2013 QCCA 1187, 2013 QCCA 1187

Source: Court of Appeal of Québec

Date: 2013-08-26

Jurisdiction: Quebec

Citation: 2013 QCCA 1187

Opinion

Unofficial English Translation Wightman c. Widdrington (Succession de) 2013 QCCA 1187 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No.: 500-09-021691-118 (500-05-001686-946) DATE: August 26, 2013 CORAM: THE HONOURABLE JACQUES CHAMBERLAND, J.A. ANDRÉ ROCHON, J.A. PAUL VÉZINA, J.A. ELLIOT C. WIGHTMAN ET AL. APPELLANTS – Defendants v. SUCCESSION OF THE LATE PETER N. WIDDRINGTON RESPONDENT – Plaintiff and CHRYSLER CANADA INC. CIBC MELLON TRUST COMPANY IMPLEADED PARTIES – Impleaded parties and ARTHUR KOSER GMBH & CO.

ET AL. (Group 3 impleaded parties – plaintiffs in the other cases pending) IMPLEADED PARTIES – Impleaded parties and LÜDER VON VERSEBE (Group 5 impleaded party – plaintiff in the other cases pending) IMPLEADED PARTY – Impleaded party JUDGMENT OF CORRECTION [ 1 ] A clerical error within the meaning of

article 520 C.C.P . was inadvertently made in paragraph [3] of the judgment rendered on July 8, 2013: [ 2 ] Therefore, THE COURT CORRECTS the judgment of July 8, 2013, by replacing the reference in paragraph [3] to "one million two hundred thirty thousand and four hundred dollars) ($1,230,400) with "one million one hundred thirty thousand and four hundred dollars ($1,130,400) so that this paragraph may read as follows: [3] ALLOWS the appeal for the sole purposes of (

a) striking the words “and severally” (page 719 of the judgment, paragraph 3639) from the conclusion condemning the appellants to pay the respondent damages, (

b) reducing the damages by $292,560 to “two million three hundred eighty thousand and four hundred dollars ($2,380,400)”, and lastly, (

c) specifying the way in which the interest and the additional indemnity will be calculated, i.e. “together with interest and the additional indemnity from the date of service of the statement of claim on the sum of one million one hundred thirty thousand and four hundred dollars ($1,130,400), with interest and the additional indemnity from March 11, 1998, on the sum of one hundred thousand dollars ($100,000), from June 11, 1998, on the sum of two hundred and fifty thousand dollars ($250,000), from September 11, 1998, on the sum of two hundred and fifty thousand dollars ($250,000), and from the date of this judgment on the sum of six hundred and fifty thousand dollars ($650,000)”. [ 3 ] WITHOUT COSTS .

JACQUES CHAMBERLAND, J.A.

Unofficial English Translation ANDRÉ ROCHON, J.A. PAUL VÉZINA, J.A. Mtre Yvan Bolduc Mtre Serge Gaudet Mtre Gary Steven Rosen Mtre Marie-Josée Hogue Heenan Blaikie For the appellants Mtre Avram Fishman Mtre Leonard W. Flanz Mtre Mark E.

Meland Mtre Margo Siminovitch Mtre Betlehem Lala Endale Fishman Flanz Meland Paquin For the respondent Mtre Stephen Walter Hamilton Stikeman Elliott Mtre Jack Greenstein (advisory capacity) Gowling Lafleur Henderson For the impleaded parties Chrysler Canada Inc. and CIBC Mellon Trust Company Mtre Martin Côté Robinson Sheppard Shapiro For the impleaded parties Arthur Koser GMBH Co. et al. Mtre Stéfanie Poitras (absent) MORENCY SOCIÉTÉ D'AVOCATS For the impleaded party Lüder Von Wersebe Dates of hearing: February 11, 12 and 13, 2013 Wightman c.

Widdrington (Succession de) 2013 QCCA 1187 COURT OF APPEAL CANADA PROVINCE OF QUEBEC MONTREAL REGISTRY No. 500-09-021691-118 (500-05-001686-946) DATE: July 8, 2013 CORAM: THE HONOURABLE JACQUES CHAMBERLAND, J.A. ANDRÉ ROCHON, J.A. PAUL VÉZINA, J.A. ELLIOT C. WIGHTMAN ET AL. APPELLANTS – Defendants v. SUCCESSION OF THE LATE PETER N. WIDDRINGTON RESPONDENT – Plaintiff and CHRYSLER CANADA INC.

CIBC MELLON TRUST COMPANY IMPLEADED PARTIES – Impleaded parties and ARTHUR KOSER GMBH & CO.

ET AL. (Group 3 impleaded parties – plaintiffs in the other cases pending) IMPLEADED PARTIES – Impleaded parties and LÜDER VON VERSEBE (Group 5 impleaded parties – plaintiffs in the other cases pending) IMPLEADED PARTY – Impleaded party JUDGMENT [1] The appellants appeal from a judgment of the Superior Court, District of Montreal (the Honourable Madam Justice Marie St- Pierre), rendered on April 14, 2011, which allowed the action of the respondent and condemned the appellants jointly and severally to pay the respondent $2,672,960, with interest and the additional indemnity from the date of service. [2] For the reasons of Chamberland, Rochon and Vézina, JJ.A., the latter dissenting on the issues related to joint and several liability and the causal connection between the appellants’ fault and the prejudice sustained by the respondent in regard to the investment of October 25, 1991, THE COURT : [3] ALLOWS the appeal for the sole purposes of (

a) striking the words “and severally” (page 719 of the judgment, paragraph 3639) from the conclusion condemning the appellants to pay the respondent damages, (

b) reducing the damages by $292,560 to “two million three hundred eighty thousand and four hundred dollars ($2,380,400)”, and lastly, (

JACQUES CHAMBERLAND, J.A. ANDRÉ ROCHON, J.A. PAUL VÉZINA, J.A. Mtre Yvan Bolduc Mtre Serge Gaudet Mtre Gary Steven Rosen Mtre Marie-Josée Hogue Heenan Blaikie For the appellants Mtre Avram Fishman Mtre Leonard W. Flanz Mtre Mark E.

Mtre Stéfanie Poitras (absent) MORENCY SOCIÉTÉ D'AVOCATS For the impleaded party Lüder Von Wersebe Dates of hearing: February 11, 12 and 13, 2013 REASONS OF CHAMBERLAND, ROCHON AND VÉZINA, JJ.A. [ 5 ] The Castor Holdings Ltd. (Castor) case is well known. The bankruptcy of Castor in 1992 generated a series of legal proceedings for professional liability against the firm of chartered accountants Coopers & Lybrand (Coopers) and its Canadian partners. [ 6 ] Nearly 100 creditors claim over $1 billion from Coopers.

In substance, the creditors allege that Coopers was negligent in its accounting work, more specifically, in auditing Castor’s financial statements. They affirm that, but for that negligence, they would not have invested or lent the amounts claimed. [ 7 ] The Superior Court devoted nearly 12 years to the hearing of that case. The trial began in September 1998. It dealt with a typical case, that of the late Peter N. Widdrington (Widdrington). The impugned judgment was handed down on April 14, 2011.

The other cases are still pending. [1] [ 8 ] For a proper understanding of the case, it is appropriate to provide a brief overview of the legal proceedings before the Superior Court and the orders it issued regarding all the remaining active cases. LEGAL HISTORY [ 9 ] In early 1994, less than two years after Castor Holding’s bankruptcy, nearly 100 creditors instituted actions for professional liability against Coopers.

The plaintiffs alleged that the defendants did not respect either the Generally Accepted Accounting Principles [2] or the Generally Accepted Auditing Standards. [3] These faults were said to have been committed particularly when Castor’s audited financial statements were prepared. [ 10 ] The plaintiffs also alleged that the defendants did not provide a financial profile that accurately reflected reality in the annual preparation of the various accounting documents.

It was alleged that the financial statements were misleading, as they did not disclose the economic dependency between various corporations related to Castor or the risky nature of the loans made to them. [ 11 ] Furthermore, the plaintiffs alleged that diligent work would have made it possible to detect the dubious mechanisms of the capitalization of interest on the loans, the financial operations that constituted “window dressing”, the poor quality of the loans, and the liquidity problems.

