



COURT OF APPEAL FOR ONTARIO

CITATION: Lavender v. Miller Bernstein LLP, 2018 ONCA 729

DATE: 20180905

DOCKET: C64207

Epstein, van Rensburg and Brown JJ.A.

BETWEEN

Barry Lavender

Moving Party (Respondent)

and

Miller Bernstein LLP

Responding Party (Appellant)

Robert Staley, Gavin Finlayson, Preet Bell and Nathan
    Shaheen, for the appellant

Paul Bates, Daniel Bach and Serge Kalloghlian, for the
    respondent

Heard: March 5, 2018

On appeal from the judgment of Justice Edward P. Belobaba
    of the Superior Court of Justice, dated July 12, 2017, with reasons reported at
    2017 ONSC 3958.

Epstein J.A.:

A.

OVERVIEW

[1]

Buckingham Securities (Buckingham) is a now defunct securities dealer.
    In 2001, the Ontario Securities Commission (the OSC) suspended Buckinghams
    registration and an order was made placing it into receivership because it
    breached regulatory requirements by failing to segregate investor assets and
    maintain a minimum level of net free capital. Its clients, who held investment
    accounts with the firm, lost millions.

[2]

The respondent, Barry Lavender, commenced a class action in 2005
    on behalf of every person who had an investment account with Buckingham when
    Buckingham was placed into receivership (the Class). Mr. Lavender alleged
    that in each of fiscal years 1998 to 2000, Buckinghams auditor, the appellant,
    Miller Bernstein LLP (the Auditor), negligently audited
an
    annual registration renewal requirement filed with the OSC that confirmed
    compliance with segregation and minimum capital requirements:
General
, R.R.O. 1990, Reg. 1015, s. 142 (under the
Securities Act
,
    R.S.O. 1990, c. S.5); see also ss. 107, 117, 118 and Form 9, known as Form 9
    Reports.
Buckinghams Form 9 Reports
falsely stated that
    Buckingham was in compliance with the regulatory segregation and minimum
    capital requirements.

[3]

The motion judge agreed with the Class, holding that the Auditor owed
    the class members a duty of care in conducting the audit and that the Auditor
    fell below the requisite standard of care. He granted summary judgment in
    favour of the Class.

[4]

The Auditor appeals. For the reasons that follow I would allow the
    appeal. In my view, the Auditor did not owe the class members a duty of care
    and the motion judge erred in so holding.

B.

BACKGROUND FACTS

[5]

Under the statutory regime that existed at the
    relevant time, which has since been repealed, the Form 9 Report had to be
    audited each year in accordance with generally accepted auditing standards and
    audit requirements published by the OSC:
General
,
    s. 144. The Auditor audited Buckinghams Form 9 Reports for the years 1998,
    1999 and 2000, and signed the audit reports contained in them.
After the
    Auditor audited the Form 9 Reports, Buckingham filed the reports with the OSC. No
    class member ever obtained or reviewed any of the Form 9 Reports through this
    process or otherwise.

[6]

In 2004, the OSC initiated proceedings against
    Buckingham and certain of its principals, including Howard Kornblum, the
    partner at Miller Bernstein who oversaw the audit. Buckingham and several of
    its principals later admitted to the OSC that, in breach of regulatory
    requirements, they made materially untrue statements in the 1999 and 2000 Form
    9 Reports filed with the OSC.

[7]

The Class asserts that by negligently performing
    its assurance audit by failing to properly review and confirm the accuracy of
    Buckinghams Form 9 Reports, the Auditor breached the duty of care that it owed
    to the Class, as clients of Buckingham, causing more than $10 million in
    losses.

[8]

In 2010, the parties consented to certification of
    the class proceeding. The certification settlement agreement, as codified in a July
    20, 2010 order of Cullity J., provided that the class members include those
    Buckingham clients who maintained accounts at Buckingham on July 6, 2001  the
    date on which the OSC suspended Buckinghams operations. As part of the
    settlement, the parties agreed to certification on six common issues and to the
    Classs abandoning its claims in negligent and reckless misrepresentation. In
    the certification order, the following common issues were certified:


i.

Did the
Securities Act
and the
    regulations thereunder (the OSA) require Buckingham to segregate the cash and
    securities of its clients from its own cash and securities?


ii.

Did Buckingham fail to
    segregate its clients cash and securities in violation of the OSA and, if so,
    when did Buckingham fail to do so?


iii.

Did the Auditor owe a duty
    of care to the Class and/or one or more of the sub-classes and what is the
    nature and extent of that duty?


iv.

If the answer to (iii) is
    yes, did the Auditor breach that duty of care to the Class and/or one or more
    of the sub-classes, either negligently or recklessly?


v.

If the answer to (iv) is
    yes, was the Auditors breach of that duty a cause of damages to all of the
    Class and/or all of one or more of the sub-classes?

1.

If the answer to (v) is
    yes, can such damages be determined on a class wide basis in respect of the
    Class and/or one or more of the sub-classes?

2.

If the answer to (v)(1) is
    yes, how should the damages to be payable by the Auditor be calculated?


vi.

Does Ontario law recognize
    a tort of knowing assistance of breach of contract and, if so, what are the
    elements of that tort?

