above Livent’s
Pantages Theatre and adjacent lands (“Air Rights Agreement”). Deloitte audited
the accounting and reporting relating to that purchase, and identified
irregularities in the accounting for the reporting of profit. Ultimately,
Livent and Deloitte disagreed about the irregularities, which left Deloitte
with a choice between resigning (and reporting those irregularities to
regulatory authorities and the next auditor), and remaining (thereby
effectively capitulating to Livent’s views on how the irregularities should be
reported). Deloitte, negligently, chose the latter route. It did not resign or
inform anyone of the accounting irregularities. Instead, it helped prepare, and
approved, the Press Release of September 2, 1997, which misrepresented the
basis for the reporting of profit arising from the Air Rights Agreement.
[10]
Further, that Press Release was issued “on the
eve of a public offering for which [Deloitte] was going to have to provide a
comfort letter” (trial reasons, at para. 193). As a result, Deloitte — again,
negligently — provided the Comfort Letter on October 10, 1997, in support of
the U.S. $125 million debenture underwriting. The purpose underlying the
Press Release and the Comfort Letter is critical. It was not to inform Livent
of its own financial position, but rather, to inform investors of
Livent’s financial position, furnishing “comfort” in respect of their
investment (despite one of Deloitte’s senior partners’ express acknowledgment
that Deloitte was in no position “to provide any comfort to any
regulators, underwriters or audit committee members as to the interim financial
statement’s conformity with GAAP”) (trial reasons, at para. 178 (emphasis
added; emphasis in original deleted)). Casting “professional skepticism, if not
GAAS, aside” (para. 209), Deloitte approved the Press Release and Comfort
Letter — all, seemingly, to maintain its profitable relationship with Livent.
[11]
Given the foregoing, the trial judge assessed
Livent’s injury as of a “measurement date” of August 31, 1997, i.e., the date
on which Deloitte would, acting reasonably, have resigned. The trial judge also
reduced Livent’s damages by 25 percent, however, for “contingencies” said to
represent the amount Livent would have lost, even without Deloitte’s
negligence.
[12]
Deloitte appeals the trial judge’s award of
damages, which amounts to the measure of damages (75 percent of damages
overall) that he estimated to have arisen after the date on which Deloitte
should have resigned.
B.
Alternative Negligence Finding: The 1997 Audit
(April 1998)
[13]
In the alternative, the trial judge held that,
if Deloitte reasonably refrained from resigning in August or September of 1997,
it was negligent in preparing the 1997 Audit which was finalized in April 1998.
That audit, which lacked “independent thought”, essentially tracked the
statutory audit for 1996 (“1996 Audit”), despite (1) Livent now presenting
inordinate risk given its “more than . . . modest history of aggressive, if not
questionable, accounting practices” (trial reasons, at para. 211); and (2)
Deloitte discovering, before the audit was completed, that Livent had
intentionally deceived it as to the nature of its contractual dealings
underlying the Air Rights Agreement. Somehow, this latter discovery of
deliberate deception — after which “all hell broke loose” (para. 213) — was not
enough to persuade Deloitte to terminate its engagement with Livent, despite
all of its testifying senior partners acknowledging that “their collective
professional skepticism would have been at the highest level” at this time
(para. 214), and despite Livent’s after-the-fact explanation for this deception
“ma[king] no sense, whatsoever” (para. 234(5)). Deloitte’s willingness to
succumb to Livent’s transparently fraudulent demands left the trial judge
“breathless” (para. 238) and was “beyond [his] comprehension” (para. 239).
[14]
Given the foregoing, the trial judge also
assessed Livent’s injury as of an “alternative” measurement date of March 31,
1998, i.e., the date on which Deloitte would, acting reasonably, have provided
a prudent audit opinion (trial reasons, at para. 306, fn. 188, and para. 369,
fn. 228).
[15]
We reiterate that the purpose of the
representation is critical. Unlike the Press Release and Comfort Letter (which
were intended to inform investors of Livent’s financial position), the
1997 Audit was intended to inform Livent of its own financial position
for various purposes, including, most importantly, shareholder oversight of
management.
III.
Analysis
A.
Duty of Care
[16]
Traditionally, the test from Anns v. London
Borough of Merton, [1977] 2 All E.R. 492 (H.L.), governed the duty analysis
in decisions of this Court addressing claims for pure economic loss (Hercules; Bow
Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd., [1997] 3 S.C.R. 1210; Canadian National Railway Co. v. Norsk
Pacific Steamship Co., [1992] 1 S.C.R. 1021). Significantly, however, the Anns
test for establishing tort liability in Canada has since been refined. In Cooper
v. Hobart, 2001 SCC 79, [2001] 3 S.C.R. 537, this Court provided greater
certainty to the law of tort by clarifying the factors which may be considered
at each stage of the Anns test. While the resulting Anns/Cooper framework
has yet to be applied by this Court in a case of auditor’s negligence, we adopt
this statement of La Forest J. for the Court in Hercules: “. . . to create a ‘pocket’ of negligent misrepresentation cases . . .
in which the existence of a duty of care is determined differently from other
negligence cases would, in my view, be incorrect” (para. 21).
[17]
We turn, therefore, to consider the test for
establishing tort liability, beginning with this Court’s decision in Hercules,
and the proper application of the general Anns/Cooper framework to cases
of auditors’ liability.
(1)
Hercules: The Anns
Test
[18]
In Hercules, this Court recognized a duty
owed by an auditor in preparing a statutory audit of its corporate client.
While the Court dismissed the plaintiff shareholders’ claim for lost personal
investments, it consistently maintained that a claim by the corporation itself
for its own losses resulting from a negligent statutory audit could have
succeeded (paras. 58-59; see also paras. 1 and 60-64):
All the participants in
this appeal . . . raised the issue of whether the appellants’ claims in respect
of the losses they suffered in their existing shareholdings through their
alleged inability to oversee management of the corporations ought to have been
brought as a derivative action . . . .
. . . if an action is to
be brought in respect of such losses, it must be brought either by the
corporation itself (through management) or by way of a derivative action.
[19]
The duty analysis in Hercules entailed
applying the then-current test for recognizing a duty of care in Canadian
negligence law: the Anns test. Comprising two stages, the Anns test
asked (1) whether a prima facie duty of care exists between the parties;
and (2) if so, whether there are any residual policy considerations which
should negate or limit the scope of the duty, the class of persons to whom it
is owed or the damages to which a breach of it may give rise (Hercules,
at para. 20; Kamloops (City) v. Nielsen, [1984] 2 S.C.R. 2, at pp.
10-11; Norsk, at p. 1155; Bow Valley, at para. 47).
[20]
Under the Anns test, a prima facie duty
of care is recognized where a “sufficiently close relationship between the
plaintiff and the defendant” exists such that “in the reasonable contemplation
of the [defendant], carelessness on its part may cause damage to the
[plaintiff]” (Hercules, at para. 22; Kamloops, at p. 10). In
other words, where injury to the plaintiff is a reasonably foreseeable
consequence of the defendant’s negligence, a duty of care would, prima facie,
arise. This relationship, where present, was labelled one of “proximity” (ibid.).
In Hercules, the Court provided greater particularity to the test of
reasonable foreseeability which established proximity under the Anns test
in the context of claims for pure economic loss arising
from negligent misrepresentation or performance of a service. Specifically, it stated that proximity would inhere in a
relationship where two criteria are met: (1) that the defendant should
reasonably foresee that the plaintiff will rely on his or her representation;
and (2) that the plaintiff’s reliance would, in the circumstances of the case,
be reasonable. The Court explained that considering the plaintiff’s reliance
within the test for the reasonable foreseeability of injury did not “abandon
the basic tenets underlying the [Anns] formula” (para. 25). Rather, as
the plaintiff’s injury in cases of pure economic loss arising
from negligent misrepresentation or performance of a service stems from his or her detrimental reliance, the reasonableness of
that reliance informs the determination of whether his or her injury is
reasonably foreseeable (paras. 25-26). Where, therefore, the Anns test
was applied to cases of negligent misrepresentation, reasonable foreseeability
of injury alone, as arising from reasonable reliance, was sufficient to establish
a proximate relationship supporting a prima facie duty of care (Hercules,
at paras. 25 and 27; Norsk, at p. 1154; Bow Valley, at para. 61).
[21]
The Anns test thereby set a low threshold
at the first stage, imposing duties in relation to a nearly limitless class of
persons who might rely on representations for nearly limitless purposes.
Indeed, as this Court stated in Hercules, “[i]n modern commercial
society, the fact that audit reports will be relied on by many different people
(e.g., shareholders, creditors, potential takeover bidders, investors, etc.)
for a wide variety of purposes will almost always be reasonably foreseeable to
auditors themselves” (para. 32). For that reason — that is, because of the low
“foreseeability” threshold for establishing a prima facie duty of care
at the first stage of the Anns test — the Court looked to the second
stage of the Anns test to negate or narrow the duty on the basis of the
“policy consideration” of indeterminacy. It was here that the Court looked to
the identity of the plaintiffs and the purpose of the audit opinion to deny
liability for investment and devaluation losses of individual shareholders
(paras. 27-28; see also Haig v. Bamford, [1977] 1 S.C.R. 466).
Specifically, the Court found that one of the purposes of a statutory audit — that is, to “allo[w] shareholders, as a group, to supervise
management and to take decisions with respect to matters concerning the proper
overall administration of the corporatio[n]” (para. 56 (emphasis
in original)) — would have permitted the corporate client to recover its own
losses at the time of receivership had the claim been brought in the
corporation’s name. As we will explain, Livent’s injury following the 1997
Audit is precisely the type of injury described in Hercules as being
compensable.
(2)
Cooper: Refining
the Anns Test
[22]
While this Court’s holding in Hercules
remains binding authority governing an auditor’s duty of care in relation to a
statutory audit, the framework by which that duty is imposed has since been
refined. In the companion cases of Cooper and Edwards v. Law Society
of Upper Canada, 2001 SCC 80, [2001] 3 S.C.R. 562, this Court revised the Anns
test by distinguishing more clearly between foreseeability and proximity,
and by placing greater emphasis on a more demanding first stage of the
two-stage analysis (Cooper, at para. 30). While, therefore, we rely on Hercules
for the general proposition that an auditor may owe its client a duty of care
in relation to a particular undertaking, it is the Anns/Cooper framework
to which we must have reference in identifying a principled basis for imposing
liability. And, properly applied, that framework will rarely, if ever,
give rise to a prima facie duty of care that could result in
indeterminate liability. Accordingly, and with great respect for contrary
views, there is no reason to resort to the second stage in order to negate all
liability in this case.
(a)
Stage One: Prima Facie Duty of Care
[23]
In Cooper, this Court recognized that
“foreseeability alone” is not enough to establish a prima facie duty of
care (para. 22; see also Edwards, at para. 9). In doing so, it signalled
a shift from the Anns test, which had grounded the recognition of a prima
facie duty upon mere foreseeability of injury (Hercules, at paras.
25 and 27; Norsk, at p. 1154; Bow Valley, at para. 61). After Cooper,
the first stage of the Anns/Cooper framework would require “something
more” (Cooper, at para. 29). That “something more” is proximity
(Odhavji Estate v. Woodhouse, 2003 SCC 69, [2003] 3 S.C.R. 263,
at paras. 47-48; Childs v. Desormeaux, 2006 SCC 18, [2006] 1 S.C.R. 643,
at para. 12; Hill v. Hamilton-Wentworth Regional Police Services Board,
2007 SCC 41, [2007] 3 S.C.R. 129, at para. 23; and Fullowka v. Pinkerton’s
of Canada Ltd., 2010 SCC 5, [2010] 1 S.C.R. 132, at para. 18).
[24]
In Cooper, the Court did not indicate
whether proximity or reasonable foreseeability should be assessed first. In
cases of negligent misrepresentation or performance of a service, however,
proximity will be more usefully considered before foreseeability. What the
defendant reasonably foresees as flowing from his or her negligence depends
upon the characteristics of his or her relationship with the plaintiff, and
specifically, in such cases, the purpose of the defendant’s undertaking. That
said, both proximity and foreseeability of injury merit further reflection.
(i)
Proximity
[25]
Assessing proximity in the prima facie duty
of care analysis entails asking whether the parties are in such a “close
and direct” relationship that it would be “just and fair having regard to that
relationship to impose a duty of care in law” (Cooper, at paras. 32 and
34).
[26]
Under the Anns test, proximity did not, “in
and of itself, provide a principled basis on which to make a legal
determination” (Hercules, at para. 23). Rather, proximity was a “label”
which expressed nothing more than a “result, judgment or conclusion” (ibid.),
where mere reasonable foreseeability of injury could be shown. While, under the
Anns/Cooper framework, the proximity analysis has become more
analytically robust, this descriptive component remains. By this, we mean that
the term “proximity” is still used, in part, as a shorthand description of
those categories of relationships in which proximity has already been found to
exist (Cooper, at para. 23). If a relationship falls within a previously
established category, or is analogous to one, then the requisite close and
direct relationship is shown. So long, then, as a risk of reasonably
foreseeable injury can also be shown — or has already been shown through an
analogous precedent — the first stage of the Anns/Cooper framework is
complete and a duty of care may be identified (ibid., at para. 36). In
such circumstances, the second stage of the Anns/Cooper framework will
seldom be engaged because any residual policy considerations will have already
been taken into account when the proximate relationship was first identified (ibid.,
at para. 39; Edwards, at para. 10).