In short, the plaintiffs alleged that they made loans to or invested in Castor on the strength of erroneous and misleading accounting documents. They brought an action in extracontractual liability against the accountants who prepared those documents while knowing full well the use that the lenders and investors would make of them. [ 12 ] From 1994 to 1998, the files advanced, but not without difficulty.

Procedural progress was punctuated by multiple examinations before and after defence and by a large number of motions debated before the Superior Court, the Court of Appeal or the Supreme Court of Canada. [ 13 ] In 1998, Paul Carrière J. of the Superior Court, was appointed to coordinate and hear the Castor case. On February 20, he issued an order establishing the parameters for the legal debate. That interlocutory judgment is important and deserves further explanation. [ 14 ] At the time, Carrière J. was coordinating the progress of 40 cases.

Some were ready to proceed, while others would not be ready for several months or even several years. The following questions arose: Should he wait for all the cases to be ready before beginning the trial? Should it be a group trial? What would be the most efficient and economical way to manage and hear the cases in without infringing the rights of each party? [ 15 ] Carrière J. made the following justifications for the order he was preparing to issue. In all cases, the plaintiffs had to establish fault, damage and a causal connection.

Although the last two elements were case specific, the issue of fault was common to all the cases. If the trial judge concluded in the first case that the defendants had committed no fault, all the cases would be brought to an end. Otherwise, only the issues of causation and damages would remain. [ 16 ] Therefore, Carrière J. chose to proceed with the Widdrington case first. He set September 8, 1998, for the start of the trial. He granted [ translation ] “status” to counsel for the other plaintiffs.

He authorized them to participate in the trial regarding common issues, including the right to adduce all relevant evidence on those subjects.

[ 17 ] In the meantime, the other cases were suspended. [ 18 ] Counsel for the different parties did not understand the scope of the order of February 20, 1998 in the same way. The defendants contended that the future judgment on common issues was merely indicative in scope and that the sole effect of the order was to allow the evidence on common issues to be adduced in the other cases.

This contention was rejected by Wery, A.C.J. on October 16, 2006. [4] Wery, A.C.J. concluded that the findings of the trial judge on the common issues would bind the parties involved in the other cases. [ 19 ] On September 8, 1998, the hearing of the Widdrington case began before Carrière J. The scope of the case was unprecedented. A single example suffices: The testimony for the plaintiff of public accountant Keith Vance,who testified four days a week, three weeks out of four and ten months a year, lasted more than three years. [ 20 ] The defendants began to adduce their evidence in February 2005.

According to the

schedule set up by Carrière J., presentation of the evidence was to end in 2008 and the judgment was to be rendered in 2010. [ 21 ] On February 11, 2005, Widdrington died. The case was continued by his heirs. [ 22 ] In October 2006, Carrière J., then in his ninth year of the trial, was forced to withdraw from the case because of illness. [ 23 ] On September 7, 2007, Rolland C.J. issued an order for the resumption of the trial under

article 464 of the Code of Civil Procedure. [5] He gave each party a year to adduce its evidence and arguments. He designated Marie St-Pierre, J.S.C., as she then was, to coordinate and hear the case. [ 24 ] On January 7, 2008, St-Pierre J. presided over a management conference. The parties agreed, firstly, to enter in the record a portion of the evidence from the first trial and, secondly, to take numerous measures to facilitate the second trial, which began on January 14, 2008. On October 4, 2010, the case was taken under advisement.

The judgment on the merits was rendered on April 14, 2011. [6] The trial proceedings began 17 years after the motions introductive of suit were filed. JUDGMENTS APPEALED FROM [ 25 ] There are three appeal files, further to an equal number of notices of appeal. The first notice of appeal deals with the judgment of the Superior Court on the merits of the dispute (500-09-021691-118). The second concerns an interlocutory judgment on the objections to the evidence (500-09-021692-116).

The third impugns an interlocutory judgment dismissing the appellants’ motion for additional evidence (500-09-021693-114). [ 26 ] In a letter dated October 29, 2012, the appellants’ attorneys informed the Court that their clients no longer intended to pursue the appeal on the issues as to (

a) whether the representation of Castor’s 1988, 1989 and 1990 financial statements complied with the GAAP and (

b) whether, in their role auditing those financial statements, they had complied with the GAAS or not, which resulted in the abandonment of the appeals from the two interlocutory judgments. [ 27 ] Only the appeal from the Superior Court judgment on the merits remain. [ 28 ] The judgment is 752 pages long (excluding the schedules) and is divided into 3639 paragraphs. It contains 3800 footnotes and a table of contents covering 18 pages. The judgment is well structured. The facts are explained powerfully and in detail.

We cannot summarize it in a few paragraphs without running the risk of betraying the trial judge’s reasoning and intellectual progression. The sole purpose of the explanation given here is to illustrate the main issues of the case. We will come back to certain facts in our analysis, even though the appellants have stated that they do not challenge the trial judge’s findings of fact.

We refer the reader to them. [ 29 ] Before providing an overview of the trial judgment, the principal protagonists of this legal saga should be introduced: Castor ° Castor Holdings Ltd. was a private financial intermediary, the activities of which were not regulated. These activities consisted in soliciting money from private and institutional investors, then investing it in high-yield mortgage loans and equity loans that it extended to real estate companies located mainly in Canada and the United States.

Its goal was thus to earn profits on the spread between what it cost it to obtain its funds and the return it achieved on the loans it extended; [7] ° Castor Holdings Limited was incorporated in New Brunswick in 1977, where it had its head office.

The true headquarters for its activities, however, was in Montreal, where its accounting and the accounting consolidation of its activities with those of its subsidiaries were done; ° Castor had a number of European subsidiaries (in Switzerland, the Netherlands, Cyprus and Ireland), as well as a West Indies subsidiary in Curacao; ° Between 1986 and 1990, Castor experienced phenomenal growth. Its assets, which totalled $643 million in 1986, jumped to $1.871 billion in 1990.I In 1992, however, the collapse occurred.

After seeking protection from the courts in February, Castor was declared bankrupt on July 9, 1992, retroactively to March 26 of that year.

Wolfgang Stolzenberg (“Stolzenberg”) ° Cofounder, shareholder, director, and president and chief executive officer of Castor from its incorporation. In 1986, he succeeded Karsten Von Wersebe as chairman of the board and acquired the latter’s interest in the firm in 1987. In short, he was the mastermind of the enterprise; ° Stolzenberg was also involved in myriad other companies, some of which were tied to real estate projects financed with money lent by Castor. Karsten von Wersebe (“Wersebe”) ° Cofounder, director and chairman of the board of directors of Castor until 1986.

He held 40% of the shares of the enterprise until 1987, when he sold his interest to Stolzenberg; ° Wersebe was also the controlling mind of the York Hannover Group, Castor’s main client. York Hannover Group (“YH Group”) ° A group of companies, divided into several subsidiaries and directed by Wersebe, active in the development and administration of real estate complexes (shopping centres, hotels, etc.), to which Castor made many loans.

DT Smith Group (“DTS Group”) ° A group of enterprises founded by David Smith, comprising eight companies and seven partnerships, involved in the development and construction of residential real estate projects in California (single-family homes and condominiums); ° DT Smith was the Castor’s second largest client, after the YH Group. Coopers ° A well-regarded firm of chartered accountants, Coopers acted as auditor of Castor’s accounts since its incorporation; ° Two teams of professionals did the audits, under the responsibility of the appellant Wightman.

The first team was based in Montreal, for Castor’s activities on North American soil, and the second in Zug (Switzerland) and in Schaan (Liechtenstein), for the activities of its subsidiaries abroad. The consolidation of the accounts and the executive meetings with Stolzenberg and other officers of Castor took place in Montreal; ° Besides the auditing of Castor’s accounts, Coopers was responsible for preparing valuation letters for Castor’s common shares, as well as admissible investment certificates (Legal-for-Life certificates). Elliot C. Wightman (“Wightman”)

° A Coopers partner, in charge of the Castor file. He directed the teams of auditors in Montreal and abroad. Widdrington ° Peter N. Widdrington was an experienced businessman with an impressive professional history. During his career, he was director of more than a score of major companies (such as CIBC and SNC-Lavalin). At the time of his first investment in Castor, he was president and chief executive officer of John Labatt Limited; ° After several meetings with Stolzenberg and after consulting his financial advisers, he decided to invest in Castor.