1.

If the answer to (vi) is
    yes, have the elements of that tort been met by all of the Class and/or all of
    one or more of the sub-classes?

[9]

In 2016, the Class moved for summary judgment on
    the first five of the six common issues.
The motion judge granted summary
    judgment in favour of the Class on the certified common issues relevant to liability.

C.

THE SUMMARY JUDGMENT DECISION

[10]


The motion judge noted that there was no real dispute over the first
    two issues: Buckingham was required to segregate and hold in trust the cash and
    securities of the Class members on a client-by-client basis at all times, and
    it failed to do so.

[11]

The motion judge identified the third issue  the question of whether the
    Auditor owed the Class a duty of care  as the core question at issue on the
    motion: at para. 11. This issue is also the crux of this appeal.

[12]

The motion judge began his duty of care analysis by noting the Classs
    claim was properly characterized as one for negligence
simpliciter
, not negligent misrepresentation. He acknowledged that this was
    obviously not a conventional negligence case, but, relying,
inter
    alia
, on this courts authority in
Lipson v.
    Cassels Brock,
2013 ONCA 165, 114 O.R. (3d) 481, he noted
    that on certain facts it is possible for a plaintiff in a negligent
    misstatement case to proceed against a defendant on the basis of a simple
    negligence claim: at para. 16. He explained, at para. 15, why the claim was properly
    one for negligence
simpliciter
:

Here as well, the plaintiffs negligence claim is
    based on the allegation that class members sustained losses which, but for the
    defendants false audit of the Form 9s, would not have been sustained. If the
    defendant had filed accurate Form 9s documenting the regulatory breaches (or
    had not filed at all) the OSC, on the evidence, would in all likelihood have
    intervened before all the assets and monies were lost. In short, I am satisfied
    that on these facts and in principle that the negligence claim is appropriate.

[13]

Turning to whether a duty of care arose in this context, the motion
    judge noted, at para. 16, that it was not sufficient for the Class to say that
    the case fit within the negligent performance of a service category in which
    courts have recognized duties of care in certain third party benefit
    situations. He pointed out that the categories which have developed to govern
    recovery in tort for pure economic loss are merely analytical tools. The
    relationship between the Class and the Auditor was not one that had been
    previously recognized as giving rise to a duty of care and the two-stage
    analysis set out in

Anns v. Merton London Borough Council
, [1978] A.C. 728 (H.L.) and
Cooper v.
    Hobart
, 2001 SCC 79, [2001] 3
    S.C.R. 537,
had to be undertaken.

[14]

As outlined in more detail below, the first stage of the
Anns/Cooper
analysis asks whether the facts disclose a sufficient level
    of foreseeability and proximity to establish a
prima facie
duty of care. The motion judge found, relying on
Hercules
    Managements Ltd. v. Ernst & Young
, [1997] 2 S.C.R. 165, that
    the foreseeability and proximity requirements were satisfied in this case. Even
    though the Class members never saw or even knew at the time about the Form 9
    Reports, the Auditor as a matter of simple justice had an obligation to be
    mindful of their interests when auditing and filing the Reports: at para. 19.
[1]
More specifically, the motion
    judge reasoned, at para. 21, as follows:

My analysis is based on the auditing standards
    applicable at the time and the evidence and admissions of the parties and their
    experts. The defendant understood that the Form 9s were used by the OSC to
    police the securities dealers and protect their investors. If the Form 9s
    indicated a breach of the segregation or minimum capital requirements, the OSC
    would intervene. If the defendant was negligent in its audit and filed false
    Form 9s, causing the OSC to believe that the securities dealer was in
    compliance with the regulatory requirements when the truth was otherwise,
    monies invested by clients of the securities dealer could well be lost. In
    short, the defendant (and in particular Mr. Kornblum) well understood the
    consequences to its clients clients if the segregation or capital deficiency
    information was misstated in the Form 9s - that a negligent audit of these Form
    9s could expose the class members to the very loss that they incurred.

[15]

The motion judge further concluded that the relationship was of
    sufficient closeness to ground foreseeability. Here, the Auditor was retained
    to audit and file the Form 9 Reports, had access to the individual names and
    investor accounts of every Class member, knew the exact amounts involved, and
    even corresponded with some of the Class members to verify that Buckinghams
    internal client account records were complete and accurate. Even if the Class
    members knew nothing about the Form 9 Reports, they would reasonably expect
    Buckingham and its auditor to provide any information required under provincial
    law accurately and honestly, particularly if that information could affect
    their financial interests.

[16]

The motion judge was therefore satisfied that the Class had established
    a
prima facie
duty of care under the first stage
    of the
Anns/Cooper
analysis.

[17]

He was similarly satisfied that policy concerns did not negate imposing
    liability. More specifically, the second stage of the
Anns/Cooper
analysis asks whether there are residual policy considerations that
    would justify denying liability in tort even though a
prima facie
duty of care has been established.

[18]

In this case, the motion judge noted that policy concerns are
    especially important in claims for pure economic loss, particularly given the
    spectre of indeterminate or unlimited liability. In his view, however, case law
    was clear that indeterminate liability was not a concern when an auditor knows
    the identity of the plaintiff (or a class of plaintiffs) and when the auditors
    statements are used for the specific purpose for which they were made.

