Supreme Court Denies Leave to Appeal Dismissal of Auditor Negligence Claim

May 06, 2019

Written By Robert W. Staley, Preet K. Gill and Nathan J. Shaheen

On May 2, 2019, the Supreme Court of Canada denied leave to appeal from the Ontario Court of Appeal’s decision in Lavender v Miller Bernstein LLP, 2018 ONCA 729.¹ The Supreme Court’s decision marks the end of a 14-year legal battle that has significantly clarified the extent to which an auditor may be liable to parties other than its own client and confirmed the high threshold for imposing liability on auditors in cases of pure economic loss.

Background

Miller Bernstein was the auditor to Buckingham Securities, a securities dealer that collapsed in 2001 when Buckingham’s registration was suspended by the Ontario Securities Commission (OSC) for failing to segregate clients’ assets and maintain minimum net capital levels. Miller Bernstein’s mandate included auditing select reports that Buckingham was required to file confidentially with the OSC, as part of the then-applicable regulatory regime for Ontario securities dealers.

In 2005, one of Buckingham’s clients, Barry Lavender, brought a class action against Miller Bernstein. Lavender alleged that Miller Bernstein negligently undertook its audits of Buckingham’s reports filed with the OSC and was thereby liable for all losses suffered by persons who were Buckingham clients at the time of its collapse. He did so despite the fact that the audited reports were not provided or available to Buckingham’s clients, meaning that no client had relied on those reports. In fact, the evidence was that Buckingham’s clients had no awareness of Miller Bernstein until after Buckingham’s collapse.

In 2010, the class action was certified on consent and, in 2016, Lavender moved for summary judgment. The key issue on the summary judgment motion (and in the case at large) was whether Miller Bernstein owed a duty of care to Buckingham’s clients, who were therefore Miller Bernstein’s client’s clients.

At first instance, the motions judge agreed with Lavender and held that Miller Bernstein owed a duty of care.² He reasoned that Miller Bernstein had a duty to be mindful of its client’s clients "as a matter of simple justice". The motions judge’s decision was a marked departure from the existing case law and, if upheld, would have extended an auditor’s liability to third parties who did not rely on the auditor’s report and who were even unaware of the auditor’s existence. Miller Bernstein appealed from the motions judge’s decision.

The Court of Appeal’s Decision

In September 2018, the Ontario Court of Appeal unanimously overturned the motions judge’s decision. The Court of Appeal held that no duty of care was owed by Miller Bernstein to Buckingham’s clients, granted summary judgment to Miller Bernstein, and dismissed Lavender’s action in its entirety.

The Court of Appeal applied the long-standing framework for auditor’s liability from the Supreme Court’s seminal decision in Hercules Managements Ltd. v Ernst & Young, [1997] 2 SCR 165 as refined by the Supreme Court’s 2017 decision in Deloitte & Touche v Livent Inc., 2017 SC 63 which affirmed and clarified the two-stage framework for determining the existence of a duty of care.

The Court of Appeal’s analysis focused on the first stage of the duty of care framework and, in particular, the question of whether there was sufficient proximity between Buckingham’s clients and Miller Bernstein. In doing so, it applied Livent, in which the Supreme Court indicated that in claims of pure economic loss against auditors arising from alleged negligent misrepresentations or performance of a service, two factors are "determinative": the scope of the auditor’s undertaking and the plaintiff’s reliance.

Based on Livent and the facts before it, the Court of Appeal held that there was insufficient proximity between Buckingham’s clients and Miller Bernstein to establish a prima facie duty of care and that, in turn, Lavender’s claims against Miller Bernstein must fail. It provided five main reasons for this conclusion:

1. Miller Bernstein’s undertaking did not extend to assisting Buckingham’s clients with making investment decisions or otherwise. Rather, its undertaking was in respect of audit reports that Buckingham filed confidentially with the OSC.
2. There was a complete absence of any reliance by Buckingham’s clients on the audited reports (or otherwise on Miller Bernstein).
3. The motions judge’s conclusion was based on palpable and overriding errors of fact regarding the relationship between Buckingham’s clients and Miller Bernstein. In particular, contrary to the motions judge’s findings, it was Buckingham (not Miller Bernstein) that filed the reports with the OSC and Miller Bernstein did not have access to the names and account details of all Buckingham clients, which in fact changed regularly.
4. The statutory scheme in which Buckingham operated did not create a proximate relationship between Buckingham’s auditor (Miller Bernstein) and Buckingham’s clients.
5. The Supreme Court has indicated that significant scrutiny is warranted when deciding whether to recognize a new duty of care in a claim for pure economic loss, which further weighed against finding proximity between Buckingham’s clients and Miller Bernstein.

For these reasons, the Court of Appeal concluded that, "when properly scrutinized in the light of the Livent decision", Lavender’s claim "cannot survive because there is no proximity between the Auditor and the Class". It therefore allowed Miller Bernstein’s appeal, dismissed Lavender’s action and, shortly afterwards, awarded Miller Bernstein nearly $1.2 million in costs for the summary judgment motion and the appeal.

The Supreme Court’s Leave Decision

In November 2018, Lavender sought leave to appeal the Court of Appeal’s decision to the Supreme Court. Miller Bernstein resisted Lavender’s leave application, arguing that Lavender was in essence asking the Supreme Court to reconsider its decision in Livent rendered less than one year earlier.

On May 2, 2019, the Supreme Court dismissed Lavender’s leave application with further costs payable to Miller Bernstein. As is normal practice, the Supreme Court did so without rendering reasons for the dismissal. The Supreme Court’s decision marks the end of Lavender’s long-running action and a hard-fought victory for Miller Bernstein.

Conclusion

The Supreme Court’s decision leaves in place the decision of the Court of Appeal, which represented the first time a Canadian appellate court had applied the Supreme Court’s decision in Livent to an auditor’s negligence claim. The Court of Appeal’s decision confirms the high threshold applicable where claims in pure economic loss are asserted against auditors by anyone other than the auditor’s client.

Notes

Authors