He made an initial investment in October of 1988 and two other investments in December of 1989 and October of 1991, for a total of $1,422,960. He became a member of Castor’s board of directors on March 21, 1990. [ 30 ] Firstly, the trial judge described the four fundamental issues raised by the dispute. The first three are common to all the cases, while the last one deals solely with the Widdrington case: [8] 1. Were the audited consolidated financial statements of Castor for 1988, 1989 and 1990 materially misstated and misleading? 2.

Did C&L commit a fault in the professional work that they performed in connection with the subject audits of Castor, the valuation opinions that they issued and the legal for life certificates? 3.

Taking into account that Castor is incorporated under the New Brunswick Corporation Act, that Coopers performed its work in various worldwide locations under the responsibility of a Montreal engagement partner and always issued the consolidated financial statements and other opinions out of its Montreal offices, that Widdrington resided in Ontario while various other claimants live in different European countries, what is the governing law applicable: New Brunswick or Ontario common law, Quebec civil law or another law? 4.

Did Widdrington suffer damages and, if he did, is there a causal connection between a fault of C&L and those damages that render Coopers liable for same? [ 31 ] At the end of her judgment, she concluded as follows regarding the first three common issues: [9] On common issues DECLARES that: – the audited consolidated financial statements of Castor for 1988 are materially misstated and misleading; – the audited consolidated financial statements of Castor for 1989 are materially misstated and misleading; – the audited consolidated financial statements of Castor for 1990 are materially misstated and misleading; – C&L failed to perform their professional services as auditors for 1988 in accordance with the generally accepted auditing standards (“GAAS”); – C&L failed to perform their professional services as auditors for 1989 in accordance with the generally accepted auditing standards (“GAAS”); – C&L failed to perform their professional services as auditors for 1990 in accordance with the generally accepted auditing standards (“GAAS”);

– C&L issued various other faulty opinions relating to Castor’s financial position during 1988 (valuation letters and certificate for Legal for Life Opinion); – C&L issued various other faulty opinions relating to Castor’s financial position during 1989 (valuation letters and certificate for Legal for Life Opinion); – C&L issued various other faulty opinions relating to Castor’s financial position during 1990 (valuation letters and certificate for Legal for Life Opinion); – C&L issued various faulty opinions relating to Castor’s financial position during 1991 (valuation letters and certificate for Legal for Life Opinion); – the governing law is Quebec civil law. [ 32 ] As regards the fourth question, she concluded that Widdrington established a causal connection between Coopers’ fault and his damages, which she set at $2,672,900.

Then followed the condemnation of Coopers to pay that amount, together with interest, the additional indemnity, and costs. [ 33 ] The trial judge devoted the first 636 pages of her judgment to the issue of Coopers’ “negligence” in preparing the audited consolidated financial statements for 1988, 1989 and 1990 and in issuing opinions about the value of Castor’s shares and for the purpose of the Legal-for-Life Certificates for 1988, 1989, 1990 and 1991. [ 34 ] On the substance of these issues, the judge concluded as follows: – The consolidated financial statements audited by Coopers for 1988, 1989 and 1990 were misstated and misleading; – The financial statements involved did not comply with the GAAP; – Coopers, in its capacity as auditor, did not comply with the GAAS; – During 1988, 1989, 1990 and 1991, Coopers issued a number of misleading opinions about Castor’s true financial situation and, more particularly, in the stock valuation letters and the Legal-for-Life Certificates; – But for Coopers’ negligence, that deception could have been easily detected. [ 35 ] The judge reached these conclusions after describing what she considered the true nature of Castor: “Castor was like a coin – it had two sides: the appearances and the reality”. [10] [ 36 ] Castor presented itself to the public as a short- and medium-term mortgage lender.

Its profits were generated by the spread between its borrowing cost and the cost at which it made its loans, and according to its financial statements and the financial statements audited by Coopers, they were spectacular. [ 37 ] But the reality was very different. [ 38 ] In fact, a very small number of the loans were short-term. The vast majority of the loans, when they matured, were renewed year after year because the borrowers were unable to meet their obligations.

Most of them were real estate partnerships related directly or indirectly to Castor, and these connections explain why Castor tolerated the systematic failure to meet the terms and conditions of the loan contracts. Furthermore, the loans were guaranteed by mortgages only in very rare cases. In short, according to the trial judge, Castor was not really involved in the field of mortgage loans, but rather in the field of high-risk equity loans.

Over the years, it consistently bailed out its clients in order to keep half-baked projects afloat, and given the chronic inability of its borrowers to meet their obligations, Castor had no choice but to systematically capitalize the interest year after year. The capitalized interest represented 90% of the enterprise’s income in 1988, 1989 and 1990. [ 39 ] A long analysis of Coopers’ failures to abide by the GAAP and the GAAS followed.

The judge concluded that if those rules had been complied with, anyone reading the accounting documents would have seriously questioned the profitability and solvency of Castor and would have noticed that not only were the loans non-performing, but the borrowers were, as a general rule, unable to meet their obligations. [ 40 ] In the judge’s opinion, Coopers could in no way have expressed a favourable opinion or submitted unqualified reports if it had performed its work in accordance with the applicable principles and standards.

She identified 29 failures or faults on the part of Coopers, although some of them overlap. [11] [ 41 ] There is no reason to elaborate further on that subject since the issue of negligence is not challenged on appeal. We will come

back to this. [ 42 ] Once the faults had been established, the judge proceeded to study the causal connection. She concluded that Widdrington had relied on Coopers’ representations at the time of his investments and that, in doing so, he had acted reasonably. [ 43 ] In order to decide the issue of liability, the judge had to determine the applicable law: civil law or common law. [ 44 ] According to her, the debate dealt with extracontractual liability, not “the status and capacity” of Castor.

Therefore, it was appropriate to apply the lex loci delicti , i.e. the law of the place where the alleged acts occurred applies. We will elaborate on that issue later on, since it constitutes one of the main grounds of appeal. [ 45 ] After recalling the general principles of civil liability, the trial judge proceeded to apply them.

She concluded that the appellants were severally (not jointly) liable for the damage caused Widdrington. [ 46 ] In the alternative, she affirmed that she would have reached the same conclusion concerning liability if the common law rules had been applied. [ 47 ] The analysis of the damage and the causal connection is divided into three parts: (1) the investment of December 28, 1989: $1,130,400; (2) the investment of October 25, 1991: $292,560; and (3) the transaction of March 11, 1998: $1,250,000. The first two were investments by Widdrington in Castor.

The third was the result of a settlement with Castor’s trustee in bankruptcy that was suing, inter alia , Widdrington in his capacity as director, for the dividend of $15 million voted by Castor’s board of directors on March 21, 1991, even though the enterprise was insolvent. [ 48 ] The judge concluded her analysis with the issue of costs. She ruled out the solution advocated by the appellants that costs should be distributed proportionately among all of the claims of the various creditors.

This proposal was aimed primarily at distributing the sizable cost of experts on the common issues among the different files. The trial judge said she believed, after her analysis, that there was no reason to stray from the usual rule. Therefore, she condemned the appellants to pay all costs.

GROUNDS OF APPEAL [ 49 ] Originally, in their notice of appeal, the appellants raised five fundamental grounds, which can be grouped under the following themes: (1) negligence; (2) the law applicable to civil liability; (3) the issues of causation and damages; (4) the joint and several condemnation of the partners; (5) costs. [ 50 ] Grounds of appeal (1), (2) and (4) are common to all the cases, whereas grounds (3) and (5) are particular to each of them. [ 51 ] In a letter dated October 29, 2012, counsel for the appellants informed the Court that his clients no longer intended to continue the appeal regarding the elements related to negligence (ground (1)).

