Deloitte & Touche (now continued as Deloitte LLP) Appellant v. Livent Inc., through its special receiver and manager Roman Doroniuk, 2017 SCC 63

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 haveexpected, 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 theconnection between the defendant’s undertaking or statement and the loss claimed.

The purpose for which the statement was made ispivotal, 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 andprovide it with audit opinions on which it could rely for the purpose of attracting investment; (2) to uncover errors or wrongdoing for thepurpose of enabling Livent itself to correct or otherwise respond to the misfeasance; and (3) to provide audit reports on which Livent’sshareholders 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 dealof capital on the strength of Deloitte’s statements. Likewise, Deloitte’s wrongful act did not prevent Livent from detecting misfeasancein the company’s management, which Livent would have corrected had it known. Finally, Livent did not prove that Deloitte’swrongdoing prevented its shareholders from exercising supervision in a manner that would have ended the company’s loss-creatingactivities at an earlier date.

The trial judge did not find that Livent’s shareholders relied on Deloitte’s negligent audit statements, or thathad they received and relied on accurate statements, they would have acted in a way that would have prevented Livent from carrying onbusiness and diminishing its assets in the period between the issuance of the relevant statements and Livent’s insolvency. Crucially, thetrial 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 relianceprevented them from taking steps to alter course.

Finally, he did not ask whether these actions, had they been taken, would haveprevented the losses that Livent built up during the seven-month period in question. If the trial judge had asked these questions, he wouldhave been obliged to answer them in the negative, since Livent offered no proof to support affirmative answers. As a result, the factualbasis 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 havemade decisions that would have limited the company’s losses.

While this may be true, it is not enough to rely on unproven assertions todefine the scope of the duty of care and to subsequently demonstrate causation. The majority’s approach suggests that an auditor willgenerally become the underwriter for any losses suffered by a client following a negligent audit report. This, notwithstanding subsequentdecisions — 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 testis not established.

It is therefore unnecessary to go on to ask whether prima facie liability is negated by policy considerations unrelated tothe relationship between the parties. However, were it necessary to do so, the policy considerations of unfair allocation of loss andindeterminacy would preclude imposing liability on Deloitte. Cases Cited By Gascon and Brown JJ. Applied: Hercules Managements Ltd. v. Ernst & Young, (SCC), [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, (SCC), [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; referredto: Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd., (SCC), [1997] 3 S.C.R. 1210; CanadianNational Railway Co. v. Norsk Pacific Steamship Co., (SCC), [1992] 1 S.C.R. 1021; Kamloops (City) v. Nielsen, (SCC), [1984] 2 S.C.R. 2; Haig v. Bamford, (SCC), [1977] 1 S.C.R. 466; Edwards v.

Law Society of UpperCanada, 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, (FOREP), [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 HongKong, [1988] 1 A.C. 175; Edgeworth Construction Ltd. v. N. D. Lea & Associates Ltd., (SCC), [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] 2S.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., (SCC), [1991] 3 S.C.R. 3; Hall v. Hebert, (SCC), [1993] 2 S.C.R. 159; British Columbia v. Zastowny, 2008 SCC 4, [2008] 1 S.C.R. 27; Stone & Rolls Ltd. (inliquidation) v. Moore Stephens, [2009] UKHL 39, [2009] 1 A.C. 1391; 373409 Alberta Ltd. (Receiver of) v. Bank of Montreal, 2002SCC 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, (SCC), [1996] 2 S.C.R. 1071; Hercules Managements Ltd. v. Ernst & Young, (SCC), [1997]2 S.C.R. 165; Canadian National Railway Co. v. Norsk Pacific Steamship Co., (SCC), [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 ChecoInternational Ltd. v. British Columbia Hydro and Power Authority, (SCC), [1993] 1 S.C.R. 12; South Australia AssetManagement 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), 1988ABCA 234 , 60 A.L.R. 1; Overseas Tankship (U.K.) Ltd. v. Morts Dock & Engineering Co., [1961] A.C. 388; Candler v. CraneChristmas & 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., (SCC), [1986] 1 S.C.R. 228; Asamera Oil Corp. v. Sea Oil & General Corp., (SCC), [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.

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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, 128O.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 Wagnerand 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 beimposed 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 frameworkgoverning negligent misrepresentation claims (Chief Justice’s reasons, at paras. 146-147). And we agree that Deloitte & Touche (nowDeloitte 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 followedthe statutory audit. In Hercules Managements Ltd. v.

