



COURT
    OF APPEAL FOR ONTARIO

CITATION: Livent Inc. v. Deloitte & Touche, 2016 ONCA 11

DATE: 20160108

DOCKET: C58659

Strathy C.J.O, Blair and Lauwers JJ.A.

BETWEEN

Livent
    Inc.,

Through
    its Special Receiver and Manager Roman Doroniuk

Plaintiff

(Respondent/Appellant
    by Cross-Appeal)

and

Deloitte & Touche
and Deloitte &
    Touche LLP

Defendants

(
Appellant
/
Respondent
    by Cross-Appeal
)

Peter Griffin, Jamie Spotswood and Matthew Fleming, for
    the appellant/respondent by cross-appeal

Peter F.C. Howard, Patrick OKelly, Aaron Kreaden and David
    Spence, for the respondent/appellant by cross-appeal

Heard:  March 23-26, 2015

On appeal from the judgment of Justice Arthur M. Gans of
    the Superior Court of Justice, dated April 4, 2014, with reasons reported at
    2014 ONSC 2176, 11 C.B.R. (6th) 12.

R.A. Blair J.A.:

OVERVIEW
..
4

FACTS
.
6

A.

Livent
.
6

B.

The Fraudulent Scheme
.
9

(1)

Livents
    Accounting Software is Modified
.
10

(2)

Kickbacks
.
10

(3)

Expense
    Rolls
.
11

(4)

Amortization
.
11

(5)

Revenue
    Transactions
.
12

C.

Withholding of other Information
.
14

D.

Discovery of the Fraud
.
15

E.

Subsequent Events
.
17

THE ISSUES
.
18

ANALYSIS
.
19

A.

THE STANDARD OF REVIEW
..
19

B.

WERE THE LOSSES SUSTAINED LIVENTS LOSSES
  OR, INSTEAD, THE LOSSES OF ITS CREDITORS AND OTHER STAKEHOLDERS?
.
20

C.

IS LIVENTS CLAIM DEFEATED BY THE DOCTRINES
  OF CORPORATE IDENTIFICATION (ATTRIBUTION) OR
EX TURPI CAUSA
?
.
24

(1)

The
Ex Turpi Causa
Defence
.
26

(2)

Corporate
    Identification Doctrine
.
30

(a)

Corporate
    Attribution Rules
.
30

(b)

Genesis and Development
    of the Corporate Identification Doctrine
.
31

(i)

Lennards Carrying
.
32

(ii)

Canadian Dredge
.
34

(iii)

Application
    of
Canadian Dredge
.
36

(3)

Use of the
    Corporate Identification Doctrine to Apply the
Ex Turpi Causa
Defence

40

(4)

Conclusion
  on Attribution and
Ex Turpi Causa
.
50

D.

THE U.S. BAR ORDERS
.
56

E.

DID THE TRIAL JUDGE EXTEND THE DUTY OF CARE
  BEYOND THE DUTY OWED TO LIVENT?
.
58

F.

WHAT ARE THE PURPOSES OF AN AUDIT OF A
    PUBLICLY-TRADED COMPANY AND WHAT IS THE STANDARD OF CARE TO BE APPLIED IN
    DETERMINING WHETHER DELOITTE WAS NEGLIGENT?
.
59

(1)

Purposes
    of an Audit of a Publicly-Traded Company
.
61

(2)

Articulating
    the Standard of Care
.
63

(3)

The
    Standard of Care Framework: 1996-1998
.
64

(a)

Statutory
    and Regulatory Framework
.
64

(b)

The CICA Handbook
.
66

(i)

The
    Objective of an Audit

67

(ii)

Knowledge of the Client

67

(iii)

Managements
    Good Faith and Professional Skepticism
..
68

(iv)

The
    Detection of Material Misstatements
.
71

(c)

The
    Deloitte Manuals
.
73

(d)

Resignation
    by an Auditor

74

(4)

Conclusion
  on Standard of Care
.
76

G.

DID DELOITTE BREACH THE STANDARD OF CARE?
.
77

(1)

Pre-1996
  Audits
.
78

(2)

1996
  Audit

79

(a)

1996
  Audit  The PPC
.
83

(b)

1996
  Audit  Musicians Pension Surplus Receivables
.
84

(c)

1996
  Audit  Revenue Transactions
.
85

(3)

1997
  Engagements
.
90

(a)

Q2/Q3
  1997 and the Put  Part One
.
90

(b)

1997
  Audit and the Put  Part Two
.
99

(i)

The
  Put  Part Two
.
101

(4)

Conclusion
  on Breach of Standard of Care
.
104

H.

WERE LIVENTS LOSSES CAUSED BY DELOITTES
    NEGLIGENCE?
.
106

(1)

Backdrop
.
106

(2)

Factual
    or But for Causation
.
110

(3)

Remoteness/Proximate
    Cause
.
113

(a)

Normal
    Business Losses and Deepening Insolvency
.
115

(b)

Contingencies
.
124

(4)

Conclusion
  on Causation
.
131

I.

DAMAGES
.
132

(1)

Measure
  and Quantum of Damages
.
132

(2)

Contributory
  Negligence
.
136

J.

THE CROSS-APPEAL: DID THE TRIAL JUDGE ERR
    IN FAILING TO HOLD DELOITTE LIABLE FOR ITS BREACHES OF THE STANDARD OF CARE IN
    RELATION TO THE 1996 AUDIT?
.
138

(1)

Contingencies
.
139

(2)

Damages
    and the 1996 Audit

139

(a)

Discovery
    of Fraud not a Precondition of Liability
.
142

(b)

Necessary
    Intermediate Audit Steps
.
144

(c)

Livents
    Access to the Capital Markets
.
151

(3)

Conclusion
  on the Cross-Appeal

153

DISPOSITION
.
154

OVERVIEW

[1]

Garth Drabinsky and Myron Gottlieb were flamboyant entertainment
    impresarios who, in the 1990s, created and developed a live entertainment
    empire known as Live Entertainment Corporation of Canada Inc., or Livent. The
    developer of high-profile stage productions such as
The Phantom of the
    Opera, Show Boat, Kiss of the Spider Woman, Music of the Night,
and
Sunset
    Boulevard
, Livent had every appearance of a healthy, dynamic, and
    successful business enterprise.

[2]

Financially, however, it was not. The Livent house of cards came
    tumbling down in 1998 when new management discovered that Drabinsky and
    Gottlieb had been fraudulently manipulating the companys financial books and
    records over a number of years in order to inflate the earnings and
    profitability of the operation so they could attract over U.S.$200 million and
    $77.5 million through the capital markets.
[1]

[3]

Livent filed for insolvency protection in Canada and the United States and
    was placed in receivership. Its assets were subsequently sold for a realization
    value of approximately U.S.$144 million. Drabinsky and Gottlieb were ultimately
    convicted of fraud and forgery and sent to jail.

[4]

Deloitte & Touche (Deloitte) was the auditor for Livent and its
    predecessor from 1989 through to 1998, when the fraud was discovered. It issued
    clean audited financial statements throughout this period. In this action,
    Livent  through a Special Receiver appointed in the insolvency proceedings for
    various purposes, including bringing this claim  sues Deloitte for damages in
    contract and negligence arising out of Deloittes failure to follow generally
    accepted auditing standards (GAAS) and thereby discover material
    misstatements in Livents books, records and financial reporting attributable to
    the Drabinsky and Gottlieb fraud.

[5]

After a 68-day trial, Gans J. found that Deloitte was not negligent in
    respect of the pre-1996 audits. Nor was Deloitte liable in respect of the 1996
    audit: while it was negligent, its negligence caused no damage to Livent.
    Deloitte was, however, liable for damages arising from negligence in
    August/September 1997 and the spring of 1998. He awarded Livent damages in the
    amount of $84,750,000 plus interest, totalling $118,035,770.

[6]

Deloitte appeals that judgment, alleging the trial judge made multiple
    legal errors. It argues that it should not be responsible for fraud committed
    by Livent. It seeks to attribute wrongs committed by Livent officers and
    employees to the corporation and to rely on the defence of
ex turpi causa
,
    sometimes referred to as the defence of illegality. Deloitte also argues that
    its negligence was not the factual or proximate cause of damages to Livent.
    While Livent became insolvent, it was in a money-losing business. And, since
    Livent is insolvent, it is Livents creditors that are hurt, not the company
    itself.

[7]

Livent rejects these arguments. In its cross-appeal, it submits that the
    trial judge erred in failing to hold Deloitte liable for negligence in respect
    of the 1996 audit and also in reducing the award of damages by 25 per cent to
    account for what he called contingencies.

[8]

For the reasons that follow, I would dismiss the appeal and the
    cross-appeal.

FACTS

A.

Livent

[9]

Drabinsky and Gottliebs goal was to create a vertically-integrated live
    entertainment empire that would generate and present high-profile musical and
    theatrical productions in the entertainment centres of the world. A
    vertically-integrated live entertainment company is one that assumes all the
    risks of and responsibilities for  and reaps all of the rewards, if any, from 
    the entire development, production and performance of the theatrical works. In
    Livents case, this included the ownership and refurbishing

of some of the theatres
    in which the works were performed. It was a costly, capital-intensive,
    high-risk/high-reward, and, as it turned out, cash-burning undertaking with a
    constant and voracious appetite for new funding. In the end, this turned out to
    be Livents undoing.

[10]

In
    1989, Drabinsky and Gottlieb left the Cineplex organization after a very public
    but failed take-over bid attempt.  In leaving, however, they purchased and took
    with them all of the assets and certain of the liabilities of Cineplexs live entertainment
    division. The assets included the Pantages Theatre in Toronto and the rights to
    the production of
Phantom
.

[11]

The
    assets were acquired in the name of their partnership, the MyGar Partnership,
    which first retained Deloitte to audit its financial statements for the year
    ended December 31, 1989. The audit retainer continued until MyGar was rolled
    into Livent in 1993.  Thereafter, Deloitte was retained annually as Livents
    auditor until the events leading up to this lawsuit occurred in 1998.

[12]

MyGar
    was initially successful, at least on the surface. It had a small number of
    shows and theatres.
Phantom
and the
Joseph and the Amazing
    Technicolor Dreamcoat
tour were popular. In May 1993, MyGar made a public
    offering and emerged as the public company, Livent. Two years later, Livent
    applied for registration with the U.S. Securities and Exchange Commission in
    order to list its shares on the NASDAQ stock exchange. Deloitte prepared
    financial statements and comfort letters with respect to all of these initiatives.

[13]

By
    the end of 1995, Livent had six shows in various stages of presentation,
    including
Show Boat, Phantom, Kiss, Music of the Night,
and
Sunset
    Boulevard
. It also had five other shows under production, including
Ragtime
,
    and was spending significant amounts acquiring and renovating the Lyric and
    Apollo Theatres in New York and the Oriental Theatre in Chicago. By all
    accounts, Livent and its colourful principals, Drabinsky and Gottlieb, were the
    toast of the live entertainment milieu.

[14]

But
    the demand for new funding was constant, and in 1996  described by the trial
    judge as a watershed year  the web began to unravel.
Phantom
in
    Toronto was nearing the end of its run.
Sunset Boulevard
was an artistic
    misfire and a financial flop. Livent was required to take an $18.5 million
    write-off on the show. The financial results for
Kiss
showed that
    critical acclaim did not necessarily translate into financial success, and
Music
    of the Night
was not meeting expectations.
Show Boat
, although
    spectacular, was losing money simply because it was such a costly production.
    In 1996 alone, Livent went to the markets to raise in excess of $96 million
    through debenture offerings and public and private placements of its common
    stock.

[15]

All
    the while  as far back as the early MyGar days  Drabinsky and Gottlieb (and a
    legion of employees who were complicit with them) had been misleading Deloitte,
    investors, and the public, through a progressively complex and massive
    fraudulent scheme.

[16]

I
    pause to describe this scheme before continuing with the chronology.

B.

The
    Fraudulent Scheme

[17]

As
    Deloitte emphasizes, the trial judge found that Livent was rife with fraud:
    para. 28.  While Drabinsky and Gottlieb were at the centre of the exercise,
    many other officers and employees of Livent were knowing and willing
    participants. These included the Chief Operating Officer, the Chief Financial
    Officer, the Senior Vice-President of Finance, Livents General Counsel, the
    Director and Executive Vice-President, the Senior Vice-President North American
    Touring, members of the accounting staff and some members of Livents Audit
    Committee. Maria Messina, who until May 1996 was the lead Engagement Partner at
    Deloitte on the Livent file, was one of them. She left Deloitte and joined
    Livent at that time, first as Vice-President Finance and later as Chief
    Financial Officer.

[18]

There
    were various aspects of the fraud. The following summary is taken largely from
    the reasons of the trial judge.

(1)


Livents Accounting
    Software is Modified

[19]

Livents
    Manager of Information Services altered Livents accounting software in various
    ways to facilitate the fraud. For example, the software was modified to (i)
    allow entries to the general ledger to be reversed or unposted and then posted
    to a different account or to a different accounting period, and (ii) permit
    staff to change the date on selected invoices. As the trial judge noted, it was
    undisputed that the purpose of these modifications was to conceal Livents
    accounting manipulations and to ensure that no trail existed which could be
    uncovered by Deloitte during the course of the audit: para. 29.

(2)


Kickbacks

[20]

Between
    1991 and 1993, Drabinsky and Gottlieb received approximately $7.5 million in
    direct or indirect kickbacks from certain Livent service providers through a
    system that saw the service providers present false or inflated invoices to
    Livent and then, after receipt of payment from Livent, forward an amount to
    Drabinsky and Gottlieb or one of their companies.  The kickbacks were part of a
    plan to enable Drabinsky and Gottlieb to receive money from MyGar in excess of
    the limits on their draws under a loan agreement with RBC.

[21]

The
    kickbacks were not disclosed to Deloitte. Many of the false or inflated
    invoices related to theatre engineering investigation work for intended
    productions and a construction development project involving the lands
    associated with the Pantages Theatre in Toronto. To make matters worse, a
    significant percentage of these inflated amounts were capitalized as assets on
    the MyGar and Livent books, thus falsifying the financial strength of the
    companies and creating  as the trial judge observed  a significant
    distortion to the balance sheet of each from the early days of the operation
    and well before the date of the IPO: para. 34.

(3)


Expense Rolls

[22]

Using
    the modified software referred to above, financial staff, at the behest of
    Drabinsky and Gottlieb, manipulated expense entries either by backing them out
    of particular accounting periods, from quarter to quarter or into another
    year-end, or by moving them into and charging them against other activities or
    productions.

[23]

These
    expense roll manipulations enabled the participants to colour the rosiness of
    Livents financial picture to their advantage, as needed.

(4)


Amortization

[24]

In
    terms of dollar value, the largest aspect of the fraudulent scheme by far
    involved the manipulation of millions of dollars of pre-production costs
    (PPC) through their improper transfer from specific shows to fixed assets, or
    from show to show and, in particular, from one show to another that had not yet
    opened.

[25]

The
    PPC included all costs incurred to mount a production prior to its opening 
    for example, the costs associated with set design and construction, costume
    design and fabrication, pre-opening advertising, and salaries and related
    amounts paid to the cast, crew and musicians during rehearsals.

[26]

The
    improper transfer of the PPC permitted the manipulators either to amortize the
    PPC over an extended period of time or to avoid amortization in any particular
    period, depending on the need to show positive results. The overall effect was
    that Livents income was significantly overstated. In the trial judges words,
    this technique was the watchword of the operation from about 1994 on to early
    1998, when the bubble burst: para. 41.

(5)

Revenue Transactions

[27]

With
    the need to show that their plans for integrated growth were flourishing and as
    the demand for more funding intensified, Drabinsky and Gottlieb turned to a
    series of one-off revenue transactions in an effort to enhance the bottom line.
    These transactions involved the supposed sale of various assets to third
    parties, including Livents interests in the production rights of its shows, the
    sponsorship or naming rights associated with its theatres or the productions,
    and certain lands and density rights associated with the redevelopment and
    expansion of the Pantages Theatre in Toronto (the Revenue Transactions).

[28]

A
    common feature of the Revenue Transactions was that the income they generated
    was to be received over a period of time. There was a continuing tension
    between Livent and Deloitte, therefore, about when and in what amounts these
    income streams could be counted as income for the purposes of financial
    accounting. Many of the Revenue Transactions also had another theme in common:
    they were not true sales of assets, but were more in the nature of loans or
    financing agreements.

[29]

There
    were four Revenue Transactions in fiscal year 1996 and five in fiscal year
    1997. As a result of them, Livent recorded approximately $40 million in income
    in those two years.

[30]

The
    most critical of the Revenue Transactions was an agreement entered into in May
    1997 between Livent and Dundee Realty Corp. (Dundee) involving the transfer
    of Livents air rights over the Pantages Theatre and some associated lands for
    the purpose of building a new condominium-hotel tower and a new theatre. The
    consideration for the transfer was $7.4 million, but the agreement contained a
    put in favour of Dundee that enabled it to escape from the transaction for a
    number of reasons, including if construction had not commenced by December
    1999. I shall refer to this agreement and its put  which proved to be central
    to the unravelling of the Livent enterprise  as the Pantages Air Rights
    Agreement and the Put.

[31]

Gottlieb
    insisted on including the revenue from this transaction in Livents second
    quarter (Q2) results for the 1997 year  something he needed to enhance the
    bottom line for purposes of a large public offering that was scheduled for the
    fall in the United States. This led to considerable controversy with Deloitte
    and a series of events which caused the trial judge to dub the Pantages Air
    Rights Agreement and the infamous Put as the Achilles heel of Deloittes
    defence in the action: para. 174.

[32]

I
    will return in more detail to this Agreement and the Put later. I note here,
    however, that although Deloitte was aware of the Revenue Transactions and spent
    some time examining them, it (like everyone else) was misled by the Livent
    players as to the true nature of the transactions.

C.

Withholding
    of other Information

[33]

There
    were other earlier instances of information being withheld from Deloitte 
    instances of which Deloitte became aware.

[34]

For
    example, an October 1990 memorandum revealed that Drabinsky and Gottlieb had
    withheld relevant financial information. The memorandum dated October 24, 1990
    from a Deloitte Manager, Ron Cutway, to two Deloitte partners, Aaron Glassman
    and Leonard Barkin, reported that RBC had concerns about MyGar. Cutway reported
    that the bank was concerned that Drabinsky and Gottlieb had failed to report
    that MyGar was in default of its agreement with the bank. RBC had also
    complained that it was not fully satisfied with their dealings with MyGar and
    that Drabinsky and Gottlieb were not proving to be as above board with the
    bank as they should be regarding cash flows and other financial information. Cutway
    concluded:

Overall I feel we should conclude that the relationship between
    the client and the bank is not good and that we should be particularly careful
    regarding the clients verbal representations concerning his relationship with
    the bank
and possibly concerning other matters as well
. [Emphasis added.]

[35]

A
    naming agreement entered into between The North York Performing Arts Centre Corporation
    and Livent in December 1991 carried with it a $7.5 million liability that was
    not disclosed to Deloitte during the 1991 audit. Deloitte learned about this
    agreement (and therefore about its non-disclosure) in or around November 1993,
    however.

[36]

The
    seeds for distrust had been sown, but Deloitte continued to show no concern. It
    would reap the produce of those seeds later on.

D.

Discovery
    of the Fraud

[37]

The
    fraud was ultimately discovered after a new management team was put in place by
    new equity investors in June 1998.

[38]

On
    April 13, 1998, Livent announced that Lynx Ventures LP, an investment vehicle
    of Michael Ovitz, had agreed to invest U.S.$20 million in Livent in return for
    12 per cent of Livents equity. It was also announced that Roy Furman, through
    Furman Selz Inc., would invest U.S.$2 million in Livent in exchange for 1.2 per
    cent of Livents equity.

[39]

The
    deal closed in June 1998 and new management subsequently took control. The new
    team included Robert Webster, a former KPMG partner who assumed responsibility
    for the financial aspects of the organization as Livents new Executive
    Vice-President.

[40]

On
    August 6, 1998, in response to an inquiry from Webster about budget overages,
    Messina and Tony Fiorino, Livents Theatre Controller, revealed to Webster that
    there had been a number of improper cost transfers to fixed asset accounts as
    well as between shows.

[41]

Later
    that day, Grant Malcolm, Livents Senior Production Controller, and Diane Winkfein,
    Livents Senior Corporate Controller, along with Messina and Fiorino, met with
    Webster. They disclosed additional accounting irregularities to him.

[42]

A
    press release was immediately issued disclosing the fraud and the suspension of
    Drabinsky and Gottlieb. Trading of Livent shares on the TSX and NASDAQ was
    suspended.

[43]

Deloitte
    withdrew its original audit opinions on Livents financial statements for the
    years 1996 and 1997.

[44]

KPMG
    was appointed to conduct an independent investigation and PricewaterhouseCoopers
    was retained as an independent accounting advisor for Livents Audit Committee.
    Deloitte conducted a re-audit.

[45]

On
    November 18, 1998, Livent issued restated financial statements for the fiscal
    years ended 1996 and 1997, and the first quarter of 1998. The restatements
    identified over $98 million in accounting irregularities.

E.

Subsequent
    Events

[46]

The
    following day, November 19, 1998, Livent filed for insolvency protection in the
    United States and in Canada. Its assets were sold in the insolvency proceedings
    to SFX Entertainment Inc. for approximately U.S.$144 million. Drabinsky and
    Gottlieb were dismissed for cause.

[47]

In
    September 1999, Livent was placed in receivership and Ernst & Young was appointed
    Receiver and Manager. Two years later, in November 2001, Roman Doroniuk was
    appointed the Special Receiver and Manager of Livent for various purposes,
    including a potential action against Deloitte. This action was commenced on
    February 28, 2002.

[48]

Livents
    collapse generated a number of U.S. class actions brought by certain investors
    against Deloitte and other defendants under U.S. securities laws. These actions
    were settled. As part of the settlement, the U.S. judge supervising the class
    actions issued orders containing bar provisions and releases. The effect of
    those bar provisions and releases is an issue on this appeal.

[49]

To
    complete the saga up to the point of this proceeding, Drabinsky and Gottlieb
    were convicted of two counts of fraud and one count of forgery in Ontarios Superior
    Court of Justice. Their convictions were upheld on appeal, although the
    sentences imposed were reduced to five years imprisonment for Drabinsky and
    four years imprisonment for Gottlieb.

[50]

Further,
    Deloitte partners were the subject of proceedings before the Discipline
    Committee of the Institute of Chartered Accountants of Ontario. Three partners
    were disciplined for their actions relating to the audit of Livents 1997
    financial statements. The decision of the Discipline Committee was upheld by
    this Court as well.

THE ISSUES

[51]

I
    note that while Livent sued Deloitte in contract and tort, the main thrust of
    the argument at trial related to the negligence claim and Livent conceded that
    the damages would be the same in contract as in tort. For that reason, the
    trial judges reasons focus on the tort analysis. However, he concluded that the
    contract claim succeeded for the same reasons as the tort claim. On the appeal
    and cross-appeal, argument focussed on the tort claim as well.

[52]

For
    the purposes of these reasons, the issues to be addressed are the following:

(a) Were the losses sustained Livents losses or, instead, the
    losses of its creditors and other stakeholders?

(b) Is Livents claim defeated by the doctrines of corporate
    identification (an aspect of corporate attribution) or
ex turpi causa,
or
    by the effect of the U.S. bar orders?

(c)  Did the trial judge extend the duty of care beyond the
    duty owed to Livent?

(d)  What are the purposes of an audit of a publicly-traded
    company and what is the standard of care to be applied in determining whether
    Deloitte was negligent?

(e)   Did Deloitte breach the standard of care?

(f)  If Deloitte did breach the standard of care, were Livents
    losses caused by Deloittes negligence? This involves a consideration of (i)
    the application of the but for test, and (ii) issues of remoteness and
    proximity, including the notions of normal business losses and deepening
    insolvency, and what the trial judge referred to as contingencies;

(g) If Livents losses were caused by Deloittes negligence,
    what are those damages and should they be limited or minimized by operation of
    the doctrine of contributory negligence?

(h)  Did the trial judge err in failing to hold Deloitte liable
    for its breaches of the standard of care in relation to the 1996 audit (the
    cross-appeal)?

ANALYSIS

A.

THE STANDARD OF
    REVIEW

[53]

The
    standard of review on an appeal of this nature is not controversial.

[54]

The
    standard of review on pure questions of law is correctness, while that
    applicable to findings of fact, and questions of mixed fact and law that lie
    more towards the factual end of the spectrum, is palpable and overriding error:
Housen v. Nikolaisen
, 2002 SCC 33, [2002] 2 S.C.R. 235, at paras. 8, 10,
    36. This latter deferential standard is equally applicable to inferences of
    fact, which a trial judge arrives at by sifting through the relevant facts,
    deciding their weight, and drawing factual conclusions:
Housen
, at paras.
    22, 25. As the Supreme Court of Canada explained in
H.L. v. Canada (A.G.)
,
    2005 SCC 25, [2005] 1 SCR 401, at para. 74,

it is not open to appellate
    courts to interfere with reasonable inferences drawn by the trial judge:

Not infrequently,
different
inferences may reasonably be
    drawn from facts found by the trial judge to have been directly proven. Appellate
    scrutiny determines whether inferences drawn by the judge are reasonably
    supported by the evidence. If they are, the reviewing court cannot
reweigh
    the evidence
by substituting, for the reasonable inference preferred by the
    trial judge, an equally  or even more  persuasive inference of its own. This
    fundamental rule is, once again, entirely consistent with both the majority and
    the minority reasons in
Housen.
[Emphasis in original.]