[27]
This Court has on occasion defined previously
established categories of proximity in broad terms. In Hill, for
example, the Court listed “[t]he duty of care of the motorist to other users of
the highway; the duty of care of the doctor to his patient; the duty of care of
the solicitor to her client” (para. 25). Proximate relationships will not
always, however, be identified so generally. In particular, whether proximity
exists between two parties at large, or whether it inheres only for particular
purposes or in relation to particular actions, will depend upon the nature of
the particular relationship at issue (ibid., at para. 27; Haig,
at p. 479). Indeed, and as we explain below, factors which support recognizing
“novel” proximate relationships do so based upon the characteristics of the
parties’ relationship and the circumstances of each particular case (Cooper,
at paras. 34-35).
[28]
It follows that, where a party seeks to base a
finding of proximity upon a previously established or analogous category, a
court should be attentive to the particular factors which justified recognizing
that prior category in order to determine whether the relationship at issue is,
in fact, truly the same as or analogous to that which was previously
recognized. And, by corollary, courts should avoid
identifying established categories in an overly broad manner because, again,
residual policy considerations are not considered where proximity is found on
the basis of an established category (Cooper, at para. 39).
Analytically, this makes sense. For a court to have previously recognized a
proximate relationship, second-stage residual policy considerations must
already have been taken into account. When, therefore, a court relies on an
established category of proximity, it follows “that there are no overriding
policy considerations that would [negate] the duty of care” (ibid.). A consequence of this approach,
however, is that a finding of proximity based upon a previously established or
analogous category must be grounded not merely upon the identity of the
parties, but upon examination of the particular relationship at issue in each
case. Otherwise, courts risk recognizing prima facie duties of care
without any examination of pertinent second-stage residual policy
considerations.
[29]
Where an established proximate relationship cannot
be found, courts must undertake a full proximity analysis. To determine whether the “‘close and direct’
relationship which is the hallmark of the common law duty of care” exists (Saadati
v. Moorhead, 2017 SCC 28, [2017] 1 S.C.R. 543, at para. 24, citing Cooper,
at para. 32, and Donoghue v. Stevenson, [1932] A.C. 562 (H.L.), at pp.
580-81), courts must examine all relevant “factors arising from the relationship
between the plaintiff and the defendant” (Cooper, at para. 30 (emphasis
in original); Edwards, at para. 9; Childs, at para. 24; Odhavji,
at para. 50; Hill, at para. 24; Fullowka, at para.
26; Saadati, at para. 24). While these factors are diverse and depend on
the circumstances of each case (Cooper, at para. 35), this Court has
maintained that they include “expectations, representations, reliance, and the
property or other interests involved” (ibid., at para. 34; Odhavji,
at para. 50; Fullowka, at para. 26) as well as any statutory obligations
(Cooper, at para. 38; Edwards, at paras. 9 and 13; Odhavji,
at para. 56).
[30]
In cases of pure economic loss arising from
negligent misrepresentation or performance of a service, two factors are
determinative in the proximity analysis: the defendant’s undertaking and the
plaintiff’s reliance. Where the defendant undertakes to provide a
representation or service in circumstances that invite the plaintiff’s
reasonable reliance, the defendant becomes obligated to take reasonable care.
And, the plaintiff has a right to rely on the defendant’s undertaking to do so
(W. N. Hohfeld, “Some Fundamental Legal Conceptions as Applied in Judicial
Reasoning” (1913), 23 Yale L.J. 16, at pp. 49-50). These corollary
rights and obligations create a relationship of proximity (Haig, at p.
477; Caparo Industries plc. v. Dickman, [1990] 1
All E.R. 568 (H.L.), at pp. 637-38; Glanzer v. Shepard,
135 N.E. 275 (N.Y. 1922) at pp. 275-76; Ultramares Corp. v. Touche,
174 N.E. 441 (N.Y. 1931), at pp. 445-46; E. J. Weinrib, “The Disintegration
of Duty” (2006), 31 Adv. Q. 212, at p. 230).
[31]
Rights, like duties, are, however, not limitless. Any
reliance on the part of the plaintiff which falls outside of the scope of the
defendant’s undertaking of responsibility — that is, of the purpose for which the representation was made or the
service was undertaken —
necessarily falls outside the scope of the proximate relationship and,
therefore, of the defendant’s duty of care (Weinrib; A. Beever, Rediscovering
the Law of Negligence (2007), at pp. 293-94). This principle, also referred
to as the “end and aim” rule, properly limits liability on the basis that the
defendant cannot be liable for a risk of injury against which he did not
undertake to protect (Glanzer, at pp. 275 and 277; Ultramares, at
pp. 445-46; Haig, at p. 482). By assessing all relevant factors arising
from the relationship between the parties, the proximity analysis not only
determines the existence of a relationship of proximity, but also
delineates the scope of the rights and duties which flow from that
relationship. In short, it furnishes not only a “principled basis upon which to
draw the line between those to whom the duty is owed and those to whom it is
not” (Fullowka, at para. 70), but also a principled delineation of the
scope of such duty, based upon the purpose for which the defendant undertakes
responsibility. As we will explain, these principled limits are essential to
determining the type of injury that was a reasonably foreseeable consequence of
the defendant’s negligence.
(ii)
Reasonable Foreseeability
[32]
Assessing reasonable foreseeability in the prima
facie duty of care analysis entails asking whether an injury to the plaintiff was a reasonably foreseeable
consequence of the defendant’s negligence (Cooper, at para. 30).
[33]
Broadly speaking, reasonable foreseeability
concerns the likelihood of injury arising from the defendant’s negligence (Donoghue,
at p. 580). This inquiry is not amenable to, and does not require, actuarial
precision. The jurisprudence gives content, however, to the foreseeability
inquiry, providing courts with guidance. In the abstract, a defendant’s
negligent misrepresentation or performance of a service could potentially give
rise to innumerable injuries tangentially cascading from the originally
contemplated service. This was so in Hercules, where the Court
recognized that an auditor’s statement could be relied upon by a potentially
limitless number of individuals (e.g., shareholders or takeover bidders), for a
potentially limitless array of purposes (e.g., investments or takeover bids), any of which could result in various
foreseeable injuries.
[34]
As we have already observed, however, reasonable
foreseeability of injury is no longer the sole consideration at the first stage
of the Anns/Cooper framework. Since Cooper, both reasonable
foreseeability and proximity — the latter expressed in Cooper as
a distinct and more demanding hurdle than reasonable foreseeability — must be
proven in order to establish a prima facie duty of care. And, in cases
of negligent misrepresentation or performance of a service, the proximate
relationship — grounded in the defendant’s undertaking and the plaintiff’s
reliance — informs the foreseeability inquiry. Meaning, the purpose underlying
that undertaking and that corresponding reliance limits the type of injury
which could be reasonably foreseen to result from the defendant’s negligence.
[35]
As a matter of first principles, it must be
borne in mind that an injury to the plaintiff in this sort of case flows from
the fact that he or she detrimentally relied on the defendant’s undertaking,
whether it take the form of a representation or the performance of a service.
It follows that an injury to the plaintiff will be reasonably foreseeable if
(1) the defendant should have reasonably foreseen that the plaintiff would rely
on his or her representation; and (2) such reliance would, in the particular circumstances
of the case, be reasonable (Hercules, at para. 27). Both the
reasonableness and the reasonable foreseeability of the plaintiff’s reliance
will be determined by the relationship of proximity between the parties; a
plaintiff has a right to rely on a defendant to act with reasonable care for
the particular purpose of the defendant’s undertaking, and his or her reliance
on the defendant for that purpose is therefore both reasonable and reasonably
foreseeable. But a plaintiff has no right to rely on a defendant for any other
purpose, because such reliance would fall outside the scope of the defendant’s
undertaking. As such, any consequent injury could not have been reasonably
foreseeable.
[36]
We add this. Under the Anns test, the
Court recognized that auditors may owe a prima facie duty of care to an
innumerable number of parties on the basis of reasonable foreseeability alone (Hercules,
at para. 32). We acknowledge that the Anns/Cooper framework, when
applied to cases of negligent misrepresentation, will give rise to a far
narrower scope of reasonably foreseeable injuries and, therefore, a narrower
range of prima facie duties of care. This is no indictment of the Anns/Cooper
analysis. Rather, it was the very purpose and effect of this Court’s
instruction in Cooper that “something more” than mere
foreseeability is required at the first stage of the Anns/Cooper framework.
By requiring examination of the relationship between the parties as we have
just discussed, Cooper gave Canadian courts a more complete array of
legal tools to determine whether it is “just and fair” to impose a prima
facie duty of care.
(b)
Stage Two: Residual Policy Considerations
[37]
Where a prima facie duty of care is
recognized on the basis of proximity and reasonable foreseeability, the analysis
advances to stage two of the Anns/Cooper framework. Here, the question
is whether there are “residual policy considerations” outside the relationship
of the parties that may negate the imposition of a duty of care (Cooper,
at para. 30; Edwards, at para. 10; Odhavji, at para. 51).
[38]
By “residual”, we mean that such considerations
“are not concerned with the relationship between the parties [already
considered at stage one], but with the effect of recognizing a duty of care on
other legal obligations, the legal system and society more generally” (Cooper,
at para. 37; see also Edwards, at para. 10). To the extent, therefore,
that stage one of the prima facie duty of care is said to engage
“policy” considerations arising from the relationship between the parties —
i.e., the recognition that it is sound “policy” to only hold defendants liable
for negligence when they are in a proximate relationship with the plaintiff and
when the injury suffered was reasonably foreseeable (see Cooper, at
para. 25) — such “policy” considerations are not revisited at stage two (ibid., at para. 28).
Indeed such reconsideration would be both redundant and analytically
confusing (ibid., at para. 29).
[39]
Cooper, and in
particular, its strict delineation between “factors arising from the relationship
[between the parties]” (para. 30 (emphasis in original)) and factors that “are
not concerned with the relationship between the parties” (para. 37) has
impacted the stage at which certain factors are considered within the Anns/Cooper
framework. For example, principles that were traditionally considered at the
second stage of the Anns test in cases of negligent misrepresentation,
such as (1) whether the defendant knew the identity of the plaintiff or the
class of plaintiffs who would rely on its representation; and (2) whether the
reliance losses claimed by the plaintiff stem from the particular transaction
in respect of which the statement at issue was made (Hercules, at paras.
27 and 40; Bow Valley, at paras. 55-56), are no longer considered at the
second stage. This is because, as we have explained, these factors arise from
the relationship between the parties and are, therefore, properly
accounted for under the first stage proximity and reasonable foreseeability
analysis.
[40]
What, then, remains to be considered at the
second stage of the Anns/Cooper framework? In Cooper, this Court
identified factors which are external to the relationship between the parties,
including (1) whether the law already provides a remedy; (2) whether
recognition of the duty of care creates “the spectre of unlimited liability to
an unlimited class”; and (3) whether there are “other reasons of broad policy
that suggest that the duty of care should not be recognized” (para. 37). In
this way, the residual policy inquiry is a normative inquiry. It asks whether
it would be better, for reasons relating to legal or doctrinal order, or
reasons arising from other societal concerns, not to recognize a duty of care
in a given case.
[41]
The place within the Anns/Cooper
framework of this policy inquiry is significant. It follows the proximity and
foreseeability inquiries. The policy inquiry assesses whether, despite
the proximate relationship between the parties, and despite the
reasonably foreseeable quality of the plaintiff’s injury, the defendant should
nonetheless be insulated from liability (Cooper, at para. 30; Odhavji,
at para. 51). That it would limit liability in the face of findings of both
proximity and reasonable foreseeability makes plain how narrowly it should be
relied upon (Cooper, at para. 30, citing Yuen Kun Yeu v.
Attorney-General of Hong Kong, [1988] 1 A.C. 175 (P.C.); Edgeworth
Construction Ltd. v. N.D. Lea & Associates Ltd., [1993] 3 S.C.R. 206,
at p. 218). Only in rare cases — such as those concerning decisions of
governmental policy (Cooper, at paras. 38 and 53) or quasi-judicial bodies (ibid., at
para. 52; Edwards, at para. 19) — should liability be denied when a
defendant’s negligence causes reasonably foreseeable injury to a plaintiff with
whom he or she shares a close and direct relationship. In light of the above,
the stage at which certain factors are considered in the Anns/Cooper framework
is material.
[42]
In this case, the Chief Justice finds that, if
it were necessary to proceed to the second stage of the Anns/Cooper framework,
she would insulate Deloitte from liability based on the residual policy
consideration of indeterminacy (para. 166). We concede that indeterminate
liability may, in some cases, be a legitimate residual policy consideration (Cooper,
at paras. 37 and 54; Hercules, at para. 31). In our view, however,
rarely, if ever, should a concern for indeterminate liability persist after a
properly applied proximity and foreseeability analysis (Saadati, at
para. 34; Fullowka, at para. 70). Robust application of stage one of the
Anns/Cooper framework should almost always obviate concerns for
indeterminate liability. This follows from an appreciation of what
indeterminate liability, as a concept, actually means.
[43]
Indeterminate liability is liability of a
specific character, not of a specific amount. In particular,
indeterminate liability should not be confused with significant liability (Gross
v. Great-West Life Assurance Co., 2002 ABCA 37, 299 A.R. 142, at para. 38).
Certain activities — like flying commercial aircraft, manufacturing
pharmaceutical drugs, or auditing a large corporation — may well give rise to
significant liability. But such liability arises from the nature of the
defendant’s undertakings and of the severe but reasonably foreseeable scale of
injury that can result where such undertakings are negligently performed. This
explains the significant compensation which these high risk undertakings
typically attract. It also explains why contractual disclaimers limiting
liability may often be warranted (Edgeworth, at p. 220). In contrast,
the liability arising from these “high risk” undertakings may only be
characterized as “indeterminate” if the scope of such liability is impossible
to ascertain (Black’s Law Dictionary (10th ed. 2014), sub verbo
“indeterminate”). In other words, liability is truly “indeterminate” if “the
accepted sources of law and the accepted methods of working with those sources
such as deduction and analogy — are insufficient to resolve the question” (M.