Ernst & Young, (SCC), [1997] 2 S.C.R. 165, this Courtrecognized that a statutory audit is prepared to allow shareholders to collectively “supervise management and to take decisions withrespect 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’sshareholders were unable to discharge by reason of Deloitte’s negligence.

As a consequence, Livent’s corporate life was artificiallyprolonged, resulting in the interim deterioration of its finances. There was a sufficient evidentiary basis for liability based on impairedshareholder supervision.

Application of the Anns/Cooper framework, coupled with the basis for auditor liability specifically identified bythis 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, shecorrectly identifies the trial judge’s core finding that Deloitte’s conduct fell below the standard of care on two occasions: “. . . eitherwhen it failed to discover the fraud and act on that discovery in August 1997, or when it signed off on Livent’s 1997 financial statementsin 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, likethe 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 1997press release (“Press Release”) and provision of a comfort letter (“Comfort Letter”); and

(2) Deloitte’s preparation and approval of the1997 clean audit opinion (“1997 Audit”). We would not label all of these documents “audit statements”. Indeed, collapsing thedistinctions 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 itsoperations.

Specifically, Livent says that, had Deloitte been prudent in relation to these representations, Livent’s life would not have beenartificially extended and that, in turn, it would have suffered less corporate loss (calculated as the increase in the deficit between itsliabilities and assets at the time of its liquidation): trial reasons, at paras. 23-25, citing Livent’s amended statement of claim, at paras. 210and 212. A detailed recounting of the events pertaining to these two representations is, therefore, critical to the negligence analysis in thiscase. 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 werethe Press Release and Comfort Letter. [9] The Comfort Letter pertains to an agreement whereby Dundee Realty Corp. sought to purchase the air rights aboveLivent’s Pantages Theatre and adjacent lands (“Air Rights Agreement”). Deloitte audited the accounting and reporting relating to thatpurchase, and identified irregularities in the accounting for the reporting of profit.

Ultimately, Livent and Deloitte disagreed about theirregularities, which left Deloitte with a choice between resigning (and reporting those irregularities to regulatory authorities and the nextauditor), 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, andapproved, the Press Release of September 2, 1997, which misrepresented the basis for the reporting of profit arising from the Air RightsAgreement. [10] Further, that Press Release was issued “on the eve of a public offering for which [Deloitte] was going to have toprovide a comfort letter” (trial reasons, at para. 193). As a result, Deloitte — again, negligently — provided the Comfort Letter onOctober 10, 1997, in support of the U.S. $125 million debenture underwriting. The purpose underlying the Press Release and theComfort Letter is critical.

It was not to inform Livent of its own financial position, but rather, to inform investors of Livent’s financialposition, furnishing “comfort” in respect of their investment (despite one of Deloitte’s senior partners’ express acknowledgment thatDeloitte was in no position “to provide any comfort to any regulators, underwriters or audit committee members as to the interimfinancial 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, tomaintain 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., thedate 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 ofdamages 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 of1997, 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, beforethe audit was completed, that Livent had intentionally deceived it as to the nature of its contractual dealings underlying the Air RightsAgreement. 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 collectiveprofessional skepticism would have been at the highest level” at this time (para. 214), and despite Livent’s after-the-fact explanation forthis deception “ma[king] no sense, whatsoever” (para. 234(5)).

Deloitte’s willingness to succumb to Livent’s transparently fraudulentdemands 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 March31, 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 (whichwere intended to inform investors of Livent’s financial position), the 1997 Audit was intended to inform Livent of its own financialposition 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 dutyanalysis in decisions of this Court addressing claims for pure economic loss (Hercules; Bow Valley Husky (Bermuda) Ltd. v.

Saint JohnShipbuilding Ltd., (SCC), [1997] 3 S.C.R. 1210; Canadian National Railway Co. v. Norsk Pacific Steamship Co., (SCC), [1992] 1 S.C.R. 1021). Significantly, however, the Anns test for establishing tort liability in Canada has since beenrefined. 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 thefactors which may be considered at each stage of the Anns test.

