Deloitte & Touche v Livent Inc (Receiver of)

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Deloitte & Touche v Livent Inc (Receiver of)
Supreme Court of Canada 2.jpg
Hearing: 15 February 2017
Judgment: 20 December 2017
Full case nameDeloitte & Touche v Livent Inc, Through its Special Receiver and Manager Roman Doroniuk
Citations 2017 SCC 63
Docket No. 36875
Prior historyAPPEAL from Livent Inc v Deloitte & Touche 2016 ONCA 11 (8 January 2016), affirming Livent Inc v Deloitte & Touche LLP 2014 ONSC 2176 (4 April 2014). Leave to appeal granted, Deloitte & Touche v. Livent Inc., Through its Special Receiver and Manager Roman Doroniuk 2016 CanLII 33999 (9 June 2016)
RulingAppeal allowed in part, McLachlin CJ and Wagner and Côté JJ dissenting in part
Holding
Anns v Merton LBC and Cooper v Hobart apply in cases of pure economic loss arising from an auditor’s negligent misrepresentation or performance of a service. A two-stage analysis must be undertaken to determine 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 such a duty.
Court Membership
Chief Justice: Beverley McLachlin
Puisne Justices: Rosalie Abella, Michael Moldaver, Andromache Karakatsanis, Richard Wagner, Clément Gascon, Suzanne Côté, Russell Brown, Malcolm Rowe
Reasons given
MajorityGascon and Brown JJ, joined by Karakatsanis and Rowe JJ
Concur/dissentMcLaughlin CJ, joined by Wagner and Côté JJ
Abella and Moldaver JJ took no part in the consideration or decision of the case.

Deloitte & Touche v Livent Inc (Receiver of) 2017 SCC 63 is a leading case of the Supreme Court of Canada concerning the duty of care that auditors have toward their clients during the course of a professional engagement.

Supreme Court of Canada highest court of Canada

The Supreme Court of Canada is the highest court of Canada, the final court of appeals in the Canadian justice system. The court grants permission to between 40 and 75 litigants each year to appeal decisions rendered by provincial, territorial and federal appellate courts. Its decisions are the ultimate expression and application of Canadian law and binding upon all lower courts of Canada, except to the extent that they are overridden or otherwise made ineffective by an Act of Parliament or the Act of a provincial legislative assembly pursuant to section 33 of the Canadian Charter of Rights and Freedoms.

In tort law, a duty of care is a legal obligation which is imposed on an individual requiring adherence to a standard of reasonable care while performing any acts that could foreseeably harm others. It is the first element that must be established to proceed with an action in negligence. The claimant must be able to show a duty of care imposed by law which the defendant has breached. In turn, breaching a duty may subject an individual to liability. The duty of care may be imposed by operation of law between individuals who have no current direct relationship but eventually become related in some manner, as defined by common law.

An auditor is a person or a firm appointed by a company to execute an audit. To act as an auditor, a person should be certified by the regulatory authority of accounting and auditing or possess certain specified qualifications. Generally, to act as an external auditor of the company, a person should have a certificate of practice from the regulatory authority.

Contents

Background

In 1998, Livent's financial statements for the 1996 and 1997 fiscal years were restated, resulting in a significant downward adjustment of reported income, and its share value fell from USD $6.75 to $0.28 per share. [1] This resulted in numerous criminal, civil, regulatory and disciplinary proceedings in both Canada and the US. [1] [lower-alpha 1]

Fiscal year 1-year term for government and business financial reporting

A fiscal year used by governments for accounting and budget purposes, which varies between countries. It is also used for financial reporting by businesses and other organizations. Laws in many jurisdictions require company financial reports to be prepared and published on an annual basis, but generally, do not require the reporting period to align with the calendar year. Taxation laws generally require accounting records to be maintained and taxes calculated on an annual basis, which usually corresponds to the fiscal year used for government purposes. The calculation of tax on an annual basis is especially relevant for direct taxation, such as income tax. Many annual government fees—such as Council rates, license fees, etc.—are also levied on a fiscal year basis, while others are charged on an anniversary basis.

After Livent sought bankruptcy protection under the Companies' Creditors Arrangement Act in November 1998, it was subsequently placed into receivership in September 1999, with Ernst & Young being appointed as receiver and manager. [3] In November 2001, a special receiver was appointed by the court with respect to any potential legal action against Deloitte, Livent's former auditor, and such action was commenced in February 2002, alleging that "Deloitte owed a duty to ensure that Livent’s financial statements were reported in accordance with its own accounting policies and generally accepted accounting principles," [4] which, if followed, would have revealed the extent of fraudulent activity that had been occurring within the company. [5] It was further alleged that "[i]ts 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." [6]

<i>Companies Creditors Arrangement Act</i>

The Companies' Creditors Arrangement Act ("CCAA") is a statute of the Parliament of Canada that allows insolvent corporations owing their creditors in excess of $5 million to restructure their business and financial affairs.