[55]

All
    of these considerations underlie my approach to the analysis of the appeal and
    the cross-appeal.

B.

WERE
    THE LOSSES SUSTAINED LIVENTS LOSSES OR, INSTEAD, THE LOSSES OF ITS CREDITORS
    AND OTHER STAKEHOLDERS?

[56]

A
    recurring theme in Deloittes submissions is that Livent is not claiming for
    its own losses, but rather is advancing a proxy claim, indirectly, for losses
    sustained by its creditors and investors that will be recoverable in Livents
    insolvency proceedings.  For example, in its factum, Deloitte argues that:

·

the duty of care to an auditors client does not extend to
    assuming economic responsibility for losses experienced by those standing
    behind it;

·

the authorities do not support imposing economic responsibility
    on auditors for losses beyond those actually suffered by the corporation;

·

it is a mistake to assume that an auditors duty to its client
    exists to the extent of all possible losses, however indeterminate, without
    regard to who exactly is experiencing those losses;

·

Livent itself lost nothing because of its frauds;

·

the trial judge incorrectly assumed that investor losses are
    recoverable so long as the company lends its name to an action to recover
    investor losses on behalf of the investors; and

·

[t]he trial judge  failed to apply these principles and granted
    an award of damages to Livent representing losses experienced not by it, but by
    its creditors.

[57]

I
    reject Deloittes submission that the losses were not Livents losses. It
    impermissibly conflates damages sustained by the corporation with the
    distribution of those damages, once recovered, to creditors and other stakeholders,
    as part of the assets of the corporation, in the course of the proceeding under
    the
Companies Creditors Arrangement Act
, R.S.C. 1985, c. C-36 (CCAA).
    The two legal constructs are quite different, with different rationales and
    purposes. To conflate them is to disregard the long-recognized principle of
    corporate law that a corporation is a legal entity separate and apart from its
    shareholders and stakeholders, and that the corporation alone has the right to
    sue for wrongs done to it:
Hercules Managements Ltd. v. Ernst & Young
,
    [1997] 2 S.C.R. 165, at para. 59.

[58]

In
    this respect, the debate on the appeal surrounding the impact of the Supreme
    Court of Canadas decision in
Hercules
, and related authorities, is of
    little assistance. In
Hercules
, the Court affirmed that, generally
    speaking, auditors do not owe a duty of care to investors as individuals and
    that a claim for auditors negligence causing harm to the corporation rests
    with the corporation; it must be pursued either by the corporation or by way of
    a derivative action on behalf of the corporation.

[59]

Here,
    Deloitte relies on
Hercules
for the converse proposition: if the
    corporation must sue for damages caused to it by an auditors negligence, and
    third-party stakeholders may not assert such a claim, it follows that the
    corporation may not be used as a passive receptacle of a cause of action
    against the auditor to pursue claims for the benefit of anyone but itself. As
    I have said, however, Livent is not suing here to recover losses sustained by
    anyone else.

[60]

The
    trial judge was clear that he was assessing damages sustained by the
    corporation.  At para. 365, he stated:

[I]t is clear and beyond doubt that Livent cannot advance a
    claim on behalf of stakeholders, such as shareholders and noteholders. The
    claim for breach of contract and for negligence is that of the corporation and
    no such cause of action rests with the shareholders or creditors. The fact that
    some stakeholders might benefit from any recovery in this action does not, in
    my view, alter this conclusion.

[61]

And
    the trial judge summarized Livents theory of damages as follows, at para. 291:

The plaintiffs theory of damages can best be expressed in the
    following sentence: the measure of damage equals the change or increase in the
    losses sustained
by Livent
between the time of Deloittes breach and the
    time of Livents eventual CCAA filing, if not its insolvency. [Emphasis added.]

[62]

The
    damages experts  Ian Ratner for Livent and Stephen Cole for Deloitte 
    formulated that theory into the following equation:

Loss (L) = Actual Liquidation Deficit (ALD)  Estimated
    Liquidation Deficit (ELD)

or,

L = ALD  ELD

[63]

In
    this formula, the Actual Liquidation Deficit or ALD is not in dispute. It
    represents the losses sustained by Livent after taking into account the amounts
    recovered on the sale of its assets to SFX Entertainment Inc. in August 1999,
    and is fixed at $418,830,000. The quantum of the Estimated Liquidation Deficit
    or ELD is contested, but is established by determining what the estimated loss
    on the sale of the assets would have been at the Measurement Date  namely,
    the date when (a) Deloitte breached its standard of care, (b) the fraud would
    have been discovered but for the breach, (c) if the fraud had been uncovered,
    Livent would have been unable to access the capital markets, and (d) this
    would, in turn, have led to a formal insolvency.

[64]

I
    will return to the formula later. For present purposes, it is important to note
    that
both
experts agreed that the formula generates a number that
    captures
Livents
economic loss. In his examination-in-chief on behalf
    of Deloitte, Cole stated:

The new Ratner theory, as I said earlier, is the sum
    [referenced in an exhibit], and I should say at the outset that I believe that
that
    is a quantification of Livents economic loss
.
I dont believe it is
    a correct calculation, but
it is focused on Livent the corporation.



His new theory will bring the court to the same place as what I
    have been advancing. They are very similar but for our different methods of
    computing fair market value.
Both methods address the corporations loss
and
    both methods recognize the penultimate importance of fair market value.
    [Emphasis added.]

[65]

I
    do not suggest that, in making this statement, Cole was conceding that, as a
    matter of law, Deloitte was responsible for Livents loss. What he was
    recognizing  as I see it  is that whatever loss the formula produced was a
    loss sustained by Livent and not by anyone standing behind it, such as a
    creditor, investor, or shareholder. I agree and have no difficulty in
    concluding that the losses in question are Livents losses.

C.

IS
    LIVENTS CLAIM DEFEATED BY THE DOCTRINES OF CORPORATE IDENTIFICATION
    (ATTRIBUTION) OR
EX TURPI CAUSA
?

[66]

At
    trial, Deloitte took the position that Livents losses were not recoverable
    because they were caused by its own illegal acts. This submission was advanced
    on two separate, but somewhat overlapping bases. First, Deloitte argued that
    Livents claim is defeated by operation of the defence of illegality, also
    known as
ex turpi causa
. Secondly, it relied on the doctrine of
    corporate identification (sometimes referred to as the doctrine of
    attribution). As the trial judge noted, these submissions achieved more than
    some prominence during oral argument: para. 245.

[67]

The
    trial judge rejected both defences. He concluded that, for legal and policy
    reasons, neither the corporate identification nor the
ex turpi causa
doctrine
    should apply. It was not necessary to attribute the frauds to Livent in order
    to prevent the wrongdoers from profiting from their frauds or to protect the
    integrity of the legal system. None of the damages to be paid by Deloitte would
    directly or indirectly benefit a participant in the frauds. Attributing the
    frauds to Livent would not serve the public policy objectives of either
    doctrine.

[68]

Deloitte
    submits the trial judge erred in arriving at these conclusions. It argues that
    the trial judge failed to recognize that the frauds perpetrated by Livents
    principals, Drabinsky and Gottlieb, and many senior managers and other
    employees, permeated the corporate structure such that Livent was itself
    identified with the impugned conduct. The frauds were not committed
against
Livent; they were committed
by
Livent. In addition, Deloitte was a
    victim of the frauds and the
ex turpi causa
doctrine should be applied
    to prevent Livent from profiting from its own criminal acts.

[69]

The
    analysis of these issues requires an examination of both the
ex turpi causa
doctrine and the corporate identification doctrine. When and why does a
    partys conduct bar recovery under the
ex turpi causa
doctrine?  When
    and why is a corporation identified with the conduct of its directing mind in
    circumstances such as these? And does either doctrine afford Deloitte a defence
    to Livents claim? In answering these questions, I will review the case law in
    some detail, given the significance of these issues not only at trial, but also
    on appeal.

[70]

As
    I will explain, I agree with the trial judge that neither doctrine assists
    Deloitte.

(1)


The
Ex Turpi Causa
Defence

[71]

The
    phrase
ex turpi causa non oritur actio
means from a dishonourable cause
    an action does not arise. The statement of Lord Mansfield in
Holman v.
    Johnson
(1775), 98 E.R. 1120, at p. 1121, has often been cited as
    authoritative:

No Court will lend its aid to a man who founds his cause of
    action upon an immoral or an illegal act. If, from the plaintiff's own stating
    or otherwise, the cause of action appears to arise
ex turpi causa
, or
    the transgression of a positive law of this country, there the Court says he
    has no right to be assisted. It is upon that ground the Court goes; not for the
    sake of the defendant, but because they will not lend their aid to such a
    plaintiff.

[72]

The
    leading Canadian cases on
ex turpi causa
are the decisions of the
    Supreme Court of Canada in
Hall v. Hebert
, [1993] 2 S.C.R. 159, and
British
    Columbia v. Zastowny
, 2008 SCC 4, [2008] 1 S.C.R. 27.

[73]

In
Hall
, the plaintiff was injured when, in a drunken state, he lost
    control of his friends car and suffered serious head injuries. He sued his
    friend, the owner of the car, with whom he had been drinking, for giving him
    permission to drive the vehicle while drunk. The defendant raised the
ex
    turpi causa
defence.

[74]

The
    appeal concerned, amongst other things, the role of
ex turpi causa
in
    tort cases. The majority decision, written by McLachlin J., held that courts
    can bar recovery in tort on the basis of the plaintiffs illegal or immoral
    conduct, but only to preserve the integrity of the legal system. That concern
    does not exist where the plaintiffs claim is merely for compensation for
    personal injuries sustained due to the defendants negligence. She emphasized,
    at pp. 179-80, that the use of the
ex turpi causa
defence is limited:

[T]here is a need in the law of tort for a principle which
    permits judges to deny recovery to a plaintiff on the ground that to do so
    would undermine the integrity of the justice system. The power is a limited
    one. Its use is justified where allowing the plaintiff's claim would introduce
    inconsistency into the fabric of the law, either by permitting the plaintiff to
    profit from an illegal or wrongful act, or to evade a penalty prescribed by
    criminal law. Its use is not justified where the plaintiff's claim is merely
    for compensation for personal injuries sustained as a consequence of the
    negligence of the defendant.

[75]

The
    majority of the Court declined to apply the defence in the circumstances of
    that case.

[76]

In
Zastowny
, the Supreme Court affirmed
Hall
, describing the
ex
    turpi causa
doctrine as a matter of judicial policy designed to preserve
    the integrity of the justice system by preventing inconsistency in the law.

[77]

The
    case involved a prisoner who was sexually assaulted by a prison official while
    he was in jail. The prisoner sued and was awarded general and aggravated
    damages, the cost of future counselling, and compensation for past and future
    wage loss. At issue was whether he was barred from receiving compensation for
    wages lost due to incarceration.

[78]

Quoting
    from
Hall
, Rothstein J. described the issue, at para. 20, as under what
    circumstances should the immoral or criminal conduct of a plaintiff bar the
    plaintiff from recovering damages to which he or she would otherwise be
    entitled[?] He summarized the applicable principles and approach derived from
Hall
,

which I in turn summarize as follows:

·

Because the application of the
ex turpi

causa
doctrine invalidates otherwise valid and enforceable actions in tort, its
    application must be based on a firm doctrinal foundation, must be made subject
    to clear limits and should occur in very limited circumstances.

·

The
only justification
for its
    application is to preserve the integrity of the legal system. This concern is
    only in issue where a damages award in a civil suit would allow a person to
    profit from illegal or wrongful conduct or would permit evasion or rebate of a
    penalty prescribed by the criminal law. This would create inconsistency in the
    law by punishing conduct through the criminal law, on the one hand, and by
    rewarding it on the other.

·

The
ex turpi

causa
doctrine
    generally does not preclude an award of damages in tort because such awards
    tend to compensate the plaintiff rather than amount to

profit.

·

The
ex turpi

causa
doctrine is a
    defence in a tort action. The plaintiff's illegal conduct does not give rise to
    a judicial discretion to negate or refuse to consider the duty of care which
    goes to the relationship between a plaintiff and a defendant. It is independent
    of that relationship. The defendant may have caused harm by acting wrongly or
    negligently, but the responsibility for this wrong is suspended only because
    concern for the integrity of the legal system trumps the concern that the
    defendant be responsible.

·

Treating the
ex turpi causa
doctrine as a
    defence places the onus on the defendant to prove the illegal or immoral
    conduct that precludes the plaintiff's action. And as a defence, it allows for
    segregation between claims for personal injury and claims that would constitute
    profit from illegal or immoral conduct, or the evasion of, or a rebate of, a
    penalty provided by the criminal law.

[79]

The
    Supreme Court concluded that permitting the plaintiff to recover the wages he
    lost while in prison would introduce an inconsistency in the fabric of the law,
    which would compromise the integrity of the justice system. In effect, the
    plaintiff would be indemnified for the consequences of committing illegal acts
    for which he had been found criminally responsible.

[80]

The
    application of the
ex turpi causa
doctrine has therefore been strictly
    limited in Canada. It will apply only where allowing a plaintiffs claim would
    introduce inconsistency into the fabric of the law  by giving with one hand
    what it takes away with the other:
per
McLachlin J. in
Hall,
at
    p. 178, quoted with approval by Rothstein J. in
Zastowny
,

at
    para. 22.

[81]

I
    now turn to the corporate identification doctrine, since the issue is whether
    the frauds of Drabinsky and Gottlieb can be attributed to Livent for the
    purposes of invoking the
ex turpi causa
defence.

(2)


Corporate
    Identification Doctrine

(a)


Corporate Attribution Rules

[82]

By
    way of introduction, it is helpful to understand how the corporate
    identification doctrine meshes with other rules of corporate attribution.

[83]

As
    the Privy Council noted in
Meridian Global Funds Management Asia Ltd. v.
    Securities Commission
, [1995] 2 A.C. 500, at p. 506, a variety of rules are
    used to determine which acts should be attributed to a corporation. A
    corporations primary rules of attribution are typically found in its
    corporate constitution. For instance, the articles of association may specify
    that a majority vote of shareholders shall be a decision of the company. There
    are also primary rules of attribution found in business law and general rules
    of attribution  such as agency law  that apply equally to natural persons.

[84]

As
    the Privy Council explained at p. 507, [t]he companys primary rules of
    attribution together with the general principles of agency, vicarious liability
    and so forth are usually sufficient to enable one to determine its rights and
    obligations. It is only in exceptional cases  for instance, where a rule of law
    precludes attribution on the basis of the general principles of agency or
    vicarious liability  that these principles are not sufficient. For example, a
    rule may be stated in language primarily applicable to a natural person or
    require some state of mind. It is in these special circumstances that the
    doctrine of corporate identification comes into play.

(b)


Genesis and Development of the Corporate
    Identification Doctrine

[85]

The
    corporate identification doctrine has its origins in two distinct and unrelated
    fields, criminal law and maritime law. In criminal law, the doctrine arose from
    the need to resolve the issue of whether, and in what circumstances, a
    corporation could be subject to criminal liability for a
mens rea
offence (an offence requiring a guilty mind). In shipping law, it arose from
    the need to determine whether a ship-owning corporation could take advantage of
    a defence, or limit its liability by statute, when the events giving rise to
    the claim occurred without the actual fault or privity of the owner of the
    ship. These concepts, a guilty mind and fault or privity, are not readily
    applicable to a corporation, which is a legal fiction.

[86]

I
    now turn to the two leading cases on corporate identification.

(i)

Lennards Carrying


[87]

The
    seminal case on corporate identification is the House of Lords decision in
Lennards
    Carrying Co., Ltd. v. Asiatic Petroleum Co., Ltd.
,

[1915] A.C. 705
.
Under s. 502 of the
Merchant Shipping Act
, 1894 (U.K.), 57 & 58
    Vict., c. 60, a ship owner had no liability for loss or damage to goods caused
    by a fire on board the ship where the damage occurred without his actual fault
    or privity. The issue could be resolved easily enough where the owner was a
    person, but how could a
corporation
be actually at fault for, or privy
    to, the cause of the damage?

[88]

Cargo
    owners sued the ship owner in question after the ship caught fire as a result
    of defective boilers and the cargo was destroyed. The ship was owned by one
    limited company and managed by another. The managing director of the latter
    company, John M. Lennard, was registered as the ships manager and took part in
    its active management on behalf of the ships owner. He knew, or at least ought
    to have known, that the ships boilers were defective.

[89]

The
    House of Lords concluded that the ships owner could not avoid liability based
    on s. 502. In what has become a famous passage, Viscount Haldane described the
    nature of a corporation and its directing mind, at p. 713:

My Lords, a corporation is an abstraction. It
    has no mind of its own any more than it has a body of its own; its active and
    directing will must consequently be sought in the person of somebody who for
    some purposes may be called an agent, but who is really the directing mind and
    will of the corporation, the very ego and centre of the personality of the
    corporation. That person may be under the direction of the shareholders in
    general meeting; that person may be the board of directors itself, or it may
    be, and in some companies it is so, that that person has an authority co-ordinate
    with the board of directors given to him under the articles of association, and
    is appointed by the general meeting of the company, and can only be removed by
    the general meeting of the company.

[90]

Viscount
    Haldane went on to find, at pp. 713-14, that in the case of a corporation, the
    requisite fault or privity was not based on the corporations vicarious
    liability for the acts of its employees, but rather was the fault of somebody
    for whom the company is liable because his action is the very action of the
    company itself. Since Lennard was the directing mind of the ship-owning
    company, his fault or privity in relation to the cause of the fire was the
    companys fault or privity and it could not escape liability.

[91]

While
    the House of Lords explained its decision as a matter of statutory
    interpretation, the decision has been read as establishing a general principle
    of corporate liability:
R. v. Canadian Dredge & Dock Co
., [1985] 1
    S.C.R. 662, at p. 678. It is not evident, however, that
Lennards Carrying
was intended to state principles of general application.

[92]

In
Meridian Global Funds
, the Privy Council recognized, at p. 506, that
    there has been some misunderstanding of the true principle upon which that
    case was decided. It emphasized, at p. 507, that the decision in
Lennards
    Carrying
was a matter of statutory interpretation and that fashioning a
    special rule of attribution is context-specific:

[T]here will be many cases in which  the
    court considers that the law was intended to apply to companies and that 
    insistence on the primary rules of attribution would in practice defeat that
    intention. In such a case, the court must fashion a special rule of attribution
    for the particular substantive rule. This is always a matter of interpretation:
    given that it was intended to apply to a company, how was it intended to apply?
    Whose act (or knowledge, or state of mind) was
for this purpose
intended
    to count as the act etc. of the company? One finds the answer to this question
    by applying the usual canons of interpretation, taking into account the
    language of the rule (if it is a statute) and its content and policy. [Emphasis
    in original.]

[93]

Despite
    this caution,
Lennards Carrying
has been followed and referred to in a
    long line of cases, including the leading Canadian case on corporate
    identification,
Canadian Dredge
.

(ii)

Canadian Dredge


[94]

Canadian
    Dredge
involved an appeal by four corporations convicted of fraud and
    conspiracy under the
Criminal Code
, R.S.C. 1970, c. 34, as a result of
    bid rigging. They contended that they were not liable because their managers,
    who were responsible for the bidding, were acting in fraud of the corporations,
    were acting for their own benefit, or were acting contrary to instructions.
    Some of the appellants also challenged the existence of any theory of corporate
    criminal liability for
mens rea
offences.

[95]

The
    Court stated the specific question to be resolved, at p. 669:

Is the criminal liability of a corporation, when it is based on
    the misconduct of a directing mind of the corporation, affected because the
    person who is the directing mind is at the same time acting, in whole or in
    part, in fraud of the corporation, or wholly or partly for his own benefit or
    contrary to instructions that he not engage in any illegal activities in the course
    of his duties?

[96]

In
    answering this question, Estey J. traced the history of the identification
    theory, including the decision in
Lennards Carrying
, and explored its
    development in various jurisdictions. He described the theory in the following
    way, at pp. 682-83:

[The identification theory] produces the
    element of
mens rea
in the corporate entity, otherwise absent from the
    legal entity but present in the natural person, the directing mind. This
    establishes the identity between the directing mind and the corporation which
    results in the corporation being found guilty for the act of the natural
    person, the employee. In order to trigger its operation and through it
    corporate criminal liability for the actions of the employee (who must
    generally be liable himself), the actor-employee who physically committed the
    offence must be the 
ego
, the centre of the corporate personality,
    the vital organ of the body corporate, the 
alter ego
 of the employer
    corporation or its

directing mind.



It is the wrongful action of the primary
    representative which by attribution to the corporation creates primary rather
    than vicarious liability, according to the identification theory.

[97]

The
    difficult question for the Court to answer was the appropriate outer limit of
    the attribution
of
criminal conduct of
    a directing mind when he undertakes activities in fraud of the corporation or
    for his own benefit: p. 701. Estey J. ultimately drew the following
    boundaries, at pp. 713-14:

Where the criminal act is totally in fraud of
    the corporate employer and where the act is intended to and does result in
    benefit exclusively to the employee-manager, the employee-directing mind, from
    the outset of the design and execution of the criminal plan, ceases to be a
    directing mind of the corporation and consequently his acts could not be
    attributed to the corporation under the identification doctrine[T]he
    identification doctrine only operates where the Crown demonstrates that the
    action taken by the directing mind (a) was within the field of operation
    assigned to him; (b) was not totally in fraud of the corporation; and (c) was
    by design or result partly for the benefit of the company.

[98]

In
    this case, Deloitte submits that this test is satisfied and so the wrongful
    acts of Livents directing minds should be attributed to Livent.

(iii)

Application of
Canadian Dredge


[99]

Canadian
    Dredge
has been applied in a number of different contexts. In particular,
    Deloitte points to the fact that it has been applied in the non-statutory,
    civil context. Deloitte also points to the fact that the corporate
    identification doctrine has been used as a shield as well as a sword.
In other words, rather than using the corporate identification
    doctrine to impose liability
on
a corporation,
    as was the case in
Canadian Dredge
, it has been used to shield a
    defendant from liability
to
a corporation.
Deloitte relies on two cases in support of these submissions.

[100]

First, Deloitte
    relies on this Courts decision in
Standard Investments
    Ltd. v. Canadian Imperial Bank of Commerce

(1986),
    52 O.R. (2d) 473, leave to appeal refused, [1986] S.C.C.A. No. 29, as an
    example of a case in which the
Canadian Dredge
test has been applied in the
    non-statutory, civil context.

[101]

In that case,
    two bank customers sued the bank for breach of fiduciary duty based on the
    conduct of the banks president and chairman. After considering
Lennards
    Carrying
and
Canadian Dredge
, Goodman J.A. stated, at p. 493:

In my view the identification doctrine is equally applicable in
    a civil action where the plaintiff seeks to establish liability on the part of
    a defendant corporation on the basis of an alleged breach of fiduciary duty
    (without reliance on the principle of
respondeat superior
). It is my
    further view that in such a case the onus on the plaintiff can be no higher
    than that placed on the Crown in a case of alleged corporate criminal
    responsibility.

[102]

It was found
    that the knowledge, intentions and acts of the president and chairman were those
    of the corporation for the purpose of determining whether the corporation had
    committed a breach of its fiduciary duty to its customer.

[103]

I do not find
Standard
    Investments
of particular assistance, beyond its demonstration that
Canadian
    Dredge
can apply in the civil context to attribute knowledge or state of
    mind to a corporate defendant. It also demonstrates that attribution is not the
    end of the analysis, but rather a step in determining the legal consequences of
    the knowledge or state of mind. However, it does not deal with a situation
    where, as here, a defendant attempts to avoid liability by attributing the acts
    of corporate individuals to a plaintiff.

[104]

Deloitte also
    places significant reliance on the Supreme Court of Canadas decision in
373409 Alberta Ltd. (Receiver of) v. Bank of Montreal,
2002 SCC 81,
[2002] 4 S.C.R. 312, for the proposition that
    corporate identification may be used as a shield.

[105]

The case
    involved two private corporations. Douglas Lakusta was the sole shareholder,
    director and officer of 373409 Alberta Ltd. and Legacy Holdings Ltd. He
    received a cheque payable to 373409, but altered the cheque by adding Legacy as
    a payee. He deposited it into Legacys account without endorsing it. The bank
    credited Legacys account with the amount, which Lakusta subsequently withdrew.

[106]

After 373409
    went into liquidation, its Receiver and Manager brought an action in conversion
    against the bank for having accepted 373409s unendorsed cheque for deposit
    into Legacys account. A lending institutions liability in conversion depends
    on finding that (1) payment on the cheque was made to someone other than the
    rightful holder of the cheque, and (2) such payment was not authorized by the
    rightful holder. In that case, the sole question was whether the bank was
    authorized by 373409 to deal with the cheque as it did.

[107]

The Supreme
    Court concluded that 373409, through Lakusta, authorized the bank to deposit
    the proceeds of the cheque into Legacys account. In effect, Lakusta,
qua
shareholder and director, authorized Lakusta,
qua
officer, to deposit
    373409s funds into Legacys account.