While the resulting Anns/Cooper framework has yet to be applied by thisCourt in a case of auditor’s negligence, we adopt this statement of La Forest J. for the Court in Hercules: “. . . to create a ‘pocket’ ofnegligent misrepresentation cases . . . in which the existence of a duty of care is determined differently from other negligence caseswould, 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 inHercules, 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 thecorporation itself for its own losses resulting from a negligent statutory audit could have succeeded (paras. 58-59; see also paras. 1 and60-64): All the participants in this appeal . . . raised the issue of whether the appellants’ claims in respect of the losses they suffered in theirexisting shareholdings through their alleged inability to oversee management of the corporations ought to have been brought as aderivative action . . . . . . . if an action is to be brought in respect of such losses, it must be brought either by the corporation itself (through management) orby way of a derivative action. [19] The duty analysis in Hercules entailed applying the then-current test for recognizing a duty of care in Canadiannegligence law: the Anns test.

Comprising two stages, the Anns test asked (1) whether a prima facie duty of care exists between theparties; and (2) if so, whether there are any residual policy considerations which should negate or limit the scope of the duty, the class ofpersons 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, (SCC), [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 theplaintiff and the defendant” exists such that “in the reasonable contemplation of the [defendant], carelessness on its part may causedamage to the [plaintiff]” (Hercules, at para. 22; Kamloops, at p. 10). In other words, where injury to the plaintiff is a reasonablyforeseeable consequence of the defendant’s negligence, a duty of care would, prima facie, arise.

This relationship, where present, waslabelled one of “proximity” (ibid.). In Hercules, the Court provided greater particularity to the test of reasonable foreseeability whichestablished proximity under the Anns test in the context of claims for pure economic loss arising from negligent misrepresentation orperformance of a service.

Specifically, it stated that proximity would inhere in a relationship where two criteria are met: (1) that thedefendant should reasonably foresee that the plaintiff will rely on his or her representation; and (2) that the plaintiff’s reliance would, inthe circumstances of the case, be reasonable. The Court explained that considering the plaintiff’s reliance within the test for thereasonable foreseeability of injury did not “abandon the basic tenets underlying the [Anns] formula” (para. 25).

Rather, as the plaintiff’sinjury in cases of pure economic loss arising from negligent misrepresentation or performance of a service stems from his or herdetrimental 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 injuryalone, 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 ofpersons who might rely on representations for nearly limitless purposes.

Indeed, as this Court stated in Hercules, “[i]n moderncommercial society, the fact that audit reports will be relied on by many different people (e.g., shareholders, creditors, potential takeoverbidders, 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 theAnns 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 liabilityfor investment and devaluation losses of individual shareholders (paras. 27-28; see also Haig v. Bamford, (SCC), [1977] 1S.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, tosupervise 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 theclaim been brought in the corporation’s name. As we will explain, Livent’s injury following the 1997 Audit is precisely the type ofinjury 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 astatutory 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 clearlybetween 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 carein relation to a particular undertaking, it is the Anns/Cooper framework to which we must have reference in identifying a principled basisfor imposing liability. And, properly applied, that framework will rarely, if ever, give rise to a prima facie duty of care that could resultin indeterminate liability. Accordingly, and with great respect for contrary views, there is no reason to resort to the second stage in orderto 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 primafacie 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” isproximity (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, atpara. 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. Incases of negligent misrepresentation or performance of a service, however, proximity will be more usefully considered beforeforeseeability.

What the defendant reasonably foresees as flowing from his or her negligence depends upon the characteristics of his orher relationship with the plaintiff, and specifically, in such cases, the purpose of the defendant’s undertaking. That said, both proximityand 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 “closeand direct” relationship that it would be “just and fair having regard to that relationship to impose a duty of care in law” (Cooper, atparas. 32 and 34). [26] Under the Anns test, proximity did not, “in and of itself, provide a principled basis on which to make a legaldetermination” (Hercules, at para. 23). Rather, proximity was a “label” which expressed nothing more than a “result, judgment orconclusion” (ibid.), where mere reasonable foreseeability of injury could be shown.

While, under the Anns/Cooper framework, theproximity 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 anddirect relationship is shown.

So long, then, as a risk of reasonably foreseeable injury can also be shown — or has already been shownthrough 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 policyconsiderations 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, forexample, 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; theduty of care of the solicitor to her client” (para. 25).

Proximate relationships will not always, however, be identified so generally. Inparticular, whether proximity exists between two parties at large, or whether it inheres only for particular purposes or in relation toparticular actions, will depend upon the nature of the particular relationship at issue (ibid., at para. 27; Haig, at p. 479).