In law, receivership is a situation in which an institution or enterprise is held by a receiver—a person "placed in the custodial responsibility for the property of others, including tangible and intangible assets and rights"—especially in cases where a company cannot meet financial obligations or enters bankruptcy. The receivership remedy is an equitable remedy that emerged in the English chancery courts, where receivers were appointed to protect real property. Receiverships are also a remedy of last resort in litigation involving the conduct of executive agencies that fail to comply with constitutional or statutory obligations to populations that rely on those agencies for their basic human rights.

Ernst & Young Multinational professional services network headquartered in London, England

Ernst & Young is a multinational professional services firm headquartered in London, England, United Kingdom. EY is one of the largest professional services firms in the world. Along with Deloitte, KPMG and PricewaterhouseCoopers (PwC), EY is considered one of the Big Four accounting firms. EY has recently shifted its historical business focus towards consulting. In particular, EY advanced its market presence in strategic consulting and entered into direct competition with what has been a traditional field of "Big Three" companies, namely Bain, McKinsey and BCG. By series of acquisitions and shift of market focus, EY expanded its market share in areas including operations services consulting, strategy services consulting, HR services consulting, financial services consulting & technology services consulting.

The courts below

At trial

At the Ontario Superior Court of Justice, Deloitte was held to have been negligent, and Gans J awarded damages totalling $84,750,000 to Livent. In so doing, he observed that the standard of care is based on the profession's generally accepted auditing standards, and that the current state of Canadian jurisprudence concerning an auditor's duty can be expressed as follows: [7]

The Superior Court of Justice is a superior court in Ontario. The Court sits in 52 locations across the province, including 17 Family Court locations, and consists of over 300 federally appointed judges.

  • "he must come to it with an inquiring mind ... suspecting that someone may have made a mistake somewhere and that a check must be made to ensure that there has been none." [na 1]
  • "it might be said that the modern procedures call for more sophistication and higher standards on the part of those who perform the work [and] it would seem that due skill and care calls for a more searching and critical approach today on matters of stock and provision for bad and doubtful debts than it did fifty years ago, and to some extent even ten years ago." [na 2]
  • "where an auditor who is following or attempting to follow GAAS has an opportunity to acquire or is exposed to knowledge or information which might affect his opinion but he fails to recognize and act on that information ... [s]uch an omission cannot, in my view, always be excused even if the auditor is following GAAS." [na 3]

In that regard, liability was assessed as follows:

  • On a balance of probabilities, any breach of the standard of care in audits prior to 1996 did not cause any damage to Livent; [8]
  • The 1996 audit procedures did not conform to GAAS, but the negligence did not cause any compensable harm; [9]
  • Issues arising in the 1997 audit, together with issues arising from additional work related to assurance for a press release and comfort letter relating to financing efforts in mid-year, were so significant that Deloitte should have resigned as auditor and reported their findings to Livent's audit committee as well as to the securities regulators, or, alternatively, they should have refused to issue an auditor's report for that year; [10]
  • The doctrines of corporate identification [lower-alpha 2] and ex turpi causa non oritur actio [lower-alpha 3] were not available as a defence by Deloitte [11]
  • Deloitte's negligence was the proximate cause of the damages in question, in line with recent English jurisprudence [lower-alpha 4]
  • Contributory negligence was not available for reducing any damages in question [13]
  • Deepening insolvency, while much discussed in academic literature, [14] did not assist in reducing damages [15]

A press release, news release, media release, press statement or video release is an official statement delivered to members of the news media for the purpose of providing information, an official statement, or making an announcement. A press release is traditionally composed of nine structural elements. Press releases can be delivered to members of the media both physically and electronically.

A comfort letter is a document prepared by an accounting firm assuring the financial soundness or backing of a company. The comfort letter can be issued by a Certified Public Accountant declaring no indication of false or misleading information in the financial statements and that the company's prospectus follows the prevailing accounting standards. This is sometimes used in connection with an initial public offering. Comfort letters are also sometimes provided by those involved in evaluating a company's assets, for instance, in the case of oil and gas companies, third-party reserve engineering firms.