V. Tushnet, “Defending the Indeterminacy Thesis”, in B. Bix, ed., Analyzing
Law: New Essays in Legal Theory (1998), 223, at pp. 224-25). More
specifically, there are three pertinent aspects to so-called “indeterminacy” in
these cases: (1) value indeterminacy (“liability in an indeterminate amount”);
(2) temporal indeterminacy (“liability . . . for an indeterminate time”); and
(3) claimant indeterminacy (“liability . . . to an indeterminate class”): Hercules,
at para. 31, citing Ultramares, at p. 444. Naturally, when a claim has
value, temporal, and claimant indeterminacy, our legal tools are insufficient
to resolve the quantum of infinite damages that will flow from such a claim.
[44]
All this said, it would be very difficult for
liability of an indeterminate character, so understood, to survive a robust
analysis of proximity and foreseeability at the first stage of the Anns/Cooper
framework. In cases of negligent misrepresentation or performance of a service,
the requisite proximity analysis will address claimant indeterminacy because
the class of claimants is determinate, including only those in respect
of whom the defendant undertook to act. Likewise, foreseeability, which is
constrained by the purpose of the undertaking in question, should address
concerns about value indeterminacy, because the value of damages is limited —
that is, determined — by the reasonably foreseeable quality of the
injury (Hercules, at para. 32). Finally, proximity and foreseeability
should both address temporal indeterminacy since the longer the period of time
over which injury is said to have occurred, the less likely the defendant
undertook to protect against it and the less foreseeable the injury, taken as a
whole. Hence Cardozo C.J.’s statement in the oft-cited Ultramares decision
that a duty which gives rise to indeterminacy “enkindle[s] doubt whether a flaw
may not exist in the implication of a duty that exposes to these consequences”
(p. 444; see also Weinrib, at p. 231; Beever, at p. 275). In other words, a
finding of indeterminate liability at the damages stage strongly suggests that
a legal error occurred at the duty stage, since a finding of a prima facie
duty of indeterminate scope underlies the resulting indeterminate liability.
[45]
We would add one final point. Indeterminate
liability is a residual policy consideration, nothing more. The presence of
indeterminacy need not be dispositive of liability in all cases. To approach
the analysis otherwise would transform indeterminate liability from a policy consideration
into a policy veto. While indeterminacy may militate against liability,
other policy considerations — such as the immense profit margins that “high
risk” actors often benefit from, or the extent to which “high risk” actors
voluntarily assume the risk of indeterminate liability — may ultimately justify
maintaining that liability, despite its indeterminacy (Beever, at p. 293).
Even, therefore, in the rare case where indeterminate liability survives the
proximity and foreseeability inquiries, it is not automatic that such
indeterminacy will necessarily govern (Fullowka, at para. 70).
Indeed, any so-called “indeterminate liability” which
survives stage one of the Anns/Cooper framework presumably arises from
the risk against which the defendant voluntarily undertook to protect the
plaintiff and, therefore, may justly and fairly result in liability.
B.
Application
[46]
Having set out the proper legal framework for
establishing liability in cases of pure economic loss arising from negligent
misrepresentation or performance of a service, we turn now to apply that
framework to the trial judge’s two findings of negligence in this case.
[47]
In summary, at the first stage of the Anns/Cooper
framework, a duty of care is established where proximity and reasonably
foreseeability of injury are found. In our view, Deloitte’s undertakings in
relation to soliciting investment, and the 1997 Audit, gave rise to proximate
relationships. The purpose of those undertakings, in turn, determines the type
of injury that was reasonably foreseeable as a result of Livent’s
reliance. Livent relied on the 1997 Audit for the purpose it was provided.
Thus, a resulting injury was reasonably foreseeable. The same cannot be said,
however, in respect of Deloitte’s negligent assistance in soliciting
investment.
[48]
At the second stage of the Anns/Cooper
framework, residual policy considerations may negate Deloitte’s duty of
care. But none apply to the negligent provision of the 1997 Audit.
(1)
Solicitation of Investment (August to October
1997)
(a)
Prima Facie Duty of Care
(i)
Proximity
[49]
The proximity analysis first asks whether the
relationship at issue falls within, or is analogous to, a previously recognized
category of proximity (Cooper, at para. 36; Edwards, at para. 9).
[50]
In Hercules, this Court found that an
auditor may be in a proximate relationship with its corporate client sufficient
to give rise to a duty of care. That proximate relationship was not, however,
between an auditor and its client at large. Rather, the recognized relationship
was limited to the preparation of a statutory audit (para. 14).
[51]
In this case, the asserted proximate
relationship is not so narrow in scope. Livent claims that Deloitte owed it a
duty of care in relation both to (1) the preparation of the 1997 Audit; and (2)
the approval of the Press Release and preparation of the Comfort Letter. We see
it as vital to the resolution of this case to distinguish between these two
sets of documents.
[52]
The mere fact that proximity has been recognized
as existing between an auditor and its client for one purpose is
insufficient to conclude that proximity exists between the same parties for all
purposes. As discussed above, an overly broad characterization of an
established category of proximity which fails to consider the scope of activity
in respect of which proximity was previously recognized, risks a premature
imposition of a prima facie duty of care. In our respectful view, this
very error impairs the reasons of the trial judge and the Court of Appeal. This
approach is fundamentally inconsistent with the framework set out by this Court
in Cooper. For this reason, we do not agree that this Court has
previously established a proximate relationship as between an auditor and its
client for the purposes of soliciting investment. In these circumstances, we
must undertake a full proximity analysis.
[53]
As we have indicated above, the full proximity
analysis in cases of negligent misrepresentation is focussed upon the purpose
of the defendant’s undertaking and the plaintiff’s reliance. From August to
October of 1997, the services which Deloitte provided to Livent — particularly
its ongoing assistance in relation to the Press Release and the provision of
the Comfort Letter — were undertaken for the purpose of helping Livent to solicit
investment. Given this undertaking, Livent was entitled to rely upon Deloitte
to carry out these services with reasonable care. From this, it follows that a
relationship of proximity arose in respect of the content of Deloitte’s
undertaking. Deloitte’s undertaking did not entitle Livent to rely
on Deloitte’s services and representations for all possible purposes.
Rather, the “close and direct” relationship which obligated Deloitte to act
with reasonable care was limited to the purpose for which Deloitte undertook to
act. In this regard, we agree with the Chief Justice that “[l]oss that results
from [Livent’s] inability to attract investment . . . may fall within
the scope of Deloitte’s duty of care”, though only in relation to the Press
Release and Comfort Letter (para. 153).
(ii)
Reasonable Foreseeability
[54]
Having established a relationship of proximity
for the purpose of soliciting investment, Livent asserts that the increase in
its liquidation deficit beginning in the fall of 1997 was a reasonably
foreseeable consequence of Deloitte’s negligence, because “[t]he false
financial picture that ought not to have been certified by Deloitte” was relied
upon by Livent to artificially extend its solvency (R.F., at para. 108). In
other words, had Deloitte resigned rather than continued to assist Livent in
soliciting investment, Livent would have known its actual finances and avoided
their interim deterioration. In our view, however, this type of injury was not
a reasonably foreseeable consequence of Deloitte’s negligent assistance in
soliciting investment. This follows from our earlier observations about how the
scope of the parties’ proximate relationship limits the type of injuries that
are reasonably foreseeable.
[55]
In cases of negligent misrepresentation or
performance of a service, a plaintiff’s injury will be reasonably foreseeable
where (1) the defendant should reasonably foresee that the plaintiff will rely
on his or her representation; and (2) reliance by the plaintiff would, in the
particular circumstances of the case, be reasonable (Hercules, at para.
27). Whether reliance is reasonable and reasonably foreseeable will turn on
whether the plaintiff had a right to rely on the defendant for that purpose.
Here, Livent argues that it detrimentally relied on Deloitte’s services and
representations to artificially extend the life of the corporation. This
reliance is not, however, tied to the solicitation of investment, but was a
matter of oversight of management. Phrased in terms of Deloitte’s undertaking,
during the fall of 1997 Deloitte undertook to assist Livent in soliciting
investment, not in oversight of management. Losses related to this undertaking
— for example, an inability to solicit investment because of Deloitte’s
negligence — may be recoverable from Deloitte. But losses outside the scope of
this undertaking, including those claimed here relating to a lack of oversight
of management extending Livent’s solvency, are not recoverable from Deloitte.
Simply put, Deloitte never undertook, in preparing the Comfort Letter, to
assist Livent’s shareholders in overseeing management; it cannot therefore be
held liable for failing to take reasonable care to assist such oversight. And,
given that Livent had no right to rely on Deloitte’s representations for a
purpose other than that for which Deloitte undertook to act, Livent’s reliance
was neither reasonable nor reasonably foreseeable. Consequently, the increase
in Livent’s liquidation deficit which arose from its reliance on the Press
Release and Comfort Letter was not a reasonably foreseeable injury.
[56]
This is not to say that Livent had no resources
for oversight at the time Deloitte assisted in soliciting investment. Indeed,
for internal oversight purposes, Livent could reasonably rely on Deloitte’s
1996 Audit. Unlike the Comfort Letter, the 1996 Audit was prepared for the
purpose of assisting shareholder oversight of management. As a consequence, its
negligent preparation could result in reasonably foreseeable injury flowing
from the shareholders’ inability to oversee management. The trial judge,
however, made a finding of fact that any negligence in Deloitte’s preparation
of the 1996 Audit caused no injury to Livent. As this finding has not been
cross-appealed by Livent, we make no further comment on it.
(b)
Residual Policy Considerations
[57]
Having concluded that no prima facie duty
of care arose in respect of Deloitte’s assistance in soliciting investment and
the resulting increase in Livent’s liquidation deficit, there is no need to
consider residual policy considerations.
(2)
1997 Clean Audit Opinion (April 1998)
(a)
Prima Facie Duty of Care
(i)
Proximity
[58]
This Court has previously established that an
auditor owes its corporate client a duty of care in the preparation of a
statutory audit. It follows that the established proximate relationship in Hercules
will be dispositive of the existence of a duty of care in this case, unless
the purpose of Deloitte’s undertaking to prepare such an audit in this case can
be distinguished from the undertaking in Hercules. As we will show, it
cannot.
[59]
In Hercules, at para. 48, this Court
cited Lord Oliver’s statement in Caparo, at p. 583, identifying the
purposes of a statutory audit:
It is the auditors’ function to ensure, so far as possible, that the financial information as to the
company’s affairs prepared by the directors accurately reflects the company’s
position in order first, to protect the company itself from the consequences
of undetected errors or, possibly, wrongdoing . . . and, second, to
provide shareholders with reliable intelligence for the purpose of enabling
them to scrutinise the conduct of the company’s affairs and to exercise their
collective powers to reward or control or remove those to whom that conduct has
been confided. [Emphasis added; emphasis in original deleted.]
[60]
These purposes, according to La Forest J., were
no different under the statutory audit provisions in Manitoba’s Corporations
Act, R.S.M. 1987, c. C225, which were at issue in Hercules.
Regarding the second purpose, this Court stated that a statutory audit was
necessary to “permit the shareholders, as a body, to make
decisions as to the manner in which they want the corporation to be managed, to
assess the performance of the directors and officers, and to decide whether or
not they wish to retain the existing management or to have them replaced” (Hercules,
at para. 49). The purpose of the audited reports then “was, precisely, to
assist the collectivity of shareholders of the audited companies in their task
of overseeing management” (ibid.).
[61]
No party before us has suggested that the purposes
for which a statutory audit is prepared, and which have been recognized in
Canadian law for 20 years, have changed. These purposes are consistent with the
governing statute in this case: Ontario’s Business Corporations Act,
R.S.O. 1990, c. B.16 (“OBCA”). In particular, ss. 153 and 154 of the OBCA
require Deloitte, as Livent’s auditor, to examine Livent’s financial statements
in order for Livent’s directors to fulfill their obligation to place a yearly
statutory audit before its shareholders at the annual general meeting. And,
while the engagement letters between Deloitte and Livent indicated that the
detection of fraud was not guaranteed even where Deloitte acted with all
reasonable care, they did not disclaim liability for negligently failing to
uncover fraud. Thus, in our view, Deloitte did not alter the purpose for which
it undertook to provide the 1997 Audit or disclaim liability in relation to
that purpose.
[62]
Given the foregoing, no basis exists for distinguishing
the purpose of the statutory audit in this case from the purpose which underlay
the statutory audit in Hercules. It follows that proximity is
established between Livent and Deloitte in relation to the statutory audit, on
the basis of the previously recognized proximate relationship identified by
this Court.
(ii)
Reasonable Foreseeability
[63]
Livent says that the increase in its liquidation
deficit was a reasonably foreseeable consequence of Deloitte’s negligent audit,
because the audit preserved a false financial picture upon which Livent relied
to artificially extend its solvency and delay filing for bankruptcy. In other
words, if Deloitte had taken reasonable care in auditing Livent, then Livent
would have discovered the fraud and avoided the interim deterioration of its
assets.
[64]
In our view, this type of injury was a
reasonably foreseeable consequence of Deloitte’s negligent audit. The purpose
of the 1997 Audit was, as this Court described in Hercules, two-fold:
(1) to protect the company from the consequences of undetected errors and
wrongdoing; and (2) to provide shareholders with reliable intelligence enabling
oversight (para. 48, citing Caparo, at p. 583). Those purposes, as we have already described in our discussion of
proximity generally, inform the scope of reasonably foreseeable injury.