More specifically, the attorney wrote the following: [ translation ] During their preparation for this hearing, and in light of what they consider to be the most important and fundamental issues raised by the present appeal—namely, the applicable law (conflict of laws), the liability of the auditor for the use that may have been made of its various reports (auditing reports, valuation letters and Legal for Life Certificates), in accordance with both the principles of Canadian common law and Quebec civil law, the causal connection (reliance), damages, interest and costs, and the nature of the liability of the partners (joint and several liability)—the appellants have made the decision not to continue their appeal on the following issues: (

a) Did the presentation by Castor Holdings Ltd. of its financial statements for the fiscal years ending December 31, 1988, 1989 and 1990 comply with the Generally Accepted Accounting Principles (“GAAP”)? (

b) Did Coopers & Lybrand, in its role as auditor of these financial statements of Castor Holdings Ltd., comply or not comply with the Generally Accepted Auditing Standards (“GAAS”)? [ 52 ] Before broaching the analysis proper, it is appropriate to examine in more detail the role played by Coopers and above all by Wightman, the person in charge of the file, in this whole affair. ROLE PLAYED BY COOPERS AND WIGHTMAN [ 53 ] The judge found that “[t]he audited consolidated financial statements of Castor for 1988, 1989 and 1990 are materially

misstated and misleading”. [12] [ 54 ] Audited financial statements imply two stages: preparation of the statements, which is the work of the enterprise, and auditing, which is the work of the auditor. During the three years in question, Stolzenberg was Castor’s all-pervasive and powerful controlling mind, or in the judge’s words, “the mastermind behind Castor”. He was the one who prepared the financial statements so that his enterprise would appear to be flourishing, whereas it was—we now know—insolvent and bankrupt as of 1987.

At Coopers, the partner Wightman had been responsible for the Castor file for many years, and his poor auditing work provided approval for Stolzenberg’s fraudulent statements. [ 55 ] The appellants now concede that the presentation of Castor’s financial statements for 1988, 1989 and 1990 did not comply with the GAAP and that their auditing did not comply with the GAAS. [ 56 ] The wise abandonment of those grounds confirms the judge’s finding of fault against the appellants.

The issue merits further discussion, however, to understand the discussion below on the causal connection between Coopers’ fault and Widdrington’s loss.

To ensure an appreciation of the nature and scope of Coopers’ fault, we must say a few words about Stolzenberg’s fraud. [ 57 ] Stolzenberg created a Ponzi scheme in which the operating deficits and annual dividends were paid out of the amounts received from new investors or new lenders. [ 58 ] The enterprise’s prosperity was just an illusion; the reality was disastrous. [ 59 ] The reality: Almost all the real estate promoters to which Castor lent money were unable to finish their projects and make them profitable.

Once their first mortgage creditors were paid–if they were–the promoters were unable to repay their borrowings from Castor or even simply pay the accrued interest. [ 60 ] The appearance: On the basis of the entries in the accounting books, Stolzenberg made new advances to the promoters, and these advances were used to [ translation ] “pay” the interest, on paper. Thus, he killed two birds with one stone in order to embellish Castor’s financial statements: a new loan at an attractive interest rate increased its investments, and the interest, which was considered to have been paid, increased its income.

From 1987 to 1990, the figures in the statements were inflated by these ploys, from $80 million in 1988 to $120 million in 1989 and to $160 million in 1990. [ 61 ] The catch was that Castor itself had to pay the interest, not to mention the generous dividends that the shareholders expected, as they were convinced that the enterprise was exceptionally successful according to Coopers’ unqualified statements.

The result was the Ponzi scheme to pay interest and dividends, in real money, out of the new cash inflows from additional borrowings or the recruitment of new investors like Widdrington. [ 62 ] To conceal the actual gap with the inflated figures, Stolzenberg developed a complex structure of interrelated legal entitles— there were 40 or so in the organization chart—in a number of countries and under his more or less direct control. It is worth noting in passing that he was very careful not to reveal his conflicts of interest.

This was a sophisticated set-up, which led Coopers to argue that it was itself a victim of the fraud.

The judge rejected that supposed justification, which has since been abandoned: “. . . the alleged fraud and misrepresentations by Castor’s management cannot serve to relieve [Coopers] of the responsibility arising from their improper and deficient performance as accountants and auditors”. [13] [ 63 ] Not only should the uncollected interest not have been added to the revenue account, but on the contrary, the revenue should have been reduced by provisions for bad debts, since Castor’s debtors were having serious financial problems. [ 64 ] In addition to this grave problem, the judge referred to two more false entries in Castor’s statements that reveal its duplicity, in terms of reality versus appearance. [ 65 ] Castor’s statements showed $100 million in “debentures”.

This entry improved the liquidity of the enterprise and demonstrated the lenders’ trust in its reputation. But the investigation revealed that that was merely another slight of hand by Stolzenberg. The judge described the path taken by the sums that came from Castor and returned there to improve its apparent situation. She related in detail the transactions between the various entities, with the result that, “at the end of the day and on a consolidated basis, 100 million of current liabilities of Castor were moved to long-term debt”.

That was “a circular transaction”, a vicious circle, and the statements were “materially misleading”. [14] [ 66 ] Stolzenberg also entered in the statements a $20-million deposit available in the short term, even though the deposit was given as security and was therefore unavailable. This liquidity reassured readers, who saw it as protection if anything unexpected cropped up. Unfortunately, they were being seriously deceived. [ 67 ] In the circumstances, stating that Castor’s financial statements did not comply with accounting principles is an understatement.

The prime objective of the GAAP is that the statements provide a faithful picture of the financial situation of an enterprise, while Stolzenberg provided exactly the opposite, with great skill and in bad faith, as he blithely distorted the statements in order to make Castor look good. [ 68 ] Of course, Castor’s seeming prosperity was conspicuous. Business was stirred up millions of dollars at a time in colossal projects: the Centre Eaton in Montreal, Maple Leaf Village in Niagara Falls, the Toronto Skyline, the World Trade Centre in Toronto, and so on.

Castor did deals everywhere on the planet, with a number of banks and many investors. The meetings of the directors were held in world financial capitals: New York, Zurich, etc. On occasion, Widdrington was even invited to go to these meetings in a private jet. And for many years, the dividends matched the growth. [ 69 ] Thus, the setting was dazzling and ripe for exploitation by a savvy swindler. But millionaires are cautious, and there had to be more to convince investors to sign their cheques.

Stolzenberg had an ultimate weapon of persuasion, however, in the form of. financial statements that had been audited by a highly respectable firm that confirmed the soundness and prosperity of his enterprise, year after

year and without any qualifications. [ 70 ] This leads us to consider the role of Coopers and the partner Wightman in this fraud. Did he simply make a mistake, through a lack of judgment, incompetence or negligence, or did he play a more important role in bringing investors to trust Stolzenberg? [ 71 ] A co-conspirator is [ translation ] “. . . a person playing a secondary role in an offence”. [15] [ 72 ] Wightman’s role with Castor exceeded that of a simple auditor. He was involved in Stolzenberg’s approach.

He had objectively become his co-conspirator. [ 73 ] The appellants’ admission that the auditing of Castor’s financial statements for 1988, 1989 and 1990 did not comply with generally recognized principles in the profession is simplistic. The auditing work was botched. Wightman lost the independence required of an auditor; he was unable to keep a healthy distance from his client. He was too involved in the client’s business, “far beyond his role as Castor’s auditor”, according to the judge. [16] In addition, he lost his ability to think critically about Stolzenberg.

Informed by his team of the discovery of disturbing irregularities, or red flags, Wightman met with Stolzenberg but subsequently did nothing; no investigation was conducted and there were no qualifications in the auditing report, On the contrary, the report confirmed that everything was fine, that everything was going well, and that the enterprise was flourishing. [ 74 ] In a long

section of the judgment, the judge explained in detail what Coopers did not do or did incorrectly throughout the progress of the auditing work. It is easy to see why the result was a fiasco. For example, on the strength of the audited statements, Coopers confirmed that the market value of the shares was $580, whereas Castor’s bankruptcy, which occurred barely a few months later, made it clear to all that they were really worth nothing.