[19]

Here, the motion judge was satisfied that the Auditor both knew the
    Class members identities and that the Form 9 Reports were used for the very
    purpose for which they were prepared  to be relied on by the OSC in protecting
    investor (class member) assets: at para. 29. The Auditor knew the names of
    each of Buckinghams clients at the time of its audits and was required to stay
    informed of any major changes to Buckinghams business between audits.
    Moreover, its potential liability was narrowly circumscribed since it knew its
    precise potential liability (the sum of all customer accounts) at the time of
    each audit. As a result, the motion judge concluded, at para. 39, that [u]nder
    the
Anns-Cooper
analysis  the defendant owed a duty of care to the
    class to conduct an audit of Buckinghams Form 9 reports with the skill and
    care of a competent practitioner.

[20]

After reaching this central conclusion, the motion judge went on to hold
    that the Auditor breached the duty of care it owed to the Class. The Auditor
    signed audit reports addressed to the OSC for fiscal years 1998, 1999 and 2000,
    falsely stating that it had examined the Form 9 Reports in accordance with
    auditing standards. It admitted that it breached its duty of care in the 1999
    and 2000 Form 9 audits and there was uncontested evidence that it also breached
    its duty with respect to the 1998 Form 9 audit.

[21]

On the fifth issue, damages, the motion judge held that it was not possible
    at that time to determine damages on a Class-wide basis. He noted that the
    Class had indicated it may bring a follow-up motion based on a corrected
    spreadsheet prepared by the Receiver to determine the issue of damages at a
    later time.

[22]

On the basis of this analysis, the motion judge answered the questions,
    with the exception of the question of damages, in favour of the Class, and
    granted summary judgment.

D.

ISSUE

[23]

In my view, the central issue on appeal is whether the Auditor owed the
    Class a duty of care in relation to its audit of the Form 9s. For the reasons
    outlined below, I conclude that it did not. In light of this conclusion, it is
    not necessary to consider any of the other issues raised on appeal; I would
    allow the appeal and dismiss the Classs claim.

E.

ANALYSIS

(1)

The Duty of Care Analysis after
Livent

[24]

In
    the Supreme Courts recent decision in
Livent,
the court applied and
    refined the
Anns/Cooper
framework to define the duty of care owed by an
    auditor. Its analysis sets the conceptual table for my determination of whether
    the Auditor owed the Class a duty of care in this case. Below I consider and
    describe the
Anns/Cooper
framework, with particular attention paid to
    the Supreme Courts recent refinements in
Livent
.

[25]

In
    order to understand the application of
Livent
to this appeal, it is
    helpful to briefly restate the facts of that case. The
Livent
appeal
    arose out of the receivership of a theatre company, Livent Inc. (Livent),
    whose principals were fraudulently manipulating the companys financial records
    in order to attract investment. Its auditor, Deloitte & Touche
    (Deloitte), never uncovered the fraud, but did identify irregularities in the
    reporting of an asset sale in 1997. Nevertheless, Deloitte did not resign and
    instead assisted Livent in soliciting investment by providing a comfort letter
    and helping to prepare and approve a press release that misrepresented the
    basis for the reporting of Livents profit from the fraudulent sale. It also
    prepared Livents 1997 audit, finalized in 1998 after Deloittes discovery of
    the reporting irregularities. When the fraud was subsequently uncovered by new
    equity investors, Livent filed for insolvency protection and was placed into
    receivership.

[26]

Livent,
    through its receiver, sued Deloitte for damages in negligence and breach of contract.
    The trial judge concluded that Deloitte owed Livent a duty of care and fell
    below the standard of care on two occasions: (i) its provision of the comfort
    letter and approval of the press release containing misrepresentations in order
    to help Livent solicit further investment; and (ii) its completion of Livents
    1997 statutory audit.

[27]

This court dismissed the appeal. Deloitte appealed to the Supreme
    Court.
The principal issue before the Supreme Court was the nature and
    scope of the duty of care owed by Deloitte with respect to those two separate
    negligent acts. The appeal was
allowed, in part.

[28]

Applying
    the
Anns/Cooper
framework, Gascon and Brown JJ., for the majority,
    concluded that Deloitte owed Livent a duty of care in relation to its 1997
    statutory audit, but not in relation to its representations concerning the
    solicitation of investment. Livent asserted that it detrimentally relied on
    Deloitte in each of these events, which impaired its ability to oversee its
    operations. The court, however, drew a distinction between the two events. Because
    the comfort letter and press release were prepared in order to solicit
    investment and not to assist shareholders with management oversight, Livent
    could not reasonably rely on those documents to oversee management. By
    contrast, the majority concluded that Deloitte owed a duty of care to Livent in
    relation to the statutory audit because the audit was prepared for the precise
    purpose of scrutinizing management conduct.

[29]

In
    reaching these conclusions, the Supreme Court refined and applied the two
    stages of the
Anns/Cooper
analysis. At the first stage, the court asks
    whether the facts establish a
prima facie
duty of care. The court then
    proceeds to the second stage, where it asks whether residual policy
    considerations justify denying liability in tort. I consider these two stages
    below.