[108]

While Major J.
    noted, at para. 22, that Lakustas actions may have been wrongful vis-à-vis
    373409s creditors, his actions were not in fraud of the corporation itself:

In
Canadian Dredge & Dock Co. v. The
    Queen
,
[1985] 1 S.C.R. 662
, it was held at p. 713,
    that where a criminal act is totally in fraud of the corporate employer and
    where the act is intended to and does result in benefit exclusively to the
    employee-manager, that act cannot be attributed to the corporation. In this
    appeal, Lakustas diversion of money from 373409 to Legacy may very well have
    been wrongful
vis-à-vis
the corporation's creditors. However, Lakustas
    action was not in fraud of the corporation itself. Since Lakusta directed the
    funds into Legacys account with the full authorization of 373409s sole
    shareholder and director, being himself, that action was not fraud in respect
    of 373409.

[109]

Because 373409,
    through Lakusta, authorized the bank to deposit the cheques proceeds into
    Legacys account, the bank was not liable in conversion.

[110]

The trial judge
    in this case commented on this decision. He noted that it did not involve an
    action by an affected company against a third party for a breach of duty or
    contract. He stated that [p]roperly understood,
373409 Alberta Ltd.
did
    not involve [the] corporate identification doctrine at all: fn. 167. Rather,
    the case depended on the primary rules of attribution in corporate law, where
    the actions of the sole shareholder and director are attributed to the
    corporation.
Canadian Dredge
was only used to explain why the
    wrongfulness of Lakustas actions with respect to the creditors did not prevent
    his actions from being attributed to the corporation for the purpose of
    determining whether the bank was authorized to deal with the cheque.

[111]

I agree that the
    Supreme Courts decision in
373409 Alberta
was more concerned with conventional rules of attribution than with
    the corporate identification theory. The Supreme Court found that
Lakusta
    was the sole officer of
373409

and its only agent. He
    was acting within the scope of the authority granted to him by 373409

and
    his action in instructing the bank to deposit the cheques proceeds into
    Legacys account was attributable to the corporation on agency principles. I
    therefore find the case of little assistance.

(3)

Use of the Corporate Identification Doctrine to Apply the
Ex Turpi
    Causa
Defence


[112]

Two things are
    apparent from the foregoing cases on the
ex turpi causa
defence and the
    corporate identification doctrine.

[113]

First, under
    Canadian law, the
ex turpi causa
defence does not give the court
    discretion to withhold a civil remedy for damages merely because the plaintiff
    has engaged in misconduct. The overriding concern is whether permitting
    recovery would give rise to inconsistency in the law and thereby damage the
    integrity of the legal system.

[114]

Secondly, the
    corporate identification doctrine, which has been applied in both the civil and
    the criminal context, both as a sword and as a shield, is not a free-standing
    legal rule. It is a mechanism to facilitate the application of rules of law,
    either statutory or common law, to a corporation where the primary rules of
    attribution are not available. I agree with the proposition, expressed by the
    Privy Council in
Meridian Global Funds
, that the application of the
    mechanism must be tailored to the terms of the particular substantive rule it
    serves.

[115]

In this case,
    the question is whether the corporate identification doctrine can be used to
    attribute the frauds of Drabinsky and Gottlieb to Livent, allowing Deloitte to
    rely on the
ex turpi causa
defence. I now turn to case law dealing with
    that very issue  the use of the corporate identification doctrine to apply the
ex turpi causa
defence.

[116]

The parties
    point to three cases in which the issue was the use of the corporate
    identification doctrine to attribute wrongdoing to a corporation for the
    purposes of applying the
ex turpi causa
defence.

[117]

First, Deloitte
    relies on
Hart Building Supplies Ltd. v. Deloitte and Touche
, 2004 BCSC
    55, 41 C.C.L.T. (3d) 240, a decision the trial judge in this case described as
    being almost on all fours: para. 255. Deloitte says the trial judge erred in
    not following
Hart Building
, 
the only case on point in
    the Canadian jurisprudence and which is squarely against Livents position.

[118]

Hart Building
    sued its auditor, Deloitte, for failing to detect that Calvin Larson  the
    corporations president, general manager, director and minority shareholder 
    had fraudulently overstated its inventory. Deloitte argued that Larsons
    actions were the actions of Hart Building and that the corporation was not
    entitled to profit from its own fraud.

[119]

After setting
    out the criteria established in
Canadian Dredge
for the application of
    the corporate identification doctrine, the trial judge in
Hart Building
commented
    that Canadian courts have applied the doctrine where it was established either
    that the directing mind intended to benefit the corporation as well as himself
    or herself, or that the corporation did, in fact, obtain some benefit, even if
    the ultimate consequences for the corporation were disastrous.

[120]

She found that
    Larson was the directing mind of Hart Building and he had acted within his
    authority in dealing with the inventory and with Deloitte. Larsons intention
    was to allow Hart Building to survive until economic conditions had improved
    and this was to the benefit of the corporation.

[121]

She rejected the
    submission that the corporate identification doctrine should not be applied
    because doing so would deny compensation to Hart Building, a victim of
    Deloittes negligence. Deloitte was a victim of Larsons deception and to allow
    recovery would permit Hart Building to benefit from its own fraud. She
    concluded, at paras. 63-64:

Larson was Hart's directing mind and its alter
    ego. Hart may not benefit from its own fraud. Hart, in the person of Larson,
    deliberately misrepresented the true state of its financial affairs to
    Deloitte, in contravention of the agreement it entered into with Deloitte by
    virtue of the representation letters Larson, acting on behalf of Hart, signed.
    Hart knew that the audited financial statements were incorrect, because Hart
    provided false information with the knowledge and intention that the auditors
    would rely on that false information in preparation of the statements. Hart did
    not rely on the audited statements because Hart's directing mind knew those
    statements were incorrect.

The identification doctrine applies in these
    circumstances and Hart's action must be dismissed.

[122]

The trial judge
    in the case before this Court declined to follow
Hart Building.
He
    referred to an article by Professor Darcy L. MacPherson

that questioned
    the application of the doctrine to actions against third parties and raised policy
    arguments against its use to shield an auditor from liability for negligence in
    the preparation of the statutorily-mandated audit: see Darcy L. MacPherson, Emaciating
    the Statutory Audit  A Comment on
Hart Building Supplies Ltd. v. Deloitte
    & Touche
 (2005) 41 Can. Bus. L.J. 471.

[123]

The trial judge
    concluded that the corporate identification doctrine was not intended to and
    does not apply to an action commenced by an aggrieved company against a third
    party for negligence or breach of contract: para. 261. He concluded, as well,
    that on a proper analysis, the issue was not whether the fraud of the
    principals should be attributed to the corporation for all purposes, but rather
    whether it should be attributed to the corporation for the purposes of applying
    the
ex turpi causa
doctrine.

[124]

I think the
    trial judge was right in declining to follow
Hart Building
, which is not
    binding in any event.

The trial judge in
Hart Building
applied
    the
ex turpi causa
doctrine without actually identifying it, and without
    considering the issue identified by the Supreme Court in
Hall
and
Zastowny
    
namely, whether the application of the doctrine was necessary to preserve
    the integrity of the justice system.

[125]

However, to the
    extent that the trial judge in this case was suggesting that the corporate
    identification doctrine could never be used to attribute thoughts or actions to
    a corporation for the purposes of allowing a third party to rely on a defence
    such as
ex turpi causa
, I should not be taken as agreeing with that
    general proposition. The application of an attribution rule is contextual and
    will depend on the circumstances of the case.

[126]

The second case
    referred to by the parties was the House of Lords decision in
Stone &
    Rolls Ltd. (in liquidation) v. Moore Stephens (a firm)
, [2009] UKHL 39, [2009]
    1 A.C. 1391, one of the Courts last decisions before being replaced by the
    Supreme Court of the United Kingdom. In Deloittes submission, the trial judge
    erred in relying on Lord Mances dissenting opinion. Livent, on the other hand,
    submits that the case is distinguishable, as it involved a one-person company,
    although it also submits that Lord Mances dissenting opinion is persuasive.

[127]

Stone and Rolls
    Ltd. (S & R) was beneficially owned, controlled and managed by Zvonko
    Stojevic. He used the company to engage in frauds on a number of banks,
    including a Czech bank. Substantial sums were fraudulently extracted from the
    banks, channelled through S & R and paid to Stojevic and other fraudsters. The
    Czech bank successfully sued Stojevic and S & R, obtaining judgment for
    more than U.S.$94 million. S & R was unable to pay the damages and went
    into liquidation.

[128]

The companys
    liquidators sued the companys auditor, Moore Stephens, in contract and
    negligence for failure to detect the fraud. It was acknowledged that if the
    claim against the auditor succeeded, the major beneficiary would be the Czech
    bank, which had no direct claim against the audit firm. The firm denied
    negligence and brought an application to have the claim struck on the basis of
ex
    turpi causa
.

[129]

The trial judge
    held that the actions and state of mind of Stojevic could be attributed to S &
    R, but since detection of fraud was the very thing the auditor was engaged to
    undertake, the firm was not entitled to rely on that fraud to support an
ex
    turpi causa
defence.

[130]

Moore Stephens
    appealed to the Court of Appeal. The Court concluded that S & R was to be
    attributed with responsibility for the fraudulent activities of Stojevic, since
    S & R was a villain, not a victim. Because S & R relied on the illegal
    conduct to found its claim against its auditor,
ex

turpi causa
was
    a defence to the claim.

[131]

In a split
    decision, the House of Lords dismissed the appeal.

[132]

The majority, in
    three separate sets of reasons, agreed in the result that the auditor could
    invoke the
ex turpi causa
defence.

[133]

Lord Phillips,
    who delivered the lead opinion, observed at para. 86, that all whose interests
    formed the subject of any duty of care owed by Moore Stephens to S & R,
    namely the companys sole will and mind and beneficial owner Mr. Stojevic, were
    party to the illegal conduct that forms the basis of the companys claim.
    However, Lord Phillips was not persuaded that
ex turpi causa
would
    necessarily defeat S & Rs claim if S & R were a company with
    independent shareholders that had been high-jacked by Mr Stojevic: para. 63.

[134]

In dissent, Lord
    Scott concluded Stojevics actions should not be attributed to S & R for
    the purposes of an action by S & R against its auditor. He was not
    satisfied that the
ex turpi causa
doctrine was engaged because, as the
    company was insolvent, Stojevic would not benefit from his misconduct.

[135]

Lord Mance, who
    was also in dissent, agreed, at para. 275, that the
ex turpi causa
doctrine
    should not apply:

[T]his appeal should be allowed on the ground that Moore Stephenss
    duty was to the company, that it is not sufficient for Moore Stephens to argue
    that every relevant emanation of the company consisted of Mr. Stojevic as its
    directing mind and sole shareholder, if Moore Stephens failed in breach of duty
    to the company to detect the continuing scheme of fraud being pursued by Mr.
    Stojevic and to detect that the company was (in fact, due to such scheme of
    fraud) insolvent or potentially so. In that context, Moore Stephens cannot
    attribute to the company itself, for the purpose of invoking against it the
    maxim ex turpi causa, the knowledge of and involvement in the fraud of Mr.
    Stojevic which (it is for present purposes to be assumed) they ought to have
    detected and reported to regulators or other proper authorities in the
    company's interests. What would have happened upon such detection and report is
    simply a matter of causation.

[136]

He expressed
    concern that the view espoused by the majority will weaken the value of an
    audit and diminish auditors exposure in relation to precisely those companies
    most vulnerable to management fraud: para. 276. As discussed below, I share
    his concern about weakening the integrity of the audit system.

[137]

Given its
    multiple sets of reasons, it has been said that it is notoriously difficult to
    extract a ratio from the judgments in
Stone & Rolls
:
Madoff
    Securities International Ltd. v. Raven & Ors
, [2013] EWHC 3147 (Comm.),
    at para. 315. Indeed, in
Jetivia SA v. Bilta (U.K.) Ltd. (in liquidation)
,
    2015 UKSC 23, [2015] 2 W.L.R. 1168, a subsequent decision of the U.K. Supreme
    Court, Lords Toulson and Hodge concluded, at para. 154, that 
Stone &
    Rolls
should be regarded as a case which has no majority
ratio
    decidendi
. It stands as authority for the point which it decided, namely
    that on the facts of that case no claim lay against the auditors, but nothing
    more. With some qualifications, Lords Neuberger, Clarke, and Carnwath were of
    the view that
Stone & Rolls
should, borrowing the words of Lord
    Denning M.R. in
In re King
, [1963] Ch. 459 (C.A.), at p. 483, be put on
    one side in a pile and marked not to be looked at again:
Bilta
, at para.
    30. Lord Mance himself observed that the correctness in law of the outcome in
Stone
    & Rolls
might one day fall for reconsideration: para. 50.

[138]

In view of these
    qualifications, I find
Stone & Rolls
to be of limited assistance. I
    also agree that the case is distinguishable in that it involved a one-person
    company.

[139]

Thirdly, it
    remains to consider the judgment of the U.K. Supreme Court in
Bilta
,
    referred to above. That decision, affirming the judgment of the Court of
    Appeal, was released after the argument of the appeal in this case. This Court
    invited and received additional submissions on the decision.

[140]

Bilta (U.K.) Ltd.
    was an English company. Its directors, Muhammad Nazir and Chetan Chopra, who
    was the sole shareholder, used the company to perpetrate a Value-Added Tax or VAT
    fraud. It was alleged that Jetivia SA, a Swiss company, and its managing
    director, Urs Brunschweiler, had knowingly assisted the Bilta directors in
    their breach of fiduciary duty. This resulted in Bilta owing the tax
    authorities more than £38 million and becoming insolvent. Biltas liquidators
    then commenced proceedings against Jetivia, Brunschweiler, Nazir and Chopra for
    conspiracy to defraud, breach of fiduciary duty, dishonest assistance, and
    fraudulent trading.

[141]

Jetivia and
    Brunschweiler applied for their claims to be struck out or summarily dismissed
    on the grounds that they were precluded by
ex turpi causa.
The argument
    was that Bilta could not sue them because the wrongful acts of Biltas
    directors should be attributed to the company.

[142]

The High Court
    dismissed the application for summary dismissal, and Jetivia and Brunschweiler
    appealed. The Court of Appeal dismissed the appeal and the Supreme Court
    unanimously dismissed a further appeal.

[143]

The Supreme
    Courts judgment by the seven-member Court consisted of four separate sets of
    reasons. There was considerable disagreement on the scope of the
ex turpi
    causa
defence, but some unanimity on the doctrine of attribution. Lord
    Neuberger, summarizing his views and those of five of his colleagues, stated
    the following proposition on attribution, at para. 7:

Where a company has been the victim of wrongdoing by its
    directors, or of which its directors had notice, then the wrongdoing, or knowledge,
    of the directors cannot be attributed to the company as a defence to a claim
    brought against the directors by the company's liquidator, in the name of the
    company and/or on behalf of its creditors, for the loss suffered by the company
    as a result of the wrongdoing, even where the directors were the only directors
    and shareholders of the company, and even though the wrongdoing or knowledge of
    the directors may be attributed to the company in many other types of
    proceedings.

[144]

This proposition
    is not difficult to accept. Directors cannot tag a corporation with their own
    misdeeds to set up a defence to a suit by the companys liquidators.

[145]

The Court did,
    however, disagree about the approach to the
ex turpi causa
defence,
    having what Lord Neuberger described, at para. 13, as a spectrum of views. His
    own view was that the case was not a proper one for the resolution of the
    issue.

[146]

In view of the well-established
    Canadian jurisprudence on the
ex turpi causa
doctrine, I derive little
    assistance from
Bilta
on this point
.

[147]

In conclusion, I
    find
Hart Building,

Stone & Rolls
and
Bilta
of little
    assistance in determining whether the trial judge erred in refusing to allow
    Deloitte to rely on the
ex turpi causa
defence through the mechanism of
    the corporate identification doctrine.

[148]

I now turn to an
    analysis of the trial judges application of the corporate identification and
ex
    turpi causa
doctrines on the facts of this case and my conclusions in that
    regard.

(4)


Conclusion on
    Attribution and
Ex Turpi Causa

[149]

In my view, the
    trial judge did not err in concluding that Deloitte could not rely on the
    corporate identification doctrine or the
ex turpi causa
doctrine to
    excuse itself from liability.

[150]

The trial judge
    properly identified the question to be answered. He recognized that the
    question was not whether Gottlieb and Drabinskys fraud should be attributed
    to the corporation
for all purposes
: para. 263 (emphasis in original). Rather,
    the question was whether their fraud should be attributed to Livent
for
    purposes of applying the
ex turpi causa
doctrine
: para. 263
    (emphasis in original). He recognized that he was obliged to determine whether
    declining to apply the doctrine would undermine the justice system.

[151]

The trial judge
    was not persuaded that attributing Drabinsky and Gottliebs frauds to Livent
    would serve the purposes of the
ex turpi causa
doctrine on the facts of
    this case. He stated, at para. 270:

In the case at bar, the plaintiff corporation had innocent
    shareholders and directors who were not party to the fraudulent schemes of
    Gottlieb and Drabinsky. Hence, if Livent were to recover damages from Deloitte,
    none of that money would provide any benefit, direct or indirect, to anyone who
    participated in the fraud. No wrongdoer would therefore be allowed to profit
    from his wrong or to evade a criminal sanction, and therefore the integrity of
    the legal system would not be called into question. In these circumstances,
    therefore, I am not persuaded that the purpose of the
ex turpi causa
doctrine would be served by attributing the fraud to the company.

[152]

He also noted
    that attributing the frauds to the company in the circumstances of the case
    would deprive the innocent participants of a remedy for auditors negligence in
    a situation where the services of an auditor are most important  where there
    is fraud by high-level management.

[153]

The trial judge quoted with approval, at para. 272, Lord Mances
    observation, made at para. 241 of
Stone & Rolls
in dissent, that the
very thing an auditor undertakes is to exercise reasonable care in
    relation to the possibility of financial impropriety. Lord Mance said:

Leaving aside situations in which the directing mind(s) is or
    are the sole beneficial shareholder(s), it is obvious ... that
an auditor
    cannot
, by reference to the
maxim
ex turpi causa
,
defeat a claim for breach of duty in failing to detect
    managerial fraud at the company's highest level by attributing to the company
    the very fraud which the auditor should have detected. It would lame the very
    concept of an audit
 a check on management for the benefit of shareholders
     if the higher the level of managerial fraud, the lower the auditor's
    responsibility. When Lord Bridge noted in
Caparo Industries plc v Dickman
[1990]
    2 AC 605, 626E that shareholders' remedy in the case of negligent failure by an
    auditor to discover and expose misappropriation of funds by a director
    consisted in a claim against the auditors in the name of the company, he cannot
    conceivably have had in mind that it would make all the difference to the
    availability of such a claim whether the director was or was not the company's
    directing mind.
The fact that a "very thing" that an auditor
    undertakes is the exercise of reasonable care in relation to the possibility of
    financial impropriety at the highest level makes it impossible for the auditor
    to treat the company itself as personally involved in such fraud, or to invoke
    the maxim
ex turpi causa
in such a case
. [Emphasis added.]

[154]

The policy
    underlying the
ex turpi

causa
doctrine is, as I have discussed,
    to maintain the integrity of the justice system by preventing a wrongdoer from
    profiting from his or her wrongdoing or evading a criminal sanction. As noted
    above, there may be cases where the doctrine could be applied as a defence in a
    civil action brought by a corporate plaintiff and cases where the wrongdoing of
    the directing mind(s) of a plaintiff corporation could be attributed to the
    corporation for the purposes of invoking the
ex turpi causa
doctrine.

[155]

However, I
    reject Deloittes submission that the trial judge erred in failing to apply the
    corporate identification doctrine, despite finding that the test from
Canadian
    Dredge
had been met, and further erred in finding that Livents cause of
    action was not barred by the
ex turpi causa
defence.

[156]

In my view, even
    if the
Canadian Dredge
test were to be applied in the context of this
    case such that the fraudsters acts are attributed to Livent, there is no basis
    for invoking the
ex turpi causa
defence through attribution because invoking
    the defence is not required to maintain the integrity of the justice system in
    these circumstances. The actual fraudsters will not profit from their
    wrongdoing and have not evaded criminal sanction. Nor will Livent profit from
    the wrongdoing. As I will explain, Livent in fact suffered a loss.

[157]

In addition, I
    am not persuaded that the three-step
Canadian Dredge
test  which was
    developed in a much different context than the one here  is necessarily the complete
    answer where a defendant seeks to attribute illegal or wrongful acts to a
    corporate plaintiff for the purposes of invoking the
ex turpi causa
defence in a civil action, as Deloitte seeks to do here. As I have explained,
    the application of the corporate identification doctrine must be tailored to
    the terms of the particular substantive rule it serves.

[158]

In my view, even
    if the
Canadian Dredge
factors are satisfied, there are at least two
    additional factors that are relevant to the inquiry. The first is whether applying
    attribution for the purposes of
ex turpi causa
is consistent with the
    contract or relationship between the plaintiff and the defendant, including
    contractual or other duties owed by the defendant to the plaintiff. The second
    is whether doing so is necessary to preserve the integrity of the justice
    system  an overriding consideration in the
ex turpi causa
context.

[159]

In the
    circumstances of this case, the contractual relationship between Deloitte and
    Livent was shaped by the statutory, regulatory and professional standards
    governing Deloitte as an auditor of a public company, which I detail below.

[160]

In addition, I
    note that under the engagement letters, which formed part of the contract
    between Deloitte and Livent, Deloitte undertook to
evaluate
    the fairness of the presentation of the financial statements in conformity with
generally accepted accounting
    principles (
GAAP) and to conduct its audits in
    accordance with GAAS.
It is true that, under those same letters, Livent
    acknowledged that it was responsible for designing
effective
    internal controls, properly recording transactions in the accounting records,
    making appropriate accounting estimates, safeguarding assets and ensuring the
    overall accuracy of the financial statements. Nonetheless,
in accordance with GAAS, Deloitte was under an obligation
to
    have proper auditing procedures in place to reduce the risk of not detecting
    material misstatements to an appropriately low level.
To
    borrow the words of Lord Mance,
one of the very things Deloitte was
    retained to do was to exercise reasonable care in relation to detecting fraud. This
    is underscored by the fact that Deloitte knew at all material times that the
    financial statements it prepared were being used to solicit investment in
    Livent.

[161]

With respect to
    the second inquiry  whether attribution is necessary to preserve the integrity
    of the justice system  as found by the trial judge, no wrongdoer would profit
    and no criminal sanction would be evaded if Livent were awarded damages. In
    short, it is unnecessary to apply the
ex turpi causa
doctrine to
    preserve the integrity of the justice system. Indeed, it could be said in these
    circumstances that the opposite would be true. I find perceptive Lord Mances view
    in
Stone & Rolls
, referred to above, that [i]t would lame the very
    concept of an audit if the auditor could, by reference to the maxim
ex
    turpi causa
, defeat a claim for breach of duty in failing to detect
    managerial fraud at the companys highest level by attributing to the company
    the very fraud which the auditor should have detected: para. 241.

[162]

Furthermore,
    applying the
ex turpi

causa
doctrine in these circumstances would
    risk undermining the value of the public audit process, and thereby the
    integrity of the justice system as well. I agree with the trial judges
    observation, at para. 271, that applying the
ex turpi

causa
doctrine
    on these facts would have a perverse effect:

Indeed, to attribute the fraud to the company
    in these circumstances would have the perverse effect of depriving the innocent
    participants in the enterprise of a remedy for the negligence of its auditor in
    precisely those cases where the services of an auditor are most critical 
    namely, the detection of wrongdoing by high-level management. That proposition
    is, in my opinion, part of the underlying rationale of the leading auditors'
    negligence cases in Canada and the U.K.  [T]he leading decisions in both
    jurisdictions contemplate a corporation bringing an action against its auditor
    for failure to detect wrongdoing by directors.

[163]

In the end
    result, there is no reason to interfere with the trial judges conclusion that
    Deloitte cannot rely on the corporate identification doctrine for the purposes
    of invoking the
ex turpi causa
defence to escape liability for its negligence.

D.

THE
    U.S. BAR ORDERS

[164]

Nor am I
    persuaded that the U.S. bar orders preclude Livent from advancing its claim.

[165]

As I have
    explained, Deloitte takes the position that this action is really brought on
    behalf of Livents stakeholders. It submits that the Receivers claims should
    be dismissed because the stakeholders have already received compensation
    through settlements of investor class actions in the United States. Building on
    this argument, it also submits claims that Livents action is barred by releases
    and bar orders made by a U.S. court in approving the settlements of the class
    actions brought on behalf of Livents shareholders and noteholders.

[166]

The
    settlements were embodied in orders of the United States District Court for the
    Southern District of New York. The terms of the orders were similar.  These
    terms:

·

approved the settlements as fair and reasonable and in the best
    interests of the class;

·

discharged Deloitte and barred all future claims against it in,
    arising out of, or relating to, the actions;

·

released Deloitte of all claims belonging to the representative
    plaintiffs and members of the classes;

·

released Deloitte of all claims by others arising out of the
    claims settled by the classes; and

·

barred the classes or anyone claiming on their behalf from
    pursuing the settled claims, directly or indirectly, in any other forum.

[167]

The trial judge
    rejected Deloittes position on this issue. He gave two reasons.

[168]

First, the U.S.
    class action litigation was entirely different from this proceeding. The plaintiffs
    and causes of action were different. The class actions were brought under U.S.
    securities legislation permitting investors to recover their personal financial
    losses from Deloitte as a result of misrepresentations in Livents financial
    statements. The claims in this action were brought by Livent, as distinct from
    its stakeholders, and the cause of action was for negligence in the performance
    of the auditors duties, not negligent misrepresentation.

[169]

Secondly,
    Deloittes submission was contrary to Livents plan of reorganization, which courts
    in Canada and the U.S. approved and to which Deloitte is deemed to have
    consented. The plan confirmed that Livents assets included its claim against
    Deloitte.