Widdrington lost his entire investment, and more. [ 75 ] In light of the judge’s description of the serious and numerous shortcomings in the auditing, stating that Coopers failed to comply with auditing standards is a second understatement. [ 76 ] Regarding more specifically the connection between Coopers’ fault and the investors’ loss, three aspects are relevant: • the distribution of the audited statements; • the valuations of the shares and the Legal-for-Life Certificates; • the involvement of Wightman with the investors. [ 77 ] We have seen that Stolzenberg distributed Castor’s audited statements to all potential investors in his constant quest for new capital.

Coopers’ auditing reports, with no qualifications, thus became a major consideration for anyone thinking of investing, particularly since Castor, a private company, was not listed on the stock exchange. Stock market fluctuations are another important consideration for investors. The absence of this second consideration made the first consideration crucial in Castor’s case. [ 78 ] The appellants contend, however, that an auditor’s report is intended for the shareholders’ meeting, nothing else.

Although the statements of a large enterprise constitute quasi-public documents, the distribution of which cannot be controlled, the same was not true of Castor, where Stolzenberg and his team themselves conveyed the audited financial statements to potential investors, with Wightman’s knowledge and consent. [ 79 ] Generally, auditors know that their clients use their report when dealing with bankers, lenders, suppliers and so on, even though in principle their report is intended for the shareholders’ meeting.

They do not, however, require the enterprise that retains their services to refrain from using their report that way for its own benefit. And the law does not prohibit it either. [ 80 ] Coopers knew that investors such as Widdrington relied on its auditing reports to invest. It accepted this distribution and assisted it, as the judge noted. [17] The audits were performed in the following circumstances: . . . C&L knew that the audited financial statements, or their by-products, would be distributed to third parties and relied upon for the purposes of allowing and making investment decisions.

After revision by C&L, at the request of Wightman, 1 500 copies of a brochure which included information on the financial statements were printed annually. Brochures were written or translated in various languages. . . .

In July 1991, Wightman met with M. Gilligan and M. Martin from Bayerische Bank who wanted to speak to someone knowledgeable who had the ability to confirm the financial well-being of Castor. With them, Wightman went through the various steps of C&L’s auditing process. [References omitted.] [ 81 ] Twice a year, Coopers determined the fair market value of Castor shares on the basis of the financial statements. The falsity of the statements resulted in the falsity of the valuations.

Furthermore, the judge criticized the methodology used and accepted the opinion of Coopers’ own expert that there was a need for a warning that its opinion was based on very limited assumptions. Here again, there was a lack of professionalism. [ 82 ] That work by Coopers—its services were retained and paid for by Castor—was not part of the ordinary mission of an auditor.

An auditing report, which is required by law, was used primarily at the shareholders’ meeting, while the valuations, required by contract, were intended to reassure present and future Castor investors about the value of the shares. [ 83 ] Wightman knew that the valuations were used to recruit new investors. He first denied this, but had to admit it once he was confronted with the documents in which this fact is explicitly indicated. In addition, he claimed that only the directors received them, but he admitted sending 100 copies to Stolzenberg, whereas there were only 14 directors.

In both cases, the judge considered his testimony not credible and not reliable. [ 84 ] The Legal-for-Life Certificates were sent to institutional investors that administered the money of others, such as life insurers (hence their name) and trustees that manage pension funds. The law obliges them to invest in securities that meet many requirements— safe investments, as it were. On the basis of the audited statements, Coopers calculated certain ratios that subsequently provided the foundation for issuing certificates that the legal requirements had been met.

Inadequate auditing of the statements led to the falsity of the certificates, which again contained no qualifications or warnings. [ 85 ] Although the certificates were intended primarily for institutional investors, they were also sent by Stolzenberg to other investors, present and future. They were another weapon of persuasion for him, all the more useful since Castor was not rated by a credit rating agency.

One can imagine the attraction for an investor of a safe investment certified by a well-regarded accounting firm. [ 86 ] The last point connecting Coopers’ work to the investors who were swindled is the involvement of Wightman in Castor’s activities, including the search for new capital. [ 87 ] The judge’s first criticism of Wightman concerned his lack of independence from Castor and Stolzenberg; his critical judgment, which is essential to auditing, was lacking.

She pointed out that he compromised himself by becoming deeply involved in Castor’s business, both its internal governance and its external promotion. [ 88 ] Wightman participated in the governance of the enterprise. In 1977, he organized Castor’s administrative structure and became its auditor.

Later, he organized the international structure and was a stakeholder in its establishment in various entities in the United States, the Caribbean, Switzerland, Cyprus and Ireland. [ 89 ] He advised Castor about various purchases such as gas production rights, research credits, and hotels, various loans and other investments, and the purchase of a plane. He also gave his opinion in tax matters and became the spokesman for the enterprise with authorities in Quebec City and Ottawa, where he defended, among other things, the attribution of revenue between Castor and its subsidiaries.

It is therefore not surprising that all of these duties frequently led him to join the board of directors and, upon occasion, to participate in its meetings from beginning to end. [ 90 ] As an example of the intensity of his involvement, the judge related the establishment of the Irish subsidiary, in which he was active at every stage: [18] The role played by Wightman with respect to CH (Ireland) is a prime example of his integral role in setting up Castor’s subsidiaries. Wightman began proposing Ireland as a potential low-tax jurisdiction in which to establish a subsidiary as early as 1984.

Wightman conceived the concept for this entity and spearheaded the process to obtain the required approvals to bring the project to fruition. Throughout the process, Wightman: • negotiated with Irish authorities to obtain the required operating license, and

• was involved in: o incorporating the entity, o hiring personnel, o introducing Castor to prospective financers, o reviewing proposed transactions for the company, and finding clients to make use of the operations that he designed. [ 91 ] Wightman also promoted Castor to his own clients, his partners and his acquaintances. The judge noted that several of these individuals invested in Castor, through his initiative; she listed them and indicated how Wightman intervened in each of the many cases. Not to mention the business opportunities that Castor had through him, both here and abroad: the

summary of Wightman’s interventions covers 20 pages of the judgment. [ 92 ] Considering how Wightman became Castor’s champion, the unqualified audit reports and the ever-rising share valuations containing glowing comments are no longer surprising.

Even just before Castor’s bankruptcy, Wightman confirmed an increase in value and described a promising future: [19] Under the subheading “Main considerations in establishing value”, C&L wrote: . . . • The book value per common share, as at September 30, 1991, is $455.77 (Appendix). • Despite the slowdown in the real estate market in North America, management does not expect major adjustments to the company’s mortgage portfolio or to the net earnings.

In fact, because of the slowdown additional opportunities may be provided for Castor. . . . • In our opinion, the fair market value of the common shares of Castor, on or about September 30. 1991, is approximately $550 to $580 per share. [ 93 ] Wightman’s fault extended well beyond the shortcomings that have been observed in the auditing work as such. [ 94 ] Stolzenberg was the engine of the fraud, but it would not have worked so well without the lubricant provided by Wightman. [ 95 ] In fact, the judge doubted his good faith.

In addition to the cases in which she found that his version lacked credibility, she also noted that he hid his acts from his own partners: [20] The fact that he hid these numerous relationships from his partners in his annual declarations, and to his partner Johnson in the context of their relationship for Sloppin, suggests that he knew or felt that he had something to hide.

Moreover, his changing or “improved” testimonies on these issues point in the same direction. [ 96 ] In short, Coopers’ fault–and above all, Wightman’s fault –certainly concerned the legal obligations between the auditor and the general meeting of his client’s shareholders, but it also concerned the obligations they assumed over the years by becoming involved in Castor’s governance and multiplying contacts with third-party investors. ANALYSIS (

A) APPLICABLE LAW [ 97 ] Since the case has certain foreign elements, the issue of the law applicable to the dispute arises. [ 98 ] The parties’ attorneys rightly agreed that the applicable conflict rules are those of the court seized of the dispute ( lex fori ).

[ 99 ] Since the facts in the dispute all occurred prior to the coming into force of the new Civil Code of Québec , reference must be made to articles 6 and 8 of the Civil Code of Lower Canada (C.C.L.C.): Art. 6 The laws of Lower Canada govern the immoveable property situate within its limits. Moveable property is governed by the law of the domicile of its owner.