(a)

Stage One:
Prima Facie
Duty of Care

[30]

Most
    relevant for this appeal, the majority of the Supreme Court in
Livent
,
    at para. 20,

reaffirmed that there is a
prima facie
duty of
    care where there exists a sufficiently close relationship between the
    plaintiff and the defendant. This stage of the analysis involves establishing
    both reasonable foreseeability and proximity. The majority stressed that these
    elements are conceptually distinct and must be considered separately.

[31]

The
    majority in
Livent
reiterated the statement from
Cooper
that
    foreseeability alone is not enough to establish a
prima facie
duty
    of care; the first stage of the
Anns/Cooper
framework requires
    something more. That something more is proximity. The majority observed, at
    para. 24, that it is useful to consider proximity before foreseeability in cases
    of negligent misrepresentation or negligent performance of a service because
    [w]hat the defendant reasonably foresees as flowing from his or her negligence
    depends upon the characteristics of his or her relationship with the plaintiff,
    and specifically, in such cases, the purpose of the defendants undertaking..

[32]

The
    proximity analysis determines whether the parties are sufficiently close and
    direct that it would be just and fair having regard to their relationship to
    impose a duty of care:
Livent
, at para. 25, citing
Cooper
, at
    paras. 32 and 34. As most recently reaffirmed by the Supreme Court in
Rankin
    (Rankins Garage & Sales) v. J.J.,
2018 SCC 19, at para. 23
,
that
    close and direct relationship must be such that the defendant is under an
    obligation to be mindful of the plaintiffs interests.

[33]

A preliminary question at this stage is whether the relationship at
    issue falls within a previously established category of relationship in which proximity
    has already been found to exist. If the relationship falls within a previously
    established category, or is analogous to one, then proximity is established,
    without more:
Livent
,

at paras. 26-28. The majority in
Livent
cautioned,
    however, that courts must be careful to avoid identifying established
    categories in an overly broad manner: at para. 28. As the majority noted, at
    para. 52, the mere fact that proximity has been recognized as existing between
    an auditor and its client for
one
purpose is
    insufficient to conclude that proximity exists between the same parties for
all
purposes (emphasis in original). Rather, the majority
    explained, at para. 28, that a finding of proximity based upon a previously
    established or analogous category must be grounded not merely upon the identity
    of the parties, but upon examination of the particular relationship at issue in
    each case.

[34]

Where
    an established proximate relationship cannot be found, courts must undertake a
    full proximity analysis by examining the relationship between the plaintiff and
    the defendant. Relevant considerations may include, but are not limited to,
    expectations, representations, reliance, and the property or other interests
    involved as well as any statutory obligations:
Livent,
at para. 29,
    citing
Cooper
, at paras. 34, 38.

[35]

In
    cases of pure economic loss arising from negligent misrepresentation or
    performance of a service, two factors are determinative of the proximity
    analysis: (i) the defendants undertaking; and (ii) the plaintiffs reliance:
Livent
,
    at para. 30. Where the defendant undertakes to provide a representation or
    service in circumstances that invite the plaintiffs reasonable reliance, the
    defendant becomes obligated to take reasonable care, and the plaintiff has a
    right to rely on the defendants undertaking to do so. These corollary rights
    and obligations create a relationship of proximity:
Livent,
at para.
    30.

[36]

However,
    the plaintiffs reliance must be within the scope of the defendants
    undertaking  that is, the purpose for which the representation was made or the
    service was undertaken. Anything outside that scope will fall outside the scope
    of the proximate relationship and the defendants duty of care; the defendant
    cannot be liable for a risk of injury against which it did not undertake to
    protect:
Livent
,

at
    para. 31.
Further, as the majority in
Livent
observed, at para. 31, the proximity analysis not only determines the
existence
of a relationship of proximity, but
    also delineates the
scope
of the rights and
    duties which flow from that relationship (emphasis in original).

[37]

Although
    the proximity and reasonable foreseeability stages are analytically distinct,
    they are nonetheless connected.
In cases
    of

negligent misrepresentation or
    performance of a service,
Livent
explains that the proximate
    relationship informs the foreseeability inquiry: at para. 34. A plaintiffs
    injury will be reasonably foreseeable in such cases where (1) the defendant
    should reasonably foresee that the plaintiff will rely on its representation;
    and (2) reliance would, in the particular circumstances of the case, be
    reasonable:
Livent,
at para. 35. This is also defined by the nature of
    the defendants undertaking. The plaintiff may rely on the defendant to act
    with reasonable care for the particular purpose of the undertaking, but not for
    a purpose outside the scope of that undertaking.

(b)

Stage Two: Residual Policy Considerations

[38]

Where
    a
prima facie
duty of care is recognized on the basis of proximity and
    reasonable foreseeability, the analysis advances to stage two of the
Anns/Cooper
framework. The court goes on to ask whether there are any residual policy
    considerations outside the relationship of the parties  that is,
despite
the
    proximate relationship between the parties and the reasonably foreseeable
    quality of the plaintiffs injury  that may negate the imposition of a duty of
    care:
Livent
, at paras. 37, 41.