[170]

I agree with
    the trial judges conclusion and his reasons.

[171]

Nothing in the
    court orders approving the settlements expressly or impliedly includes Livents
    claims in this action within the scope of the settled claims. Livent was a defendant
    in the class actions. The settlements contained no release or bar of Livents
    claims against Deloitte. As a matter of interpretation, the orders do not
    address Livents claims. Deloitte does not argue otherwise.

[172]

Deloitte is
    therefore driven to argue that this is really an action brought on behalf of
    Livents stakeholders, who have already been compensated in the class actions. I
    have previously rejected that submission.

[173]

I therefore
    reject this ground of appeal.

E.

DID THE TRIAL JUDGE EXTEND THE DUTY OF CARE BEYOND THE DUTY OWED
    TO LIVENT?

[174]

The trial judge
    found that the duty of care question could be
answered
    in the affirmative without too much difficulty: para. 49. He noted that in the
    wake of the Supreme Courts decision in
Hercules
,

there
    can be little doubt that auditors owe a duty of care to the company for the
    benefit of the corporate collective, the shareholders: para. 50.

[175]

Deloitte,
    however, argues that, in effect, the trial judge extended an auditors duty of
    care to its client to include economic responsibility for losses experienced by
    those standing behind it. In doing so, it raises the spectre of indeterminate
    liability  an issue that has been the subject of discussion in a number of
    cases: see e.g.
Ultramares Corp. v. Touche
, 174 N.E. 441 (N.Y.C.A. 1932),
per
Cardozo C.J., at p. 444;
Caparo Industries plc v. Dickman
,
    [1990] 1 All E.R. 568 (H.L.), at pp. 576-77;
Haig v. Bamford
, [1977] 1
    S.C.R. 466, at p. 484;

and
Hercules
, at paras. 31-41.

[176]

I reject
    Deloittes argument on this point.

[177]

There can be no
    real dispute that Deloitte owed a duty of care to its client, Livent, to
    conduct the audit in accordance with the applicable standard of care.

[178]

While issues of
    remoteness remain to be addressed below, for duty of care purposes, once it is
    accepted that the cause of action being asserted belongs to Livent and is not
    being advanced for the benefit of third-party stakeholders, policy concerns
    about imposing an indeterminate liability on auditors   much touted by
    Deloitte in its argument  fall away.

[179]

I now turn the
    issue of the standard of care.

F.

WHAT
    ARE THE PURPOSES OF AN AUDIT OF A PUBLICLY-TRADED COMPANY AND WHAT IS THE
    STANDARD OF CARE TO BE APPLIED IN DETERMINING WHETHER DELOITTE WAS NEGLIGENT?

[180]

The trial judge
    considered the standard of care for the relevant period at some length. In
    assessing the standard of care, he considered the evolution of case law dealing
    with auditors negligence. He also heard days of expert evidence. D. Paul Regan
    testified as an expert on behalf of Livent, while Ken Froese and David Yule
    gave expert evidence on behalf of Deloitte. Amongst other things, they made
    reference to the Handbook of the Canadian Institute of Chartered Accountants
    (the CICA Handbook), the Institute of Chartered Accountants of Ontario Members
    Handbook (the ICAO Members Handbook) and its Council Interpretations, and
    Deloittes audit manuals for the relevant period (the Deloitte Manuals).

[181]

Recognizing that
    an auditor has a duty to exercise, at a minimum, the skill and care which a
    reasonably competent and cautious auditor would exercise in the same circumstances,
    the trial judge grappled with the more difficult task of determining the
    requisite standard of skill and care to be exercised in this particular case.

[182]

Deloitte does
    not appear to challenge the trial judges analysis on standard of care other
    than on the question of the duty of an auditor to resign. Nevertheless, in this
    section I will review the standard of care analysis in some detail, since it informs
    the subsequent discussion on negligence, causation and damages.

[183]

Before turning
    to the standard of care analysis, it is important to understand the purposes of
    an audit in the context of a publicly-traded company.

(1)


Purposes of an
    Audit of a Publicly-Traded Company

[184]

Courts,
    including the trial judge in this case, have recognized that audits fulfil two
    key objectives: (i) to ensure that the financial information presented by
    management provides a fair and accurate picture of the financial affairs of the
    corporation and of any changes in the financial position of the corporation;
    and (ii) to provide shareholders with information for the purpose of overseeing
    the management and affairs of the corporation (including the ability to measure
    the level of honesty with which management performs its duties).  In this
    regard, Lord Oliver made the following observation in
Caparo Industries
,

at p. 583:

It is the auditors function to ensure, so far as possible,
    that the financial information as to the companys affairs prepared by the
    directors accurately reflects the companys 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
    companys affairs and to exercise their collective powers to reward or control
    or remove those to whom that conduct has been confided.

[185]

The Supreme
    Court of Canada adopted this statement of the objectives of an audit in the
    Canadian context in
Hercules,
at paras. 48-49. The same purposes are
    amply reflected elsewhere in the case law, and they remain central to the
    auditing function in the corporate context: see e.g.
In re London and
    General Bank
(No. 2), [1895] 2 Ch. 673 (Eng. C.A.), at pp. 682-83
;
Fomento (Sterling Area) Ltd. v. Selsdon Fountain Pen Co.
    Ltd.
, [1958] 1 All E.R. 11 (H.L.), at p. 23;
Pacific Acceptance Corp. v.
    Forsyth
(1970), 92 W.N. (N.S.W.) 29 (S.C.), at p. 53;
Roman Corp. Ltd.
    v. Peat Marwick Thorne
(1993), 11 O.R. (3d) 248 (Gen. Div.), at p. 260; and
Capital Community Credit Union Ltd. v. BDO Dunwoody
(2000), 4 B.L.R.
    (3d) 1 (Ont. S.C.), at paras. 223-27, affd (2002), 151 O.A.C. 32. See also
    William A. Macdonald,
Report of the Commission to Study the Publics
    Expectations of Audits
(Toronto: Canadian Institute of Chartered
    Accountants, 1988), at pp. 1-2.

[186]

In the case of
    publicly-traded corporations, however, an audit has a third important and
    broader objective involving the responsibilities of securities regulators and
    the interests of the investing public. It is not only the corporation and its existing
    shareholders who need and rely on the auditors reports. Securities regulators
    and members of the investing public also rely on them for disclosure of a fair
    and accurate picture of the financial position of the corporation. The
    auditors standard of care in such circumstances must reflect this reality as
    well.

[187]

This role of an
    audit of a publicly-traded company is reinforced by s. 1.1 of the
Securities
    Act
,
R.S.O. 1990, c. S.5,

which
    provides that one of the Acts purposes is to foster fair and efficient capital
    markets by protecting investors from unfair, improper or fraudulent practices,
    and to maintain public confidence in those markets. An auditor must be alive to
    the impact of its reports in this context.

[188]

It follows that
    the auditor of a publicly-traded company acquires an added layer of
    responsibilities that is not necessarily present where the audit is performed
    in relation to a private corporation or private individuals.

(2)


Articulating the
    Standard of Care

[189]

The general
    standard of care applicable to an auditors work was described near the turn of
    the 19th century in
In re Kingston Cotton Mill Co. (No. 2)
, [1896] 2 Ch.
    279 (Eng. C.A.), at p. 288:

It is the duty of an auditor to bring to bear on the work he
    has to perform that skill, care, and caution which a reasonably competent,
    careful, and cautious auditor would use. What is reasonable skill, care, and caution
    must depend on the particular circumstances of each case.

[190]

This formulation
    has stood the test of time and been adopted in cases too numerous to list. The
    secret of its longevity lies in its contextual adaptability. While the general
    formulation of the standard of care remains the same, the particular
    circumstances of a case encompass not just the factual setting in which the
    audit is conducted, but also the statutory and regulatory framework and the
    professional requirements prevailing at the time. Facts vary and the governing
    statutory, regulatory and professional requirements evolve over time, but they
    all contribute to the setting in which the standard is to be applied in any
    particular case. Where, as here, the audit is of a publicly-traded corporation
     and thus there is an added public-interest dimension to the auditors
    responsibilities  the setting calls, in addition to everything else, for close
    adherence to the dictates of all applicable securities regimes accompanied by a
    careful attentiveness to the need for accurate financial disclosure to
    securities regulators and the public.

[191]

I will review
    what the standard of care was at the relevant time. For the purposes of this
    appeal, the relevant period is 1996 to 1998.

(3)


The
    Standard of Care Framework: 1996-1998

(a)


Statutory and Regulatory Framework

[192]

Livent appointed Deloitte as its auditor to fulfill its obligations
    under the
Securities Act
.
At the material time, s. 21.10(4) of t
he
Securities Act
required Livent to appoint an auditor to
    prepare and submit annual audited financial statements prepared in accordance
    with GAAP, as well as other regulatory filings, to the Ontario Securities Commission.

[193]

As a reporting issuer, Livent was required to file comparative
    financial statements prepared in accordance with GAAP after its financial year-end:
Securities Act
, s. 78. Along with the comparative financials, it was
    required to file an auditors report prepared in accordance with the
    regulations and the auditor was required to make such examinations necessary
    to prepare the report: ss. 78(2) and (3).

[194]

The regulations under the
Securities Act
directed an auditor
    conducting an audit required by that

Act to prepare its report in
    accordance with GAAS: R.R.O. 1990, Reg. 1015, ss. 1(3)
,
2(2).

[195]

A public corporation, such as Livent, listed on the NASDAQ stock
    market in the United States was subject to similar legislative requirements.

[196]

At the relevant time, National Policy Statements (NPS)  which
    were issued by the Canadian Securities Administrators and adopted by the
    Ontario Securities Commission  applied to the Livent audits as well. Amongst
    other things, the NPS made clear that an auditors report containing one or
    more reservations (i.e. a qualified opinion, an adverse opinion, or a denial of
    opinion) would generally not satisfy the requirements of the securities
    legislation: NPS No. 50, Part 5 (
Reservations in an Auditors Report Filed
    by an Investment Fund
).

[197]

In
    addition, Livent was subject to requirements under Ontarios
Business Corporations
    Act
, R.S.O. 1990, c. B.16 (OBCA).
It was obliged to
    appoint an auditor for the purposes of reporting on the financial health of the
    company: OBCA,
s. 149
. As Livents auditor, Deloitte
    was required (i) annually to examine and verify the fairness and accuracy of its
    financial statements as prepared by management in accordance with GAAP, and (ii)
    to prepare an auditors report in accordance with GAAS:
OBCA, ss. 153(1),
    155; and
R.R.O. 1990, Reg. 62, ss. 40-41. Deloitte also had an
    obligation to inform Livents directors if it was notified or became aware of
    an error or misstatement in a financial statement that was, in its opinion,
    material: OBCA, s. 153(3).

(b)

The CICA Handbook

[198]

Deloittes role
    as Livents auditor was also subject to the professional standards applicable
    to auditors as set out in the CICA Handbook and the ICAO Handbook at the time.

[199]

The Supreme Court of Canada has said that rules set by a
    self-governing professional body are of guiding importance in determining the
    nature of the duties flowing from a particular professional relationship:
Hodgkinson
    v. Simms
, [1994] 3 SCR 377, at p. 425. Further, [t]hese rules must be
    taken as expressing the collective views of the profession as to the
    appropriate standards to which the profession should adhere:
MacDonald
    Estate v. Martin
, [1990] 3 S.C.R. 1235, at p. 1244.

[200]

In the auditing context, this Court has held that the CICA Handbook
    is of great assistance to courts in determining the requisite standard and a
    persuasive guide to the applicable standard of care:

Bloor Italian Gifts Ltd. v. Dixon
(2000), 48 O.R. (3d) 760, at paras. 27, 31;

and
Sherman v. Orenstein & Partners
(2006), 11 B.L.R. (4th) 233, at para. 33.

[201]

The trial judge reviewed
    the relevant provisions in the CICA Handbook in considerable detail, focusing
    on those sections dealing with Audit of Financial Statements (s. 5000),
    Knowledge of the Entitys Business (s. 5140) and Auditors Responsibility to
    Detect and Communicate Misstatements (s. 5135).

[202]

Given their
    significance, I will review the standards from the CICA Handbook in effect at
    the relevant time in some detail.

(i)

The Objective of an Audit

[203]

At the time, the
    CICA Handbook provided that the objective of an audit of financial statements was
    to express an opinion as to whether the statements presented fairly, in all
    material respects, the financial position, results of operations, and changes
    in financial position in accordance with GAAP: s. 5000.01. Deloitte certainly
    accepted this purpose, as it was explicitly stated in Deloittes engagement
    letters to Livent.

(ii)


Knowledge of the Client

[204]

The CICA
    Handbook stressed the importance of continuously obtaining and applying
    knowledge of the clients business. The trial judge summarized the salient
    points stipulated in s. 5140 of the CICA Handbook, entitled Knowledge of the
    Entitys Business, at para. 92:

(i) Auditors must obtain and apply knowledge of the clients
    business continuously and cumulatively.  The knowledge obtained from the moment
    of the decision to accept the engagement, together with knowledge amassed over
    the course of the subsequent audit periods, must be updated to ensure that it
    reflects the current circumstances of the client.

(ii) Knowledge obtained when planning an audit for the current
    period must be refined and supplemented as the audit progresses.

(iii) As a corollary, the planning and execution of an audit
    must reflect the auditors knowledge of the client.

(iv) Knowledge of the clients business affects multiple
    components of the audit, including determining materiality levels, assessing
    the inherent risk associated with the audit, understanding and obtaining
    sufficient information in respect of the clients internal controls,
    identifying the nature and sources of available audit evidence, designing audit
    procedures, and understanding the substance of transactions.

(v) Assessing whether sufficient appropriate audit evidence has
    been obtained, including evidence related to significant management representations.

[205]

As the trial
    judge noted, at para. 93, an auditor is required to assess the information
    accumulated during the course [of] the audit to determine whether or not
    decisions made during the planning stage remain appropriate. Amongst other things,
    the CICA Handbook instructed auditors, in making this assessment, to identify
    and consider the business environment of the client, the characteristics of
    ownership and management, and the operating characteristics of the client.

(iii)

Managements Good Faith and Professional Skepticism

[206]

The CICA
    Handbook dealt with the concept of managements good faith and the related
    concept of professional skepticism, which are particularly significant in this
    case given the trial judges finding that one of Deloittes shortcomings was
    its failure to exercise sufficient professional skepticism.

[207]

The Handbook recognized
    at s. 5000.05 that the assumption of managements good faith [was] a
    fundamental auditing postulate, which meant that 
in the absence of
    evidence to the contrary
, the auditor [could] accept accounting records and
    documentation as genuine and representations as complete and truthful
    (emphasis added). At the same time, [t]he assumption of managements good
    faith [was] not a source of audit evidence nor a substitute for the requirement
    to obtain sufficient appropriate audit evidence to afford a reasonable basis to
    support the content of the auditors report.

[208]

Sections 5000.06
    and 5135.05 dealt with the need to approach the audit with an attitude of
    professional skepticism. I set them out in their entirety, given their
    significance in this case:

Section 5000.06

An attitude of professional scepticism means the auditor
    assesses the validity of evidence obtained
and is alert to evidence which
    contradicts the assumption of managements good faith
. For example, the
    auditor is alert to evidence which may indicate accounting records and
    documentation have been altered or representations are false. It does not mean
    the auditor is obsessively sceptical or suspicious.
Without an attitude of
    professional scepticism
, the auditor may not be alert to circumstances
    which should lead him or her to be suspicious and
he or she may then draw
    inappropriate conclusions from evidence gathered
.

Section 5135.05

An attitude of professional scepticism is inherent in applying
    due care in accordance with the general standard
Such an attitude is
    necessary for proper consideration of factors which increase the risk of
    material misstatements and evaluation of evidence obtained
. The auditor
    recognizes that conditions observed and evidence obtained,
including
    information from previous audits
, need to be evaluated with an attitude of
    professional scepticism
to assess the risk of material misstatement
. In
    particular, an attitude of professional scepticism means the auditor is alert
    to:

(a) factors which increase the risk
    of material misstatement

(b) circumstances which make him or
    her suspect the financial statement are materially misstated;

(c) conditions observed or evidence
    obtained which contradicts the assumption of managements good faith. The
    auditor needs to be aware of factors which increase the possibility of
    management misrepresentation. For example, management can direct subordinates
    to record transactions or conceal information in a manner that can materially
    misstate financial statements. [Emphasis added.]

[209]

These provisions
    echoed the sentiments expressed long ago in
In re Kingston Cotton Mill Co.
    (No. 2)
to the effect that an auditor is a watch-dog, but not a
    bloodhound, and is entitled to rely on the representations made by tried
    servants of the company in whom confidence is placed by the company and to
    assume they are honest, provided the auditor takes reasonable care, but that [i]f
    there is anything calculated to excite suspicion, the auditor should probe it
    to the bottom: pp. 288-89.

[210]

Lord Denning expressed
    similar views regarding the need for professional skepticism in
Fomento
,
    at p. 23:

An auditor is not to be confined to the mechanics of checking
    vouchers and making arithmetical computations.
He is not to be written off
    as a professional adder-upper and subtractor. His vital task is to take care
    to see that errors are not made
, be they errors of computation, or errors
    of omission or commission, or downright untruths.
To perform this task
    properly, he must come to it with an inquiring mind
not suspicious of
    dishonestly, I agreebut suspecting that someone may have made a mistake
    somewhere and that a check must be made to ensure that there has been none. [Emphasis
    added.]

(iv)

The Detection of Material Misstatements

[211]

The CICA
    Handbook affirmed that the auditor was responsible for detecting material
    misstatements in financial statements or other financial information. It
    defined misstatements as either errors (i.e., unintentional misstatements) or
    fraud and other irregularities (i.e., intentional misstatements): ss. 5135.01-5135.02.

[212]

The CICA
    Handbook recognized  as did the trial judge  that fraud may be very difficult
    to detect. However, given the difficulty in detecting fraud, the Handbook stressed
    the need to have proper auditing procedures in place to reduce the risk of not
    detecting material misstatements to an appropriately low level, and, in
    particular, the need to adapt the auditing plan where circumstances made the
    auditor suspect the financial statements were materially misstated: ss. 5135.07-5135.17.

[213]

For instance, in
    circumstances involving higher risk assessment  as Deloitte recognized the
    Livent environment to be  the CICA Handbook imposed an obligation to perform
    heightened audit procedures providing more reliable evidence: s. 5135.07. This
    included recognizing the need for more extensive supervision and the use of
    personnel with more experience and training: s. 5135.08. The CICA Handbook also
    stipulated that where there was a reason to suspect the financial statements
    were materially misstated, the auditor was required to perform procedures to
    confirm or dispel that suspicion: s. 5135.14.

[214]

These provisions
    were consistent with the common law, which affirmed that until a suspicion is dispelled
     until the auditor has probe[d] it to the bottom  the auditor cannot make an
    unqualified auditors report. Even where the auditor may be following or
    attempting to follow GAAS, it may not be excused from liability where the
    auditor has an opportunity to acquire or is exposed to knowledge or
    information which might affect [its] opinion but [it] fails to recognize and
    act on that information:
Revelstoke Credit Union v. Miller
, [1984] 2
    W.W.R. 297 (B.C.S.C.), at p. 303.

[215]

Subsequent
    authorities considering the same applicable standards have confirmed that where
    the auditor uncovers significant weaknesses during the course of the audit,
    it has a duty to inform the directors of the client company:
BDO Dunwoody
,
    at paras. 231-32. See also
Pineridge Capital Group Inc. v. Dunwoody &
    Co.,
1999 CanLII 5925 (B.C.S.C.), at paras. 26-27; and
Sydney
    Cooperative Society Ltd. v. Coopers & Lybrand
, 2003 NSSC 35, 213 N.S.R.
    (2d) 115, at paras. 148-49.

(c)

The Deloitte Manuals

[216]

As noted earlier
    in these reasons, Deloitte had its own manuals on how to conduct an audit in
    accordance with GAAS  the Deloitte Manuals  which set a standard of care
    Deloitte must be presumed to accept as reasonable: see
Dairy Containers Ltd. v. NZI Bank Ltd.
, [1995] 2 N.Z.L.R. 30 (H.C.)
, at p.
    54.

[217]

Amongst other
    things, the Deloitte Manuals dealt with the detection of fraud and error.
    Interestingly, it appears Deloitte set a higher standard for itself than that
    of assuming managements good faith. Article 1.37 of the particular Manual in
    effect for the years subsequent to 1995 neither assumed that management was
    dishonest nor assumed unquestioned honesty.  It stated:

We neither assume that management is dishonest nor assume
    unquestioned honesty. Rather, we exercise professional skepticism and recognize
    that conditions observed and evidential matter obtained, including information
    from prior audit engagements, need to be objectively evaluated to determine
    whether the financial statements are presented fairly in all material respects.

[218]

Article 17 of
    the same Manual is significant as well. It dealt with circumstances where control
    tests indicated the
possible existence
of fraud or error (emphasis
    added).  Article 17.75 stated:

If the results of our tests of controls indicate the possible
    existence of fraud or error, we should consider the potential effect on the
    financial statements. If we believe the indicated fraud or error or risk
    thereof could have a material effect on the financial statements, we should
    perform appropriate modified or additional procedures.

[219]

Subsequent
    provisions in the same Article fleshed out how to approach the appropriate
    modified or additional procedures. In particular, Article 17.77 did not allow
    Deloitte auditors to assume that an instance of fraud or error was an isolated
    occurrence. Article 17.78 noted the auditors responsibility to confirm or
    dispel a suspicion of fraud or error, and to discuss the matter with
    management if the suspicion could not be dispelled.

(d)


Resignation by an Auditor

[220]

It is important
    to note one final issue related to the standard of care before turning to breaches
    of the standard of care. As noted above, Deloitte takes issue with the trial
    judges finding that it ought to have resigned in August/September 1997 or
    April 1998 at the latest.

[221]

Where an auditor
    suspects fraud or error and management does not assist the auditor in
    dispelling the suspicion, the auditor is left with three options:

·

to issue an unqualified audit report and risk breaching the
    standard of care owed to the client, the applicable legislation, and possibly the
    contract with the client;

·

to issue a reservation of opinion, which will generally not
    satisfy the clients need for an unqualified audit report under the legislation;
    or

·

to resign.

[222]

If the auditor
    chooses the second option and the client elects to discharge the auditor, then
    the incoming auditor must request that the outgoing auditor explain the reasons
    for the replacement, thus putting the new auditor on notice of the formers
    suspicions: OBCA, s. 151(4).

[223]

In addition to
    requirements under the OBCA, Part 4 of NPS No. 31 (
Change of Auditor of a
    Reporting Issuer
), which was in effect at the relevant time, imposed
    reporting obligations on reporting issuers where an auditor resigned or was
    discharged. The reporting issuer was required to prepare and deliver a
    Reporting Package to its shareholders, the securities administrators, and the
    incoming and outgoing auditor: NPS No. 31, ss. 4(1)-4(3). Where the change of
    auditor followed a reportable event  defined as a disagreement, unresolved
    issue or consultation  the reporting issuer was required to describe the
    information contained in the Reporting Package, including the outgoing
    auditors reasons for its resignation or discharge, in a press release: NPS No.
    31, ss. 3.3, 4.4.

[224]

At the relevant
    time, the resignation of auditors was addressed in the ICAO Members Handbook.
    According to Council Interpretation 201.1 in the ICAO Members Handbook, issued
    June 1993, an auditor could and, as a matter of professional judgment, should
    resign in certain circumstances, including where there was a loss of trust in
    the client. Paragraphs 10, 12, and 15 of Council Interpretation 201.1 provided:

The auditor should never lightly resign an appointment before
    reporting and should not resign at all before reporting if there is reason to
    suspect that the auditors resignation is required by reason of any impropriety
    or concealment, upon which it is the auditors duty to report. Subject to that
    general statement, however,
there may be exceptional circumstances in a
    particular case that would justify the auditors resignation. This will be a
    matter of individual judgment in each case
.

As a general rule, the proper course for an appointed auditor
    to follow is the completion of the auditors statutory duties: having been
    appointed by the shareholders the auditor should report, as required in the
    legislation. The auditor should cease to act on behalf of a client only after a
    successor has been properly appointed and the auditor has been relieved or
    disqualified.

An auditor
should not voluntarily cease to act on behalf of
    a client after commencement of an audit engagement except for good and
    sufficient reason
. Reasons may include:

(a)
loss of trust in the client
;

(b) the fact that the auditor is placed in a situation of
    conflict of interest or in circumstances where the auditors objectivity could
    reasonably be questioned; or

(c)
inducement by the client to perform illegal, unjust or
    fraudulent acts
. [Emphasis added.]

[225]

As discussed
    below, this document was introduced into evidence and expert evidence was led
    on the resignation issue.

(4)

Conclusion on Standard of Care

[226]

The foregoing
    discussion underlies the analysis of whether Deloitte breached the standard of
    care, to which I now turn.

G.

DID
    DELOITTE BREACH THE STANDARD OF CARE?