Auditors report

The auditor's report is a disclaimer thereof, issued by either an internal auditor or an independent external auditor as a result of an internal or external audit, as an assurance service in order for the user to make decisions based on the results of the audit.

On appeal

Both parties appealed to the Court of Appeal for Ontario. Deloitte appealed with respect to the issues of corporate identification, ex turpi causa and proximate liability, while Livent's cross-appeal submitted that the trial judge erred in failing to hold Deloitte liable for negligence in respect of the 1996 audit and also in reducing the award of damages by 25 per cent.

The appeal and cross-appeal were both dismissed. In a 3-0 ruling, Blair JA held that:

  • even if the factors identified in Canadian Dredge [lower-alpha 5] are satisfied, enquiries must be made by the Court as to whether applying attribution for the purposes of ex turpi causa is consistent with the contract or relationship between the plaintiff and the defendant, and whether doing so is necessary to preserve the integrity of the justice system; [16]
  • the trial judge did not err in determining that the cause of action belonged to Livent, and no question of indeterminate liability arose; [17]
  • while auditors have a general duty to ensure that financial statements present "a fair and accurate picture" and to provide shareholders with the information necessary to help them in their oversight of management, auditors of publicly-traded corporations are also obliged to ensure that their reports help "to foster fair and efficient capital markets by protecting investors from unfair, improper or fraudulent practices, and to maintain public confidence in those markets." [18]
  • Deloitte was only responsible for those losses that were reasonably foreseeable as a result of its negligence [19]
  • the trial judge did not err in determining Deloitte's causation of negligence, [20] nor was his approach in error in assessing the quantum of damages [21] or as to not apply the doctrine of contributory negligence [22]
  • as to the cross-appeal, while auditors may be exposed to liability in the absence of fraud, the trial judge did not err in his approach [23]

At the Supreme Court of Canada

In a 4-3 ruling, the appeal was allowed in part, and Livent was awarded for costs throughout. For the majority, Gascon and Brown JJ held that the framework established in Anns v Merton LBC [na 4] and Cooper v Hobart [na 5] served to identify whether a duty of care existed, and that the Court's previous decision in Hercules Managements Ltd [lower-alpha 6] had already established where liability may exist in the context of a statutory audit. Accordingly, Deloitte was liable for negligence only with respect to Livent's 1997 audit, and damages were reduced from $84,750,000 to $40,425,000. A several-stage analysis is required in order to properly determine whether liability arises:

  • While Hercules stands 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 that identifies a principled basis for imposing liability. [24]
  • In Stage 1, foreseeability alone is not enough to establish a prima facie duty of care - it is also necessary to establish proximity; [25] therefore, in the prima facie duty of care analysis:
  • proximity 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" [26]
  • reasonable foreseeability entails asking whether an injury to the plaintiff was a reasonably foreseeable consequence of the defendant’s negligence [27]
  • In Stage 2, where a prima facie duty of care is recognized on the basis of proximity and reasonable foreseeability, the question then becomes whether there are "residual policy considerations" outside the relationship of the parties that may negate the imposition of a duty of care [28]
  • In that regard, indeterminate liability is liability of a specific character, not of a specific amount, and it is only a residual policy consideration [29]

Applied to the case at hand, Deloitte’s undertakings in relation to soliciting investment, and the 1997 Audit, gave rise to proximate relationships, [30] but the increase in Livent’s liquidation deficit which arose from its reliance on the Press Release and Comfort Letter connected with the first undertaking was not a reasonably foreseeable injury. [31] However, the injury that arose to Livent from the negligent handling of the 1997 audit was reasonably foreseeable, and there was no basis in distinguishing this case from the facts that arose in Hercules. [32]

In response to McLachlin CJ's assertion that, while the above framework for analysis was conceptually correct, residual policy considerations would have also defeated Livent's claim in this case, [33] the majority declared:

  • The character of indeterminacy has temporal, claimant and value aspects, none of which arise here. [34]
  • A remoteness analysis [35] does not apply, as 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. [36] However, Livent's loss was reasonably foreseeable. [37]
  • The "SAAMCO principle" [na 6] does not apply in the present case, as "the shareholders’ capacity to oversee the conduct of Livent’s business was entirely dependent upon the statutory audit preceding that oversight." [38]

While Canadian Dredge remains authoritative as to the application of the doctrine of corporate identification, its principles provide a sufficient basis to find that the actions of a directing mind be attributed to a corporation, not a necessary one, and, where 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. [39]