Specifically, at the time Deloitte undertook to provide the 1997 Audit, Livent
was entitled to rely on Deloitte to take reasonable care in doing so for these
recognized purposes. Livent’s reliance on Deloitte for the purpose of
overseeing the conduct of management was therefore both reasonable and
reasonably foreseeable. And, as Livent’s injury arises from its detrimental
reliance, the injury linked to that reliance is itself reasonably foreseeable.
[65]
It follows that the type of injury Livent
suffered here was a reasonably foreseeable consequence of Deloitte’s
negligence. Through the 1997 Audit, Deloitte undertook to assist Livent’s
shareholders in scrutinizing management conduct. By negligently conducting the audit, and impairing Livent’s
shareholders’ ability to oversee management, Deloitte exposed Livent to
reasonably foreseeable risks, including “business losses” that would have been
avoided with a proper audit. Indeed, the risk of injury flowing from undetected
fraud is precisely the type of injury statutory audits seek to avoid.
[66]
We add one final point in this regard. In Hercules
(at para. 48), this Court cited Caparo for the proposition that
statutory audits are conducted, in part, “to provide shareholders with reliable
intelligence for the purpose of enabling them to scrutinise the conduct of the
company’s affairs”. If subsequent business decisions that would not have
survived such scrutiny do not fall within the scope of an auditor’s duty of
care, one wonders what injury, if any, could result in liability for a
negligent audit with respect to this recognized auditing purpose. Corporate
scrutiny connotes both knowledge of problems within the corporation, and
decisions reflecting an appreciation of those problems. Indeed, it is
only by acting on the knowledge contained in an audit that is the product of
reasonable care that corporation’s avoid losses that would have otherwise
occurred without that audit.
(b) Residual
Policy Considerations
[67]
Having found a proximate relationship based on a
previously recognized category, we need not consider residual policy
considerations to negate or limit the scope of the duty of care (Cooper,
at para. 39). Nonetheless, as the Chief Justice finds, in the alternative, that
the policy consideration of indeterminate liability would deny recovery in this
case (paras. 165-166), it is useful to examine how the established proximate
relationship engaged in this case precludes indeterminate liability.
[68]
As discussed, the character of indeterminacy in
these cases has three pertinent aspects: (1) temporal; (2) claimant; and (3)
value (Hercules, at para. 31, citing Ultramares, at p. 444). None
of them arise here, consistent with our earlier observation that a robust
application of the Anns/Cooper framework will usually, if not always,
preclude the imposition of liability that is in any way indeterminate (Saadati,
at para. 34; Fullowka, at para. 70).
[69]
Here, as to temporal indeterminacy, any
suggestion that Livent could recover indefinitely from the negligent
preparation of the 1997 Audit fundamentally mischaracterizes the scope of annual
statutory audits. The injury flowing from the 1997 Audit could not be assessed
over an indeterminate time window. Rather, statutory audits must occur
annually (OBCA, s. 154). As a result, the liability that could attach to
one year’s negligent audit could not extend beyond the following year’s audit,
which would effectively supersede the prior year’s audit as the factual and
legal cause of the injury alleged. Put simply, the time window during which
liability might flow from a single negligent statutory audit is not
indeterminate. It is one year.
[70]
Regarding claimant indeterminacy, the class of
claimants here could not be further from indeterminate: it represents
one single claimant — Livent. In Hercules, this Court noted that “audit
reports will be relied on by many different people (e.g., shareholders,
creditors, potential take-over bidders, investors, etc.)” (para. 32). That
claim gave rise to indeterminate liability because the class of claimants (the
“many different people”) was indeterminate. For example, any number of
investors could rely on an audit to inform their investment decisions. This
case, in contrast, is entirely distinguishable. The fact of a single potential
claimant raises no concern of claimant indeterminacy.
[71]
We note, parenthetically, that Deloitte
characterizes Livent’s claim as, in reality (that is, in light of its
insolvency), a claim by its various stakeholders. But this submission conflates
the plaintiff, Livent, with the stakeholders who may benefit from the success
of Livent’s claim, thereby disregarding Livent’s separate corporate
personality. More importantly, it directly contradicts this Court’s holding in Hercules
that a derivative action — which, too, could benefit various stakeholders —
is the appropriate vehicle for a claim regarding a negligent statutory audit
(paras. 1 and 58-64).
[72]
The absence of temporal and claimant
indeterminacy in turn explains the absence of value indeterminacy in this case.
Here, Livent’s improvident use of investment funds could not result in
liability of an indeterminate value. Rather, the liability in this case
could not exceed the losses of a single corporation. When undertaking to audit
Livent, Deloitte must have known that Livent was a substantial corporation, and
in turn, that it could suffer large financial losses if misinformed by its
auditor. But significant liability is distinct from indeterminate
liability (Gross, at para. 38). Put differently, Deloitte was, indeed,
“able to gauge the scale of its potential liability” before undertaking the
1997 Audit (Chief Justice’s reasons, at para. 176). This is a far cry from the
limitless potential quantum of lost investments by innumerable third parties
relying on audit statements for their own investment decisions (see Hercules,
at para. 32). The concern that Deloitte did not know “the scope of [its]
liability at the time [it took] on [its] engagement” with Livent (Chief
Justice’s reasons, at para. 176) conflates indeterminate liability with undetermined
liability.
[73]
The Chief Justice describes the liability sought
to be imposed here as “indeterminate” because Livent’s reliance purportedly
fell outside the scope of Deloitte’s undertaking (para. 170). We disagree. To the
contrary, value indeterminacy is limited by the purposes for which the audit
was prepared, and Livent’s reliance fell squarely within that purpose. In Hercules,
this Court rejected a claim by investors because they might use audit reports
for a “collateral or unintended purpose” (para. 38), thereby giving rise to
indeterminate liability (since the variety of purposes to which an audit may be
put is potentially limitless). But that is not the case here. The 1997 Audit
was prepared for the express purpose of oversight of management by Livent’s
shareholders, and the loss at issue flowed from those shareholders’ inability
to conduct that oversight. It follows that the purposes underlying the 1997
Audit — of which, as we have explained, there are only two — do not give rise
to potential indeterminacy, and by corollary, relate to potential losses that,
too, are not indeterminate. This is not a case where, for example, an unknown
third-party relied on an audit to launch a takeover bid — a purpose outside the
scope of the audit (Hercules, at para. 32). Rather, this is a case in
which an established purpose of the audit was undermined, and where losses
predictably flowed from that failed purpose (Haig, at pp. 478-79).
[74]
Here, one claimant (Livent) is suing
Deloitte for failing to satisfy one of two auditing purposes (oversight
of management) which would have been superseded by an audit one year
later. No indeterminate liability arises in this context. In this regard, La
Forest J.’s remarks for this Court in Hercules (at para. 37) are
apposite:
. . . in cases where the defendant
knows the identity of the plaintiff (or of a class of plaintiffs) and where the
defendant’s statements are used for the specific purpose or transaction for
which they were made, policy considerations surrounding indeterminate liability
will not be of any concern since the scope of liability can readily be
circumscribed.
[75]
The lack of indeterminacy here between Deloitte
(an auditor) and Livent (its corporate client) is unsurprising given (1) this
Court’s recognition in Hercules that a duty of care exists between an
auditor and its corporate client in relation to a statutory audit; and (2) this
Court’s direction in Cooper that the second stage of the Anns/Cooper framework
need not be considered where a previously recognized proximate relationship
exists.
(c) Remoteness
[76]
The Chief Justice says that Deloitte’s complete
immunity from liability would similarly flow from a remoteness analysis (para.
173). We disagree.
[77]
In a successful negligence action, a plaintiff
must demonstrate that (1) the defendant owed him or her a duty of care; (2) the
defendant’s behaviour breached the standard of care; (3) the plaintiff
sustained damage; and (4) the damage was caused, in fact and in law, by the
defendant’s breach (Mustapha v. Culligan of Canada Ltd., 2008 SCC 27,
[2008] 2 S.C.R. 114, at para. 3; Saadati, at para. 13). The principle of
remoteness, or legal causation, examines whether “the
harm [is] too unrelated to the wrongful conduct to hold the defendant fairly
liable” (Mustapha, at para. 12, citing A.M. Linden and B. Feldthusen, Canadian
Tort Law (8th ed. 2006), at p. 360; see also Saadati, at para. 34).
It is trite law that “it is the foresight of the reasonable man which alone can
determine responsibility” (Mustapha, at paras. 11-13, citing Overseas
Tankship (U.K.) Ltd. v. Morts Dock & Engineering Co., [1961]
A.C. 388 (P.C.), at p. 424). Therefore, injury will be sufficiently related to
the wrongful conduct if it is a reasonably foreseeable consequence of that
conduct.
[78]
We acknowledge that remoteness, so understood,
overlaps conceptually with the reasonable foreseeability analysis conducted in
the prima facie duty of care analysis (Mustapha, at para.
15). But the two are distinct: the duty analysis is concerned with the type
of injury that is reasonably foreseeable as flowing from the
defendant’s conduct, whereas the remoteness analysis is concerned with the
reasonable foreseeability of the actual injury suffered by the plaintiff
(L. N. Klar and C. S. G. Jefferies, Tort Law, (6th ed. 2017), at p. 565:
“Remoteness questions deal with how far liability should extend in reference to
injuries caused to the plaintiff, once a duty relationship
. . .[has] been established” (emphasis added)).
[79]
Remoteness, at its core, turns on the reasonable
foreseeability of the actual injury suffered by the plaintiff. But, and as we
have explained, the loss here — stemming from Deloitte’s failure to
fulfill the specific undertaking it made to Livent — was reasonably
foreseeable. It follows that remoteness is not a bar to Livent’s recovery.
[80]
Nonetheless, the Chief Justice holds that
Livent’s loss is too remote because it cannot be attributed to its
shareholders’ reliance on the 1997 Audit for the purpose of overseeing
management. Specifically, she says that “Livent did not prove and the trial
judge did not find that Livent’s shareholders relied on Deloitte’s negligent
audit statements, or that had they received and relied on accurate statements,
they would have acted in a way that would have prevented Livent from carrying
on business and diminishing its assets” (para. 159). With respect, we see the
matter differently. In its amended statement of claim, Livent advanced its
theory of impaired shareholder reliance (A.R., vol. III, at p. 112):
As a consequence of the Auditors’
breaches of duty, they missed repeated opportunities to uncover and reveal the
accounting irregularities and errors being orchestrated by Drabinsky and
Gottlieb. Consequently, the Livent Stakeholders were deprived of the
opportunity to exercise their collective will by, inter alia, ousting Drabinsky
and Gottlieb thereby avoiding further losses, damages and liabilities incurred
by Livent and the Livent Stakeholders. [Emphasis added.]
[81]
Similarly, when the trial judge summarized
Livent’s position at trial, he wrote (at para. 23):
[Deloitte’s] alleged negligent issuance
of unqualified opinions, in turn, deprived the honest directors and
shareholders of the opportunity to put a stop to the fraud, and the losses
eventually caused to the company by the fraud, at an earlier date. [Emphasis
added.]
[82]
The trial judge accepted this theory: “I believe
that the honest directors and innocent shareholders in this case were entitled
to rely on Deloitte’s audits to discharge their supervisory task” (para. 341).
Nonetheless, the Chief Justice would deny liability because, in her view,
“Livent offered no proof to support” the assertion that its shareholders would
have called management to account had they received a non-negligent audit in
March of 1998 (para. 161). But this is precisely what the record shows.
On November 18, 1998, Livent received a prudently prepared audit of its
restated 1997 financial statements. This prudent audit disclosed a
“significant, if not staggering” difference in reported income (trial reasons,
at para. 15). Specifically, the prudent audit uncovered an additional loss of
over $50 million during the 1997 fiscal year.
[83]
Livent’s response upon receipt of this audit
report is telling and, in our view, belies any suggestion that informed
shareholder scrutiny would have permitted Livent to act in any manner other
than expected. That same day, “Drabinsky and Gottlieb were dismissed for
cause . . . and Livent voluntarily made a petition for bankruptcy protection”
in the United States (trial reasons, at para. 16). The next day, “Livent
filed for protection under the Companies’ Creditors Arrangement Act,
R.S.C. 1985, c. C-36 in Canada” (ibid.). It is difficult to conceive of a clearer demonstration of when
and how Livent’s shareholders would have “prevented Livent from carrying on
business and diminishing its assets” had Deloitte prepared a prudent audit in
March of 1998 (Chief Justice’s reasons, at para. 159).
[84]
On this record, any speculation that Livent’s
shareholders might have done nothing in response to rampant fraud is simply
unsustainable. Indeed, the similarly speculative claim that Livent’s
shareholders might have done nothing when confronted with a notional
liquidation deficit of approximately $365 million in early April 1998 (when we
know that the actual liquidation deficit of $413.83 million in mid-November
1998 prompted Livent’s immediate petition into bankruptcy) is — also in light
of this record — equally improbable.
[85]
The Chief Justice, however, advances one
additional basis upon which to deny Deloitte’s liability: that Deloitte should
be liable “only for the information” it provided (the audit opinion),
not “for the decision[s] to be informed by it” (para. 171). This proposition
does not preclude Deloitte’s liability here.