[227]

The trial judge conducted
    his analysis of, and made his findings on, whether Deloitte had performed the
    Livent audits in accordance with GAAS and whether, if it had done so, the fraud
    or other irregularities would have been detected, over four general time periods:
    (i) the pre-1996 audits; (ii) the 1996 audit; (iii) the Q2 and third quarter (Q3)
    1997 engagement; and (iv) the 1997 audit. He found that Deloitte had fallen
    below the applicable standard of care in relation to both the Q2 and Q3 1997 engagement
    and the 1997 audit, and that it was therefore negligent, by having (at least):

·

improperly dealt with such audit items as the PPC and certain of
    the Revenue Transactions, including the Pantages Air Rights Agreement and its
    accompanying Put;

·

failed to put a proper audit plan and the necessary auditing
    procedures in place to detect possible misstatements or irregularities, when it
    knew that Livent was a high risk client whose principals pushed the envelope
    (and, in fact, characterized the 1996 audit as such);

·

become too close to the client and lost its required level of
    professional skepticism;

·

succumbed to the demands of Gottlieb to change the audit team to
    one more open to Livents approach and, having done so, failed to put a team in
    place that had sufficient knowledge of the Livent audit history and the
    aggressive characteristics of its two flamboyant principals and that was, in
    the trial judges words, at para. 210, simply not up to the task;

·

failed to respond with the appropriate professional skepticism
    following Gottliebs incurably deceitful presentation to the Livent audit
    committee;

·

failed to resign in such circumstances; and

·

allowed its name be associated with the announced settlement of
    auditing differences in September 1997, when it knew that the press release
    announcing the resolution was misleading.

[228]

Deloitte does
    not appear to challenge the negligence findings set out above, with one
    exception: it submits that the trial judge erred in finding that it was obliged
    to resign as auditor in August/September 1997.

[229]

In my view, the
    record amply supports the trial judges findings that Deloitte was negligent in
    its conduct of the 1997 audit and the Q2 and Q3 1997 engagement. Indeed, the
    evidence to that effect is overwhelming. The trial judges findings on
    negligence and the consequences of the negligence are lengthy and complex.  I review
    them in the following passages, as they are key to my analysis on causation and
    damages, as well as to the issues on the cross-appeal, set out below.

(1)


Pre-1996 Audits

[230]

The trial judge
    found that Deloitte met the requisite standard of care in the preparation of
    Livents annual audits up to and including the 1995 audit year. This was at
    least partly because both parties experts agreed that they could not conclude
    any higher than that Deloitte may have, not should have, discovered the
    fraud in the pre-1996 timeframe, and partly because the level of professional
    skepticism expected to be applied to the audit was lower in Canada during this
    period than in the U.S. (Livents expert was an American.)

[231]

The trial judge
    was not persuaded that Deloitte had fallen below the accepted standards for the
    pre-1996 audits, despite Livents arguments about the improper amortization of the
    PPC in that period, the need to take into account what was known to be Drabinsky
    and Gottliebs aggressive approach to accounting matters and their general
    reputation as
enfants terribles
, and the level of staff experience
    applied to the audits.

(2)

1996 Audit

[232]

The trial judge
    found that Deloitte failed to meet its standard of care and to complete the
    1996 audit in accordance with GAAS in the way in which it dealt with two areas
    of the audit: (i) the PPC; and (ii) the Musicians Pension Surplus Receivables
    in relation to two of Livents productions, the
Kiss
tour in New York
    and
Show Boat
in New York. In addition, although he ultimately found
    that Deloitte did not fall below the required standard in dealing with the 1996
    Revenue Transactions prior to mid-July 1997, he nonetheless concluded that the
    criticisms related to the treatment of those transactions were not without
    merit.
[2]

[233]

In the end,
    however, the trial judge concluded that these breaches did not cause Livent any
    compensable damages. That said, the seeds for the troubles to come were
    germinating during this period.

[234]

Livent contests the
    trial judges conclusion on the cross-appeal, which I address in detail below.

[235]

As I have noted,
    the trial judge found that 1996 was something of a watershed year for Livent
    and, as a consequence, Deloitte. Financially speaking, Livent was ever in need
    of new money to finance its productions, which involved significant upfront
    costs, and real estate investments in Chicago, New York, Vancouver and Toronto.
    The trial judge described Livents financial position in 1996, at para. 134:

Livent was always casting a covetous eye to the capital
    markets, seeking to raise money either by way of debenture offerings or through
    public or private placements of its common stock. In 1996 alone, it raised in
    excess of $96 million, with an increase in liabilities, net of production trade
    accounts, of almost $70 million from 1995. Revenues from productions were not
    keeping pace with the demands of the operation and it became apparent that
    Livent was going to have to look away from its core business to fund its debt
    burden, at the very least. Indeed, in 1996 Livent took an $18.5 million
    write-off in respect of the
Sunset Boulevard
production, which was by no
    means insignificant. [Footnote omitted.]

[236]

It was also significant
    during this period  at least from Deloittes perspective  that it had to
    re-staff its Livent audit team after Messina left Deloitte to join Livent. In
    her place, Deloitte appointed John Cressatti as the new Engagement Partner.
    While there was some carryover from the old team, including senior manager
    Christopher Craib, Cressatti had no experience dealing with Livent and was a
    relatively new audit partner.

[237]

Deloitte
    recognized that the audit risk at this time was greater than normal  a Deloitte
    euphemism for high risk. The trial judge noted, at para. 136, that in
    preparing the 1996 audit plan in which the overall assessment of the engagement
    risk was so defined, the Livent audit team was confronted with the following
    realities:

·

Livent faced internal and external business and industry risks.

·

It had entered into a number of material and unique revenue-generating
    transactions, which created reporting issues.

·

It was publicly-traded in both Canada and the U.S. and attracted
    a high level of scrutiny and public observation.

·

Livent management was sensitive to reported net earnings levels,
    and was aggressive in arriving at its bottom line.

·

The valuation of the PPC was subject to management estimation and
    financial projections. In addition, resultant amortization and/or write-offs of
    the PPC were known to have a significant impact on net earnings.

[238]

And while not specifically identified as an engagement risk for 1996,
    previous audit planning memos underscored
that Drabinsky and Gottlieb were
    very demanding and expected timely, high-quality service at relatively low cost.
    The trial judge described the pressures on the Livent audit team, at para. 137:

It was previously understood that the pressures on the audit
    partners were and would be significant. Deloitte recognized that its tax group
    in particular might be able to provide additional services to Livent, although
    there was a strained relationship in that area, which had to be safeguarded in
    some fashion. Whether this inherent conflict between the Firm's professional
    obligations, on the one hand, and its attempts to earn additional fees and
    satisfy the demands of its client, on the other, drove the audit agenda was
    never directly addressed in evidence, but sometimes appeared to be the elephant
    in the room. [Footnote omitted.]

[239]

It was also recognized
    in planning the 1996 audit that the level of professional skepticism had to be
    increased on all fronts. It was anticipated in the audit planning memo that
    there would be more than normal Engagement Partner involvement, if not the
    utilization of two audit partners, to ensure compliance with the audit plan. At
    the same time, however, the planning materiality level for 1996 was set at
    $1,670,000, an increase of roughly 30 per cent from the previous year. The
    trial judge was puzzled by that change since it meant that less drilling down
    would be undertaken by the audit staff even though there were some new and
    looming issues, as the planning memo suggested: para. 139.

[240]

With that
    backdrop in mind, I turn to the trial judges analysis with respect to the three
    areas referred to above  namely the PPC, the Musicians

Pension Surplus
    Receivables, and the 1996 Revenue Transactions.

(a)

1996
    Audit  The PPC

[241]

The trial judge
    observed that the PPC should have been front and center in the Deloitte
    collective mindset when it came to the completion of the 1996 audit: para.
    143.  He concluded that Deloittes approach to the 1996 PPC audit cannot be
    said to have been in accordance with GAAS by any measure: para. 152. Indeed,
    it did not even comply with Deloittes own undertaking in its audit plan for
    the year to [o]btain operating projections for each production and to
    compare projected results with historical results where data available: paras.
    146-48. Deloitte was aware that the Livent productions had performed poorly in
    1996, and that after amortization of PPC, the Livent shows lost, in the aggregate,
    $22.9 million, while they were projected to earn a net income of $20.6 million,
    a variance or swing of 218%: para. 148. Nonetheless, except for isolated
    instances, Deloitte failed: (i) to obtain and review the 1996 budgets; (ii) to
    do more than accept managements estimates as to potential revenue for any one
    show (which led it into the realm of audit by conversation); (iii) to test
    the accuracy of those estimates against recently experienced results (which
    were available and which would have cast doubt on the accuracy of the
    estimates); or, (iv) to test the reasonableness of Livents forecasting by
    looking at past forecasts against actual results. In the end, when Deloitte did
    its after-the-fact corrective audit, an $11 million charge was taken against
    1996 net income in respect of the PPC not sufficiently amortized in the year,
    in addition to a $3.1 million adjustment for the PPC improperly recorded or
    moved from account to account between various productions.

[242]

There was ample
    evidence to support the trial judges findings with respect to Deloittes
    failure to comply with GAAS in relation to the 1996 audit of the PPC.

(b)


1996 Audit  Musicians Pension Surplus
    Receivables

[243]

Under New York
    law, Livent was required to use musicians represented by a local union for its
    performances in New York, and to remit a percentage of box office revenues to
    the union on account of the musicians pension entitlements. Livent told
    Deloitte, however, that the union was entitled to receive less under its
    collective agreement than what Livent had remitted and so Livent was entitled
    to record the difference as a credit and a receivable. Livent did not disclose that
    the union disputed this interpretation.

[244]

The trial judge
    concluded that it was acceptable for Deloitte to have accepted Livents
    representation for the 1995 audit, but not for the 1996 audit.  Instead of
    decreasing, which one would have expected had Livents representation been
    accurate, the receivable remained the same for one show (the
Kiss
tour
    in New York) and increased for the other (
Show Boat
New York).  Deloitte
    ignored this evidence, which the trial judge found was a red flag and should
    have been recognized as such, especially considering that the audit risk for
    the 1996 audit was set as high: para. 162. Deloittes expert acknowledged in
    cross-examination at trial that this aspect of the audit did not conform to
    GAAS.

(c)


1996 Audit  Revenue Transactions

[245]

I described the
    Revenue Transactions in general terms above. As explained, they were designed
    to enhance the veneer of Livents profitability in order to attract much-needed
    cash funding and involved the sale to third parties of various Livent assets.
    A common feature of these transactions was that the income they generated was
    to be received over a period of time and so there was a continuing tension
    about when and in what amounts these income streams could be counted for the
    purposes of financial accounting. Many of the transactions also had another
    theme in common: they were not true sales of assets, but were more in the
    nature of loans or financing agreements.

[246]

There were four
    of these Revenue Transactions in fiscal year 1996 and five in fiscal year 1997.
    As a result of them, Livent recorded approximately $40 million in income in
    those two years.

[247]

Deloittes
    treatment of the Revenue Transactions in the 1996 audit was subject to some
    criticism. Nevertheless, the trial judge was not prepared to find that, even if
    Deloitte had taken appropriate measures, the fraud or other irregularities in
    relation to these transactions would have been discovered, given the deceit
    that permeated the Livent organization at the time. He concluded that Deloitte
    could not be faulted for its treatment of the Revenue Transactions prior to
    mid-July 1997.

[248]

The criticisms
    of the 1996 audit treatment of the Revenue Transactions are significant,
    however, because they signal a flaw that would ultimately prove to be Deloittes
    undoing: Deloitte was becoming too accommodating to its client  something
    driven by the threat of losing its high-profile and high-flying client  and in
    the process had lost its professional objectivity and its required attitude of
    professional skepticism. As I will explain, Deloitte yielded to Livent
    pressures and lent its name to the Q2 1997 financial statements that did not
    comply with Canadian GAAP and provided a clean audit opinion for the 1997 audit
    year that did not comply with GAAS. Had Deloitte not done so, the trial judge
    found that the fraud would have been uncovered in August/September 1997 or, at
    the very latest, in April 1998.

[249]

Deloittes audit
    planning memorandum for the 1996 audit acknowledged that Livent had entered
    into multiple material and unique revenue-generating transactions in 1995 and
    1996, which motivated management to select reporting methods that were less favourable
    than potential alternatives  whatever that meant, as the trial judge observed:
    para. 163.

[250]

It is not
    necessary to review the 1996 Revenue Transactions here. The trial judge
    ultimately concluded, although not without some misgivings, that Livent was
    not liable for its performance of the 1996 audit with respect to the Revenue
    Transactions, even though criticisms of Deloittes treatment of them had merit:
    para. 170. Suffice it to say that a considerable amount of Deloitte partner and
    staff time and resources were devoted to the debate over the amount of revenue
    from these transactions to be included in revenue for the 1996 audit year. After
    much back-and-forth between Deloitte (including representatives of Deloitte
    U.S.) and Gottlieb and other senior Livent financial personnel, Deloitte
    finally accepted over $30 million in revenue from these transactions as income
    for 1996 from a Canadian GAAP perspective.  In contrast, Deloitte U.S. accepted
    only $16 million for U.S. GAAP purposes.

[251]

In assessing the
    Revenue Transactions, the trial judge relied heavily on what was known at trial
    as the Wardell Chronology. This was a memorandum prepared by Bob Wardell, an
    Advisory Partner on the Livent file, in July 1997 in preparation for a meeting
    between Martin Calpin, Deloittes National Risk Management Partner, and
    Gottlieb who, the memorandum suggests, was continually threatening to drop
    Deloitte as Livents auditor. Deloittes concern about losing Livent as a
    client is evidenced by the following comments from the Wardell Chronology as
    summarized by the trial judge, at para. 168:

Gottlieb was not pleased that Deloitte was questioning Livent
    management on the agreements and felt that Deloitte U.S. was dragging its feet
    in agreeing with the inclusions of the same amounts [i.e. the approximate $30
    million accepted by Wardell from a Canadian GAAP perspective] for U.S. GAAP
    purposes. He threatened to pull the account if Deloitte did not accept Livent's
    accounting treatment of the transactions.

At the end of March [1997], Wardell met with two other senior
    partners of Deloitte, Bruce Richmond and Paul Cobb. The latter was responsible
    for the Dundee Bancorp audit. Wardell "
was concerned not only with the
    impact these events were having with respect to our relationships with Livent,
    an important public client, but also the possible fallout to Dundee Bancorp
    given Myron's relationship with Ned Goodman and his position as Chairman of
    Dundee's audit committee
".
[3]

The U.S. Partners were unmoved by the arguments. In June [1997],
    Rod Barr, a senior Canadian partner in the National Office and a specialist on
    SEC matters, was asked by his American counterparts to weigh in on the
    argument. He reviewed the transactions but remained adamant that the Canadian
    position was flawed and "would NOT withstand the scrutiny of a
    professional skeptical challenge". In this prophetic memo, he raised four
    areas of concern [to the U.S. partners], which ultimately formed the basis of
    the plaintiff's criticism of Deloitte in respect of the transactions:

(a) Was
    Deloitte certain that there were no side deals "or other relationships
    among the counterparties" that would alter the nature of the agreements?

(b) Why
    were the agreements silent on refundability?

(c) What
    analysis had been undertaken to ensure that the counterparties had the ability
    to meet their commitments under the agreements?

(d) What
    audit procedures were actually undertaken to check on the legitimacy of the
    agreements, since the U.S. partners were under the impression that much of the
    work comprised an audit by conversation, only?

Wardell was not persuaded that the
    complaints and warnings articulated by Barr were warranted. While he was more
    inclined to accept that the deals reached were obtained because of the
    "level of sophistication, business acumen and negotiating skills of
    Messrs. Drabinsky [and] Gottlieb", a position which he believed was lost
    on his U.S. partners, he was in large measure, relying on the "
written
    and verbal representations from Livent's senior in-house counsel and all senior
    executives
", including his former partner Messina, that there were no
    undisclosed agreements or amendments. He went on to observe: "
If we
    were not prepared to accept such representations, it seems to me we should
    resign as auditors as we effectively would be questioning the fundamental
    integrity of our client
". [Underlining in original; emphasis added
    in italics; footnotes omitted.]

[252]

The trial judge
    concluded his review of the Wardell Chronology by noting, at para. 169, how
    Deloitte gave in to Gottliebs forceful, if not bullying, tactics:

As previously suggested, the Wardell
    Chronology was prepared as an
aide mémoire
for
    Martin Calpin in preparation for a meeting that was scheduled to take place
    with Gottlieb in late July, during which Gottlieb wanted to discuss "
relationship
    and client services issues
". Gottlieb clearly believed that the best
    defence was a good offence and, as I assess the evidence,
bullied the
    Deloitte partners to bend to his positions, with the added leverage of his
    connection to Dundee Bancorp and its CEO, Ned Goodman, which he threw in for
    good measure
. [Emphasis added.]

[253]

In other words,
    Deloittes thinking about the substantive issues was, at least to some degree,
    influenced by strong pressure from Gottlieb.

(3)


1997 Engagements

[254]

In 1997, the
    seeds of trouble took root.  Unfortunately, Deloitte continued to mistake the
    weeds for flowers when a little digging in the exercise of its professional
    skepticism obligation and the application of its accumulated audit knowledge
    would have revealed the underlying rot.

[255]

The 1997 year has
    two components for purposes of the analysis: (i) the Q2 and Q3 engagement; and
    (ii) the 1997 audit.

[256]

Because of their
    central role in what occurred in relation to the 1997 year  recall the trial
    judge referred to them, at para. 174, as the Achilles heel of Deloittes
    defence  I now return in more detail to the Pantages Air Rights Agreement and
    the controversial Put, and the circumstances surrounding them.

(a)

Q2/Q3 1997 and the Put  Part One


[257]

As explained
    above, the Pantages Air Rights Agreement purported to transfer Livents air
    rights above the Pantages Theatre and adjoining lands to Dundee for a price of
    $7.4 million. The parties initially entered into a letter agreement dated May
    22, 1997. Attached to the letter agreement was a term sheet, which included the
    Put in favour of Dundee enabling Dundee to withdraw from the arrangement in
    certain circumstances. The parties subsequently entered into a more formal
    Master Agreement, which was said to be effective as of June 30, 1997,
    although the transaction did not close until August 15, 1997.

[258]

The controversy
    over the Put first flared up in August 1997.

[259]

Deloitte had a
    number of concerns about the Pantages Air Rights Agreement, including that the
    Put effectively allowed Dundee to exit the Agreement without paying the balance
    of $4.9 million on the transfer price. On August 1st, Wardell and Peter Chant,
    who were Advisory Partners on the Livent file, met with Gottlieb, Messina and
    Gord Eckstein, Livents Senior Vice-President of Finance. Wardell and Chant
    advised them that it would not be appropriate to recognize the gain from the
    transfer of the air rights in Q2 1997  something that Livent was intent on
    accomplishing in order to shore up its Q2 financial statements for the purposes
    of a planned debenture offering in fall 1997.

[260]

On August 6th,
    Messina informed Wardell that Gottlieb was pushing to have $6 million included
    in Q2 and to have no public disclosure of its inclusion. That same day, Wardell
    called Gottlieb to express concern that Gottlieb would even consider that
    course of action. He warned Gottlieb that if Livent were to include a material
    gain on the air rights transaction in Q2, Deloitte would not be able to provide
    the comfort letters needed for the debenture offering in the fall.

[261]

Gottlieb ignored
    Wardells warning. Instead, he went to the Livent Audit Committee and tabled
    draft consolidated financial statements for Q2 and the six months ending June
    30, 1997, which included a $6 million gain on the sale of the air rights. Deceitfully,
    he did not inform the Audit Committee about Deloittes concerns, and the Audit
    Committee approved the financial statements. No one from Deloitte was present
    at the meeting.

[262]

When Wardell and
    Chant learned what had happened shortly thereafter, they were understandably
    upset. Gottlieb was advised that Deloitte was going to exercise its statutory
    right as an auditor to insist that an Audit Committee meeting be convened. Deloitte
    sent Gottlieb a letter on August 25th formally advising that, in its view, the
    Q2 results as reported were materially misstated.

[263]

Gottlieb
    responded, before the Audit Committee met, by purporting to eliminate at least
    some of Deloittes concerns by having Livents lawyer delete any reference to
    the Put in the Master Agreement. Livents solicitors and Dundee provided
    misleading information that the Put had been removed and that there was a firm
    deal for the sale of the air rights as at June 30, 1997. In spite of these
    assurances, Deloitte remained concerned.

[264]

As it turned
    out, Deloittes concerns were justified. Assurances from Livents external
    counsel and from Dundee aside, and unbeknownst to Deloitte, Livent and Dundee
    had entered into a covert side agreement on August 15th that contained the Put
    that Deloitte had been advised was intentionally deleted from the Master
    Agreement.

[265]

There were
    intense discussions over this period of time, but in the end Deloittes
    opposition was overcome.

[266]

The Audit
    Committee met on August 26th, 27th and 29th. Deloitte presented its concerns
    and advised that it would resign if Livent did not reverse the revenues. Deloitte
    argued that the sale revenues could not be reported in Q2, even though the Put
    had been removed from the Master Agreement as of August 15th, for three
    reasons: (i) no tangible consideration had passed prior to June 30th; (ii) the
    transaction had not closed as of that date; and (iii) the appropriate GAAP
    guidelines would not permit revenue recognition.

[267]

To buttress its
    position in the debate, Livent sought second opinions from KPMG and from an
    accounting professor from the Ivey Business School. Both supported Livents
    position that the transaction was, arguably, properly reportable in Q2. As the
    trial judge observed, [t]he matter appeared to come down to whether or not
    Deloitte would resign as auditors or whether or not some accommodation could or
    should be negotiated: para. 187. With the two opinions in hand that supported
    their position, Gottlieb and Eckstein were content to let Deloitte resign
    should it decide to do so. However, others within the Livent camp were
    concerned that Deloittes resignation might negatively affect other sponsorship
    deals and the debenture offering planned for the fall.

[268]

Ultimately, a
    compromise was reached. It involved Livents issuing of the following press
    release on September 2nd:

Livent Inc. announced today that in contemplation of a possible
    issuance of U.S. $100 million debt securities in the United States, it has
    adjusted its accounting treatment for non-theater real estate transactions in
    order to be consistent with U.S. GAAP. This adjustment, which has no effect on
    prior years income, will result in the recognition of income before income
    taxes of $4.8 million ($0.17 per share) in the third quarter of 1997 rather
    than in the second quarter, as previously announced. The adjustment is in
    connection with the sale by the Company of air rights to a real estate
    developer pursuant to a binding contractual arrangement in place prior to the
    end of the second quarter.

[269]

The effect of
    moving the $4.8 million from Q2 1997 to Q3 was that $1.2 million was still left
    in Q2 when, on the evidence pertaining to Canadian GAAP, it ought not to have
    been. As well, the press release did not tell the whole story, and left the
    reader with the mistaken view that the decision to revise the financials was
    driven by a technical U.S. GAAP issue, rather than by Deloittes concerns about
    the appropriateness of recognizing the revenue at all. The trial judge was also
    troubled by Deloitte countenancing a press release suggesting there was a
    binding deal at the end of Q2 when  even on Livents version  there had been
    a material amendment in August by, minimally, dropping the Put.

[270]

Even after the
    compromise, however, Gottlieb remained unhappy.  He pressured Deloitte to
    change the audit team. Deloitte yielded to this pressure.  Instead of treating
    Gottliebs request as a red flag warranting a review of the entire
    relationship from Deloittes perspective, rather than from the clients
    perspective, Deloitte changed the composition of the team almost entirely. That
    left the audit role to be conducted by a new set of senior partners and a
    support and field staff that had little or no history of the file or the client
    relationship.

[271]

The trial judge
    commented that he was not sure the Livent-Dundee and Goodman-Gottlieb
    relationships were not forming part of the backdrop against which this decision
    was made: para. 195.

[272]

In the end, the
    trial judge took Deloitte to task at para. 196 for being too accommodating to
    Livent:

Whatever might have been Deloittes motivation to continue as
    auditor, I have concluded that it was too accommodating at this point and put
    itself in a most curious if not fatal position by changing the audit team,
    virtually from top to bottom.

[273]

In addition, the
    trial judge found that Deloitte should have remained firm in its resolve to
    sever its relationship with Livent at the end of August 1997 at the earliest,
    but no later than the end of Q3, or September 30
th
, at the latest:
    para. 201. In his view, the red flags were certainly aflutter by that time: para.
    201.  However, while Deloitte, even with the change of audit teams, was
    clearly aware that Livents management was more than merely pushing the
    envelope from a GAAP perspective, it seemed to turn a blind eye to the warning
    signs: para. 201.

[274]

In reaching
    those conclusions, he made a number of key findings:

·

there was a complete breakdown in the Deloitte/Livent relationship
    when Gottlieb placed the Q2 statements before the Audit Committee in early
    August 1997 without advising the Committee of Deloittes concerns, an
    inexcusable action that could not  once discovered  simply be negotiated away:
    para. 202;

·

with this knowledge, and with or without knowledge of the other
    Revenue Transactions, Deloittes collective professional skepticism should
    have been elevated at this point when they had reason to question the integrity
    of Gottlieb: para. 204;

·

someone at Deloitte should have questioned Dundees president and
    Deloittes external counsel about why the Put was apparently intentionally
    deleted: para. 204;

·

the situation deteriorated even further when Deloitte agreed to
    the September 2nd press release when it knew or ought to have known that it was
    misleading: para. 205; and

·

to make matters worse, Gottlieb subsequently sought to include
    the present value of a new Revenue Transaction involving AT&T in the Q3
    results: para. 206.

