Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63 – Torts — Duty of care — Negligence

On appeal from a judgment of the Ontario Court of Appeal (2016 ONCA 11) affirming a decision of Gans J. (2014 ONSC 2176).

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 (4-3): 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.

Reasons for judgment: Gascon and Brown JJ. (Karakatsanis and Rowe JJ. concurring)

Reasons Dissenting in Part: McLachlin C.J. (Wagner and Côté JJ. concurring)

Neutral Citation: 2017 SCC 63

Docket Number: 36875