[39]

The
    majority in
Livent
clarified, at para. 41, that the first stage of the
Anns/Cooper
framework does most of the analytical heavy lifting. Only
    in rare cases, such as those considering decisions of governmental policy or
    quasi-judicial bodies, will liability be denied on the basis of stage two.
Residual policy considerations contemplate the effect of recognizing a
    duty of care on other legal obligations, the legal system and society more
    generally:
Livent,
at para. 38, citing
Cooper
, at para. 37.

[40]

Accordingly,
    the
Livent
majority observed, at para. 42, that rarely, if ever, will
    a concern for indeterminate liability persist after a properly applied
    proximity and foreseeability analysis.

[41]

Applying this framework, the majority held that Deloitte owed Livent a
    duty of care in relation to the 1997 statutory audit, but not with respect to
    the comfort letter and press release.

The Statutory Audit

[42]

The
    majority concluded that Deloittes statutory audit fell within an established
    category of proximity, and that the type of injury Livent suffered as a result
    of the statutory audit was a reasonably foreseeable consequence of Deloittes
    negligence.

[43]

Proximity was established based on a previously recognized category of proximate
    relationship. The court had already held in

Hercules
    Managements
that an auditor owes its corporate client a duty
    of care in the preparation of a statutory audit. It thus followed that, unless
    the purpose of Deloittes undertaking to prepare the audit differed from the
    purpose underlying the audit in
Hercules Managements
, proximity was established. Finding it did not differ, the majority concluded
    Livent and Deloitte were in proximity in relation to the audit.

[44]

Reasonable foreseeability was also established. The majority agreed
    that Livents losses were a reasonably foreseeable consequence of Deloittes
    negligence, since the negligence allowed Livent to artificially extend its
    solvency. The majority found, at para. 64, that the purpose of the audit was to
    protect Livent from the consequences of undetected errors and wrongdoing, and
    to provide shareholders with reliable intelligence, enabling oversight. Livents
    reliance on Deloitte for the purpose of overseeing the conduct of management
    was therefore both reasonable

and reasonably foreseeable.

[45]

Since
a proximate relationship based on a previously recognized
    category was found, the court noted that it need not consider whether residual
    policy considerations negated the duty of care.

The Comfort Letter and Press
    Release

[46]

With
    respect to the comfort letter and press release, the majority found that
    proximity was established
for the purpose of helping Livent to
    solicit investment, but that Livents losses (which did not arise out of any
    inability to attract investment) did not fall within the scope of Deloittes
    duty of care and were not a reasonably foreseeable consequence of Deloittes
    assistance.

[47]

The
    majority first considered proximity. As the courts had not previously
    established a proximate relationship between an auditor and its client for the
    purposes of soliciting investment, it was necessary to conduct a full proximity
    analysis. Here, the
majority held that Deloittes provision of a
    comfort letter and ongoing assistance in relation to a press release were
    undertaken for the purpose of helping Livent to solicit investment and that
    Livent was therefore entitled to rely upon Deloitte to carry out these services
    with reasonable care.

[48]

However,
    the court held that Livents losses were not a reasonably foreseeable
    consequence of Deloittes assistance in the solicitation of investment. In
    drafting the comfort letter and helping with the press release, Deloitte
    undertook only to assist Livent with soliciting investment; it did not
    undertake to assist Livents shareholders in overseeing management.
    Accordingly, Deloitte could not be held liable for failing to take reasonable
    care to assist such oversight. Livent had no right to rely on Deloittes
    representations for that purpose, and its reliance was neither reasonable nor
    reasonably foreseeable.

[49]

Having
    concluded that no
prima facie
duty of care arose, the court did not go
    on to consider residual policy considerations with regard to the press release
    and comfort letter that were prepared for Livents solicitation of investment.

(2)

The Parties Submissions on the Duty of Care and
Livent
s
    Impact on this Appeal

[50]

The
    parties filed supplementary factums addressing the application of
Livent
to
    the appeal. Both parties agree that the analysis from
Livent
is highly
    relevant to the outcome of this appeal and that the key theme from the Supreme
    Courts decision

is the necessity of ascertaining the scope of an
    auditors undertaking when conducting a duty of care analysis. They agree that
    the Auditors undertaking here is central to determining whether proximity and
    reasonable foreseeability are established. They disagree, however, on the
    proper characterization of that undertaking in the circumstances.

(a)

The Auditors Position

[51]

The
    Auditor argues the motion judges decision is inconsistent with the principles articulated
    in
Livent
. This is based on two refinements to the
Anns/Cooper
analysis
    from
Livent
: (i) the clear distinction drawn between foreseeability
    and proximity; and (ii) a greater emphasis placed on a more demanding first
    stage of the
Anns/Cooper
test.

[52]

In
    the light of these refinements, the Auditor argues the motion judge conflated
    reasonable foreseeability and proximity and failed to properly engage in the
    proximity analysis. The Auditor argues that on the facts of this case, reliance
    is required to establish proximity. Absent reliance, the relationship between
    the Class and the Auditor cannot meet this threshold.