[275]

The trial judge also
    found that Deloitte fell below the standard of care in accepting the revenue
    from the Pantages Air Rights Agreement for inclusion in the Q3 results and in a
    manner that was inconsistent with the September 2nd press release. He accepted
    the evidence of Livents expert that it was not open for Livent to recognize a
    gain on the sale of Air Rights in Q3 1997 when it had issued a press release
    that stated unequivocally that it was backing out the gain to accord with U.S.
    GAAP  and then did not adhere to the restrictions described by U.S. GAAP: para.
    198. In fact, Douglas Barrington, Deloittes Vice-Chairman at the time in
    question, accepted this conclusion in cross-examination, acknowledging that
    [i]f you adopted U.S. GAAP and it didnt qualify, then it shouldnt be in Q3:
    para. 198.

[276]

As I have noted,
    Deloitte does not seriously challenge the trial judges negligence findings
    save one. It takes issue with the finding that it had an obligation to sever
    its relationship with Livent during this time period and that, by failing to do
    so, it was negligent. It contends that the evidence did not support the finding
    that it ought to have resigned in August/September 1997, and that an auditors
    decision to resign is a matter of professional judgment and is owed deference
    by the courts.

[277]

I reject these
    submissions. In my view, there is no reason to interfere with the trial judges
    finding that Deloitte ought to have resigned in August/September 1997.

[278]

One of
    Deloittes own partners, Wardell, had raised resignation as a possibility in
    July 1997 and it was very much on the table at the August 1997 meetings.

[279]

Contrary to
    Deloittes submission, there was ample evidence to support the trial judges
    finding that Deloitte ought to have resigned. As discussed above, Council
    Interpretation 201.1 in the ICAO Members Handbook, which was in effect at the
    relevant time, stated that a loss of trust in the client provided good and
    sufficient reason for resignation. Deloittes expert, Ken Froese, testified
    that an auditors resignation was governed by the Council Interpretations. He
    agreed that resignation could be appropriate in a situation where you have a
    loss of trust in the client sufficient that you dont have confidence in their
    integrity or what theyre telling you, although his opinion was that in the
    circumstances involving Gottliebs presentation to the Audit Committee without
    revealing Deloittes concerns, it could go either way.

[280]

The trial judge
    found, however, that there was, or should have been, a complete breakdown of
    the relationship between Deloitte and Livent in August/September 1997. In support
    of that conclusion, the trial judge pointed to the red flags alerting Deloitte
    to the fact Livents management was more than merely pushing the envelope from
    a GAAP perspective: para. 201. And, as noted above, the trial judge also
    pointed to Gottliebs conduct in purposefully placing the Q2 statements before
    the Audit Committee when he knew they contained information which Deloitte
    presaged amounted to material misstatements (an act the trial judge described
    as inexcusable and not simply one which could be negotiated away): para.
    202. These findings, which support his conclusion that Deloitte ought to have
    resigned, were open to the trial judge.

[281]

Nor do I think
    the finding should be overturned on the basis of deference to the exercise of
    an auditors professional judgment. Professional judgment must be exercised
    reasonably in the circumstances; it is not a panacea for laundering
    professional negligence. Here, the trial judge found, as he was entitled to do
    on the record, that Deloitte simply turned a blind eye to the warning signs. It
    is clear from reading his reasons as a whole that he did not accept that
    Deloitte had exercised its professional judgment reasonably in the
    circumstances.  I agree with that conclusion.

[282]

In summary,
    there is no reason to interfere with the trial judges findings with respect to
    Deloittes treatment of the Pantages Air Rights Agreement and the Put for Q2
    and Q3 1997 or his conclusions about Deloittes failure to meet the requisite
    standard of care in relation to them, including its duty to resign.

(b)


1997 Audit and the Put  Part Two

[283]

In the trial
    judges view, [t]he 1997 audit was beset with problems right from the get-go:
    para. 210. He held that Deloitte failed to comply with GAAS and with its legal
    professional obligations in four general areas.

[284]

First, the new
    team, put in place at Gottliebs insistence, was not up to the task: para. 210.
    It had little or no history with the client or senior management. It was still
    reeling from the previous Q2 and Q3 1997 engagement, which had been thrust on
    it quickly. It had to deal with five new Revenue Transactions put together by
    Drabinsky and Gottlieb. Finally, it had to cope with a last-minute requirement,
    just before audit sign-off, that the capitalized PPC for the year be reduced by
    $27.5 million in order to accommodate the demands of Ovitz and Furman as a
    condition of their share purchases.

[285]

Secondly, the
    1997 audit plan was inadequate and displayed little independent thought. It
    lacked any cautionary instructions to assist the new team, which was charged
    with the responsibility of auditing a greater than normal risk audit client
    that had more than a modest history of aggressive, if not questionable,
    accounting practices: para. 211.

[286]

Thirdly, issues
    relating to the treatment of the PPC for 1997 and the treatment of the five new
    unusual Revenue Transactions should have compelled Deloitte to withhold a
    clean audit. The trial judge was particularly nonplussed over how Deloitte
    could have been prepared to sign off on the final PPC numbers put forward by
    management just prior to the Audit Committee meeting on April 9, 1998, yet do a
    complete U-turn and agree to sign off on PPC numbers that were written down by
    an additional $27.5 million, simply because that was a condition of the Ovitz
    and Furman share transaction.

[287]

Finally,
    Deloitte fell below the standard of care in its treatment of the uncovered Put.
    Having learned that the Put, which it had been told had been intentionally
    deleted, was alive and well and in full force, Deloitte was obliged to conduct
    a full and thorough investigation of the entire Livent file. As the trial judge
    found, [o]n April 3, Deloitte knew that management, at its highest level, was
    involved in a fraud, and therefore the assumption of managements good faith
    was, by definition, contradicted: para. 233. In such circumstances, as the
    CICA Handbook and the Deloitte Manual indicated at the time, the auditor was
    required to adapt the audit plan, to perform heightened audit procedures, and
    to bring an attitude of professional skepticism to the process. Deloitte did
    not do any of this in relation to the revelation of the continuing Put.

[288]

The trial judge
    concluded that, the Put issue aside, Deloitte was obliged to withhold a clean
    audit opinion for the 1997 audit year, given the other issues noted above.

[289]

Since it was the
    Put that garnered most of the trial judges attention, however, I return in
    more detail to the second part of the Put controversy.

(i)


The Put  Part Two

[290]

On or about
    April 2, 1998 (before the final 1997 audit sign-off), Dundees President,
    Michael Cooper, told Bob Savaria, the Deloitte Engagement Partner on the Dundee
    audit, that Dundee took the position that the Put was still operative. Savaria delivered
    this news to the Deloitte partners on the Livent audit, who then convened a
    meeting. The meeting included various Deloitte partners on the Livent file and
    the Dundee file, as well as legal counsel.

[291]

Chant attended
    the meeting. He was one of Deloittes senior Advisory Partners on the Livent file
    at the time and he was upset. He made a number of forceful points to his
    partners before leaving the meeting in an angry huff. First, he emphasized that
    Gottlieb had misled them on three separate occasions. Secondly, he argued that
    if this were Deloitte U.S., they would have already terminated their
    relationship with Livent. Thirdly, he warned that Deloitte should terminate its
    relationship with Livent.  Finally, in his view the Put had not been
    intentionally deleted, but rather had been removed from the Master Agreement and
    inserted into a separate confidential agreement to deceive Deloitte back in
    August 1997.

[292]

After Chant left
    the meeting, the remaining partners decided to formulate a plan to investigate
    the matter further, which included speaking to Drabinsky and Gottlieb.

[293]

Barrington and Tony
    Power, Deloittes new Lead Client Services Partner on the team, met with
    Drabinsky, who expressed ignorance of the whole matter. Gottlieb, who then
    joined the meeting, provided the following explanation, quoted by the trial
    judge, at para. 219:

Myron agreed that there was a side agreement but it was only
    temporary, a bridging situation. He said that when he talked to Cooper about
    removing the put, Cooper agreed that they didnt need it but that he couldnt
    make the decision on his own, that it would have to go to his CEO for
    clearance. Therefore he suggested the temporary side agreement to protect
    himself.

Myron said that Cooper came back to him later and said that he
    had received clearance and said the agreement doesnt exist; it was never
    there; so tear it up. So Marvin [sic] tore it up "it was as simple as
    that, I swear to God". We will now get documentation of this position from
    both sides.

[294]

Surprisingly,
    given what had already transpired, Barrington and Power were satisfied with
    Gottliebs facile explanation. Barrington subsequently prepared a memo setting
    out the terms on which Deloitte would continue working with Livent. It included
    a list of steps to be taken for Deloitte to accept that the Put had been
    eliminated. In particular, Deloitte wanted: (1) a copy of the secret Put
    agreement signed on August 15, 1997; (2) confirmation in writing that the Put
    agreement was cancelled in Q3; (3) an opinion from Livents legal counsel that
    the document was an effective cancellation of the Put in Q3; and (4) full
    disclosure of those facts to the Audit Committee in Deloittes presence.

[295]

Deloitte
    subsequently took the position that it had been provided with a satisfactory
    explanation regarding the Put based on the following events:

·

Gottlieb told Barrington and Power that he had ripped up his copy
    of the Put, at some unspecified time and date, when Cooper told him it was no
    longer needed.

·

Ned Goodman, Dundee Bancorps CEO, wrote Gottlieb a letter dated
    April 4th that said that the Put agreement had been cancelled sometime in
    August, a fact which he had not communicated to Cooper because of the pace of
    business and travel.

·

On April 7th, counsel for Livent drafted an agreement that
    effectively said that if the Put had been alive, it was now officially dead.

[296]

But that was not
    the end of the Put.

[297]

According to
    Gottlieb, the Put remained alive and well. As noted by the trial judge,
    Gottlieb wrote to Cooper on April 7th  the same date as the agreement
    purporting to eliminate the Put  confirming that the Put agreement is binding
    and effective and remains so in favour of Dundee Realty Corporation as if it
    has never been cancelled: para. 227. Indeed, the Put was subsequently
    memorialized in yet another agreement dated May 27, 1998 with modest changes
    from the August 15, 1997 version. In a cover letter from Gottlieb to Goodman
    enclosing the agreement, Gottlieb asked that the agreement be kept in a sealed
    envelope in a safe or safety deposit box.

[298]

As noted above,
    the trial judge concluded that [o]n April 3, Deloitte knew that management, at
    its highest level, was involved in a fraud, and therefore the assumption of
    managements good faith was, by definition, contradicted: para. 233. He
    described Deloittes plan to deal with the elimination of the Put as well
    short of reasonable, both in terms of its design and its execution and
    Deloittes investigation  which the trial judge said at best appeared to have
    been an audit by conversation  as [falling] well short of generally accepted
    auditing standards and its legal standard of care: paras. 231, 234.

[299]

The trial
    judges conclusions were well-supported by the record.

(4)

Conclusion on Breach of Standard of Care

[300]

From the history
    of the relationship, Deloitte knew that Drabinsky and Gottlieb were aggressive
    entrepreneurs who pushed the envelope in terms of accounting and financial measures.
    As early as the Cutway memo in 1990 and the non-disclosure respecting the
    naming agreement (known by the 1993 audit), at least some within Deloitte had
    concerns about Drabinsky and Gottlieb not proving to be as above board  as
    they should be.

[301]

Additional red
    flags emerged during the following years.  These red flags should have
    heightened Deloittes awareness of the need to apply an objective attitude of
    professional skepticism, but apparently did not.  By August/September 1997, the
    red flags were fully aflutter and included:

·

the fact that the audit environment for the 1996 audit had been classified
    as high risk;

·

the 218 per cent variance in the 1996 audit between Livents
    $22.9 million loss after amortization of the PPC and the projected net income
    of $20.6 million;

·

the frequent resort to unusual Revenue Transactions and the
    insistent inclusion of questionable revenues from those transactions in income;

·

the inconsistency in the Musicians Pension Surplus Receivables from
    the 1995 audit to the 1996 audit;

·

Gottliebs known deceit in failing to disclose Deloittes reservations
    about including the gain from the Pantages Air Rights Agreement in Q2 1997 to
    the Audit Committee in August 1997;

·

Gottliebs insistence that Deloitte change the composition of the
    audit team in order to make it more compatible with Livents accounting
    strategies; and finally,

·

Gottliebs constant resort to the severance-of-the-relationship
    trump card.

[302]

By April 1998, in
    the course of conducting the 1997 audit, there was yet another red flag  the
    revelation that the Put continued to exist and that management had clearly lied
    to Deloitte in that regard.

[303]

All of these factors
    supported the trial judges finding that Deloitte had failed to meet its
    professional standard of care as of August/September 1997 or, at the latest,
    April 1998, and that Deloitte was therefore negligent.

[304]

I turn now to
    what follows from these findings of negligence.

H.

WERE
    LIVENTS LOSSES CAUSED BY DELOITTES NEGLIGENCE?

(1)

Backdrop

[305]

The trial
    judges causation analysis must be understood against the backdrop of Livents
    theory of liability and damages, which the trial judge accepted.

[306]

In Livents
    submission, had Deloitte conducted its audits and financial statement
    engagements in accordance with the requisite standard of care, Deloitte would
    have discovered the fraud and other material misstatements earlier. In the
    alternative, had Deloitte resigned, as it should have done in August/September
    1997, the fraud would have been discovered by its successor, or at least
    Deloittes reasons for resignation  loss of trust in Livents management 
    would have had to be disclosed to regulators and the public. As a result,
    Deloitte would not have been able to give clean audit opinions or otherwise
    endorse interim unaudited financial statements with comfort letters from the
    point of the discovery onwards. Without the clean audit opinions and comfort
    letters, Livent would no longer have been able to access the capital markets to
    satisfy its insatiable appetite for cash, and no further losses would have been
    incurred because Livent would have become insolvent at that point.  Livents
    measure of damages therefore equals the change or increase in the losses it
    sustained  i.e., the difference in its net asset/liability position  between
    the time of Deloittes breach and the time of Livents eventual CCAA filing (L
    = ALD  ELD).

[307]

As outlined
    above, the trial judge found that Deloitte had not fallen below the requisite
    standard of care in relation to the 1995 or earlier audits. He concluded that
    Deloitte had failed to meet the standard of care with respect to:

(i) certain aspects of the 1996 audit; (ii) the
    work performed regarding the interim unaudited six-month Q2 and Q3 1997 financial
    statements; and (iii) the 1997 audit. He found, however, that even if Deloitte
    had fulfilled its duty of care with respect to the 1996 audit year, it would
    not have resulted in Livent being denied access to the capital markets at that
    time, thereby triggering the but for test for causation for that period.
[4]
With respect to 1997, however, he found that the but for test was met: if
    Deloitte had fulfilled its duty with respect to the Q2 and Q3 1997 engagement
    and the 1997 audit, Livent would no longer have been able to access the
    markets.

[308]

In support of his
    conclusion on causation with respect to 1997, the trial judge found that:

·

Deloitte knew at all material times that Drabinsky and Gottlieb
    were using the financial statements certified by it, and the comfort letters
    provided, to assist them in convincing third parties to invest money in or
    extend credit to Livent (indeed, Deloitte admitted that Drabinsky and Gottlieb
    used the false and misleading financial results of Livent they had caused to be
    promulgated to induce stakeholders to invest in or extend credit to Livent);

·

the use of fraudulently misstated financial statements to induce
    people to invest in a company was an entirely predictable (i.e., reasonably
    foreseeable) outcome;

·

while the fraudsters may not have been directly stealing money
    from the company, they nonetheless caused Livent to improperly incur greater
    liabilities than it would otherwise have incurred;

·

Deloitte should have resigned from the audit at the end of August
    1997 or, at the latest, September 30, 1997; or, at the very least,

·

Deloitte should not have given a clean comfort letter respecting
    the fall 1997 debenture offering or a clean audit opinion respecting the 1997
    financial statements;

·

had either of these events occurred, Livents access to the
    capital markets to fill its voracious need for cash through debt or equity
    financing, would have been foreclosed; and, as a result,

·

Livent would have been required to shut down its business and
    seek insolvency protection before it incurred the subsequent increase in
    liabilities arising from its continued financing ventures (liabilities which,
    reasonably foreseeably, could not be offset by Livent revenues, given the
    cash-burn nature of the Livent operations at the time).

[309]

Deloitte raises
    a number of issues on causation and damages. It challenges the trial judges
    findings on, and analysis of, factual causation. It also raises a number of
    issues related to remoteness or proximate cause and damages. In particular, it
    contends that:

·

the trial judge failed to apply the but for test properly, as
    he did not expressly consider what would have occurred if Deloitte had complied
    with the standard of care;

·

the damages claimed are too remote to be attributed to Deloittes
    conduct because they flow not from Deloittes negligence, but rather from the
    vicissitudes in Livents business to which Livent was always exposed and which
    Deloitte had no part in causing;

·

Canadian courts ought not to give effect to the notion of
    deepening insolvency adopted in some U.S. jurisdictions;

·

Deloittes liability ought to have been reduced to nil as a
    result of the contingencies the trial judge applied; and

·

Livents contributory negligence should bar it from recovering
    (or, at least, recovering everything).

[310]

As I will
    explain, I reject each of these submissions.

(2)

Factual or But for Causation

[311]

As the Supreme
    Court of Canada has recently confirmed in
Clements v. Clements
, 2012 SCC
    32, [2012] 2 S.C.R. 181, the test for showing causation is the but for test 
    a factual inquiry to be applied in a robust and common sense fashion. The test
    requires the court to be satisfied, on a balance of probabilities, that but
    for the defendants negligence the injury would not have occurred (i.e., the
    defendants negligence was necessary to bring about the injury): see paras.
    8-10,
per
McLachlin C.J.  The Court made the following observation, at
    para. 10:

A common sense inference of but for causation from proof of
    negligence usually flows without difficulty.  Evidence connecting the breach of
    duty to the injury suffered may permit the judge, depending on the
    circumstances, to infer that the defendants negligence probably caused the
    loss.

[312]

It is not
    necessary that the defendants negligence be the sole cause of the injury, as explained
    by Major J. in
Athey v. Leonati
, [1996] 3 S.C.R. 458, at para. 17:

As long as a defendant is
part
of the cause of an
    injury, the defendant is liable, even though his act alone was not enough to
    create the injury.  There is no basis for a reduction of liability because of
    the existence of other preconditions: defendants remain liable for all injuries
    caused or contributed to by their negligence. [Emphasis in original.]

[313]

Deloitte takes
    issue with the trial judges but for analysis as it relates to the trial
    judges finding that, had it resigned in August/September 1997, the fraud would
    have been discovered. In particular, the trial judge found that disclosure of
    the reasons for resigning might very well have sounded the death knell to the
    proposed debenture offering, signalling the end of Livents access to the
    capital markets: para. 188.

[314]

Deloitte submits
    that the trial judges comment that Deloittes resignation might very well
    have prevented the proposed debenture offering from proceeding does not
    constitute a finding that the offering would not have occurred.

[315]

Deloitte also submits
    that the resignation would not have led to the discovery of the fraud or have
    prevented the fall 1997 debenture offering from proceeding because all it would
    have revealed  had it been disclosed to the regulators and a subsequent
    auditor  was that there had been a simple accounting dispute over whether
    revenue associated with the Pantages Air Rights Agreement could be recognized
    in Livents Q2 financial statements.

[316]

Furthermore,
    Deloitte contends that, even if it had resigned, a replacement auditor would
    have been found and would have given the fall 1997 comfort letter and the clean
    1997 audit opinion, thus enabling Livent to continue beyond Q3 1997.

[317]

In my view, none
    of these arguments has merit.

[318]

I do not accept
    that the trial judge made no finding as to what would have happened had
    Deloitte resigned in the August/September period. I read his comment that
    disclosure to the regulator or successor auditor might very well have sounded
    the death knell as a finding on a balance of probabilities that disclosure
    would have ended Livents access to the capital markets.

[319]

Nor am I persuaded
    by the argument that disclosure of the reasons for resignation would have been
    as benign as Deloitte submits.  While it may be accurate to say that the
    resignation would not have been as a result of the fraud  given how things
    stood at the time  it is not accurate to say that the reason for the
    resignation, if fully disclosed, would have been simply an accounting dispute
    over the inclusion of a revenue item in the financial statements.  The
    disclosed reason would have had to have been a loss of trust in the client
    based on the lack of integrity of at least Gottlieb, one of the two driving
    forces of the company.  The impact of that type of disclosure would inevitably
    have had more impact on regulators, the successor auditor, and potential
    investors than a mere accounting dispute over revenue inclusion.

[320]

These
    conclusions undermine the submission that a replacement auditor would likely
    have emerged and continued to depict the same laundered image of Livents
    operations. Disclosure to the regulators, the public and the subsequent auditor
    that the reasons for resignation included genuine questions about the integrity
    of Livent would have set red flags even more aflutter and would have required a
    very close, more careful and objective investigation into Livents financial
    statements  one that involved the requisite application of an attitude of
    professional skepticism.

[321]

I am not
    persuaded that the trial judge erred in his finding, at para. 241, that Deloittes
    resignation in August/September 1997 would have precipitated Livents demise:

I have first concluded that Deloitte should have
    pulled the plug on its relationship with Livent at the end of August
    or, at the very latest, September 1997. In my view, had matters come to a head
    on either of those two dates, then Deloitte would have been obliged
    to make full and frank disclosure not only to the Audit Committee but to the
    regulators, the results of which would have put Livent in the
    position it found itself in 11 months hence.

[322]

I agree with the
    trial judge that it is more likely than not that a careful and objective
    investigation into Livents financial statements, pursued with an attitude of
    professional skepticism, would have revealed the fraud, with the same
    consequences that followed when the fraud was actually discovered a year later.

[323]

I now turn to
    the issue of remoteness or proximate cause.

(3)


Remoteness/Proximate Cause

[324]

As explained in
Mustapha v. Culligan of Canada Ltd.
, 2008
    SCC 27, [2008] 2 S.C.R. 27, at para. 12, the remoteness inquiry asks whether
    the harm [is] too unrelated to the wrongful conduct to hold the defendant
    fairly liable. The test for determining whether the harm is too remote is
    reasonable foreseeability:
Mustapha
,

at paras. 12-13.

[325]

The trial judge dealt
    with remoteness at paras. 308-26 of his reasons. There, he addressed two
    English cases 
Galoo Ltd. (in liq.) v. Bright Grahame Murray (a firm)
,
    [1995] 1 All E.R. 16 (C.A.), and
Sasea Finance Ltd. (in liquidation) v. KPMG
    (formerly KPMG Peat Marwick McLintock (a firm))
, [2000] 1 All E.R. 676
    (C.A.)  which I will discuss below. Relying on those cases, as well as the
    evidence before him, he found that most, but not all, of Livents losses were
    attributable to the improper increase in liabilities caused by Deloittes
    negligence. At para. 318, he stated:

On the one hand,
    Livents losses after the Measurement Date are largely attributable to the very
    fraud which Deloitte should have detected. The fraudsters may not have been
    directly stealing from the company, but they did directly cause the company to
    improperly incur greater liabilities than it would otherwise have incurred. The
    use of fraudulently misstated financial statements to induce people to invest
    in a company is entirely predictable.
Livents losses  to the extent they
    are attributable to this improper increase in liabilities  cannot be said to
    be too remote
. [Emphasis added.]

[326]

The trial judge
    recognized, however, that not all of Livents losses ought to be visited on
    Deloitte. He found that Deloitte ought not to be liable for the losses
    attributable to Livents legitimate but unsuccessful ventures: para. 319.
    Accordingly, he reduced the net economic loss number of $113 million as at
    August 31, 1997 (which I will discuss below) by 25 per cent to reflect that
    Deloittes breaches of the standard of care were not the proximate cause of all
    of the losses sustained by Livent.

[327]

In reaching that
    number, he relied on expert evidence regarding contingencies, which related
    to the vagaries of the business Livent was in.

[328]

Deloitte submits
    that the trial judge made a number of errors in his analysis of remoteness and
    damages. I will address each of the alleged errors in turn.

(a)

Normal Business Losses and Deepening Insolvency

[329]

In arguing that
    it should not bear the losses sustained by Livent, Deloitte raises two, and in
    some ways overlapping, themes. Deloitte argues, first, that the trial judge
    erred in applying a doctrine known as deepening insolvency that has received
    mixed application in various U.S. jurisdictions, but that has not, as yet, been
    applied in Canadian jurisprudence. Secondly, it submits that any alleged
    negligence on its part did not cause Livents loss; rather, any losses
    sustained by Livent from continuing in business were caused by the money-losing
    nature of its business, which Deloitte had no part in causing.

[330]

At the heart of
    each submission is the argument that an auditors negligence permitting a
    corporation to continue operating a money-losing business may create the
    opportunity for losses to continue or accumulate, but is not the proximate
    cause of those losses, which continue to be attributable to the decisions of
    management.

[331]

For this
    proposition, Deloitte relies on several American authorities that criticize the
    notion of deepening insolvency: see e.g.
In re CitX Corp.
, 448 F. 3d
    672 (3d Cir. 2006); and
In re Parmalat Securities Litigation
, 501 F. Supp.
    2d 560 (Dist. Ct. N.Y. 2007). Deepening insolvency has been defined in
    American writings and jurisprudence as the artificial prolongation of a
    corporations existence past the point of insolvency, or an injury to [a
    debtors] corporate property from the fraudulent expansion of corporate debt
    and prolongation of corporate life: John Tully, Plumbing the Depths of
    Corporate Litigation: Reforming the Deepening Insolvency Theory (2013) U. Ill.
    L. Rev. 2087, at p. 2089; and
In re CitX Corp.
, at p. 677, citing
Official
    Committee of Unsecured Creditors v. R.F. Lafferty & Co.
, 267 F. 3d 340
    (3d Cir. 2001).