But the law of Lower Canada is applied whenever the question involved relates to the distinction or nature of the property, to privileges and rights of lien, contestations as to possession, the jurisdiction of the courts and procedure, to the mode of execution and attachment, to public policy and the rights of the crown, and also in any other cases specially provided for by this code. The laws of Lower Canada relative to persons, apply to all persons being therein, even to those not domiciled there; subject, as to the latter, to the exception mentioned at the end of the present article.

An inhabitant of Lower Canada , so long as he retains his domicile therein, is governed, even when absent, by its laws respecting the status and capacity of persons; but these laws do not apply to persons domiciled out of Lower Canada, who, as to their status and capacity, remain subject to the laws of their country. Art. 8 Deeds are construed according to the laws of the country where they were passed, unless there is some law to the contrary, or the parties have agreed otherwise, or by the nature of the deed or from other circumstances.

It appears that the intention of the parties was to be governed by the law of another place; in any of which cases, effect is given to such law, or such intention expressed or presumed. [ 100 ] According to the classic triptych, the analysis is based, firstly, on the characterization of the nature of the problem. In this case, the appellants mainly argued that the dispute concerns status and capacity pursuant to the fourth paragraph of

article 6 of the Civil Code of Lower Canada . The respondents, on the other hand, contend that it concerns Coopers’ extracontractual liability, which is governed by the third paragraph of that article. [ 101 ] The result of this characterization makes it possible, secondly, to identify the applicable conflict rules and thus, thirdly, the legal system governing the dispute. Positions of the parties [ 102 ] The main proposition of the appellants is that the debate is governed by the law of New Brunswick, since Castor was incorporated there. This proposal is based on the following syllogism.

Above all, the dispute raises the issue of the status and capacity of Castor’s officers. Castor’s auditor was an officer of Castor within the meaning of the Business Corporations Act of New Brunswick (B.C.A.N.B.). [21] Hence, the liability of this officer must be decided on the basis of the lex societatis , which in this case is the law of Castor’s place of incorporation, that is, the law of New Brunswick, since that is the law that created the auditor’s duties. [ 103 ] In the alternative, the appellants argue that Ontario law applies to the dispute.

That is apparently where Widdrington received the misleading information and sustained the economic loss for which he claimed reparation, the place where the prejudice occurred. This had the effect of crystallizing Coopers’ liability, since there can be no liability without prejudice. [ 104 ] For the respondent, the debate bears solely on Coopers’ professional liability toward third parties. This liability must be analyzed in the place where the faults generating the liability were committed, the lex loci delicti , the law of the place where the offence was committed.

The evidence [ 105 ] Before proceeding with the characterization, it is appropriate to briefly review the facts underlying this analysis. [ 106 ] For tax reasons, it seems, Castor’s officers chose to incorporate the corporation in New Brunswick. Apart from the incorporation, Castor never conducted activities there. [ 107 ] Castor’s true headquarters was in Montreal, where it conducted its national and international business until its bankruptcy in 1992. [ 108 ] The contracts between Castor and Coopers were entered into in Montreal. They covered auditing work, as well as various accounting work.

The auditing work was performed by Coopers’ team in Montreal and in part by a European team. The European team reported to Coopers’ Montreal partner. The consolidated financial statements were prepared in Montreal, where, as a general rule, the meetings were held between Coopers and Castor’s executives to put the final touches on the work. [ 109 ] Castor’s audited consolidated financial statements were issued in Montreal. They appeared on Coopers’ letterhead, indicating 1170 Peel Street, Montreal.

The same was true of the opinions Coopers issued in the stock valuation letters and the calculations made for the purpose of the Legal– for-Life Certificates. [ 110 ] To perform their work, it was mandatory for Coopers’ partners to be members of the Ordre des comptables professionnels agréés du Québec. [22] It is therefore not surprising to note that the appellants’ two experts refer to the Quebec code of ethics in analyzing Coopers’ conduct.

[ 111 ] Widdrington was domiciled in Ontario. It was in that province that he took cognizance of Coopers’ accounting documents at the root of his claim. It is common grounds that this was also where he sustained the economic loss for which he claimed reparation. Characterization [ 112 ] Under the lex fori , how should the legal situation be characterized?

What legal relationships are involved? [23] What is the essence of the dispute, of the debate between the parties? [ 113 ] In their respective written proceedings, the parties identify the dispute as one concerning professional liability for negligence committed in regard to a third party who was not a party to the service contracts between Castor and Coopers. [ 114 ] Paragraph 118 of Widdrington’s re-reamended statement and the response to that paragraph in paragraph 118 of the re- reamended defence are eloquent: As professional accountants, Defendants owed a duty to Plaintiff to conduct their audits, and all other professional services rendered to Castor in relation to the reliability of the financial statements and the valuation of Castor, in accordance with the Canadian Generally Accepted Accounting Principles (“GAAP”), the Canadian Generally Accepted Auditing Standards (“GAAS”), the Canadian Institute of Chartered Accountants Handbook (“CICA”) and the Code of Ethics of the Canadian Institute of Chartered Business Valuators (“CICBV”) namely but without limitation: . . . . . . and, They deny paragraph 118 of the Plaintiffs Declaration in so far as they owed no duty whatsoever to Plaintiff and further add that, in any event, based upon the information available to them at the time they performed their work, which they had no valid reason to disbelieve or doubt in any way, all of their services in connection with Castor’s financial affairs were performed in accordance with the standards of their profession and the conclusions they arrived at were reasonable under the circumstances. [ 115 ] These allegations clearly show that this case raises an issue of extracontractual liability governed by, among other things,

article 1053 of the Civil Code of Lower Canada or since January 1, 1994,

article 1457 of the Civil Code of Québec . Authors Baudouin and Deslauriers explain this clearly: [ translation ] In regard to the client, an accountant’s liability is subject to the general rules of the law of obligations (arts. 371 et seq. of the Civil Code ) and therefore, depending on the exact characterization of the undertaking (a mandate, a service contract, a sui generis mixed contract), to the rules proper to these various contracts. . . . In regard to third parties, the remedy is founded on the rules of extracontractual liability, particularly

article 1457 of the Civil Code . . . . [24] [Emphasis added.] [ 116 ] The debate does not concern Coopers’ status and capacity as Castor’s auditor. If it did, it would lead to the application of the lex societatis . Here is why. [ 117 ] In its ordinary meaning, “the status and capacity” referred to in the fourth paragraph of

article 6 of the Civil Code of Lower Canada , applicable to legal persons (article 17 C.C.L.C.), does not encompass the extracontractual liability of officers or directors of a corporation toward third parties, to the extent that we are to conclude that Coopers is an officer of Castor. [ 118 ] Scholarly commentary has defined this connecting factor in the following manner. [ 119 ] Professor Emanuelli writes: [25] [ translation ] 510.

Questions concerning the status and capacity of legal persons are related to the legal person’s legal existence, organization and operation, the jurisdictions of its units and representatives, its capacity to perform certain legal acts, the conditions of its merger with another legal person, the conditions of its dissolution, and so on . . . . [ 120 ] For their part, professors Goldstein and Groffier [26] write: [ translatin ]

It is also the act of incorporation that governs the powers, particularly those of representation, of the officers and directors, the manner in which they are appointed, their number and so on. . . . [ 121 ] In her Précis de droit international privé québécois , Professor Groffier writes: [27] [ translation ] In principle, the power of a foreign corporation and its capacity to perform

an act are governed by its personal law. Its civil capacity can therefore be more or less broad than that of the corresponding local legal persons. This is the law that governs, inter alia , the powers of the officers and directors, the way in which they are appointed, their number and so on. [ 122 ] Professor Goldstein states the following in his commentary on

article 3083 of the Civil Code of Québec : [28] [ translation ] A few clarifications will shed some light on the meaning and scope of the “status and capacity of legal person” connecting factor. . . . . . The law of the place of incorporation governs, as a preliminary issue, the “existence” of a legal person, i.e. the existence of its juridical personality and therefore, in practice, its susceptibility to being the holder of rights and obligations, as well as, pursuant to the second paragraph of

article 3083 of the Civil Code of Québec , its status including its state, i.e. its type (a general partnership, a joint venture, etc.) and its capacity (its power to exercise its rights, etc.). As for its field,

an act governing the status and capacity of legal persons [ translation ] “determines the conditions of its constitution, operation and dissolution”. Hence, it is the law of the place of incorporation that determines whether the transfer of head office from one state to another causes the dissolution of the legal person or not. In addition, the law of a new place of incorporation will indicate whether or not the legal person created constitutes the continuity of a legal person formerly incorporated under another act. [ 123 ] In an

article dealing with the reform of the Civil Code of Québec , Professor Glenn agrees: [29] [ translation ] 16. A legal person. The status and capacity of a legal person are also part of the personal status. . . .