[53]

The
    Auditor submits that
Livent
emphasizes the importance of properly
    ascertaining the scope of a defendants undertaking  a defendant cannot be
    liable for an injury in relation to which it did not take responsibility. Here,
    the Auditor undertook to audit Buckinghams Form 9 Reports, which were to be
confidentially
submitted by Buckingham to the OSC
only
. The scope of the
    Auditors undertaking extended only to Buckingham or, at the furthest, to the
    OSC. The Auditor did not undertake responsibility to assist the Class in
    supervising the management of Buckingham, or in selecting or retaining a securities
    dealer. No representations were made to the Class, there was no reliance by the
    Class, and the Class could not have had any expectations of the Auditors.

[54]

On
    the reasonable foreseeability analysis, the Auditor emphasizes
Livent
s
    focus on the nature of the plaintiffs reasonable reliance. In this case, there
    was no reliance  neither the representative plaintiff nor any member of the
    Class saw the Form 9 Reports or even knew of their existence. In any event, the
    Class did not have the right to rely on the Auditor for something outside the
    scope of the Auditors specific undertaking.

[55]

On
    the second branch of the
Anns/Cooper
test, the Auditor argues that
    indeterminate liability concerns in these circumstances must negate any duty of
    care, despite the Supreme Courts observing in
Livent
that only in
    rare cases will liability be negated solely because of residual policy
    considerations.

(b)

The Classs Position

[56]

The
    Class agrees that
Livent
provides the applicable framework for the
    proximity analysis in this case, subject to necessary modifications to account
    for a different method of causation since this is not a negligent
    misrepresentation case. It also agrees that the proximity analysis from
Livent
focuses on the nature of the defendants undertaking. However, the Class
    argues that the Auditor mischaracterizes its undertaking in a manner that is
    inconsistent with the record. It argues that the Auditor undertook to protect
    the Class against the
very
harm that occurred: specifically, the Class
    asserts that the Auditor undertook to provide accurate information as part of
    its Form 9 audits so that the OSC would use that information to protect
    investors.

[57]

To
    support this assertion, the Class points to the following aspects of the record,
inter alia
:

·

Mr. Kornblums
    admissions that: (i) the OSC used the Form 9 Reports to facilitate the
    identification of circumstances when an entity was not in compliance with the
Securities Act

and Regulations; (ii) he knew the Form 9 Reports would
    be sent to the OSC; (iii) the reason the OSC wanted the Form 9 Reports to be
    audited was to provide comfort that the numbers were accurate; and (iv) the
    OSC was relying on the Auditor to achieve that level of comfort.

·

The Auditors
    regulatory expert admitted that the OSC reviewed the Form 9 Reports as part of
    its investor protection mandate and that the reports were a key part of the
    rules around licensing which had an underlying goal of protection of
    investors.

·

Auditing
    standards required the Auditor to understand that the OSC would use the Form 9
    Reports to execute its investor protection function, and that negligence in its
    audit of the segregation or capital requirements could cause the precise loss
    that the Class suffered.

·

The motion judge
    found as a fact at para. 21 of his reasons, as outlined above, that [the Auditor]
    understood that the Form 9s were used by the OSC to police the securities
    dealers and protect their investors. If the Form 9s indicated a breach of the
    segregation or minimum capital requirements, the OSC would intervene. If [the Auditor]
    was negligent in its audit and filed false Form 9s, causing the OSC to believe
    that the securities dealer was in compliance with the regulatory requirements
    when the truth was otherwise, monies invested by clients of the securities
    dealer could well be lost.

[58]

The
    Class also argues that the harm that occurred was reasonably foreseeable. The
    Form 9 Report was a special report on compliance; its purpose was to provide
    accurate information to the OSC so the OSC could protect Class member assets.
    The Auditors negligent audit impaired the OSCs investor protection function
    and exposed the Class members to the specific foreseeable risk against which the
    Auditor undertook to protect.

(3)

Application: The Duty of Care Analysis

(a)

Stage One: Is There a
Prima Facie
Duty of Care?

(i)

Proximity

[59]

I
    agree with the Auditor that the motion judge, who, as I previously indicated,
    did not have the benefit of the
Livent
decision, conflated the
    questions of proximity and foreseeability and that he did not conduct a proper
    proximity analysis in this case. This is a legal error. Conducting such an
    analysis, and in light of the Supreme Courts refinements of the
Anns/Cooper
test in
Livent
, in my view, the Classs claim fails on the first
    branch of that test and this court can intervene: see
Housen v. Nikolaisen
,
    2002 SCC 33, [2002] 2 S.C.R. 245, at para. 36. I do not believe that proximity
    is established between the Auditor and the Class in relation to the Form 9
    Reports. As I explain below, the parties are
not
in such a close and
    direct relationship that it would be just and fair having regard to that
    relationship to impose a duty of care in law:
Livent
, at para. 25.

The
    relationship does not fit within a previously established category of proximity

[60]

I
    begin by observing that the relationship between the Auditor and the Class does
    not fall within a previously established or analogous category of relationship
    where proximity has already been found.
The Class has not
    identified any case in which a duty of care has been recognized between an
    auditor and a companys investor account holders for purposes of auditing the
    companys Form 9 Reports or through a similar component of the securities
    statutory regime.
Accordingly, this court must undertake a full proximity
    analysis to determine whether there is a sufficiently close and direct
    relationship to ground a duty of care:
Livent,
at para. 29.