As to the question of contributory negligence, the Negligence Act in Ontario [40] requires that a plaintiff’s fault be factored into the apportionment of damages. However, corporate identification is a prerequisite to the plaintiff, Livent, being at fault. Therefore, the Act only makes contribution by a negligent plaintiff mandatory; it does not make attribution of negligence to a plaintiff mandatory. [41]

Impact

As the SCC held in Hercules, "if an action is to be brought [against an auditor] in respect of such losses, it must be brought either by the corporation itself (through management) or by way of a derivative action." [42] The case was notable in that it was initiated by Livent's bondholders, who were not in a position to sue directly but did finance the special receiver (acting on behalf of the corporation), whose litigation will enable them to receive a large part of the award. [43] The win proves that this indirect route can succeed, but it will most likely benefit creditors more than shareholders. [43] While Hercules expressed concern about the effect of indeterminate liability upon an auditor's duty of care, Livent found that it was not of sufficient concern, as well as declaring that auditors are no longer insulated from liability on the basis of policy concerns. [44]

The SCC also observed that "the liability that could attach to one year’s negligent audit could not extend beyond the following year’s audit," [45] which has been observed to be a significant finding in limiting potential liability. [46]

The SCC's holding that a proximate relationship will preclude indeterminate liability in any event, in the context of a statutory audit, has been observed to be a key development in Canadian jurisprudence. [47] Such jurisprudence was already developing, and at least one other ruling, in similar circumstances and with similar effect, was already made in a summary judgment in Ontario, even before the SCC handed down its judgment. [48]

There are still uncertainties as to the extent to which the decision will affect the dynamics and details of the audit process. [49] The Capital Markets Institute of the Rotman School of Management at the University of Toronto hosted a panel in January 2018 to assess the implications of the decision for auditor responsibility, governance and Canadian public corporations. [50] [51] It is quite likely that audit firms will face greater insurance premiums as a result of their now-higher risk exposure, which will thus result in debate as to how that risk should be allocated (with likely cascading down into higher audit fees to be charged to all clients). [52]

Jurisprudence in this matter is mixed within the various members of the British Commonwealth. The Commercial Court of England and Wales stated in January 2019 that it did "not consider the Livent decision to be of any real assistance in identifying the scope of the duty of an auditor under English law, or as to the circumstances in which legal causation will be established. It appears from a consideration of the majority judgment that the approach to scope of duty in Canadian law is not identical to that in English law as it stands today, [lower-alpha 7] nor does there appear to have been any detailed analysis of the correlation or otherwise between the auditors' negligence and the particular losses claimed, which also involves a consideration of what reliance there was (on which the majority and the Chief Justice differed as to the existence of any such reliance)." [na 7]

Further reading

Notes and references

Notes

  1. ↑ Disciplinary proceedings were undertaken against four of Deloitte's partners, of whom three were found guilty of the charges laid. [2]
  2. ↑ originally identified in Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd , [1915] AC 705 (8 March 1915), adopted by the SCC in Canadian Dredge & Dock Co v The Queen 1985 CanLII 32, [1985] 1 SCR 662(23 May 1985)
  3. ↑ recently examined in Moore Stephens v Stone Rolls Ltd (in liq) [2009] UKHL 30, [2009] 1 AC 1391(30 July 2009)
  4. ↑ within the bounds discussed in Galoo Ltd & Ors v Bright Grahame Murray (a firm) [1993] EWCA Civ 3, [1995] 1 All ER 16(21 December 1993) and Sasea Finance Ltd (in liquidation) v KPMG (formerly KPMG Peat Marwick McLintock) [2000] 1 All ER 676 [12]
  5. ↑ with respect to the actions taken by the directing mind of a corporation
  6. ↑ Hercules Managements Ltd v Ernst & Young 1997 CanLII 345, [1997] 2 SCR 165(22 May 1997), which adopted Caparo Industries plc v Dickman [1990] UKHL 2, [1990] 2 AC 605(8 February 1990) into Canadian jurisprudence
  7. ↑ because of the House of Lords overruling Anns v Merton in 1990, in Murphy v Brentwood District Council [1991] UKHL 2, [1991] 1 AC 398(26 July 1990)

Cited cases

  1. ↑ Fomento (Sterling Area) Ltd v Selsdon Fountain Pen Co Ltd, [1958] 1 All ER 11, at 23
  2. ↑ Pacific Acceptance Corporation v Forsyth, (1970) 92 WN (NSW) 92, at 74
  3. ↑ Revelstoke Credit Union v Miller, [1984] 2 WWR 297, at 303-304
  4. ↑ Anns v Merton London Borough Council [1977] UKHL 4 , [1978] AC 728(12 May 1977)
  5. ↑ Cooper v Hobart 2001 SCC 79 , [2001] 3 SCR 537(16 November 2001)
  6. ↑ South Australia Asset Management Corp v York Montague Ltd [1996] UKHL 10 , [1997] AC 191(20 June 1996)
  7. ↑ Assetco Plc v Grant Thornton UK LLP [2019] EWHC 150(Comm) at para. 955(31 January 2019)