In the case of a legal person that was not constituted under Quebec law, it will therefore be up to the foreign law of incorporation, or the federal law in the case of a company incorporated federally, to establish the existence or dissolution of the legal person, its capacity to go before a court, the limits to its power to act (the rule of specialties in French law and of ultra vires in common law countries), and the powers of its officers. [ 124 ] Lastly, in an older work, Professor Castel writes the following: [30] [ translation ] Essentially, the problem that arises here is which law sets the conditions of constitution, operation and dissolution of companies, corporations or foreign companies, that is, their capacity to hold rights and perform the acts required to acquire and exercise those rights. [ 125 ] In the case at bar, no issue of that nature is raised.

The issue is not whether a [ translation ] “unit” exceeded the powers that its incorporation, status or by-laws attributed to it, nor does the case concern any issues of a corporate nature. [ 126 ] If the internal relations of a legal person, its capacity to act and its method of operation are governed by corporate law, the same is not true of the rights and obligations governing the activity of chartered accountants in Quebec or of the rules of extracontractual liability— that is, the consequences of such activity—toward third parties. [ 127 ] In support of their contentions, the appellants cite a passage from the text of professors Talpis and Castel written in the context of the reform of the Civil Code : [ translation ] 137.

The law applicable to the corporation determines its conditions of constitution, its capacity for enjoyment, and the conditions of operation and dissolution, the liability of its officers and its representation. . . . [31]

[Emphasis added.] [ 128 ] The expression [ translation ] “the liability of its officers” appears to have been poorly chosen. What is an officer? Can an auditor be considered an officer? There are reasons to doubt that. Be that as it may, it is appropriate to conclude that the authors are no doubt referring to the statutory and penal liability of directors under corporate laws, not their extracontractual liability toward third parties. [ 129 ] The appellants argued at length regarding the conflict rules arising from English law and continental law.

They have asked the Court to make use of them, alleging that they lead to the application of the lex societatis . It is appropriate to respond to those arguments. The theory is interesting, but, with respect, it does not withstand scrutiny. [ 130 ] At the core of their argument is the appellants’ contention that an auditor is an officer of the corporation. [ 131 ] Their theory is based on the English text of

section 105 of the B.C.A.N.B. [ 132 ] As we can see, the English version (“to hold office”) differs from the French version (“ mandat ”): 105

(1) Shareholders of a corporation may by ordinary resolution at the first meeting of shareholders and at each succeeding annual meeting appoint an auditor to hold office until the close of the next annual meeting. 105

(2) An auditor appointed under

section 62 is eligible for appointment under subsection (1). 105

(3) A resolution under subsection (1) is valid only until the next succeeding annual meeting of shareholders. 105

(4) The remuneration of an auditor may be fixed by ordinary resolution of the shareholders or, if not so fixed, may be fixed by the directors. 105

(5) If an auditor is not appointed at a meeting, then the incumbent auditor continues in office until his successor is appointed unless a resolution is passed not to appoint an auditor for the ensuing year. 105

(1) Les actionnaires d’une corporation peuvent, par voie de résolution ordinaire, à la première assemblée annuelle des actionnaires et à chaque assemblée annuelle subséquente, nommer un vérificateur dont le mandat expire à la clôture de l’assemblée annuelle suivante. 105

(2) Le vérificateur nommé en vertu de l’article 62 peut également l’être conformément au paragraphe (1). 105

(3) La résolution mentionnée au paragraphe (1) n’est valide que jusqu’à l’assemblée annuelle suivante d’actionnaires. 105

(4) La rémunération du vérificateur peut être fixée par voie de résolution ordinaire des actionnaires ou, à défaut, par les administrateurs. 105

(5) À défaut de nomination d’un vérificateur lors d’une assemblée, le vérificateur en fonctions poursuit son mandat jusqu’à la nomination de son successeur, sauf si une résolution est adoptée à l’effet de ne pas nommer un vérificateur pour l’année suivante. [ 133 ] A debate arose between the parties regarding these provisions. Relying on both English and French authors, counsel for the appellants contended that the duties and liability of the auditors appear in the corporate laws. Consequently, their liability should be assessed under the law of the place of incorporation.

The respondent maintained that, on the contrary, it is of the essence of all Canadian corporate laws that the auditor be independent from the corporation, its officers and its directors. Therefore, the respondent concluded that calling an auditor an officer of the corporation would be an oxymoron. [ 134 ] Upon examination, the controversy is more one of semantics than of substance. This debate also does not suggest any solutions. As interesting as it may be from the standpoint of comparative law, the English and continental approach does not support the appellants’ theory.

What is more, the application of the lex societatis in this case would lead to an unacceptable legal situation. We will discuss each of these ideas in sequence. [ 135 ] As a general rule, Canadian corporate statutes enshrine the principle of the auditor’s independence. At the head of the list is

section 104 of the B.C.A.N.B., which provides for the following: 104

(1) Subject to subsection (5), a person is disqualified from being an auditor of a corporation if he is not independent of the

corporation, any of its affiliates, or the directors or officers of any such corporation or its affiliates. 104

(2) For the purposes of this section, (

a) independence is a question of fact; and (

b) a person shall be deemed not to be independent if he or his business partner (

i) is a business partner, a director, an officer or an employee of the corporation or any of its affiliates, or a business partner of any director, officer or employee of any such corporation or any of its affiliates, (ii) beneficially owns or controls, directly or indirectly, a material interest in the securities or security interests of the corporation or any of its affiliates, or (iii) has been a liquidator or trustee in bankruptcy of the corporation or any of its affiliates within two years of his proposed appointment as auditor of the corporation. 104

(3) An auditor who becomes disqualified under this

section shall, subject to subsection (5), resign forthwith after becoming aware of his disqualification. 104

(4) An interested person may apply to the Court for an order declaring an auditor to be disqualified under this

section and the office of auditor to be vacant. 104

(5) An interested person may apply to the Court for an order exempting an auditor from disqualification under this

section and the Court may, if it is satisfied that an exemption would not unfairly prejudice the shareholders, make an exemption order on such terms as it thinks fit, which order may have retrospective effect. [ 136 ] As for the Canadian Business Corporations Act (C.B.C.A.), [32] on which most provincial laws seem to be modelled, [33] it provides as follows: 161 .

(1) Subject to subsection (5), a person is disqualified from being an auditor of a corporation if the person is not independent of the corporation, any of its affiliates, or the directors or officers of such corporation or its affiliates.

(2) For the purposes of this section, (

a) independence is a question of fact; and (

b) a person is deemed not to be independent if he or his business partner (

i) is a business partner, a director, an officer or an employee of the corporation or any of its affiliates, or a business partner of any director, officer or employee of any such corporation or any of its affiliates, (ii) beneficially owns or controls, directly or indirectly, a material interest in the securities of the corporation or any of its affiliates, or (iii) has been a receiver, receiver-manager, sequestrator, liquidator or trustee in bankruptcy of the corporation or any of its affiliates

within two years of the person’s proposed appointment as auditor of the corporation.

(2.1) For the purposes of subsection (2), a person’s business partner includes a shareholder of that person.

(3) An auditor who becomes disqualified under this

section shall, subject to subsection (5), resign forthwith after becoming aware of the disqualification.

(4) Any interested person may apply to a court for an order declaring an auditor to be disqualified under this

section and the office of auditor to be vacant.