No relationship of proximity is
    established in the circumstances

[61]

In
    conducting the proximity inquiry courts must examine all relevant factors
    arising from the relationship between the parties. The relevant factors vary
    depending on the circumstances of the case. They may include reliance,
    expectations, representations, property or other interests, and statutory
    obligations:
Livent
,

at para. 29, citing,
inter alia,

Cooper
, at paras. 35 and 38;
Odhavji Estate v. Woodhouse
,
    2003 SCC 69, [2003] 3 S.C.R. 263, at paras. 50 and 56;
Fullowka v.
    Pinkertons of Canada Ltd.
, 2010 SCC 5, [2010] 1 S.C.R. 132, at para. 26;
Edwards
    v. Law Society of Upper Canada
, 2001 SCC 80, [2001] 3 S.C.R.
    562, at paras. 9 and 13. In cases of pure economic loss arising from negligent
    misrepresentation or performance of a service, the defendants undertaking and
    the plaintiffs reliance are determinative:
Livent
, at para. 30.

[62]

The absence of a personal relationship between the parties, while not
    necessarily determinative, is nonetheless an important factor to consider:
Hill
    v. Wentworth Regional Police Services Board
, 2007 SCC 41,
    [2007] 3 S.C.R. 129, at para. 30;
Cavanaugh v. Grenville Christian
    College
, 2013 ONCA 139, 304 O.A.C. 163, at paras. 75‑77.
    The court will inquire into whether the defendants actions have a close or
    direct effect on the plaintiff, such that the [defendant] ought to have had
    the [plaintiff] in mind as a person potentially harmed:
Hill
, at para. 29. As the Supreme Court explained in
Hercules
    Managements
, at para. 24, the plaintiff must establish that
    the circumstances of the relationship inhering between the plaintiff and the
    defendant are of such a nature that the defendant may be said to be under an
    obligation to be mindful of the plaintiffs legitimate interests in conducting
    his or her affairs.

[63]

Here, the motion judge anchored his finding of proximity on the
    correspondence between some of the Class members and the Auditor as well as his
    conclusion that the Class members would reasonably expect the Auditor and
    Buckingham to provide accurate information to the OSC:

In my view, on the particular facts herein, a
    relationship of sufficient closeness has been established. The defendant was
    retained by Buckingham to audit and file the Form 9s. In doing this assurance
    audit for its client, the defendant had access to the individual names and
    investor accounts of every class member. The defendant knew the exact amounts
    involved, and even corresponded with some of the class members to verify that
    Buckinghams internal client account records were complete and accurate. Some
    of the class members responded to the auditors letter and alerted the
    defendant to serious discrepancies between Buckinghams internal account
    records and the actual holdings and activity within their accounts. The
    defendant also knew, without being told, that even if the class members knew
    nothing about the Form 9s, they would reasonably expect Buckingham and its
    auditor to provide any information required under provincial law accurately and
    honestly, particularly if that information could affect their financial
    interests. [at para. 23]

[64]

With
    respect, I am of the view that the motion judges finding that a relationship
    of proximity existed is unsupportable on the evidence. Simply put, it stretches
    proximity beyond its permissible bounds. I say this for the following reasons.

[65]

First,
    the primary reason I believe proximity has not been established turns on the
    nature of the Auditors undertaking and the connection between that undertaking
    and the loss claimed. Buckingham retained the Auditor to audit its Form 9
    Reports, which Buckingham then filed confidentially with the OSC. Although the
    motion judge observed that the Form 9 Reports were used by the OSC to police
    securities dealers and that their purpose was to protect investor assets, it
    does not necessarily follow that the audit of the Form 9 Reports creates
    proximity between an auditor and those investors. The Auditor made no
    representations to members of the Class, most of whom never even knew of the
    Auditors existence or its involvement with Buckingham. The Auditor did not
    undertake to assist the Class in making investment decisions. The limited scope
    of the Auditors undertaking and lack of direct connection between the Auditor
    and the Class militate against finding proximity in this case.

[66]

In
    my view, the interposition of the OSC and Buckingham between the Auditors and
    the Class rendered the relationship between the parties too remote to ground a
    duty of care. The Auditor may well have owed a duty of care to Buckingham to
    properly conduct the audit. Perhaps an argument could be made that a duty was also
    owed to the OSC (which provided regulatory oversight and received the audit
    reports). This, however, is an issue I need not determine. In this case, the
    Auditors undertaking did not extend to assisting the Class members  who, as
    mentioned earlier and as the motion judge noted, never saw the Form 9 Reports
    and did not even know of their existence  with supervising Buckingham and
    making investment decisions. As a result, I am of the view that the Auditors
    undertaking in this case strongly militates against a finding of proximity.

[67]

A
    second related consideration weighing against holding that the Auditor and
    Class were in a proximate relationship for the purpose of the Form 9 Reports is
    the absence of
any
reliance, whether intended or not. Indeed, the
    Class conceded that the members did not rely on or review any of the Form 9
    Reports. As I have indicated, the Form 9 Reports were held confidentially by
    the OSC. They were not shared with the Class and not intended to inform or
    induce the Class in making investment decisions. The absence of the class
    members reliance on the Form 9 Reports further supports my view there is no
    proximity between the Auditor and the Class in relation to the Reports.

