Deloitte & Touche v. Livent Inc. (Receiver of)

Deloitte & Touche v. Livent Inc. (Receiver of)
Collection
Supreme Court Judgments
Date
2017-12-20
Neutral citation
2017 SCC 63
Report
[2017] 2 SCR 855
Case number
36875
Judges
McLachlin, Beverley; Karakatsanis, Andromache; Wagner, Richard; Gascon, Clément; Côté, Suzanne; Brown, Russell; Rowe, Malcolm
On appeal from
Ontario
Notes
SCC Case Information: 36875
Decision Content
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: Canada Law Book, 2012.
Weinrib, Ernest J. “The Disintegration of Duty” (2006), 31 Adv. Q. 212.
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