[332]

Deloitte also
    relies on the English Court of Appeals decision in
Galoo
, which deals
    with a somewhat similar fact situation to the one in this case.

[333]

In my view, the
    U.S. and English cases relied on by Deloitte do not undermine the conclusion
    that its negligence was the proximate cause of those losses attributable to the
    improper increase in net liabilities.

[334]

The theory of
    deepening insolvency was an important issue at trial. As noted by the trial
    judge, [a]
significant amount of time was
    devoted by both sides to the concept of deepening insolvency: para. 344.
At the end of the day, however, the trial judge was not persuaded that the
    notion of deepening insolvency 
assist[ed]
    the defendant in reducing the damages: para. 352.

[335]

Deloitte submits, however, that the trial judge did,
    in effect, apply the concept of deepening insolvency and erred in doing so. I
    do not agree and, in my view, the concept of deepening insolvency provides
    little, if any, assistance in this case.

[336]

American
    authorities supporting the doctrine (either as a cause of action or a theory of
    damages) have done so on the basis that third-party negligence permitting
    management to prolong the life of a corporation past insolvency and accumulate
    additional debt beyond its ability to pay may constitute recoverable harm to
    the corporation: see e.g.
Bloor v. Dansker (In re Investors Funding Corp. of
    New York Securities Litigation)
, 523 F. Supp. 533 (Dist. Ct. N.Y. 1980);
Schacht
    v. Brown
, 711 F. 2d 1343 (7th Cir. 1983);
Thabault v. Chait
,

541
    F. 3d 512 (3d Cir. 2008); and
Lafferty
.

[337]

American
    authorities criticizing and declining to apply the doctrine have done so on the
    basis that an insolvent corporation is not necessarily harmed by, but may even
    benefit from, entering into additional debt transactions and that a companys insolvency
    is deepened not by the debt or investment itself, but rather by managements
    misuse of the opportunity created by them: see e.g.
In re CitX Corp.
;

and
Parmalat
.

[338]

I do not think
    it necessary, or useful, in this case to determine whether deepening
    insolvency is to be recognized as a cause of action or a theory of damages in
    Canada. It is a label that describes many of the same considerations that
    underlie the debate about whether the damages that Livent claims are available
    under traditional tort and contract principles.  In my view, they are, and in
    this respect I agree with the statement of the Court of Appeals for the Third Circuit
    in
Thabault
, at p. 523, that traditional damages, stemming from actual
    harm of a defendants negligence, do not become invalid merely because they
    have the effect of increasing a corporations insolvency.

[339]

To qualify as
    actual harm of a defendants negligence, the injury sustained must have been
    a reasonably foreseeable risk or consequence of the breach, however. This
    brings me to the debate surrounding
Galoo
and subsequent related
    authorities from the U.K.

[340]

Galoo Ltd. and
    its parent company sued their auditor alleging that it had negligently failed
    to discover their continued insolvency. The Galoo companies argued that, had
    they known they were insolvent, they would have ceased trading and would not
    have incurred further liabilities or trading losses.  Two kinds of harm were
    alleged: (i) the acceptance of increased debt; and (ii) continued trading
    losses.  The Court of Appeal concluded on the facts as pleaded 
Galoo
was a pleadings case  that the statement of claim disclosed no reasonable
    cause of action.

[341]

Galoo
is
    somewhat analogous to the present case factually and in terms of the arguments
    raised against the auditor. Perhaps signalling why Deloitte argues
Galoo
is on all fours with this case, Glidewell L.J. summarized the plaintiffs
    submissions on the trading losses head of damages as follows, at p. 24:

(a) If they had not acted in breach of their duty in contract
    or tort, [the auditor] would have detected the fraud during their audit of the
    1985 accounts. (b) In that case, [the Galoo companies] would have been put into
    liquidation in mid-1986 and thus ceased to trade at that date. (c) If the
    companies had ceased to trade, they would neither have incurred any further
    trading losses nor paid the dividend in 1988. (d) Therefore the trading losses
    and the loss caused by the dividend payment were caused by the breach of duty
    by [the auditor].

[342]

Deloitte submits
    that, unless this Court determines that
Galoo
should not be followed in
    Ontario, the appeal should be allowed. I would not incorporate
Galoo
into
    the law of Ontario. But there are a number of reasons why
Galoo
does not
    assist Deloitte, in any event.

[343]

First, the
    circumstances of the losses in
Galoo
are distinguishable. With respect
    to the first head of damages, the Galoo

companies claimed that they had
    suffered a loss merely because they had continued to accept loans. The Court
    recognized that the acceptance of new debt could not, in and of itself, amount
    to a loss causing damages. It was balance sheet neutral in the sense that, on
    acceptance of the loan, the company had both the money to use and the
    obligation to repay it. As for the trading losses, the Galoo companies alleged
    that the opportunity to incur trading losses from their continued operations resulted
    in compensable damages. The Court rejected this claim because the auditors
    negligence did no more than create the occasion (i.e., the continued operations
    of the business) for the harm to occur, but did not cause the harm itself  in
    the sense in which the word cause is used in law: p. 30. It relied on an
    Australian decision,
Alexander v. Cambridge Credit Corp. Ltd.
(1987), 9
    NSWLR 310, which held that, as a matter of common sense, allowing a company to
    continue in existence did not,
without more
, cause losses occasioned by
    the ordinary risks associated with carrying on business.

[344]

Here, however,
    that more is present and was pleaded. Livent has alleged that Deloittes
    negligence resulted in the issuance of clean comfort letters and audit
    opinions, which Livent then relied upon to access the capital markets and
    improperly incur increased liabilities. Deloittes breaches did not merely
    create the opportunity for Livent to continue in existence, but rather assisted
    it in improperly taking on further liabilities that it could not repay, due to
    the cash-burn nature of its business. As I will explain in more detail below,
    Livent has drawn the causal nexus  missing in
Galoo
 between
    Deloittes breach and Livents loss.

[345]

Secondly,
Galoo
is also distinguishable on the basis of its legal analysis, which differs from
    the prevailing law in Canada. The
Galoo
Court rejected the application
    of the but for test and instead applied what can best be described as a
    common sense application of an effective or dominant cause test: pp.
    28-30.  In Canadian law, the negligent act need only be a cause of the
    reasonably foreseeable injury; it need not be an effective or dominant
    cause: see
Athey v. Leonati.

[346]

Finally,
Galoo
is not binding on this Court and, in any event,

does not even appear
    to reflect the law in the United Kingdom at this point.

[347]

For example, in
Sasea
,
    a subsequent case from the English Court of Appeal, the losses resulted from
    certain defalcations by a principal of the company that should have been detected
    by the auditors, but were not. The Court declined to give effect to the
    argument that the auditors negligence only created the opportunity for the
    companys losses, but did not cause them.

[348]

The Court in
Temseel
    Holdings Ltd. v. Beaumonts
, [2002] EWHC 2642 (Comm.), also declined to
    follow
Galoo
. The
Temseel
Court

rejected a motion to
    dismiss a negligence claim against an auditor. It was alleged that the auditor
    had failed to detect that the directors had overestimated the profit margins of
    certain transactions, leading the company to continue to engage in those
    transactions on the same basis, which resulted in losses to the company.
Galoo
was distinguished, at para. 52, on the basis that [t]he complaint made by the
    company [was] not simply that it was allowed to continue trading, but rather
    that in reliance upon the figures which had been supplied to it and represented
    to be correct
it continued to trade in a particular manner
 (emphasis
    added).  Livent did so in the present case as well.

[349]

The most recent
    commentary from the United Kingdom touching on this subject is contained in the
    U.K. Supreme Courts decision in
Bilta
, referred to above in the context
    of the doctrines of attribution and
ex turpi causa
, with which it was
    primarily concerned. In discussing the issue of loss or damage in their joint
    reasons, Lords Toulson and Hodge relied on remarks by Lord Mance in
Stone &
    Rolls
to the effect that to cause a deficit to a company making it
    insolvent is to cause it loss:
Bilta
, at para. 176. (Lord Mance was on
    the
Bilta
Court and gave separate reasons, but did not comment on this
    point). Lords Toulson and Hodge rejected the defendants submission that Bilta
    had suffered no loss since it began life with negligible assets and never
    acquired any lawful assets, so it had none to lose:
Bilta
, at para.
    176.  They concluded, at para. 178:

A companys profit and loss account and its balance sheet may
    be positive or negative.  When the directors caused Bilta to incur VAT
    liabilities, and simultaneously caused it to misapply money which should have
    been paid to HMRC,
leaving the company with large liabilities and no means
    of paying them, the directors caused it to suffer a recognisable form of loss
.
[Emphasis added.]

[350]

Although
Bilta
is not an auditors negligence case, the damage/loss issue is comparable to
    this case.

[351]

In the end, I do
    not accept Deloittes broad proposition that an auditors negligence permitting
    a company to continue to stay in business when, had the negligence not
    occurred, the business would have ceased operations, merely creates the
    opportunity for the business to accumulate further losses, but cannot be the
    proximate cause of those losses. As this case demonstrates, there are
    circumstances where the auditors knowledge and the factual matrix can
    establish the necessary causal nexus between the auditors breach and the
    clients losses.

[352]

As discussed
    above, a public company, such as Livent, is required by statute to have audited
    financial statements to access the capital markets in Canada and the U.S. Moreover,
    in the course of a public offering, an issuer, such as Livent, will provide
    comfort letters in conjunction with its offering memoranda. The comfort
    letters, prepared by the issuers auditor, relate to the issuers latest
    unaudited interim financial statements. Presumably, without such comfort
    letters, the markets are less likely to respond positively to the offering.

[353]

As recognized by
    the trial judge, Drabinsky and Gottlieb were more than a little aggressive in
    ensuring that Livents financial statements reflected its performance in the
    rosiest of all lights. The trial judge also found that Deloitte knew at all
    material times that Gottlieb and Drabinsky were using the financial statements
    to assist them in convincing third parties to invest money in or extend credit
    to Livent: para. 280.

[354]

Given this
    knowledge, it was a reasonably foreseeable risk that Livent would incur
    increased liabilities as a result of its continuing resort to capital market
    offerings through the use of financial statements founded on fraud or other
    material misstatements that Deloitte, in the reasonable exercise of its duties,
    ought to have discovered.

[355]

In addition,
    Deloitte had knowledge regarding the cash-burn nature of Livents business and
    the record of losses being accumulated in the various productions  knowledge derived
    through Deloittes audit history and its ongoing relationship with Livents
    principals. Consequently, it was also reasonably foreseeable and predictable
    that there would not be offsetting profits or assets to balance against the
    increased liabilities.

[356]

In these
    circumstances, the losses related to what the trial judge described, at para.
    318, as the improper increase in liabilities did not flow from the
    vicissitudes of Livents business  which Deloitte had no part in causing, as Deloitte
    has suggested.  They flowed reasonably from Deloittes failure to do its job
    properly, which would have stopped the bleeding.

[357]

Before
    concluding on the issues of factual causation and proximate cause, I turn to
    Deloittes final argument relating to the trial judges remoteness/proximate
    cause analysis  that concerning contingencies.

(b)


Contingencies

[358]

Deloitte
    submits that the trial judges erroneous approach to causation reflects itself
    in his recognition of a 25 per cent discount for what he called contingencies. On
    its cross-appeal, Livent also takes issue with the contingencies analysis.

[359]

As explained
    above, the trial judge took into account evidence of contingencies in his
    remoteness analysis. While he used the term contingencies, I do not think he
    was referring to that term in the traditional sense in which it is used in tort
    law (where contingencies generally refers to future events or considerations
    that may affect the quantum of damages awarded). Rather, the trial judge was
    using the term to refer to the evidence he had heard relating to the vagaries
    or the money-losing nature of Livents business. In the end, nothing much turns
    on the terminology used by the trial judge to describe what he was dealing with
    here.

[360]

The focus of the
    parties differences on the contingencies point is not the 25 per cent
    reduction figure chosen by the trial judge. Instead, both parties argue that
    the trial judge erred in applying
any
contingencies factor.

[361]

Livent submits
    that there should be a zero per cent reduction for contingencies because, on
    the basis of
Athey v. Leonati
and the but for test, Deloittes
    negligence does not have to be the sole cause of Livents losses, but only a
    cause, and further that, once it is foreseeable Deloittes breach would result
    in an increase in net liabilities to Livent, the full extent of the losses need
    not be foreseen for purposes of the remoteness analysis.

[362]

Deloitte
    submits, on the other hand, that there should be a 100 per cent reduction 
    i.e., no damages  because the losses all flowed from the inherent vicissitudes
    of Livents risky business and were not attributable to Deloittes breach of
    its standard of care. In the jargon of the litigation, these kinds of losses
    were loosely referred to as trading losses (after the reference to such
    losses in that fashion in
Galoo
).

[363]

I reject these
    arguments. In my view, there is no reason to interfere with the trial judges
    conclusion that there should be a 25 per cent reduction to reflect the fact
    that Deloittes negligence was not the proximate cause of all the increase in
    Livents net liabilities during the period between Deloittes breach and the
    CCAA proceeding (referred to by the trial judge as the delta period).

[364]

In arriving at
    this conclusion, the trial judge recognized an inherent difficulty with the
    contingencies analysis.  At para. 319, he stated:

[T]he basic measure of damages in this case  the increase in
    liquidation deficit that would not have occurred but for Deloittes negligence
     does not permit me to readily ascertain how much of the damage ought to be
    seen as a result of the normal vagaries of Livents business, and therefore too
    remote to be recoverable.

[365]

He turned to the
    evidence of Stephen Cole for some assistance in this regard. In particular, he
    relied on Coles evidence regarding the vagaries of the industry, which he
    summarized, at para. 320:

Cole opined that Livent engaged in a very risky business, which
    was fraught with perils right from the start of the enterprise.  He suggested
    that the following factors contributed to Livents total economic loss: (a) the
    inherent risks of the Broadway theater and musical productions industry; (b)
    the pursuit of a high-risk integrated operating strategy (i.e. all aspects of
    the production and distribution of a show were carried out by Livent); (c) the
    financial failure of several large-scale productions, which were not
    backstopped by successful productions; (d) the investment in and construction
    of multiple theaters, which was lost when the theatres were liquidated; and (e)
    the carrying and financing charges associated with the aforesaid activities.
    [Footnote omitted.]

[366]

The trial judge
    admitted he wrestled with the issue of determining the remoteness question
    through a contingencies analysis. He observed further that the application of a
    contingencies analysis [did] not admit of precise calculation and was not an
    all or nothing proposition because the concepts are more than a little soft
    and difficult if not impossible to pin down: para. 325.

[367]

Despite those
    challenges, he ultimately concluded, at paras. 324-26, that there should be a
    25 per cent reduction to reflect the fact  as he put it  that it would not
    be fair and reasonable to visit the entire delta at Deloittes door and that
    the consequence of certain of the trading losses should not be borne by
    Deloitte:

I have struggled through this area, with
    some misgivings.  It is my assessment of the evidence, heard throughout the
    course of the entire trial, including the evidence of Cole, that the raw number
    should be reduced by 25%.  In my opinion, the percentage chosen reflects the
    change in the environment in which Livent was functioning after year-end 1995,
    and would account for the trading losses that would be generated from the
    unprofitable but legitimate theatre business.

[368]

By the change
    in the environment in which Livent was functioning after year-end 1995, I take
    the trial judge to be referring to the cumulative effect of the increased
    financial stress on Livent arising from, amongst other things: (a) the
    exponentially increasing expenditures associated with at least 11 different
    shows in various stages of presentation and production, and with the cost of
    acquiring and renovating at least three theatres in the United States; (b) the
    downturn beginning in the watershed year of 1996 resulting from
Phantom
in Toronto nearing the end of its run, and the financial failure of such shows
    as
Sunset Boulevard, Kiss,
and
Show Boat
; (c) the escalating
    demand for funding accompanying these developments; and (d) the increasing pressure
    from Drabinsky and Gottlieb and their juggling to keep all of these balls in
    the air.

[369]

The trial judge
    explained it in this fashion, at para. 323:

As best as I have been able to distill the welter of material
    thrown my way, there was a change in Livents game plan from about the middle
    of 1995 to the day of reckoning in August 1998.  Unfortunately for Livent, this
    change in game plan was coupled with a change in its operating fortunes during
    this period, driven by internal and external forces.  While the general
    business strategy remained essentially the same throughout, namely the
    establishment of a vertically-integrated theatre and production company, the
    growth in expenditures in both productions and theatre construction was
    exponential, and not incremental.  That increase might have been manageable
    except for the fact that Livent suffered significant losses from several of its
    own productions, which, had things rolled out as anticipated, it might have
    self-financed some or a larger portion of the enterprise, without relying on
    the capital markets or its creditors as a primary source of funds.

[370]

Thus, the trial
    judge distinguished between losses generated from Livents unprofitable, but
    legitimate theatre business, operating within the changed environment, and
    those losses attributable to Deloittes negligence.

[371]

In grappling
    with the remoteness question, the trial judge found some assistance in
    comparing
Galoo
,
Sasea
, and this case on a spectrum of factual
    situations involving auditors negligence. I think this comparison is helpful
    as well. At one end of the spectrum,
Sasea
involved losses that were
    directly caused by the very fraud that the auditor negligently failed to detect
     namely, the embezzlement of funds from the company. In that case, the auditor
    was liable. At the other end of the spectrum,
Galoo
was a case where the
    only nexus between the auditors negligence and the resulting loss was that the
    breach allowed the company to stay in business. The claim was struck. This case
    is somewhere between those two cases on the spectrum, however. Here, as the
    trial judge found, at para. 318:

On the one hand, Livents losses after the Measurement Date are
    largely attributable to the very fraud which Deloitte should have detected. 
    The fraudsters may not have been directly stealing from the company, but they
    did directly cause the company to improperly incur
greater
liabilities
    than it would otherwise have incurred.
The use of fraudulently misstated financial statements to induce people
    to invest in a company is entirely predictable.

Livents losses  to the extent
    they are
attributable to this improper increase in liabilities
 cannot
    be said to be too remote. [Emphasis added.]

[372]

As noted earlier
    in these reasons, the trial judge summarized Livents theory of damages at
    para. 291: [T]he measure of damage equals
the change or increase in the
    losses sustained
by Livent [during the delta period] (emphasis added). However,
    while the Measurement Date is the triggering moment for the measurement of
    damages, it does not follow that Deloitte is responsible for any and all losses
    sustained by Livent during the delta period. What Livent is entitled to recover
    is the increase in liquidation deficit that would not have occurred but for
    Deloittes negligence, but not those losses that, to paraphrase
Mustapha
,
    are too remote to hold Deloitte fairly liable. In short, Deloitte is only
    responsible for those losses
that are reasonably foreseeable as a result of
    its negligence
.

[373]

As I have
    explained, it was a reasonably foreseeable risk that Livent would incur
    increased liabilities as a result of its continuing resort to the capital
    markets through the use of financial statements founded on fraud or other
    material misstatements that Deloitte ought to have discovered. In addition,
    Deloitte had knowledge of the record of losses being accumulated in the various
    productions and the cash-burn nature of Livents business, and consequently
    could have reasonably foreseen that there would not be offsetting profits or
    assets to balance against the increased liabilities.

[374]

In the result, Livent
    suffered enhanced losses, which were reasonably foreseeable, as a function of
    Deloittes negligence permitting Livent to resort again to the capital markets
    and to acquire investment liabilities which inevitably would not be offset by
    assets because of the cash-burn nature of its business.

[375]

On the other
    hand, the losses resulting from the vicissitudes of Livents money-losing business
    during the delta period are simply unrelated to Deloittes negligent acts. As
    the trial judge recognized, Deloitte should not be responsible for losses
    generated by the unprofitable, but legitimate theatre business operating within
    the changed environment from 1996 onwards.

[376]

Finally, on the
    cross-appeal, Livent submits that to apply a contingencies factor to reduce the
    quantum of damages amounts to a back door application of the doctrine of
    contributory negligence.

[377]

The trial judge
    rejected that argument. I agree with the trial judge. As explained above,
    contingencies in this context refers to the vagaries of Livents inherently
    unprofitable business. Contributory negligence refers to the apportionment of
    liability and damages arising from the negligent acts, according to the degree
    of fault of the plaintiff in relation to those acts. The two concepts are
    different.  I will deal with the issue of contributory negligence below.

(4)


Conclusion on Causation

[378]

To conclude,
    Deloittes negligence caused Livent to continue to operate in circumstances in
    which it was reasonably foreseeable both that the company would continue to
    accumulate increased liabilities through its access to the capital markets, but
    also  perhaps even more significantly  that it would have no means of paying
    down those liabilities because of the cash-burn nature of Livents money-losing
    business.

[379]

Deloittes
    negligence did not merely create the opportunity for Livent to stay in business
    (
Galoo
).  It created the opportunity for Livent to stay in business
and
for the fraudsters to continue to take Livent to the capital markets, thus
    enhancing the losses that would otherwise have been incurred had Livent
    remained in business during the delta period. The enhanced liabilities resulted
    from Deloittes negligence (
Sasea, Temseel,
and
Bilta
), would not
    have been incurred but for that negligence (
Clements
and
Athey v.
    Leonati),
were a foreseeable risk of Livents continuing in business, and
    the harm incurred was therefore not too unrelated to the wrongful conduct to
    hold [Deloitte] fairly liable (
Mustapha
).

[380]

In reaching this
    conclusion, I recognize the need for the law not to overreach by exposing
    auditors of public companies to unreasonable obligations.  In my view, however,
    where the proper factual and legal connection between the breach and the losses
    exists  i.e., where it is reasonably foreseeable that the losses will be
    sustained and where, but for the negligence, the company would not have
    incurred them  the auditors breach can be the cause of those losses and give
    rise to compensable damages.

[381]

I now turn to
    issues relating to the quantum of damages.

I.

DAMAGES


(1)

Measure and Quantum of Damages

[382]

The parties
    agree that it does not matter whether this case is viewed as a breach of
    contract case or a tort case. They do not dispute the trial judges conflation
    of the measure of damages in tort and in contract in the circumstances. Subject
    to the limiting factors discussed below, Livent is to be put in the same
    position it would have been in had the tort or breach of contract never been
    committed.

[383]

Nor do the
    parties quarrel with the use of the formula Loss (L) = Actual Liquidation
    Deficit (ALD)  Estimated Liquidation Deficit (ELD), determined as of the Measurement
    Date, as defined earlier in these reasons, for the purpose of calculating Livents
    economic loss.

[384]

As noted
    earlier, the ALD is not in dispute and is fixed at $418,830,000.  It represents
    the losses sustained by Livent after taking into account the amounts received on
    the sale of its assets. Much evidence was led about the calculation of the ELD,
    however. The experts differed. There was no agreement on what the appropriate
    Measurement Date was. The experts prepared their calculations based on
    Measurement Dates of March 1997 and March 1998 and, ultimately, at the trial
    judges request, Cole (Deloittes expert) prepared a calculation based on a
    Measurement Date of August 31, 1997.

[385]

In addition, central
    to the differences between the experts on the ELD valuation was their approach
    to establishing the value of Livents assets as at the Measurement Date. Ratner,
    for Livent, compared the actual amount realized from the sale of Livents
    assets against the adjusted book value of those same assets. Cole, on the other
    hand, estimated the fair market value of Livents assets as at the Measurement
    Dates to arrive at what he thought the assets would have netted had they been
    disposed of at those moments in time. The practical impact of the different
    approaches was that the higher the value placed on the assets at a given Measurement
    Date, the lower the ELD, and therefore the higher the damages.

[386]

The trial judge
    found that neither of the experts approaches was unassailable and,
    accordingly, that their respective numbers could [not] be accepted without
    modification: para. 303. Acknowledging that but for choosing a mid-point
    between the two (Livents suggestion), he was at a loss to settle upon a
    principled approach for preferring one set of numbers over another, he in
    effect split the difference: para. 303. He found that the raw numbers for a
    Measurement Date of March 1997 (about the time the 1996 audit was completed)
    and March 1998 (within days of the discovery of the Put) were, respectively,
    $155 million and $53.9 million, based on the mid-point between the Ratner and
    Cole calculations for those dates.

[387]

Deloitte argues
    that it was not open to the trial judge to take an unprincipled approach to
    fixing the quantum of damages by simply choosing the mid-point between the
    experts numbers.

[388]

I do not accept
    this argument. As the trial judge observed, [t]he assessment of damages is as
    often as not a mugs game (para. 274) and trial judges are obliged to do the
    best they can on the evidence, short of failing to analyze the evidence at all
    or simply guessing: see e.g.
Murano v. Bank of Montreal
(1995), 20
    B.L.R. (2d) 61 (Ont. Gen. Div.), at pp. 120-23, revd in part on other grounds
    (1998), 41 O.R. (3d) 222 (C.A.)
.

[389]

I do not think
    that the decision of this Court in
Danecker v. Danecker
, 2014 ONCA 239,
    assists Deloitte in this respect. There, the trial judge had simply averaged
    the numbers of the experts without conducting any analysis of the evidence. That
    is not the case here, where the trial judge engaged in a lengthy consideration
    and analysis of both experts evidence and their respective approaches. Having
    reviewed all of the evidence, including that of Cole and Ratner, he concluded
    that neither approach could be accepted without modification.  It does not
    follow that he was thus required to assess the damages at zero.  I see no
    palpable and overriding error in the circumstances.