[68]

The
    third reason that informs my conclusion that the motion judge erred in finding
    proximity is because, with respect, I am of the view that his analysis is
    based, in part, on factual findings that amount to palpable and overriding
    errors.

[69]

First,
    the motion judge found that the Auditor, and not Buckingham, filed the Form 9
    Reports with the OSC. This is incorrect. Although the Auditor audited the Form
    9 Reports, the obligation to file the Form 9 Reports rested with Buckingham.
    Second, the motion judge found that the Auditor had access to the names and
    accounts of every member of the Class. Again, this is incorrect. The record
    demonstrates that Buckinghams clients and their accounts changed regularly and
    the Auditor was not engaged to perform a continuous audit.

[70]

In
    my view, both of these palpable and overriding errors further distance the
    Auditor from the Class and undermine the motion judges proximity analysis.

[71]

The
    fourth factor weighing against a finding of proximity in this case is the
    relevant statutory scheme. While the Class does not contend that the duty of
    care arises by the direct operation of any statute, the statutory scheme
    nonetheless provides relevant context for assessing
the
    sufficiency of
proximity
between parties:
Livent
,

at para. 29
. Here, the statutory scheme required Buckingham,
    as a securities dealer, to segregate investor assets and maintain a net free
    capital, and to file an audited Form 9 Report with the OSC that confirmed that
    it had met these obligations:
General
, Reg. 1015, ss. 107,
    117-18, 142 and 144. In my view, it cannot be said that these provisions are
    sufficient to ground a relationship of proximity between a securities dealers
    auditor and its account holders for the purpose of this case. While the Auditor
    was required to audit Buckinghams Form 9 Reports in accordance
with
    generally accepted auditing standards and audit requirements published by the
    OSC, the statutory scheme did not create a proximate relationship between the
    Auditor and the Class for the purpose of their investment decisions in relation
    to forms that they never saw.

[72]

Finally, I am conscious of the Supreme Courts admonition that
    significant scrutiny is warranted when deciding whether to recognize a duty of
    care in a claim for pure economic loss:
Martel Building Ltd. v.
    Canada,
2000 SCC 60, [2000] 2 S.C.R. 860, at para. 35;
R.
    v. Imperial Tobacco Canada Ltd.
, 2011 SCC 42, [2011] 3
    S.C.R. 45, at para. 42. While there is no automatic bar to recovery for pure
    economic loss, such claims warrant more rigorous examination than other claims
    for negligence:
Martel
, at para. 35;
Mandeville v. The
    Manufacturers Life Insurance Company
, 2014 ONCA 417, 120
    O.R. (3d) 81, at paras. 148-50, leave to appeal refused [2014] S.C.C.A. No.
    390. This consideration further weighs against finding proximity in this case.

[73]

In
    summary, I am of the view that the Classs claim fails at the proximity stage
    of the
Anns/Cooper
analysis.
When properly scrutinized
    in the light of the
Livent
decision and other
    jurisprudence, the Classs claim cannot survive because there is no proximity
between
    the Auditor and the Class in relation to the Form 9 Reports.

(ii)

Reasonable Foreseeability

[74]

Given
    my conclusion in relation to proximity, it is not necessary to consider whether
    any harm suffered was reasonably foreseeable. As
Livent
confirms, at
    para. 23,
both
reasonable foreseeability
and
proximity are
    required to establish a
prima facie
duty of care. In the absence of
    proximity, there is no
prima facie
duty of care.

(b)

Stage Two: Do Any Residual Policy Concerns Negate the Duty of Care?

[75]

In
    the light of my conclusion on stage one of the
Anns/Cooper
analysis,
    it is not necessary to consider the second stage of the
Anns/Cooper
analysis:
Livent
, at para. 57.

F.

CONCLUSION

[76]

As
    I have outlined above, I am of the view that the Classs claim fails due to a
    lack of proximity. I would not recognize a duty of care owed by the Auditor to
    the Class in these circumstances for these purposes. The motion judge erred in
    granting summary judgment in favour of the Class.

G.

DISPOSITION

[77]

For
    these reasons, I would allow the appeal, set aside the judgment below, and
    grant summary judgment to the Auditor, dismissing the Classs claim for
    negligence.

[78]

As
    to costs, failing agreement as to costs, I would ask the parties and the Law
    Foundation of Ontario to make submissions as to the costs before the motion
    judge and before this court, taking into account and providing any requisite
    notice pursuant to the provisions of the
Rules of Civil Procedure,
R.R.O.
    1990, Reg. 194, the
Class Proceedings Act, 1992
, S.O. 1992, c. 6,

or
    any other relevant legislation.


Released: GE SEP 5 2018

Gloria Epstein J.A.

I agree. K. van
    Rensburg J.A.

I agree. David Brown
    J.A.





[1]
On appeal, the Class concedes that it was an error for the motion judge to find
    that the Auditor filed the Form 9 Reports. The Auditor audited and signed the
    Form 9 Reports, but Buckingham, as the registrant, actually filed them with the
    OSC.