(5) Any interested person may apply to a court for an order exempting an auditor from disqualification under this

section and the court may, if it is satisfied that an exemption would not unfairly prejudice the shareholders, make an exemption order on such terms as it thinks fit, which order may have retrospective effect. [ 137 ] The independence of an accountant acting as an auditor is also enshrined in professional law. [ 138 ] In Quebec,

section 36.4 of the Code of ethics of chartered professional accountants reads as follows: [34] 36.4. A member who performs or participates in an assurance engagement or a specified auditing procedures engagement shall remain free of any influence, interest or relationship which, in respect of the engagement, may impair or be perceived as impairing his professional judgment or objectivity.

The member shall comply with the independence standards provided for in Rule 204 of the Harmonized Rules of Professional Conduct adopted on 13 April 13 2010 by the Public Trust Committee of the Canadian Institute of Chartered Accountants and any subsequent amendments thereto.

These standards are disclosed in a publication sent by the Order to all its members and in an electronic document available to all on the Order’s website. [ 139 ] In Rule 204, the Harmonized Rules of Professional Conduct , to which the above provision refers, sets out a series of very strict measures to ensure the independence of auditors. [35] [ 140 ] In Lapierre v.

Pelletier , [36] Beauregard J.A. in fact considered independence to be the [ translation ] “essential attribute of an auditor”: [ translation ] The essential attribute of an auditor is that the auditor be independent from the corporation, its directors and its officers. . . . [ 141 ] Professor Rousseau comments similarly: [37] [ translation ] . . . As for their independence, it supports the jurisdiction of auditors by providing them the freedom of reflection and of decision making.

It enables auditors to be autonomous in their ideas and opinions, and contributes to their objectivity and integrity, while lending credibility to their opinions. Independence is at the heart of the auditor’s profession; it is its essence and it gives value to the auditor’s work . [Emphasis added.] [ 142 ] Author McGuinness writes the following: [38] 9.162 In carrying out their duties, the auditors of a corporation are neither agents of the corporation nor of the shareholders.

Although retained by the corporation under contract, they are not officers of the corporation within the meaning of either the OBCA or the CBCA. Instead, auditors are statutory functionaries. [ 143 ] Today, the term [ translation ] “officer” seems to have given way to “director”. [39] From an etymological standpoint, an officer is generally elected by the directors to administer the everyday affairs of the legal person.

[ 144 ] In his Dictionnaire de droit québécois et canadien , Hubert Reid defines the term “officer” in corporate law as follows: [40] [ translation ] 3. A person elected by the directors of a legal person from among its members to represent it in acts, contracts and suits and to administer everyday affairs in accordance with the powers given the officer by law, the statutes of the legal person and the nature of the duties required of the officer.

The president, vice-president, secretary and treasurer are generally the officers of the legal person. [ 145 ] Black’s Law Dictionary defines “corporate officer” as follows: [41] Officer. (14c) 1. A person who holds an office of trust, authority, or command. . . . In corporate law, the term refers esp. to a person elected or appointed by the board of directors to manage the daily operation of the corporation, such as a CEO, president, secretary, or treasurer. . . . corporate officer.

An officer of a corporation, such as a CEO, president, secretary or treasurer. [ 146 ] English law takes a nuanced position on the issue. Auditors are officers of a corporation inasmuch as the legislative texts or the by-laws of the legal person designate the auditors as such. [42] Commentary and case law affirm unconditionally that auditors must exercise their duty independently.

Auditors are neither the agents of management nor of the shareholders. [43] [ 147 ] In French law, the statutory auditor is perceived as a [ translation ] “servant of the corporation, invested with a legal mission to monitor the accounts”. Auditors must perform their duties with complete independence and in accordance with strict ethical rules. [44] [ 148 ] Examination of the Canadian legislative provisions regarding auditors in both English and French highlights a community of thought beyond superficial differences.

In all cases, auditors, even if appointed officers or servants of the corporation, are not such in the strict sense of the terms. They do their work independently. They are never under the orders of management, directors or officers. The Court of Appeal for British Columbia accurately pointed out the following in Bell v .

Klein : . . . a company auditor, elected to that office by the shareholders, although not an officer or servant in the same sense as an official subject to orders of the directors, or an executive of the management set up of the company, nevertheless is a statutory officer who may be questioned by shareholders of a public company at the annual meeting.

In short, he is a company officer in a wider sense within [the applicable rule] than one who holds only an executive, administrative or advisory office in the company. [45] [ 149 ] That said, even if we were to agree that auditors are “officers” within the broad sense of the terms of the New Brunswick statute, this does not advance the debate, for several reasons. [ 150 ] Firstly, in contrast to the Companies Act 2006 [46] in British law or the French Code de commerce , [47] the B.C.A.N.B. contains no provision regarding the liability of auditors.

The latter legislation contains only measures aimed at the appointment of auditors (s. 105), the end of their office (s. 106), the qualities required to hold the position (s. 104), the auditors’ replacement (s. 108), their right to attend annual meetings (s. 109), their power to investigate within the legal person (s. 111) and their duties to present financial statements in keeping with legal requirements (s. 110). [ 151 ] These provisions can, of course, be linked to the status and capacity of the auditor.

They are related to the internal rules of the legal person, however, never to the rules governing the external activities of the corporation, more particularly, those that govern the extracontractual liability of its officers inasmuch as the auditor is an officer, which is doubtful. [ 152 ] What is more, pushing the use of the lex societatis to its limit leads to an unacceptable situation, particularly for corporate auditors.

We return again to the appellants’ theory. [ 153 ] This theory contends that, inasmuch as the law underpinning the incorporation of a legal person governs the duty of the directors, the suppletive law of the place of incorporation—in this case, the common law—must be relied on to decide the issue of liability. [ 154 ] According to that theory, the conduct of Quebec chartered accountants in Montreal who audited the accounts of a Montreal corporation incorporated abroad is judged according to the place of incorporation of their client: France, Germany, Sweden, Japan, the United States and so on, whereas those same accountants run a high risk of not knowing the particular liability rules in those different countries.

The injured third party would hardly be better placed. Montreal third parties who claim that they sustained a prejudice following the fault of Montreal accountants in their auditing work for a Montreal corporation would see their dispute decided on the basis of the rules of the country where the legal person was constituted. [ 155 ] If need be, two elements can be added: one legal and one factual. Since Castor was not a public company, it was under no obligation to appoint an auditor. It could, but it was not obliged to do so.

Even more importantly, the trial judge accepted that Coopers’ liability went well beyond its work as auditor. [ 156 ] In conclusion, we must rule out the lex societatis and apply the lex loci delicti . Lex loci delicti

[157] Both parties refer to Tolofson v. Jensen,[48] a landmark decision of the Supreme Court of Canada dealing with the choice ofapplicable law when the interests of more than one jurisdiction are involved in a given case. [158] In Canada, Tolofson had a profound effect on private international law. Breaking with the rule of double actionabilityestablished in Phillips v.

Eyre,[49] which had been in place for over a hundred years, the Supreme Court refocused the debate on thegeneral principles of public international law. [159] For a unanimous court, La Forest J. recalls that “the underlying postulate of public international law is that generally each statehas jurisdiction to make and apply law within its territorial limit”.[50] [160] La Forest J. distinguishes the issues relating to the jurisdiction of the courts from those dealing with the applicable law.

Heformulates the question at the heart of the appeal as follows: The major issue that arises in this case is this: once a court has properly taken jurisdiction . . ., what law should it apply?[51] [161] The disputes in Tolofson concerned extracontractual liability.

In those matters, La Forest J.’s response to the question is asfollows: From the general principle that a state has exclusive jurisdiction within its own territories and that other states must under principles ofcomity respect the exercise of its jurisdiction within its own territory, it seems axiomatic to me that, at least as a general rule, the law tobe applied in torts is the law of the place where the activity occurred, i.e., the lex loci delicti.[52] [162] It is quite obvious that the law of the place where the activity occurred is the law applicable to the faulty behaviour. [163] Prejudice does not constitute an activity. [164] In the same vein

[…]

Loading document…