(d)
Additional Basis for Limiting Liability:
Information, Advice and the “SAAMCO Principle”
[86]
The Chief Justice seeks to limit Deloitte’s
liability because it merely provided “information” to Livent, not “advice”,
and, as a consequence, did not “assume responsibility for what the shareholders
decide[d] to do with that information” (para. 170). In this regard, she cites
(at para. 149) the following passage from Hughes-Holland v. BPE Solicitors,
[2017] UKSC 21, [2017] 2 W.L.R. 1029, at para. 44:
A valuer or a conveyancer, for example, will rarely
supply more than a specific part of the material on which his client’s decision
is based. He is generally no more than a provider of what Lord Hoffmann [in SAAMCO]
called “information”. At the opposite end of the spectrum, an investment
adviser advising a client whether to buy a particular stock, or a financial
adviser advising whether to invest self-invested pension fund in an annuity are
likely, in Lord Hoffmann’s terminology, to be regarded as giving “advice”.
Between these extremes, every case is likely to depend on the range of matters
for which the defendant assumed responsibility and no more exact rule can be
stated.
[87]
It is true that Deloitte, as auditor, did not
advise Livent on its business decisions. But it nevertheless “assumed
responsibility” over providing accurate information upon which the shareholders
could rely to scrutinize management conduct. Deloitte does not escape liability
simply because a negligent audit, in itself, cannot cause financial harm.
Audits never, in themselves, cause harm. It is only when they are
detrimentally relied upon that tangible consequences ensue.
[88]
The consequences of this line of reasoning
should not be understated. By effectively limiting an auditor’s liability to
the harms inherent in the negligent audit, while excluding those harms which
are a reasonably foreseeable consequence of that negligent audit (i.e., an
inability to oversee management), a central purpose for which a statutory audit
is prepared is undercut, thereby immunizing auditors from liability for any act
of negligence impairing oversight. This holding is inconsistent with the
Court’s jurisprudence (which prescribes recovery for reasonably foreseeable
injury, even if that injury is not technically immediate) and is in tension
with Hercules (which sought to limit auditors’ liability for statutory
audits to determinate corporate claims rather than indeterminate stakeholder
claims, not to insulate auditors from virtually all liability).
[89]
The Chief Justice’s reliance on the so-called “SAAMCO
principle” — derived from the House of Lords’ decision in South Australia
Asset Management Corp. v. York Montague Ltd., [1997] A.C. 191 (“SAAMCO”);
see also Nykredit Mortgage Bank plc. v. Edward Erdman Group Ltd. (No. 2),
[1997] 1 W.L.R. 1627 (H.L.); Platform Home Loans Ltd. v. Oyston Shipways
Ltd., [2000] 2 A.C. 190) (H.L.); and BPE Solicitors — is in our
respectful view mistaken for the same reason as her reliance on the dichotomy
between information and advice as described in BPE Solicitors. Her
reliance on both U.K. decisions is premised on how Deloitte never assumed responsibility
for injuries resulting from Livent’s operations — either because those injuries
were not caused by the mere information contained in the 1997 Audit (BPE
Solicitors), or because those injuries did not flow from what was incorrect
in the 1997 Audit (SAAMCO). But, in assuming responsibility for
informing shareholder scrutiny of management, Deloitte did assume
responsibility for injuries flowing from that impaired scrutiny.
[90]
In simple terms, the SAAMCO principle
denies recovery for pure economic loss where the plaintiff’s injury would still
have occurred even if the defendant’s negligent misrepresentation were
factually true. Rephrased as a test, the principle denies liability where an alternate
cause that is unrelated to the defendant’s negligence is the true
source of the plaintiff’s injury. This alternate and unrelated cause explains
why the truth of the negligent misstatement has no bearing on the plaintiff’s
ultimate injury (i.e., because, even with that truth, the injury would have
flowed as a result of the alternate cause). Or, framed from the perspective of
the duty of care, the defendant could not have undertaken to protect against
injuries that would have been caused by alternate and unrelated sources. In SAAMCO,
the House of Lords explained the principle with the commendably Albertan
example of a mountaineer:
A mountaineer about to undertake a
difficult climb is concerned about the fitness of his knee. He goes to a doctor
who negligently makes a superficial examination and pronounces the knee fit.
The climber goes on the expedition, which he would not have undertaken if the
doctor had told him the true state of his knee. He suffers an injury which is
an entirely foreseeable consequence of mountaineering but has nothing to do
with his knee. [p. 213]
[91]
In this example, the doctor’s negligent
misrepresentation (the positive knee diagnosis) is a cause that is alternate
and unrelated to the cause of the mountaineer’s injury (a mountaineering
accident unrelated to the knee, for example, an avalanche). As a result, even
had the doctor’s negligent misrepresentation been true (i.e., even if the
mountaineer’s knee had been fit), the injury would still have occurred, since
the fitness of his knee would not have prevented the injury caused by the
avalanche. In other words, the doctor could not have undertaken to protect
against an avalanche, which is unrelated to his or her diagnosis.
[92]
Deloitte is unlike the doctor. Deloitte’s
negligence related to a statutory audit, a purpose of which is management
oversight by shareholders. That oversight, in turn, informs (or is related to)
subsequent business decisions by the corporation. It follows that Livent’s
trading losses were not an alternate and unrelated cause of Livent’s injury. To
the contrary, the shareholders’ capacity to oversee the conduct of Livent’s
business was entirely dependent upon the statutory audit preceding that
oversight. In particular, the shareholders’ reliance on that audit and the
audit’s portrayal of the directors and their business ventures was a critical
component of their oversight of management — which, we reiterate, was the very
purpose in respect of which Deloitte undertook to act with reasonable care.
[93]
It therefore follows from a proper understanding
of the SAAMCO principle that it does not limit Deloitte’s liability in
respect of the 1997 Audit.
[94]
We add, however, that a full consideration of SAAMCO’s
application in Canadian law by this Court should await future cases, with
greater consideration of the principle by lower courts, more comprehensive
submissions by counsel, and critically, with facts more analogous to those in
the SAAMCO jurisprudence. SAAMCO addressed whether a negligent
valuator should be liable, not only for the difference between their valuation
and a prudent valuation, but also for a subsequent drop in the market which
exacerbated the lenders’ losses. In this specific context, the loss
attributable to the negligent valuation is easily extricable; it is the
difference between the negligent valuation and a prudent valuation. But the
same cannot be said in the context of statutory audits, where the “cause” of
future losses flowing from future commercial activity is far more complex to
isolate. Indeed, as Lord Sumption noted in BPE Solicitors (at para. 46):
Where the loss arises from a variety of
commercial factors which it was for the claimant to identify and assess, it
will commonly be difficult or impossible as well as unnecessary to quantify and
strip out the financial impact of each one of them.
[95]
In any event, the SAAMCO principle, at
least in the manner the Chief Justice applies it here, conflicts with Canadian
jurisprudence. Under established Canadian tort law, a defendant is liable if
the plaintiff proves — in respect of causation — that the defendant caused
the plaintiff’s injury in fact (Clements v. Clements, 2012 SCC 32,
[2012] 2 S.C.R. 181, at para. 8) and in law (Mustapha, at paras. 12-13).
As we have already explained, Livent proved both in respect of its injuries
after the 1997 Audit. It follows that Deloitte is liable for Livent’s injuries
following that audit. Admittedly, a defendant may limit its liability, even if
the plaintiff proves legal and factual causation, where the defendant proves
that some of the plaintiff’s injury would have still occurred without the
defendant’s negligence because of alternate hypothetical causes (Rainbow
Industrial Caterers Ltd. v. Canadian National Railway Co., [1991] 3 S.C.R.
3, at pp. 15-16). But those alternate hypothetical causes were already
accounted for in the trial judge’s 25 percent reduction in damages (trial
reasons, at paras. 324-26). And, in so far as the Chief Justice holds that
Livent failed to prove that alternate hypothetical causes did not cause the
remaining 75 percent of damages, she disregards that it is Deloitte, not
Livent, who bears the burden of proving that liability should be limited in
this fashion (Rainbow Industrial Caterers, at pp. 15-16).
C.
Defences
[96]
Finally, having concluded that we would uphold
the trial judge’s finding that Deloitte is liable for its negligence in
relation to the statutory audit, we must consider the two defences Deloitte
advanced before this Court. First, Deloitte submits that both lower courts
erred in failing to find that Livent’s action was not barred by the defence of
illegality. Secondly, Deloitte submits that, even had Livent’s action not been
barred for illegality, Deloitte should only be liable for part of the injury
due to Livent’s contributory fault.
[97]
Both defences rely on the applicability of the
doctrine of corporate identification. As the wrongdoing at issue was not that
of Livent’s but of its directors Drabinsky and Gottlieb, Deloitte cannot
succeed on either defence unless it can show that the fraudulent acts of
Livent’s employees should be attributed to the corporation. The corporate
identification doctrine is not, however, a standalone principle; rather, it is
a means by which acts may be attributed to a corporation for the particular
purpose or defence at issue. It follows that corporate identification must be
analyzed independently for each defence.
(1)
Illegality
[98]
The defence of illegality bars
an otherwise valid action in tort on the basis that the plaintiff has engaged
in illegal or immoral conduct and, therefore, should not recover (Hall v.
Hebert, [1993] 2 S.C.R. 159, at p. 169; British Columbia v.
Zastowny, 2008 SCC 4, [2008] 1 S.C.R. 27, at para. 20). Grounded in public
policy, it is available in very “limited” circumstances, only where it is
necessary to preserve the “integrity of the justice system” (Hall, at
pp. 179-80). And, the integrity of the justice system will only be compromised
where a “damage award in a civil suit would, in effect,
allow a person to profit from illegal or wrongful conduct, or would permit an
evasion or rebate of a penalty prescribed by the criminal law” (Hall,
at p. 169; Zastowny, at para. 3).
[99]
Here, the only illegal or wrongful conduct was
committed by Livent’s directors, Drabinsky and Gottlieb, and portions of
management. It follows that, for Deloitte to rely on the defence of illegality,
it must be able to attribute the “illegal or wrongful conduct” of certain
directors and managers to Livent itself, the plaintiff in this case.
[100]
The test for corporate attribution was set out
by this Court in Canadian Dredge & Dock Co. v. The Queen, [1985] 1
S.C.R. 662. To attribute the fraudulent acts of an employee to its corporate
employer, two conditions must be met: (1) the wrongdoer must be the directing
mind of the corporation; and (2) the wrongful actions of the directing mind
must have been done within the scope of his or her authority; that is, his or
her actions must be performed within the sector of corporate operation assigned
to him. For the purposes of this analysis, an individual will cease to be a
directing mind unless the action (1) was not totally in fraud of the
corporation; and (2) was by design or result partly for the benefit of the
corporation (pp. 681-82 and 712-13).
[101]
At first glance, these conditions might seem to
be satisfied in this case. Drabinsky and Gottlieb were directing minds, acting
within the sector of corporate operations assigned to them, whose fraud was
genuinely designed and executed in an attempt to assist Livent through the
artificial extension of its life. Indeed, the application of the doctrine in this
case would be consistent with the factually analogous decision in Hart
Building Supplies Ltd. v. Deloitte & Touche, 2004 BCSC 55, 41
C.C.L.T. (3d) 240. There, the test laid down by this Court in Canadian
Dredge was strictly applied in the context of a civil claim for auditor’s
negligence and was satisfied. The court attributed the fraudulent acts of the
“alter ego and directing mind” to the auditor’s corporate client and barred
recovery for the auditor’s negligent preparation of a statutory audit.
[102]
In our view, however, a strict application of
this Court’s decision in Canadian Dredge was not warranted in Hart,
and is not warranted here. It must be recalled that Canadian Dredge was
decided in the context of criminal liability. Accordingly, the underlying question
there was who should bear the responsibility for the criminal actions of a
corporation’s directing mind. Consequently, the policy factors identified
therein which weigh in favour of imputing a corporation with the illegality or
wrongdoing of its directing mind flow from the “social purpose” of holding a
corporation responsible for the criminal acts of its employees where
those acts are designed and carried out, at least in part, to benefit the
corporation (Canadian Dredge, at p. 704).
[103]
However, as Estey J. himself recognized, the
doctrine is only one of “judicial necessity” and where its application “would
not provide protection of any interest in the community” or “would not
advantage society by advancing law and order”, the rationale for its application
“fades away” (Canadian Dredge, at pp. 707-8 and 718-19). While public
policy and judicial necessity may favour imputing the corporation with the
actions of its directing minds in certain criminal prosecutions, the same
cannot be said of attributing the actions of a directing mind for the purposes
of a civil suit in the context of an auditor’s negligent preparation of a
statutory audit. As indicated above, the very purpose of a statutory audit is
to provide a means by which fraud and wrongdoing may be discovered. It follows
that denying liability on the basis that an individual within the corporation
has engaged in the very action that the auditor was enlisted to protect against
would render the statutory audit meaningless (D. L. MacPherson, “Emaciating the
Statutory Audit — A Comment on Hart Building Supplies Ltd. v. Deloitte &
Touche” (2005), 41 Can. Bus. L.J. 471). As Livent submitted, it
would be perverse to deny auditor’s liability for negligently failing to detect
fraud “where the harm [to the corporation] is likely to occur and likely to be
most serious” (R.F., at para. 94).
[104]
While, therefore, this Court’s decision in Canadian
Dredge remains the authoritative test for the application of the corporate
identification doctrine, we would reaffirm one qualification. The principles
set out in Canadian Dredge provide a sufficient basis to find
that the actions of a directing mind be attributed to a corporation, not a necessary
one (pp. 681-82). As a principle that is grounded in policy, and which only
serves as a means to hold a corporation criminally responsible or to deny civil
liability, courts retain the discretion to refrain from applying it where, in
the circumstances of the case, it would not be in the public interest to do so.