Indeed, and as weexplain 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 analogouscategory, a court should be attentive to the particular factors which justified recognizing that prior category in order to determine whetherthe relationship at issue is, in fact, truly the same as or analogous to that which was previously recognized.

And, by corollary, courtsshould avoid identifying established categories in an overly broad manner because, again, residual policy considerations are notconsidered where proximity is found on the basis of an established category (Cooper, at para. 39). Analytically, this makes sense. For acourt to have previously recognized a proximate relationship, second-stage residual policy considerations must already have been takeninto account. When, therefore, a court relies on an established category of proximity, it follows “that there are no overriding policyconsiderations that would [negate] the duty of care” (ibid.).

A consequence of this approach, however, is that a finding of proximitybased upon a previously established or analogous category must be grounded not merely upon the identity of the parties, but uponexamination of the particular relationship at issue in each case. Otherwise, courts risk recognizing prima facie duties of care without anyexamination of pertinent second-stage residual policy considerations.

[29] Where an established proximate relationship cannot be found, courts must undertake a full proximity analysis. Todetermine 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, (FOREP), [1932] A.C. 562 (H.L.), at pp. 580-81), courts must examine all relevant “factors arising from the relationship between theplaintiff 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 eachcase (Cooper, at para. 35), this Court has maintained that they include “expectations, representations, reliance, and the property or otherinterests 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 aredeterminative in the proximity analysis: the defendant’s undertaking and the plaintiff’s reliance.

Where the defendant undertakes toprovide a representation or service in circumstances that invite the plaintiff’s reasonable reliance, the defendant becomes obligated totake reasonable care. And, the plaintiff has a right to rely on the defendant’s undertaking to do so (W. N. Hohfeld, “Some FundamentalLegal Conceptions as Applied in Judicial Reasoning” (1913), 23 Yale L.J. 16, at pp. 49-50). These corollary rights and obligations createa 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 thescope of the defendant’s undertaking of responsibility — that is, of the purpose for which the representation was made or the service wasundertaken — 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 relationshipbetween the parties, the proximity analysis not only determines the existence of a relationship of proximity, but also delineates the scopeof the rights and duties which flow from that relationship.

In short, it furnishes not only a “principled basis upon which to draw the linebetween those to whom the duty is owed and those to whom it is not” (Fullowka, at para. 70), but also a principled delineation of thescope of such duty, based upon the purpose for which the defendant undertakes responsibility.

As we will explain, these principled limitsare 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 theplaintiff 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’snegligence (Donoghue, at p. 580).

This inquiry is not amenable to, and does not require, actuarial precision. The jurisprudence givescontent, however, to the foreseeability inquiry, providing courts with guidance. In the abstract, a defendant’s negligent misrepresentationor performance of a service could potentially give rise to innumerable injuries tangentially cascading from the originally contemplatedservice.

This was so in Hercules, where the Court recognized that an auditor’s statement could be relied upon by a potentially limitlessnumber of individuals (e.g., shareholders or takeover bidders), for a potentially limitless array of purposes (e.g., investments or takeoverbids), 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 thefirst stage of the Anns/Cooper framework.

Since Cooper, both reasonable foreseeability and proximity — the latter expressed in Cooperas 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’sundertaking and the plaintiff’s reliance — informs the foreseeability inquiry.

Meaning, the purpose underlying that undertaking and thatcorresponding 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 fromthe fact that he or she detrimentally relied on the defendant’s undertaking, whether it take the form of a representation or theperformance of a service.

It follows that an injury to the plaintiff will be reasonably foreseeable if (1) the defendant should havereasonably foreseen that the plaintiff would rely on his or her representation; and (2) such reliance would, in the particular circumstancesof the case, be reasonable (Hercules, at para. 27).

Both the reasonableness and the reasonable foreseeability of the plaintiff’s reliancewill be determined by the relationship of proximity between the parties; a plaintiff has a right to rely on a defendant to act withreasonable care for the particular purpose of the defendant’s undertaking, and his or her reliance on the defendant for that purpose istherefore both reasonable and reasonably foreseeable. But a plaintiff has no right to rely on a defendant for any other purpose, becausesuch reliance would fall outside the scope of the defendant’s undertaking.

