Focus On

NEGLIGENCE - Duty and standard of care - Duty of care - Causation

Wednesday, December 20, 2017 @ 1:58 PM  

Lexis Advance® Quicklaw®
Appeal from a judgment of the Ontario Court of Appeal affirming a decision awarding to Livent Inc. $84,750,000 in damages against its auditor Deloitte & Touche (Deloitte). Livent sued Deloitte, alleging it had been negligent in providing its services in relation to auditing and the solicitation of investment, specifically: Deloitte’s 1997 approval of a press release and provision of a comfort letter; and Deloitte’s preparation and approval of the 1997 clean audit opinion. Livent asserted that it detrimentally relied on Deloitte in each of these events, which impaired its ability to oversee its operations. It argued 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. The trial judge found that Deloitte’s conduct fell below the standard of care on two occasions: when it failed to discover the directors’ 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 assessed Livent’s injury as of a “measurement date” of August 31, 1997, 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.

HELD: Appeal allowed in part. The Court was to consider the test for establishing tort liability, beginning with the decision in Hercules, and the proper application of the general Anns/Cooper framework to cases of auditors’ liability. Under the Anns test, a prima facie duty of care was recognized where a “sufficiently close relationship between the plaintiff and the defendant” existed such that “in the reasonable contemplation of the [defendant], carelessness on its part could cause damage to the plaintiff”. Assessing proximity in the prima facie duty of care analysis entailed asking whether the parties were 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.” Assessing reasonable foreseeability in this same analysis entailed asking whether an injury to the plaintiff was a reasonably foreseeable consequence of the defendant’s negligence. Where a prima facie duty of care was recognized on the basis of proximity and reasonable foreseeability, the analysis advanced to stage two of the Anns/Cooper framework. Here, the question was whether there were “residual policy considerations” outside the relationship of the parties that could negate the imposition of a duty of care. In cases of pure economic loss arising from negligent misrepresentation or performance of a service, two factors were determinative in the proximity analysis: the defendant’s undertaking and the plaintiff’s reliance. Deloitte’s undertakings in relation to soliciting investment, and the 1997 clean audit opinion, gave rise to proximate relationships. The purpose of those undertakings, in turn, determined the type of injury that was reasonably foreseeable as a result of Livent’s reliance. Livent relied on the 1997 clean audit opinion for the purpose it was provided. Thus, a resulting injury was reasonably foreseeable. The same could not be said, however, in respect of Deloitte’s negligent assistance in soliciting investment. 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. At the second stage of the Anns/Cooper framework, no residual policy considerations applied to the negligent provision of the 1997 clean audit opinion. The defences of illegality and contributory fault could not be invoked by Deloitte. While public policy and judicial necessity could favour imputing the corporation with the actions of its directing minds in certain criminal prosecutions, the same could not 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. If a professional undertook to provide a service to detect wrongdoing, the existence of that wrongdoing would not normally weigh in favour of barring civil liability for negligence through the corporate identification doctrine. In the present case, the wrongdoing was not that of Livent’s but of its directors. As Livent’s losses did not flow from a failure to solicit investment, recovery was denied for the increase in Livent’s liquidation deficit beginning in the fall of 1997. The trial judge assessed Livent’s damages following the 1997 clean audit opinion at $53.9 million. Applying the trial judge’s 25 percent contingency reduction to this amount resulted in a final damages assessment of $40,425,000. This was the amount for which Deloitte was liable.

Deloitte & Touche v. Livent Inc. (Receiver of), [2017] S.C.J. No. 63, Supreme Court of Canada, McLachlin C.J. and Karakatsanis, Wagner, Gascon, Côté, Brown and Rowe JJ., December 20, 2017. Digest No. TLD-December182017011SCC