And where, as here, its application would render meaningless the very purpose
for which a duty of care was recognized, such application will rarely be in the
public interest. If a professional undertakes to provide a service to detect
wrongdoing, the existence of that wrongdoing will not normally weigh in favour
of barring civil liability for negligence through the corporate identification
doctrine. (That said, we leave for another day the question of whether the same
is true in the context of a “one man” corporation, where the sole director and
shareholder hires the auditor to uncover the wrongful action which he, himself,
carries out: Stone & Rolls Ltd.
(in liquidation) v. Moore Stephens,
[2009] UKHL 39, [2009] 1 A.C. 1391; see also 373409
Alberta Ltd. (Receiver of) v. Bank of Montreal,
2002 SCC 81, [2002] 4 S.C.R. 312, at para. 22; Bilta (U.K.) Ltd. (in liquidation) v. Nazim (No. 2), [2015] UKSC 23, [2016] A.C. 1, at para. 30.)
[105]
Finally, given the limited application of the
defence of illegality, as recognized by this Court in Hall and Zastowny, we find no further compelling reason
to justify the use of the corporate identification doctrine in these circumstances.
(2)
Contributory Fault
[106]
In the alternative, Deloitte submits that the
Court of Appeal erred in holding Deloitte liable for the entirety of the proven
loss, and specifically that Livent should have been found contributorily at
fault in accordance with s. 3 of the Negligence Act, R.S.O. 1990, c.
N.1:
In any action for damages that is
founded upon the fault or negligence of the defendant if fault or negligence is
found on the part of the plaintiff that contributed to the damages, the court
shall apportion the damages in proportion to the degree of fault or negligence
found against the parties respectively.
[107]
Again, the only conduct implicating Livent in
this case was committed by Livent’s directors, Drabinsky and Gottlieb, and
portions of management. It follows that, for Deloitte to rely on the defence of
contributory fault, it must be able to attribute the conduct of certain
directors and managers to Livent itself.
[108]
Unlike the discretionary illegality doctrine,
Deloitte notes that s. 3 of the Negligence Act is mandatory (“. . . the
court shall apportion the damages . . .”), and argues that corporate
identification must be permitted because “the application of the
corporate identification doctrine must be tailored to the terms of the
particular substantive rule it serves” (A.F., at para. 132, citing C.A.
reasons, at para. 157). This argument, however, misunderstands what the Negligence
Act actually makes mandatory. The Negligence Act requires that a
plaintiff’s fault be factored into the apportionment of damages. But corporate
identification is a prerequisite to the plaintiff, Livent, being at fault. In
other words, Deloitte’s claim that s. 3 of the Negligence Act requires
that Livent bear its share of the fault presupposes corporate identification,
in effect, putting the cart before the horse. The Negligence Act only
makes contribution by a negligent plaintiff mandatory; it does not make
attribution of negligence to a plaintiff mandatory.
[109]
In any event, we repeat our earlier conclusion
that where, as here, the use of the corporate identification doctrine would
undermine the very purpose of establishing a duty of care, it will rarely be in
the public interest to apply it. A negligent auditor cannot limit liability
for its own negligence by attributing to the corporation the wrongful acts of
its employees, such acts being the very conduct that the auditor undertook to
uncover. Additionally, had Deloitte sought to limit its liability through
apportionment, it need not have relied on the doctrine of corporate identification
at all. Specifically, Deloitte could have brought third party claims against
the guilty parties, Drabinsky and Gottlieb, for their wrongful actions. For
whatever reason, it chose not to do so. Nonetheless, the availability of a
third party claim against a fraudulent director weighs against the application
of the doctrine. In this case, it is not in the public interest to undermine
separate legal personality where the wrongdoer could have been properly named
as a third party.
D.
Conclusion
[110]
It follows from the foregoing that we would
allow the appeal, but only in part.
[111]
In our view, the trial judge and Court of Appeal
erred in finding that Deloitte’s negligence in relation to the Press Release
and Comfort Letter resulted in injuries that were reasonably foreseeable in
light of the proximate relationship between the parties. At that time,
Deloitte’s services were engaged for the purpose of soliciting investment, not
management oversight. As Livent’s losses did not flow from a failure to solicit
investment, we would deny recovery for the increase in Livent’s liquidation
deficit beginning in the fall of 1997.
[112]
We would, however, allow recovery for the
increase in Livent’s liquidation deficit which followed the 1997 Audit. We
agree with the trial judge that “Deloitte should not have signed off on the
1997 Audit in early April 1998” (para. 242) and that the increase in Livent’s
liquidation deficit which followed fell within the duty of care owed by
Deloitte to Livent in relation to the preparation of a statutory audit, the
express purpose of which was to assist Livent in management oversight.
[113]
The trial judge assessed Livent’s damages
following the 1997 Audit at $53.9 million (para. 306, fn. 188, and para. 369,
fn. 228). Applying the trial judge’s 25 percent contingency reduction to this
amount results in a final damages assessment of $40,425,000. This is the amount
for which Deloitte is liable.
[114]
Throughout these proceedings, the parties have
primarily framed this dispute as one in negligence. Indeed, this was noted by the
trial judge (at para. 47). At trial, Livent conceded that its losses for
negligent performance of a service or breach of contract would be identical (ibid.).
The trial judge agreed, finding that Livent’s claim in contract “succeed[ed]
. . . for the [same] reasons” as its claim of negligent performance
of a service and that the elements of its claim in contract were “incorporated
by reference to the finding of ‘negligence’” (para. 243). Given the above, we
would impose the same quantum of liability on Deloitte for the concurrent claim
in breach of contract.
[115]
Accordingly, the appeal is allowed in part. The
amount of the trial award is reduced from $84,750,000 to $40,425,000. Livent
shall have its costs throughout.
The reasons of McLachlin C.J. and Wagner and
Côté JJ. were delivered by
The Chief Justice —
[116]
Garth Drabinsky and Myron Gottlieb built a North
American theatre empire that came to be known as Livent Inc. Seeking ever more
spectacular success, they resorted to manipulating the company’s financial
records. When the scheme came to light, Livent collapsed. Its assets were
liquidated. Drabinsky and Gottlieb went to jail.
[117]
This is among the many lawsuits that followed.
The courts below held that Deloitte & Touche, a firm of accountants and
Livent’s auditor, breached the duty of care it owed to Livent in failing to
detect and expose Livent’s fraud, as a result of which Livent was able to
continue operations and continue losing money — money it now claims from
Deloitte.
[118]
I agree with the courts below that Deloitte owed
a duty of care to Livent, which it breached when it failed to discover and
expose Livent’s fraud in the audited statements it prepared. However, I do not
agree that Deloitte is liable for virtually all the loss that befell Livent as
it pursued its precipitous decline into insolvency through doomed investments.
I would allow the appeal.
I.
Facts
[119]
The saga that led to these proceedings began in
1989 when two would-be entertainment moguls, Drabinsky and Gottlieb, launched a
takeover bid of their employer, Cineplex Odeon Corporation. When the bid
failed, the pair formed MyGar Partnership, which purchased all of the assets
and some of the liabilities of Cineplex’s live entertainment division. These included
Toronto’s Pantages Theatre and the rights to a wildly successful show, The
Phantom of the Opera. MyGar carried on business through its nominee
corporation, Live Entertainment Corporation of Canada Inc., and both entities
were rolled into Live Entertainment of Canada Inc., or Livent Inc., in 1993.
Livent made its debut in Canada’s equity market with an initial public offering
that year. By the end of 1995, Livent’s shares were also listed on New York’s
NASDAQ exchange.
[120]
Deloitte & Touche (now Deloitte LLP) became
MyGar’s auditor in 1989 and continued as auditors for MyGar and it successor
Livent until 1998.
[121]
Livent’s strategy was vertical integration.
Unlike other players in the live entertainment industry, it brought the entire
enterprise, from production to performance, under one roof — a roof that
Livent, as a proprietor of theatre properties, also owned. This was an
immensely costly and risky undertaking. Livent invested in real estate in
Toronto, Vancouver, New York, and Chicago. It produced and presented a string
of spectacular (and therefore expensive) musicals. When its shows succeeded,
Livent reaped all the rewards. When they did not, it bore the losses alone.
[122]
Drabinsky and Gottlieb were determined to prove
that their business model worked. To be sure it did, they and their associates
cooked the books. They did so in four ways:
i.
Drabinsky and Gottlieb pocketed some $7.5 million in kickbacks in
the two years before Livent’s initial public offering. These they secured by
causing MyGar to pay false or inflated invoices to various contractors, who in
turn directed funds to Drabinsky and Gottlieb personally or to another company
they controlled. A substantial portion of the falsified expenses were booked as
assets. Drabinsky and Gottlieb’s balance sheets were thus infused with fantasy
as early as 1991.
ii.
Livent officers and employees distorted the company’s financial
records by shifting expenses between accounting periods and from one activity
or production to another. They doctored Livent’s accounting software to permit
and conceal these manipulations.
iii.
Livent overstated its bottom line by extending the time over
which it amortized the costs of putting on its productions and, in some
periods, by avoiding amortization altogether. This it did by transferring millions
of dollars of “pre-production costs” from shows to fixed assets or from one
show to another, and particularly to shows that had not yet opened.
iv.
The company recorded imaginary revenue by entering into loan or
financing agreements that it camouflaged as asset sales. Livent purported to
sell various rights related to its productions and properties, but
simultaneously entered into secret side agreements permitting purchasers to
recover what they had paid. The revenue booked from such transactions ran well
into the millions of dollars.
[123]
Livent not only misled the markets, it also
fooled its auditor. Deloitte never uncovered the company’s schemes. Livent
continued to raise investment capital and reinvest it in unprofitable theatre
enterprises. Deloitte’s auditors report for Livent’s Fiscal Year 1997 did not
disclose the fraud and, although Deloitte objected when Gottlieb presented a
misleading quarterly financial statement to the Audit Committee in August 1997,
it did not resign.
[124]
The truth came to light in 1998. New equity
investors appointed new management, who discovered “irregularities”. Deloitte
retracted its audit opinions for 1996 and 1997. A subsequent investigation and
re-audit resulted in restated financial reports. Drabinsky and Gottlieb were suspended,
fired, and convicted of fraud.
[125]
Livent filed for insolvency protection in both
Canada and the United States in November 1998 and sold its assets in August
1999. It went into receivership the following month. The trial judge found
that Livent lost $113,000,000 between the time of Deloitte’s negligent failure
to end its relationship with Livent and Livent’s insolvency. He reduced that
amount by 25 percent for contingencies and awarded $84,750,000 in damages.
Livent seeks to recover this loss from Deloitte.
II.
Judicial History
[126]
Livent sued Deloitte for $450,000,000 and other
relief. It advanced concurrent claims in tort and contract; the parties agreed
that the damages under either head would be the same. Livent claimed that
Deloitte was responsible for every dollar Livent lost from the date of
Deloitte’s breach of duty. Deloitte’s defence was that most of the losses
claimed were beyond the scope of Deloitte’s legal responsibility. The courts
below largely sided with Livent.
A.
Ontario Superior Court of Justice (Commercial
List) (Gans J.), 2014 ONSC 2176, 11 C.B.R. (6th) 12
[127]
The trial judge held that Deloitte owed a duty
of care to provide accurate information to Livent’s shareholders. He held that
the standard of care under this duty required Deloitte to take steps that would
have effectively cut off Livent’s access to the capital markets and forced it
into formal insolvency as early as 14 months before it ultimately filed for
insolvency protection. The trial judge concluded that Deloitte failed to meet
this standard of care, either when it failed to discover the fraud and act on
that discovery in August 1997, or when it signed off on Livent’s 1997 financial
statements in April 1998.
[128]
The trial judge held that the measure of damages
was the difference between Livent’s value when the breach occurred, and
Livent’s value at the time of insolvency ($113,000,000). He reduced this by 25
percent to account for “contingencies” or “trading losses” sustained as a
result of Livent’s “unprofitable but legitimate theatre business” (paras.
324-26), which he held were too remote to make Deloitte liable.
[129]
The trial judge also rejected Deloitte’s
submission that Livent’s recovery should be either barred by the defence of
illegality, or reduced on account of contributory fault pursuant to s. 3 of the
Negligence Act, R.S.O. 1990, c. N.1.
[130]
The trial judge consequently awarded damages to
Livent for breach of its duty of care, and alternatively for breach of
contract, in the amount of $84,750,000.
B.
Court of Appeal for Ontario (Strathy C.J. and
Blair and Lauwers JJ.A.), 2016 ONCA 11, 128 O.R. (3d) 225
[131]
The Court of Appeal upheld the trial judge’s
award and dismissed both the appeal and cross-appeal.
III.
Analysis
[132]
The only issue on this appeal is whether Deloitte
is liable for the lion’s share of the loss Livent sustained after it failed to
detect the fraud of the company’s principals and report it in its audit
statements (the total loss less a 25% discount for contingencies and Livent’s
improvident investments). Livent claims that if Deloitte had reported the fraud
when it should have, it would have been put out of business, which would have
saved it from the loss that it suffered thereafter. Instead, it was able to
continue to raise more capital and spend it in ways that decreased Livent’s net
worth. Deloitte argues that it is not liable for the full extent of Livent’s
pre-liquidation loss because this loss falls outside the scope of Deloitte’s
duty of care, or is too “remote” from the legal cause.
[133]
The law of negligent misstatement has limited
recovery of pure economic (financial) loss for two reasons. The first reason is
that it may be unfair to hold a person who makes a negligent misstatement
liable for all loss incurred thereafter, where other decisions and acts
contributed to that loss. This is referred to as the fair allocation of loss
principle. The second reason is to avoid the spectre of indeterminate
liability, which the law of negligence has never countenanced.