Related Research Articles

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<i>Chapman v Hearse</i>

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References

  1. 1 2 Karabus, Matthew; Na, Benjamin (May 1, 2014). "The increasing scope of auditors' negligence: Livent Inc v Deloitte & Touche LLP". Gowling WLG.
  2. ↑ "Decision and reasons for decision". Discipline Committee, Institute of Chartered Accountants of Ontario. February 11, 2007.
  3. ↑ ONSC, par. 16-17
  4. ↑ ONSC, par. 20
  5. ↑ ONSC, par. 22
  6. ↑ ONSC, par. 23
  7. ↑ ONSC, par. 59-62
  8. ↑ ONSC, par. 106-107
  9. ↑ ONSC, par. 170-173
  10. ↑ ONSC, par. 241-242
  11. ↑ ONSC, par. 261-273
  12. ↑ ONSC, par. 308-318
  13. ↑ ONSC, par. 327-343
  14. ↑ Girgis, Jassmine (2008). "Deepening Insolvency in Canada?" (PDF). McGill Law Journal . 53 (1): 167–197.
  15. ↑ ONSC, par. 344-352
  16. ↑ ONCA, par. 158
  17. ↑ ONCA, par. 174-178
  18. ↑ ONCA, par. 184-188
  19. ↑ ONCA, par. 372
  20. ↑ ONCA, par. 378-380
  21. ↑ ONCA, par. 380
  22. ↑ ONCA, par. 398
  23. ↑ ONCA, par. 410-414
  24. ↑ SCC, par. 22
  25. ↑ SCC, par. 23
  26. ↑ SCC, par. 25
  27. ↑ SCC, par. 32
  28. ↑ SCC, par. 37
  29. ↑ SCC, par. 43-45
  30. ↑ SCC, par. 47
  31. ↑ SCC, par. 55
  32. ↑ SCC, par. 62, 64
  33. ↑ SCC, par. 167, 175-176
  34. ↑ SCC, par. 62, 68
  35. ↑ proposed at SCC, par. 173
  36. ↑ SCC, par. 78
  37. ↑ SCC, par. 79
  38. ↑ SCC, par. 86-93
  39. ↑ SCC, par. 104
  40. ↑ Negligence Act , R.S.O. 1990, c. N.1
  41. ↑ SCC, par. 106-109
  42. ↑ SCC, par. 18, quoting Hercules at par. 59
  43. 1 2 McFarland, Janet (December 20, 2017). "Supreme Court says Livent auditors liable but sets conditions". The Globe and Mail .
  44. ↑ Gupta, Ankita (October 1, 2018). "Deloitte & Touche v Livent Inc.: A New Duty of Care for Auditors". thecourt.ca.
  45. ↑ SCC, par. 69
  46. ↑ Cumming, Kaitlyn (December 2017). "SCC Decision: Deloitte & Touche v. Livent Inc. Auditor Liability for Negligence" (PDF). Vancouver: Fulton & Co. LLP.
  47. ↑ Nematollahi, Sajjad (December 20, 2017). "Auditors Must Properly Audit Their Client Companies and Would be Legally Liable if they Fail to do so, Supreme Court of Canada Holds". London, Ontario: Siskinds LLP.
  48. ↑ Borlack, Howard; Puckering, Émilie-Anne (August 2017). "Auditor Held Liable in Negligence for Non-Clients' Losses". Toronto: McCague Borlack LLP., discussing Lavender v Miller Bernstein 2017 ONSC 3958 (12 July 2017)
  49. ↑ Laing, Andrea; Nickerson, Adam (December 21, 2017). "SCC Affirms Duty of Care but Reduces Auditor's Damages in Livent Decision". Blake, Cassels & Graydon.
  50. ↑ Critchley, Barry (December 22, 2017). "Assessing the fallout from Livent v. Deloitte". Financial Post .
  51. ↑ "Livent v. Deloitte: Implications For Auditor Responsibility, Governance and Canadian Public Companies". rotman.utoronto.ca. Rotman School of Management. January 22, 2018.
  52. ↑ Smith, Dale (March 5, 2018). "Supreme Court sets out liability for auditors". Law Times. Thomson Reuters.
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