[390]

The next step
    for the trial judge was to settle on a Measurement Date.  Ultimately, he landed
    on August 31, 1997 because of his views outlined above as to Deloittes
    breaches in the August/September period of that year. Recognizing that both
    experts ELDs had decreased between March 1997 and March 1998 as one moved
    closer to the ALD, the trial judge then turned to Coles re-worked estimate of
    the economic loss as of August 31, 1997 (approximately $100 million). He
    compared that number with Coles estimate as at March 1997 ($136 million), and
    applied the ratio between those two estimates (73.5 per cent) to the raw
    number of $155 million that he had arrived at in the fashion explained above. This
    gave the trial judge a net economic loss number for August 31, 1997 of $113
    million, which is the figure he reduced by 25 per cent on account of
    contingencies. I see no error in this approach.

[391]

I turn now to
    the issue of contributory negligence.

(2)


Contributory
    Negligence

[392]

The trial judge
    observed that the purpose of an audited statement, namely to [ensure] that the
    interests of shareholders are safeguarded by giving them the means to supervise
    management, would be undermined if an auditors responsibility were reduced in
    proportion to the egregiousness of the misconduct which it failed to detect:
    para. 340. I agree with that statement in the context of this case: the
    application of the doctrine of contributory negligence in the circumstances
    here would, in my view, amount to a back-door application of the doctrine of corporate
    identification, which I rejected earlier.

[393]

Deloittes
    argument is that s. 3 of the
Negligence Act
, R.S.O. 1990, c. N.1, governs
    and that the trial judge had no option but to give effect to this provision. 
    Section 3 states:

In any action for damages that is founded upon the fault or
    negligence of the defendant
if fault or negligence is found on the part of
    the plaintiff
that contributed to the damages,
the court shall apportion
the damages in proportion to the degree of fault or negligence found against
    the parties respectively. [Emphasis added.]

[394]

It is clear from
    this provision, however, that the fault or negligence contributing to the
    damages must be fault or negligence
on the part of the plaintiff
. 
    Here, I have concluded  as did the trial judge  that the fraudulent acts of
    Drabinsky and Gottlieb are not to be attributed to Livent for the purposes of
    the
ex turpi causa
defence. I agree with Livents counsel that to apply
    that same conduct to Livent for the purpose of assessing contributory
    negligence in this case is just the attribution/illegality argument under
    another name and that, in the absence of attribution, [t]he requirements of
    the
Negligence Act
are not met.

[395]

Deloitte argues
    nonetheless that the innocent representatives of Livent were at least equally
    negligent in failing to take steps that would have led to the discovery of the
    fraud. It submits that the trial judge erred in his assertion that [he] did
    not hear any evidence to suggest that the innocent members of the Board or the
    Companys shareholders knew or ought to have known, or were warned, that
    something was amiss at any time relevant to the audits in question: para.
    341.

[396]

In this respect,
    Deloitte relies principally on information that had been provided to the then-Chair
    of Livents Audit Committee regarding the inclusion of revenue from the Pantages
    Air Rights Agreement in August 1997, the recognition of what was known as the
    AT&T transaction in Q3 1997, and Deloittes discovery of the side agreement
    containing the Put in April 1998. It does not follow that conveying this
    information to the Chair of the Audit Committee  whom the trial judge found
    was basically the last honest man standing (para. 101)  constituted a
    warning, or even knowledge, that something was amiss during the period relevant
    to the audits in question. The trial judge was alive to and reviewed all of the
    pertinent evidence in assessing whether any innocent director or shareholder
    failed to take steps to minimize, if not avert, the harm done, whose want of
    care could be attributed to the Company: para. 337. He concluded that there
    was not. I see no basis for interfering with that finding.

[397]

Deloitte argued
    that it was unfair for it to be wholly responsible for the damages sustained by
    Livent when it was Livents own principals that perpetrated the fraud and
    Deloitte had relied on information obtained from other third parties such as Dundee
    and Livents solicitors. The reality is that Deloitte did not need to stand
    alone at trial. It could have taken third-party proceedings for contribution
    against the fraudsters, Dundee and the solicitors, but it chose for its own undisclosed
    reasons not to do so. Although this point is not dispositive  as the trial
    judge recognized  it works against Deloittes unfairness argument.

[398]

I would not
    interfere with the trial judges decision not to apply the doctrine of
    contributory negligence in the circumstances.

J.

THE
    CROSS-APPEAL: DID THE TRIAL JUDGE ERR IN FAILING TO HOLD DELOITTE LIABLE FOR
    ITS BREACHES OF THE STANDARD OF CARE IN RELATION TO THE 1996 AUDIT?

[399]

On the
    cross-appeal, Livent raises two issues:

(1)

Having
    found that Deloitte breached the standard of care in its audit of the 1996
    financial statements and having quantified the damages at $155 million, did the
    trial judge err in not awarding Livent the damages that resulted from this
    breach?

(2)

Regardless
    of whether damages are awarded from August 1997 or an earlier date, did the
    trial judge err in applying a 25 per cent reduction to Livents damages to
    account for contingencies?

[400]

I begin with the
    observation that what Livent endeavours to persuade this Court to do on the
    cross-appeal is, for the most part, to revisit and reweigh the trial judges
    findings of fact, the inferences he drew from those facts, and the conclusions
    of mixed fact and law to which he came based on those findings and inferences.
    I would decline to do so. In its arguments relating to the cross-appeal, Livent
    has not shown any palpable and overriding error with respect to the trial
    judges factual findings, the inferences he drew from those findings, or the
    conclusions reached as a result of those findings and inferences.

(1)

Contingencies

[401]

I have dealt
    with the contingencies issue above and for the reasons already expressed there,
    this ground of appeal cannot succeed. Accordingly, this portion of the reasons
    will deal only with the first question.

(2)


Damages and the
    1996 Audit

[402]

As noted above,
    the trial judge found that Deloitte failed to meet the standard of care by not
    completing the 1996 audit in accordance with GAAS in its treatment of: (i) the
    PPC; and (ii) the Musicians Pension Surplus Receivables in relation to the
Kiss
tour of New York and
Show Boat
in New York. However, he was 
not persuaded that [Deloittes] negligence had caused
    any compensable harm as of the signing of the opinion in 1997 for the 1996
    financial statements: para. 173.
He reached that conclusion based on
    his finding that a confrontation with management over the PPC and the Musicians
    Pension Surplus Receivables  even if those misstatements had been discovered
    as they should have been  would not have revealed instances of fraud or other
    irregularities sufficient to close Livent down: para. 171.

[403]

Livent contests
    the trial judges decision on this issue. Not surprisingly, it accepts his findings
    that Deloitte breached the standard of care in relation to the 1996 audit. However,
    it submits that the trial judge erred in finding that no compensable damages
    flowed from those breaches. Why? Because, says Livent in broad-brush terms, if
    the trial judge had assessed the impact of Deloittes deficient conduct
    relating to the 1996 audit with sufficient rigour, he would have concluded that
    a competent auditor, acting in accordance with the standard of care, should
    have exercised heightened professional skepticism, probed deeper, made other
    auditing adjustments, and discovered fraud or material misstatements of such a
    magnitude that no clean audit opinion could have been issued.

[404]

Had that occurred,
    Livents house of cards would have tumbled down by March 1997, about the time
    the 1996 audit was completed. Indeed, Livent speculates that had the audit been
    performed in a competent fashion following detection of the breaches with
    respect to the PPC and the Musicians Pension Surplus Receivables, the effect
    would have been dramatic:  instead of recording a net profit of approximately
    $11 million for 1996, Livent could well have taken a net loss of over $20
    million. Livent submits that this would have been the result had proper
    adjustments been made for the misstatements regarding the PPC and the
    Musicians Pension Surplus Receivables (said to be approximately $15 million)
    and other misstatements conceded by Deloitte (amounting to an additional $3 million),
    together with what Livent claims should have been assessed for misstatements
    relating to the Revenue Transactions (roughly another $20 million).

[405]

For these
    reasons, Livent accepts the trial judges finding that the amount of $155
    million is a fair estimation of the economic loss it claims to have sustained
    as of March 1997, but submits that he erred in not awarding that full amount in
    damages.

[406]

In advancing
    this broad submission, Livent alleges that the trial judge committed three
    errors.  In its view, he erred:

(a)

in finding
    that the discovery of fraud was a necessary precondition to a damages award;

(b)

in failing
    to analyze the impact of the necessary intermediate audit steps Deloitte was
    obliged to undertake on discovery of material misstatements; and

(c)

in failing
    to assess the probable impact of properly revised financial statements on
    Livents access to capital markets.

[407]

Although there
    is some overlap in the analysis of these alleged errors, I will deal with each
    in turn.

(a)

Discovery of Fraud not a Precondition of Liability

[408]

Livent submits
    that the trial judge considered only one of the three routes to liability
    advanced by it at trial in relation to the 1996 audit year: the failure to
    detect fraud. Livent claims it advanced two other routes to liability as well,
    which the trial judge ignored  namely, the failure to comply with auditing
    standards and the failure to probe to the bottom when suspicions ought to have
    been aroused.

[409]

I do not accept
    this submission.

[410]

I agree with
    Livent that, as a general principle, auditors may be exposed to liability in
    the absence of fraud. There is no need for a plaintiff to prove that the
    auditor ought to have discovered fraud as a threshold for establishing
    liability and damages: see e.g.
BDO Dunwoody
. However, the trial judge
    did not impose fraud as a precondition for liability in this case.

[411]

While he did
    place some emphasis on discovery of the fraud, it is apparent from the trial
    judges thorough review of Deloittes conduct in relation to the 1996 audit 
    summarized earlier in these reasons  that he was alive to the potential impact
    of other irregularities (i.e., other intentional misstatements apart from
    fraud: CICA Handbook, ss. 5135.01-5135.02). Indeed, in encapsulating his
    reasoning for not finding compensable damages in this context, the trial judge
    said, at para. 171:

While I have concluded that Deloitte did not conduct an audit
    in accordance with GAAS in respect of the PPC and Musicians' Pension Surplus
    Receivable accounts, I am not satisfied that a confrontation with management over
    these accounts as deductions from revenue would similarly have revealed
    instances of fraud
or other irregularities
sufficient to close Livent
    down.

[Emphasis added.]

[412]

Amongst the
    other irregularities reviewed by the trial judge were the material
    misstatements in the PPC amortization numbers and the quantums of the alleged
    Musicians Pension Surplus Receivables.

[413]

Finally, it is
    worth noting that, in his conclusion on the 1996 audit, the trial judge linked
    his analysis regarding compensable damages to the broader causation analysis
    set out later in his reasons. In this latter section, he dealt with both the
    but for test and issues of remoteness and proximity. In dealing with the but
    for test, he made it clear that the actionable breaches that must be taken
    into account in the causation analysis include
every breach of the standard
    of care
: para. 286 (emphasis added). In dealing with remoteness/proximate
    cause, he addressed Deloittes position that
any audit failures
on its
    part did not cause loss to Livent: para. 310 (emphasis added).

[414]

For these
    reasons, I am not persuaded that the trial judge made a finding of fraud a
    precondition to a finding of damages, as Livent asserts.

(b)


Necessary Intermediate Audit Steps

[415]

Livent submits
    that the trial judge failed to ask himself what a competent auditor would have
    been required to do next if, during the course of the audit, the auditor had
    discovered misstatements of the magnitude he found Deloitte ought to have
    uncovered during the 1996 audit (i.e., the approximate $15 million referred to
    above).  What a competent auditor would have been required to do, according to
    Livent, is captured in the following five auditing steps Livent says are found
    in the CICA Handbook then in effect:

(1)

to
    determine whether the misstatements that it detected were made intentionally or
    unintentionally;

(2)

if
    intentional misstatements were uncovered or potentially present, to probe to
    the bottom with heightened professional skepticism to either dispel or confirm
    suspicion of fraud;

(3)

to
    reconsider the audit plan when faced with material misstatements to determine
    whether audit procedures ought to be expanded in order to gain comfort that
    other material misstatements had not gone undetected;

(4)

to
    step back to consider whether all of the misstatements detected suggested a
    pattern which would mandate a re-examination of the entire audit through a lens
    of higher professional scrutiny; and

(5)

to
    quantify the known and likely misstatements in order to be able to conclude
    whether the statements were materially misstated.

[416]

I shall refer to
    these five steps as the proposed intermediate audit steps.

[417]

Livents basis
    for proposing the intermediate audit steps is founded on an approach to the
    but for test advocated in the academic writings of Professors Philip Osborne
    and David Robertson: see Philip H. Osborne,
The Law of Torts
, 4th ed.
    (Toronto: Irwin Law, 2011); and David W. Robertson, The Common Sense of Cause
    in Fact (1997) 75 Tex. L. Rev. 1765.  That approach recognizes that [t]he
    application of the
but for
test rarely calls for close or precise
    analysis and that [m]ost frequently, courts merely identify the test and draw
    a conclusion: Osborne, at p. 53. However, to enhance clarity and certainty in
    the but for analysis, the authors suggest that the application of the test
    involves a number of distinct steps. In a passage adopted by the trial judge at
    para. 286 of his reasons, Professor Osborne  whose work draws on that of
    Professor Robertson  says, at p. 53:

[T]he application of the
but for
test involves a number
    of discrete steps. First, the harm that is alleged to have been caused by the
    defendant must be identified.  Second, the specific act or acts of negligence
    by the defendant must be isolated. Third, the trier of fact must mentally
    adjust the facts so that the defendants conduct satisfies the standard of care
    of the reasonable person, being sure to leave all other facts the same. Fourth,
    it must be asked if the plaintiffs harm would have occurred if the defendants
    had been acting with reasonable care. [Footnote omitted.]

[418]

The intermediate
    audit steps proposed by Livent arise out of the third of these discrete steps.
    In substance, the third Osborne step requires the trier of fact to step back,
    isolate the specific acts of negligence, and mentally adjust the facts so that
    the defendants conduct satisfies the standard of care of the reasonable
    person. This backward-looking exercise is described by Professor Robertson as
    using the imagination to create a counterfactual hypothesis or
    counterfactual inquiry, thereby asking what
would have
happened under
    a factual scenario that never actually existed: Robertson, at p. 1770, fn. 21
    (emphasis in original).

[419]

The parties have
    not provided this Court with any jurisprudence directly adopting what I will
    call the mental adjustment or counterfactual inquiry approach articulated
    by Professors Osborne and Robertson as an aspect of the application of the but
    for test. However, the trial judge and the parties seem to have accepted it as
    a working theory, and as part of the conceptual but for framework. I am
    prepared to accept its application for the purposes of this case.

[420]

In substance,
    Livents argument is that the trial judges failure to engage in the mental
    adjustment/counterfactual inquiry exercise caused him to miss the link between Deloittes
    breaches of the standard of care for the 1996 audit and Livents damages. I
    disagree.

[421]

What the mental
    adjustment/counterfactual inquiry exercise contemplates, in my view, is that
    the trial judge  to the best of his or her ability  will carefully assess the
    evidence to determine what would likely have occurred had the defendant complied
    with the standard of care. Recall Professor Osbornes acknowledgement that
    [t]he application of the
but for
test rarely calls for close or precise
    analysis. In the context of this case, the question to be answered was what
    would likely have occurred if Deloitte had discovered the material
    misstatements pertaining to the 1996 audit that the trial judge found ought to
    have been discovered (i.e., the misstatements regarding the PPC and the
    Musicians Pension Surplus Receivables)?

[422]

In my view, the
    trial judge specifically addressed this question and, based on his findings,
    answered it. Although Livent does not agree with those findings, or the
    conclusions drawn from them, the trial judge in effect applied the mental
    adjustment/counterfactual inquiry analysis and, in doing so, demonstrated that
    he was alive to the principal issues raised by Livents proposed intermediate
    audit steps.

[423]

Livent dismisses
    the trial judges findings on the basis that he made a rolled-up hypothetical
    assumption to arrive at a but for world where Deloitte presumably provides a
    clean opinion because Gottlieb would have yielded to the suggested write-offs
    rather than pull the plug on the enterprise: para. 173. It seeks to
    characterize the factual findings underlying the trial judges conclusion as
    conclusory assumptions. Specifically, it articulates three conclusory
    assumptions:

(1) Drabinsky and Gottlieb would have yielded to the suggested
    write-offs with respect to the material misstatements regarding the PPC and
    the Musicians Pension Surplus Receivables rather than pull the plug on the
    enterprise: para. 173;

(2) a confrontation with management over these accounts as
    deductions would not have revealed instances of fraud or other irregularities
    sufficient to close Livent down: para. 171; and

(3) the 1998 write-offs speak volumes in terms of the
    pragmatism of Drabinsky and Gottlieb: para. 173.

[424]

However, the
    factual findings made by the trial judge, and the inferences and conclusions
    based on them, are not conclusory assumptions. What Livents submission
    overlooks is that the mental adjustment/counterfactual inquiry exercise called
    for in these circumstances is by nature an exercise in developing a
    hypothetical assumption (rolled-up or not), and the trial judge explicitly addressed
    his mind to what Deloitte would have done next, had it discovered the material
    misstatements. While the trial judge may not have articulated his analysis in a
    way that specifically addressed the five intermediate audit steps now proposed
    by Livent, he arrived at the end point by finding that the 1996 financial
    statements were materially misstated, but that their discovery would not have
    resulted in Deloittes failing to give a clean audit opinion for 1996.

[425]

In this respect,
    he made the following specific findings, at para. 173:

[W]hen an auditor uncovers items or misstatements that,
    individually or collectively,
would exceed materiality
, rather than
    simply withholding a clean opinion,
the issues are first discussed with
    management
to see if some middle reporting ground can be achieved.  In the
    instant case, and even though it was often Gottliebs way or the highway, I
    have no reason to conclude that, when push came to shove, Gottlieb as the
    pragmatist would not have yielded to the suggested write-offs rather than pull
    the plug on the enterprise.  His hubris and the conceit of Drabinsky, and their
    collective view that their frauds would not be discovered, would have driven
    that agenda. [Emphasis added.]

[426]

Experts for both
    Livent and Deloitte agreed that upon discovery of a material misstatement in
    the financial statements, an auditor will inform the client of the error and
    push the client to correct it. For example, Livents expert, Paul Regan,
    testified that, upon discovery of a material error, the auditor informs the
    client and the client either records the corrected entry or [i]f the client
    fails to record those entries, given the materiality of these known errors on
    the financial statements, you qualify your opinion and you dont give a clean
    opinion on those financial statements.

[427]

In addition to
    the foregoing evidence, the trial judge found that the detection of the PPC
    overstatement from 1996, had it occurred, would not itself have brought to
    light the more serious issue of the amortization rolls: para. 172.  He also
    compared the 1996 audit with the later circumstances leading to the Ovitz and
    Furman acquisitions in 1998 where Drabinsky and Gottlieb were prepared to take
    massive write-offs before the deal was done  which, the trial judge said,
    [spoke] volumes in terms of the pragmatism of Drabinsky and Gottlieb: para.
    173. This comparison, too, reinforced his view that, even with the detection of
    the 1996 misstatements, a confrontation with management would not have led to
    the discovery of fraud or other irregularities sufficient to close Livent
    down: para. 171.

[428]

While Livent
    quarrels with the trial judges resort to the comparison with the Ovitz and
    Furman transactions, I see no error in his looking at what actually happened at
    that time for some assistance in considering what would have happened in 1997. He
    was dealing with the same Livent actors pursuing their same goals in the Livent
    universe.

[429]

Although not
    specifically referred to by the trial judge in this context, his finding that
    Livent would, in the end, have yielded to Deloittes demands (had they been
    made, as they should have been) is consistent with what happened in other
    instances where concessions were made as well. In 1996, for example, when
    Deloitte pushed for a write-down for the PPC in relation to
Sunset Boulevard
,
    Livent agreed and, after discussions, assented to an $18.5 million charge
    against income. Subsequently, in 1997, after the great debate over the
    inclusion of revenue from the air rights transaction, Livent ultimately agreed to
    include most of it in Q3 and not Q2.

[430]

All the findings
    of the trial judge on this issue were grounded in the evidence.  I see no error
    in the hypothetical assumption about the but for world which the trial
    judge accepted, and no basis for overturning his finding as to what would
    likely have occurred had Deloitte complied with the standard of care and
    detected the material misstatements regarding the PPC and the Musicians
    Pension Surplus Receivables during the 1996 audit.

(c)

Livents Access to the Capital Markets

[431]

The 1996
    financial statements incorporated the material misstatements identified by the
    trial judge and, in Livents view, other material misstatements as well. Livents
    final submission on the cross-appeal is that, in the revised audit scenario,
    the trial judge failed to consider how the 1996 financial statements, had they
    been properly prepared, would have affected the covenants in Livents secured
    loans and its access to the capital markets generally.

[432]

Livent had
    acquired two new secured lenders as at December 1996  CIBC and the trustee of
    a $72.5 million debenture  to whom it owed approximately $96.8 million by the
    end of March 1997. Livent argues that, even at a conservatively estimated
    re-visited loss of approximately $3.4 million for 1996  the loss that would
    have resulted had the proper adjustments been made for the misstatements
    regarding only the PPC and the Musicians Pension Surplus Receivables  it
    would have been in breach of its loan covenants. This would have made it
    difficult for Livent to borrow more money, something that was a constant need,
    particularly in view of the accelerating cash-burn nature of its business at
    that time.

[433]

There are at
    least two difficulties with this submission. It is raised for the first time on
    appeal and Livent led no evidence at trial to the effect that any breach of its
    loan covenants would have had an impact on its ability to borrow more money or
    on its access to the debt or equity markets.

[434]

In any event,
    the trial judge found that  in the absence of a discovery of the fraud  the
    reporting of significant losses had not prevented Livent from accessing the
    capital markets. His findings are supported by the evidence.

[435]

For instance,
    apart from the Ovitz-Furman transactions referred to above  that generated U.S.$22
    million in private placements in the face of a $44 million loss position 
    James Pattison and Conrad Black (two Livent directors) were prepared to advance
    a further U.S.$12.2 million, following an additional PPC write-down of $23.6
    million in Q1 1998. It was open to the trial judge to consider what would have
    happened in respect of the 1996 audit, with these facts in mind.  He did so, at
    para. 284:

[E]ven if Deloitte had uncovered inadvertent errors in the
    years prior to year-end 1996, I am persuaded that Livent would likely still
    have been able to access the capital markets for share underwritings and debt
    placement. This proposition is underscored by the events of the spring of 1998,
    when Ovitz and Furman insisted on a massive PPC write down, throwing Livent
    into a huge loss position. Regardless of this swing in fortunes, it was still
    able to complete the underwriting.  Indeed, the situation repeated itself in
    the months following the Ovitz-Furman closing and after a further write down of
    PPC and a further anticipated Q2 loss.  Messrs. Black and Pattison seemingly
    beat a path to Drabinskys door to dump additional millions into Livents lap. The
    fraud to that point had not been uncovered and access to the capital markets
    had not been denied, accordingly. Regardless of the newly recorded losses,
    Drabinskys star was still shining brightly on the horizon.

[436]

It stands to
    reason that, if Livent could attract investment in the spring 1998 after already
    recording a $44 million loss, it could have done so after recording a $3.4
    million  or perhaps even higher  loss for year-end 1996.  The trial judges
    observation, at footnote 2, that the [cachet] associated with Drabinsky was
    clearly the allure that attracted the investors is supported by the record,
    including the testimony of Livents witness, Robert Webster, who characterized
    Drabinsky as the creative heart and soul of the company, the person with whom
    the company was identified in the public market, and the person whose skill
    set was integral to the decisions of investors. Drabinskys star was shining
    in March 1997 when the 1996 audit was being completed as well.

[437]

The probable
    impact of revised financial statements on Livents access to the capital
    markets was precisely the issue that troubled the trial judge and that he
    sought to resolve in respect of the 1996 audit. He addressed it directly, as
    well as in the context of his causation analysis and the mental
    adjustment/counterfactual inquiry exercise already described above.  I would
    not interfere with his conclusions on this issue.

(3)


Conclusion on the
    Cross-Appeal

[438]

In the end,
    Livent seeks to have this Court substitute different findings of fact for those
    arrived at by the trial judge in respect of his conclusion that no compensable
    damages flowed from the breaches of the standard of care that he identified in
    relation to the 1996 audit year. In my view, his findings, and the inferences
    and conclusions he drew from them, were well-founded on the evidence. I would
    dismiss the cross-appeal.

DISPOSITION

[439]

For all the
    foregoing reasons, the appeal and the cross-appeal are dismissed.

[440]

Counsel advised
    that the parties have resolved the issue of costs.

Released: January 8, 2015

R.A. Blair J.A.

I agree G.R.
    Strathy C.J.O.

I agree P.
    Lauwers J.A.





[1]
Dollar figures are in Canadian currency, unless otherwise specified.



[2]
I note that the trial judge concluded, at para. 170, that as of middle of
    July, [Deloitte] could not be faulted for the work it did in respect of the
    Revenue Transactions and the conclusions it reached. However, at para. 140, he
    had stated that Deloitte failed to meet its standard of care in the way it dealt
    with PPC, the Musicians Pension Surplus Receivable and the Revenue
    Transactions. Reading his reasons as a whole, I am satisfied that the trial
    judge did not find a breach with respect to Deloittes audit of the Revenue
    Transactions as of mid-July 1997.



[3]
I note, as an aside, that it was a Dundee company that was involved in the
    Pantages Air Rights Agreement and the Put, discussed in more detail below.



[4]
As noted earlier in these reasons, Livent argues on the cross-appeal that the
    trial judge erred in failing to find liability in relation to the 1996 audit. I
    will address this argument below.