[134]
These two reasons — one of principle and the
other of policy — are complementary. They work together to ensure fair outcomes
and promote predictability in the law.
[135]
As Lord Bridge observed in Caparo Industries
plc. v. Dickman, [1990] 1 All E.R. 568 (H.L.), at p. 576:
To hold the maker of the statement to
be under a duty of care in respect of the accuracy of the statement to all and
sundry for any purpose for which they may choose to rely on it is not only to
subject him, in the classic words of Cardozo C.J., to “liability in an
indeterminate amount for an indeterminate time to an indeterminate class” ([Ultramares
Corp. v. Touche, 174 N.E. 441 (N.Y. 1931), at p. 444]), it is also to
confer on the world at large a quite unwarranted entitlement to appropriate for
their own purposes the benefit of the expert knowledge or professional
expertise attributed to the maker of the statement.
See also D’Amato
v. Badger, [1996] 2 S.C.R. 1071, at para. 18; Hercules
Managements Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, at para. 31; Canadian
National Railway Co. v. Norsk Pacific Steamship Co., [1992] 1 S.C.R. 1021,
at p. 1137, per McLachlin J.; R. v. Imperial Tobacco Canada Ltd., 2011
SCC 42, [2011] 3 S.C.R. 45, at para. 99, quoting Cooper v. Hobart, 2001 SCC 79, [2001] 3 S.C.R. 537, at para. 54.
[136]
For these reasons, common law courts have
rejected a simple “but for” test for recovery of economic loss for negligent
misstatement: BG Checo International Ltd. v. British Columbia Hydro and
Power Authority, [1993] 1 S.C.R. 12, at p. 44; South Australia Asset
Management Corp. v. York Montague Ltd., [1996] 3 All E.R. 365 (H.L.) (“SAAMCO”),
at pp. 369-72, per Lord Hoffmann; Hughes-Holland v. BPE Solicitors,
[2017] UKSC 21, [2017] 2 W.L.R. 1029, at para. 38, per Lord Sumption; Hogarth
v. Rocky Mountain Slate Inc., 2013 ABCA 57, 542 A.R. 289, at paras. 37-38,
per Slatter J.A.
[137]
A “but for” test, which asks only whether the
loss would not have been incurred if the wrongful act had not been committed,
casts the net of liability too widely. It would make auditors or advisors
retained for limited purposes the insurers of the entire venture and all that
flows from it. It would not matter that the loss would not have occurred but
for other decisions (like Livent’s ill-judged investment decisions in this
case). Nor would it matter that the loss was the result of a complex web of
decision making, months and years after the negligent misstatement was
produced. All that would be required to recover all subsequent loss from the
auditors would be to show that their misstatement played a role in launching
the saga of subsequent loss. This is not fair; a person giving advice for one
purpose should not be held liable for how other people use that information for
other purposes, or be made to carry the entire loss. And, it would lead to
indeterminate liability. An auditor giving advice would never know what its
exposure might be, or whether its fee is adequate to cover the risk to which it
exposes itself.
[138]
Rejection of a “but for” test for assessing
recovery of economic loss is cemented in the common law. But it is worth noting
that Quebec civil law also recognizes the need to limit recovery of economic
loss to losses that bear a sufficient connection to the wrongful feature of the
defendant’s conduct: see Wightman v. Widdrington (Succession de), 2013
QCCA 1187, at paras. 229-31 and 243-46 (CanLII); see also D. Jutras, “Civil Law
and Pure Economic Loss: What Are We Missing?” (1987), 12 Can. Bus. L.J.
295, at pp. 308-9.
[139]
Courts have given two doctrinal explanations for
limiting recovery of economic loss following from a negligent misstatement. The
first is to say that the scope of the duty of care of the advice-giver
does not cover the loss claimed. The second is to say that the loss is too
remote from the negligent act and thus was not legally caused by that act.
[140]
While lawyers may argue over which approach is
preferable, the fact once again is that they are complementary — two sides of
the same coin. In fact, the inquiry into the duty of care and the inquiry into
remoteness invoke similar considerations.
[141]
The “scope of the duty of care” inquiry looks to
the relationship between the defendant’s advice and the plaintiff’s loss. It
asks if that relationship was “proximate”. In cases of economic loss, it
inquires into the purpose for which the advice was given and asks whether a
reasonable person would have expected, or “foreseen”, that negligent advice
would lead to the loss in question by virtue of the plaintiff’s reliance on the
advice: Hercules, at paras. 24 and 41. Put simply: Did the loss flow
from the advice, or from subsequent decisions and circumstances? Thus in Caparo,
at p. 581, Lord Bridge confirmed that the scope of the tort determines
the extent of the remedy to which the injured party is entitled. See also Platform Home Loans Ltd. v. Oyston Shipways Ltd., [1999] 1
All E.R. 833 (H.L.), at p. 847, per Lord Hobhouse.
[142]
The “remoteness” approach looks at similar
factors to the “scope of the duty of care” approach — all pointing to the
wrongdoing and its proximity to the loss claimed. The factors to be considered
are not closed. The advice-giver’s knowledge of the claimant’s circumstances,
the reasonable expectations arising from the relationship, and the presence of
intervening factors that led to the loss may figure in the analysis: Mustapha
v. Culligan of Canada Ltd., 2008 SCC 27, [2008] 2 S.C.R. 114, at paras. 12
and 14-16; Citadel General Assurance Co. v. Vytlingam, 2007 SCC 46,
[2007] 3 S.C.R. 373, at para. 31; Westmount (City) v. Rossy, 2012 SCC
30, [2012] 2 S.C.R. 136, at para. 48.
[143]
I agree with Lord Sumption’s observation in BPE
Solicitors, a recent decision from the United Kingdom Supreme Court,
that however one looks at the matter — from the perspective of the scope of the
duty of care or from the perspective of remoteness — one arrives at the same
point. In his Lordship’s words, “[w]hether one describes the principle . . . as
turning on the scope of the duty or the extent of the liability for breach of
it does not alter the way in which the principle applies”: para. 38; see also
L. N. Klar and C.S.G. Jefferies, Tort Law (6th ed. 2017), at pp. 565-66.
[144]
For the purposes of these reasons, I will first
consider whether the losses at issue fall within the scope of Deloitte’s duty
of care. This inquiry takes us to the two-part analysis for determining the
existence of a duty of care and its scope prescribed in Anns v. London
Borough of Merton, [1977] 2 All E.R. 492 (H.L.) — does the relationship
between the parties give rise to a prima facie duty of care to avoid the
type of loss claimed, and, if so, is that duty negatived by policy
considerations?
[145]
Courts in the United Kingdom have resiled from a
two-step Anns test, but continue to insist that the scope of the duty of
care must be carefully limited having regard to the relationship between the
defendant’s conduct and the plaintiff’s injuries, context and policy. They have insisted that there is no such
thing as a duty of care in the abstract; the duty is always defined by its
scope. As Lord Bridge stated
in Caparo, at p. 581, “[i]t is never sufficient to
ask simply whether A owes B a duty of care. It is always necessary to determine
the scope of the duty by reference to the kind of damage from which A must take
care to save B harmless”: see also BPE Solicitors, at paras. 21-23; Sutherland
Shire Council v. Heyman, (1985), 60 A.L.R. 1 (H.C.), at p. 40, per Brennan
J.; Platform Home Loans, at p. 847, per Lord
Hobhouse, quoting Overseas Tankship, (U.K.) Ltd. v. Morts Dock & Engineering Co. Ltd. [1961] A.C. 388 (P.C.) (“The Wagon Mound
No. 1”) at p. 425; Candler v. Crane Christmas &
Co., [1951] 1 All E.R. 426
(C.A.), at p. 436, per
Denning L.J., dissenting.
[146]
The first step of the Anns test asks
whether there is proximity, or a sufficiently close relationship, between the
parties. It focuses on the connection between the defendant’s undertaking (the
breach of which is the wrongful act) and the loss claimed. Did the defendant owe the plaintiff a prima
facie duty of care to prevent the loss, having regard to, on one hand, the
reasonably foreseeable consequences of the defendant’s conduct given the
proximity of the parties and, on the other hand, factors concerning the
relationship between the parties that negate tort liability? (see Cooper,
at paras. 30 and 34). Questions of policy relating to the relationship between
the parties should be considered at this step of the Anns analysis: Cooper,
at para. 37.
[147]
The purpose for which the statement was made
(the undertaking) is pivotal in determining whether a particular type of
economic loss was the reasonably foreseeable consequence of the negligence: Hercules,
at paras. 37-40. Was it made to enable the company to raise capital? If
so, a loss due to failure to raise capital may be recoverable. Was it made for
the purpose of permitting shareholders to review the management of the company?
If so, shareholders may recover for loss due to their inability to hold the
company to account: Hercules, at paras. 51-57. In each case, one must
determine the purpose for which the statement was made, and ask whether the loss
in question is proximate, or closely connected to the failure of the defendant
to fulfill that purpose.
[148]
Where an auditor falsely or wrongfully
represents that the audit statements are sound and can therefore be used for
their intended purpose, this constitutes negligence, or wrongdoing. Economic
loss tied to that particular wrongdoing is recoverable; other loss is not.
Whether in the United Kingdom, Quebec or the common law provinces of Canada,
courts focus on the precise nature of the wrongdoing to determine what loss is
recoverable. As Lord Sumption explained in BPE Solicitors, to be
a reasonably foreseeable consequence of the defendant’s wrongdoing, the
economic loss claimed must have “flowed from the right thing, i.e. from the
particular feature of the defendant’s conduct which made it wrongful”: para.
38. Or as Lord Hoffmann said in SAAMCO, at p. 371:
Normally the law limits liability to those consequences
which are attributable to that which made the act wrongful. In the case of
liability in negligence for providing inaccurate information, this would mean
liability for the consequences of the information being inaccurate.
See also:
Burns v. Homer Street Development Limited Partnership, 2016 BCCA 371, 91
B.C.L.R. (5th) 383, at para. 106; Hogarth, at paras. 37-38, per
Slatter J.A.
[149]
Lord Sumption pointed out in BPE Solicitors,
at para. 44, that the scope of the duty of care and the extent of the
defendant’s responsibility turns on the specific circumstances that inform the
purpose for which the statement was prepared:
A valuer or a conveyancer, for example, will rarely
supply more than a specific part of the material on which his client’s decision
is based. He is generally no more than a provider of what Lord Hoffmann [in SAAMCO]
called “information”. At the opposite end of the spectrum, an investment
adviser advising a client whether to buy a particular stock, or a financial
adviser advising whether to invest self-invested pension fund in an annuity are
likely, in Lord Hoffmann’s terminology, to be regarded as giving “advice”.
Between these extremes, every case is likely to depend on the range of matters
for which the defendant assumed responsibility and no more exact rule can be
stated.
See also Aneco Reinsurance Underwriting
Ltd. (in liquidation) v. Johnson & Higgins Ltd., [2001] UKHL 51,
[2001] 2 All E.R. (Comm.) 929, at paras. 40-41, per Lord Steyn, and para. 66,
per Lord Millett; Canadian Imperial Bank of Commerce v. Deloitte &
Touche, 2016 ONCA 922, 133 O.R. (3d) 561, at paras. 46-47 and 69-71; Temseel Holdings Ltd. v. Beaumonts Chartered Accountants,
[2002] EWHC 2642 (Comm.), [2003] P.N.L.R. 27, at paras. 22-29 and 57-62.
[150]
The purpose for which the audit report is
provided is a matter of fact based on the evidence adduced at trial: BPE
Solicitors, at para. 44; Aneco, at paras. 40-41, per Lord
Steyn, and para. 66, per Lord Millett; Canadian Imperial Bank of Commerce,
at para. 47; Temseel, at paras. 57-62. Legal obligations imposed
by statute may be relevant: Hercules, at para. 49.
[151]
Against this background, I turn to the question
at hand: What was the scope of the duty of care owed by Deloitte to Livent? The
key to answering this question is the purpose for which Deloitte prepared the
statements, which in turn defines the wrongful act — the negligent failure to
provide the correct information for the intended purpose.
[152]
In this case, three purposes of Livent’s audit
statements are discernable: (1) to report accurately on Livent’s finances and
provide it with audit opinions on which it could rely for the purpose of
attracting investment; (2) to uncover heretofore undetected errors or
wrongdoing by Livent or its personnel for the purpose of enabling Livent itself
to correct or otherwise respond to the misfeasance; and (3) to provide audit
reports on which Livent’s shareholders could rely to supervise the company’s
management (see e.g. Part XII, Business Corporations Act, R.S.O. 1990,
c. B.16; trial reasons, at paras. 89-96 and 280). Livent was entitled to
recover for losses occasioned by its own or its shareholders’ reliance on
Deloitte’s audit work for these purposes.
[153]
The scope of Deloitte’s duty of care is defined
solely by these purposes. Did its negligence prevent Livent from attracting
investment? Did its negligence prevent Livent from uncovering undetected
wrongdoing for the purpose of allowing Livent to correct the misfeasance?
Finally, did its negligence prevent shareholders from supervising the company’s
management? Loss that results from inability to attract investment, from
inability of Livent to correct undetected wrongdoing, or from inability of the
shareholders to exercise their supervisory authority, may fall within the scope
of Deloitte’s duty of care.
[154]
The first possibility is that Deloitte’s
wrongful act deprived Livent of the ability to attract investment capital.
Livent does not rely on this; in fact, Livent attracted a great deal of capital
on the strength of Deloitte’s statements. Indeed, that is the essence of its
complaint — if it had not been able to attract this money, it would not have
been able to spend it on new theatre ventures that failed and decreased
Livent’s worth. The company’s assets were not diminished by an inability to
attract investment, but by Livent’s improvident management of those
investments, revealed only on insolvency.