As such, any consequent injury could not have beenreasonably foreseeable. [36] We add this. Under the Anns test, the Court recognized that auditors may owe a prima facie duty of care to aninnumerable number of parties on the basis of reasonable foreseeability alone (Hercules, at para. 32). We acknowledge that theAnns/Cooper framework, when applied to cases of negligent misrepresentation, will give rise to a far narrower scope of reasonablyforeseeable 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 isrequired at the first stage of the Anns/Cooper framework. By requiring examination of the relationship between the parties as we havejust discussed, Cooper gave Canadian courts a more complete array of legal tools to determine whether it is “just and fair” to impose aprima 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 analysisadvances to stage two of the Anns/Cooper framework.

Here, the question is whether there are “residual policy considerations” outsidethe relationship of the parties that may negate the imposition of a duty of care (Cooper, at para. 30; Edwards, at para. 10; Odhavji, atpara. 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 societymore generally” (Cooper, at para. 37; see also Edwards, at para. 10).

To the extent, therefore, that stage one of the prima facie duty ofcare 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 injurysuffered was reasonably foreseeable (see Cooper, at para. 25) — such “policy” considerations are not revisited at stage two (ibid., atpara. 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 impactedthe stage at which certain factors are considered within the Anns/Cooper framework.

For example, principles that were traditionallyconsidered at the second stage of the Anns test in cases of negligent misrepresentation, such as (1) whether the defendant knew theidentity of the plaintiff or the class of plaintiffs who would rely on its representation; and (2) whether the reliance losses claimed by theplaintiff stem from the particular transaction in respect of which the statement at issue was made (Hercules, at paras. 27 and 40; BowValley, at paras. 55-56), are no longer considered at the second stage.

This is because, as we have explained, these factors arise from therelationship between the parties and are, therefore, properly accounted for under the first stage proximity and reasonable foreseeabilityanalysis. [40] What, then, remains to be considered at the second stage of the Anns/Cooper framework?

In Cooper, this Courtidentified 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 “otherreasons of broad policy that suggest that the duty of care should not be recognized” (para. 37). In this way, the residual policy inquiry is anormative inquiry.

It asks whether it would be better, for reasons relating to legal or doctrinal order, or reasons arising from othersocietal 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 andforeseeability inquiries. The policy inquiry assesses whether, despite the proximate relationship between the parties, and despite thereasonably 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 hownarrowly 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., (SCC), [1993] 3 S.C.R. 206, at p. 218).

Only in rarecases — 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 plaintiffwith whom he or she shares a close and direct relationship.

In light of the above, the stage at which certain factors are considered in theAnns/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/Cooperframework, she would insulate Deloitte from liability based on the residual policy consideration of indeterminacy (para. 166). Weconcede 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 appliedproximity and foreseeability analysis (Saadati, at para. 34; Fullowka, at para. 70). Robust application of stage one of the Anns/Cooperframework should almost always obviate concerns for indeterminate liability. This follows from an appreciation of what indeterminateliability, as a concept, actually means. [43] Indeterminate liability is liability of a specific character, not of a specific amount. In particular, indeterminateliability should not be confused with significant liability (Gross v.

Great-West Life Assurance Co., 2002 ABCA 37, 299 A.R. 142, atpara. 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 butreasonably foreseeable scale of injury that can result where such undertakings are negligently performed. This explains the significantcompensation which these high risk undertakings typically attract.

It also explains why contractual disclaimers limiting liability mayoften be warranted (Edgeworth, at p. 220). In contrast, the liability arising from these “high risk” undertakings may only be characterizedas “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 workingwith those sources such as deduction and analogy — are insufficient to resolve the question” (M. V. Tushnet, “Defending theIndeterminacy Thesis”, in B.

Bix, ed., Analyzing Law: New Essays in Legal Theory (1998), 223, at pp. 224-25). More specifically, thereare 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 indeterminateclass”): Hercules, at para. 31, citing Ultramares, at p. 444.

Naturally, when a claim has value, temporal, and claimant indeterminacy, ourlegal 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 robustanalysis of proximity and foreseeability at the first stage of the Anns/Cooper framework.

In cases of negligent misrepresentation orperformance of a service, the requisite proximity analysis will address claimant indeterminacy because the class of claimants isdeterminate, including only those in respect of whom the defendant undertook to act. Likewise, foreseeability, which is constrained bythe 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 foreseeabilityshould both address temporal indeterminacy since the longer the period of time over which injury is said to have occurred, the less likelythe 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 ( Sa

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