[155]
The second possibility is that the wrongful act
prevented Livent — the company itself — from detecting misfeasance in the
company’s management which Livent’s officials would have corrected if they had
known the true state of affairs. This possibility envisions the situation where
a company’s management, acting honestly and diligently, is unable to deal with
internal misfeasance because the auditors negligently failed to reveal it.
[156]
This is not Livent’s situation. Livent led no
evidence that its management did not know of Drabinsky’s and Gottlieb’s
misfeasance; indeed, it likely could not have done so. Drabinsky and Gottlieb,
the fraudsters, were themselves the management. Far from relying on the audited
statements as assurance that everything was well with the company, Drabinsky
and Gottlieb knew the audit reports were inaccurate. There is no evidence that
anyone at a lower level of Livent management would have blown the whistle if
Livent’s statements had revealed the fraud at an earlier date.
[157]
The third possibility is that Deloitte’s
wrongdoing prevented Livent’s shareholders from exercising shareholder
supervision in a manner that would have ended the corporation’s loss-creating
activities at an earlier date. Livent argues (and my colleagues Gascon and Brown
JJ. accept) that it relied on Deloitte to produce a report on the basis of
which its shareholders could discharge their supervisory function, which all
agree was one of the purposes for which the audited statements were prepared.
Livent argues, and my colleagues conclude, that all loss that shareholder
supervision might have avoided is recoverable — including the decline in the
value of the company.
[158]
This proposition faces two difficulties. The
first is that Livent never proved, nor did the trial judge find, the elements
necessary to establish it. The second is a related policy concern: to allow
recovery in the absence of the required proof would be to open the door to
indeterminate recovery. I will consider each of these difficulties in turn.
[159]
First, although the trial judge’s reasons refer
to Deloitte’s duty to Livent’s shareholders as established in Hercules,
the factual basis for liability based on impaired shareholder supervision was
lacking. Livent’s theory of the case was simply that all loss as a result of
improvident investments after the negligent audits was compensable, on a “but
for” basis. Livent did not prove and the trial judge did not find that
Livent’s shareholders relied on Deloitte’s negligent audit statements, or that
had they received and relied on accurate statements, they would have acted in a
way that would have prevented Livent from carrying on business and diminishing
its assets in the period between the issuance of the relevant statements and
Livent’s insolvency.
[160]
The trial judge, accepting Livent’s theory of
the case, held that the duty of care must be broad enough to catch all losses
that would be captured by a “but for” test. He stated the following:
In my view, the ultimate
issuance or withholding of a clean opinion is but one aspect of conducting an
audit in accordance with [generally accepted auditing standards]. It is not
close to being the complete embodiment of the duty of care. Indeed, if [the
plaintiff’s] argument were accepted, it would preclude the applicability of the
“but for” test. Instead of asking whether damages would have been sustained but
for the negligent failure to detect certain errors or fraud, one would be
restricted to asking whether or not damages would have been sustained but for
the provision of a clean opinion. [Emphasis added; para. 285.]
[161]
The broad view of the duty of care taken by
Livent, and accepted by the trial judge meant that the trial judge failed to
consider the parameters of the shareholders’ reasonable and foreseeable
reliance as required in Hercules when defining the scope of the duty of
care with respect to losses stemming from impaired shareholder supervision. My
colleagues conclude otherwise, noting that the trial judge believed that the
shareholders were entitled to rely on Deloitte’s negligent audits as an
indication of Livent’s health. Crucially, however, the trial judge did not ask
whether the shareholders had in fact relied on the audits – a critical element
to the cause of action. He did not ask whether, if they had relied, this reliance
prevented them from taking steps to replace directors or officers or otherwise
alter course. He did not ask whether this would have included shutting down
Livent on March 31st, 1998 (or at least earlier than when it was shut down in
November 1998). Finally, he did not ask whether these actions, had they been
taken, would have prevented the losses that Livent built up during the
seven-month period in question. If the trial judge had asked these questions,
he would have been obliged to answer them in the negative, since Livent offered
no proof to support affirmative answers.
[162]
I leave aside for the purposes of this case the
difficulty that the shareholders, unlike in Hercules, are not parties to
the claim or the action. Assuming this would not pose a problem, it is possible
to speculate that the necessary facts could have been proven (although given
the short time period, it seems unlikely). But the more fundamental point is
that Livent did not prove these matters, and that as a result, the factual basis
for establishing loss on the basis of shareholder supervision was entirely
lacking. The hypothetical chain of events required to establish liability on
this ground completely bypasses the complexity of shareholder decision making.
[163]
Livent’s position and the trial judge’s approach
collapse the distinction between shareholder decision making, for which an
auditor provides information for one purpose — holding management accountable
with a view to the best interest of the company — with management decision making,
for which the auditor provides information for a different purpose — responding
to error and wrongdoing. Conceiving liability in this way creates a
misalignment between the scope of the duty of care, the type of loss that is
therein contemplated, and the actual elements that must be proven in order to
make a successful claim.
[164]
The second and related difficulty the
shareholder supervision argument faces in this case is that it would lead to
unfair allocation of loss and indeterminate liability for auditors’ statements,
negating the duty of care: Hercules, at paras. 36-37.
[165]
Livent’s position — that Deloitte is liable for
all loss without proof of the elements required to advance a case based on
impaired shareholder supervision — would result in an unfair allocation of loss
as well as indeterminacy of damages. On the shareholder supervision theory
advanced by Livent, breach of a duty owed primarily to the collectivity of
shareholders (who do not advance a claim) and only derivatively to the
corporation, would result in liability for every dollar that Livent spent after
the point in time the shareholders became entitled to rely on the statements.
The auditor would be the virtual guarantor of everything Livent — not the
collectivity of shareholders to which the duty was owed — did thereafter. This
would not be a fair allocation of responsibility. The same scenario would raise
the spectre of indeterminate liability. Auditors would be unable to reasonably
predict when they are providing services to clients what their ultimate
liability would be. It would be out of their control. No matter how bad the
decisions made by the client thereafter, no matter how complex the web of
dealings that led to the ultimate loss — things that cannot be foreseen in
advance — the auditor would be liable for the total loss, on the basis that it
would not have occurred “but for” the negligent act.
[166]
For the foregoing reasons, I conclude that the
losses at issue have not been shown to fall within the scope of Deloitte’s duty
of care. The first step of the Anns test is not established. It is
unnecessary to go on to ask whether prima facie liability is negated by
policy considerations unrelated to the relationship between the parties.
However, were it necessary to do so, the policy considerations of unfair
allocation of loss and indeterminacy would preclude imposing liability on
Deloitte.
[167]
I add a doctrinal side-note at this point. In Hercules,
this Court, per La Forest J., held that the spectre of indeterminate loss
might be a policy consideration negating liability of certain loss at the
second step of the Anns test. However, since Cooper it has been
clear that policy considerations relating to the relationship between the
parties fall to be considered at the first step of Anns. It may not
therefore be necessary to resort to the second step to consider the
implications of indeterminate liability: see J. Blom, “Do We Really Need the Anns
Test for Duty of Care in Negligence?” (2016), 53 Alta. L. Rev. 895,
at pp. 906 and 908.
[168]
It remains for future cases to explore the
limits of an auditor’s liability for impaired shareholder supervision. Short of
finding that an auditor who provides information on which shareholders will
exercise their oversight powers assumes responsibility for all of the potential
consequences of carrying on business, the facts as found by the trial judge do
not enable us to do so here.
[169]
Livent’s failure to prove that any of the loss it suffered can be
attributed to its shareholders’ reliance on the negligent 1997 year-end audit
report for the purpose of corporate oversight is a sufficient basis on which to
allow the appeal in its entirety. But there is further problematic aspect of
the shareholder supervision theory on which Livent now seeks to rely. It is one
of principle.
[170]
As explained above, an auditor that provides a year-end report
for the purpose of enabling a company’s shareholders to supervise management
does not, absent proof, assume responsibility for what the shareholders decide
to do with that information. The purpose of an annual audit report is to inform
shareholder decision making, not to govern it. The auditor does not underwrite
the entire risk associated with the shareholders’ exercise of business
judgment; it is liable only for exposing shareholders to the risk of the
information it has provided being wrong. Even if the whole loss would have been
avoided if the auditor had met the standard of care, the company may recover in
damages only that part of the loss that may be attributed to the auditor’s
breach of its duty of care, which is restricted by the purpose or purposes for
which it provided its opinion. The auditor is not liable for the indeterminate
quantum of loss that the shareholders’ course of action (or inaction) may
trigger, since determining that course of action is beyond the auditor’s
undertaking of responsibility, and thus outside the scope of its duty of care.
Similarly, loss that cannot be attributed to the auditor’s breach will be too
remote to recover.
[171]
For this reason, the language of lost opportunity is unavailing.
In any case concerned with the tortious provision of information, the plaintiff
may claim that, had it only known the truth, it would have had the chance to
make different choices than it ultimately did. Unless the provider of
information has assumed responsibility not only for the information but also
for the decision to be informed by it, what the plaintiff would have done
differently if it had been provided with different information is immaterial.
Rather, the question is the extent to which the loss that in fact resulted may
be attributed to the wrongness (i.e., the tortious quality) of the information
provided.
[172]
On the trial judge’s findings, Deloitte never assumed
responsibility for any of the decisions — whether of Livent’s management or of
its shareholders collectively — that may be said to have occasioned Livent’s
loss. What Livent proved is that it relied on Deloitte’s
clean opinions to raise funds from third parties, and that it was successful in
doing so. Deloitte is not liable to Livent for loss arising from
Livent’s use of these funds, even if certain of Deloitte’s opinions were
prepared for the purpose of attracting them, because Livent did not
prove that Deloitte undertook responsibility for how Livent spent them.
[173]
The foregoing analysis is based on the scope of
Deloitte’s duty of care. The same result would follow on a remoteness approach
to the question of liability for economic loss as a result of negligent
misstatement. The question on this approach is whether the loss claimed is too
remote from the wrongful act for the act to be the “legal cause” of the loss.
The basic question is whether the loss is reasonably foreseeable, having regard
to a variety of factors, including the relationship between the parties and the
expectations that flow from it, the circumstances of the case, and other
factors bearing on the connection between the wrongful act and the loss claimed
including external or intervening influences. In the end, a close and proximate
connection between wrongful act and the loss claimed must be established,
having regard to all these things and to the purpose for which the information
was furnished.
[174]
It follows that Livent cannot recover the losses
it claims against Deloitte. The claim in tort must be dismissed. The result is
the same with respect to Livent’s action in contract; here too the losses would
be too remote: see B.D.C. Ltd. v. Hofstrand Farms Ltd., [1986] 1 S.C.R.
228, at pp. 243-44, citing Asamera Oil Corp. Ltd. v. Sea Oil & General
Corp., [1979] 1 S.C.R. 633; S. M. Waddams, The Law of Damages (5th
ed. 2012), at §14.720. Given the trial judge’s determination, at para.
243, that the elements of the action in contract were identical to the elements
of the action in tort, it follows that the trial judge’s conclusion that there
was a breach in contract is erroneous.
[175]
Although in many respects I agree with Gascon and Brown JJ.’s
articulation of the general framework that governs this matter, I part company
with my colleagues in two key respects. First, I take the view that, for Livent
to make out its claim, it must prove on the evidence the elements required to
establish Deloitte’s liability on the basis of impaired shareholder
supervision. My colleagues suggest that, had Deloitte provided sound audit
reports, Livent’s shareholders and management may have made decisions that
would have limited the company’s losses. While this may be true, it is not enough
to rely on unproven assertions to define the scope of the duty of care and to
subsequently demonstrate causation. My colleagues’ approach suggests that an
auditor will generally become the underwriter for any losses suffered by a
client following a negligent audit report. This, notwithstanding subsequent
decisions — reliant or capricious —
made by the client’s shareholders. I conclude, in contrast, that reliance
cannot be presumed, but must be proved.
[176]
Second, I take a different view of indeterminate liability than
my colleagues. They assert that liability is not indeterminate where a
reviewing court can set a value or time frame for a plaintiff’s claimed loss ex
post facto. However, the common law’s policy against indeterminacy is
directed at ensuring that auditors and other advisors can determine the scope
of their liability at the time they take on an engagement and render their
services. The question is whether an auditor or other
advisor was able to gauge the scale of its potential liability — in terms of the types of losses for which it undertook
responsibility — before embarking on a course of
conduct. Although Deloitte might have been in a position to
identify the total net value of Livent, Livent has not proved that Deloitte
bore responsibility for the myriad ways that Livent could have gone about
depleting its value after receiving the auditor’s statements. This is what
makes the liability identified by my colleagues indeterminate and therefore
outside the scope of the duty of care.
[177]
Having concluded that Deloitte is not liable for
the losses claimed, it is not necessary to consider the apportionment of
damages under s. 3 of the Negligence Act, nor is it necessary to
consider whether Deloitte can raise the defence of illegality against Livent.
IV.
Disposition
[178]
I would allow the appeal, with costs to Deloitte.
Appeal
allowed in part with costs to Livent Inc. throughout, McLachlin C.J. and Wagner and Côté JJ. dissenting in part.
Solicitors for the
appellant: Lenczner Slaght Royce Smith Griffin, Toronto; Dentons Canada,
Toronto.
Solicitors for the
respondent: Stikeman Elliott, Toronto and Ottawa.
Solicitors for the
intervener the Canadian Coalition for Good Governance: McMillan, Toronto.
Solicitors for the
intervener Chartered Professional Accountants of Canada: Borden Ladner
Gervais, Toronto and Ottawa.