Auditor Held Liable in Negligence for Non-Clients' Losses

Case Comment: Lavender v. Miller Bernstein

Howard Borlack,
Partner

August 2017

by Howard Borlack

The recent Ontario Superior Court decision, Lavender v Miller Bernstein,¹ serves as a reminder – and a warning – that the Canadian jurisprudence is beginning to recognize a cause of action in negligence emerging from a negligent misrepresentation where the representor owes a duty of care to the representee. In this case, an auditor was found liable for the substantial financial loss of a securities dealer's clients, though it was the security dealer who fraudulently misrepresented information to its clients.

The fact that the plaintiffs were non-clients of the defendant and may have not even been aware of the defendant's role at the time of the loss is irrelevant, broadening the scope of liability for future negligence claims alike.

Background
On July 6, 2001, the Ontario Securities Commission (OSC) placed Buckingham Securities into receivership as it had contravened several regulatory requirements. Moreover, the securities dealer concealed their breaches by falsifying information on financial documents that were eventually audited by the defendant, accounting firm Miller Bernstein. This resulted in a loss of over ten million dollars to the plaintiffs, a class on behalf of the Buckingham Securities' investors.

The plaintiffs alleged that the defendant negligently filed the misrepresented documents and, as such, they breached their duty of care to the class members. Specifically, they claimed that had the defendant correctly audited and filed accurate documentation, the OSC would have intervened before their financial assets were lost. The defendant denied liability and accused the plaintiff of "disguising" a claim in misrepresentation to avoid proving the elements of reliance and causation.

The primary legal issues considered were whether the defendant auditor owed a duty of care to the plaintiffs and, if so, whether they breached it.

Analysis
The Court performed the two-step Anns-Cooper analysis² in concluding that the defendant breached their duty of care to the plaintiffs.

First, the Court determined that there existed a sufficient level of foreseeability and proximity to establish a prima facie duty of care towards the plaintiffs. The defendant knew the consequences of failing to disclose the regulatory breaches in the documentation and that a negligent audit could expose the plaintiffs to financial damages. Additionally, it is reasonable for investors to expect their securities dealer and its auditor to disclose all information required under provincial law.

Second, the Court recognized that indeterminate liability is not a concern in cases where an "auditor knows the identity of the plaintiff (or a class of plaintiffs) and where the defendant's statements are used for the specific purpose for which they were made".³ Since the defendant knew the investors' personal information at the time of the audit, they ought to have known the people to whom they could be liable if they conducted themselves in a negligent manner. Also, the documents containing the misrepresentation were used for the "very purpose for which they were prepared - to be relied on by the [Ontario Securities Commission] in protecting investor (class member) assets".⁴

Conclusion
This ruling is noteworthy, as it emphasizes that auditors owe a duty of care to, as Justice Belobaba would say, "their client's clients".⁵ Historically, suing an auditor proved to be difficult. In 1997, the Supreme Court of Canada significantly limited the circumstances during which a non-client may sue an auditor, impeding many claims as against them due to concerns of indeterminate liability.⁶ But the message in the case at bar is clear: if the auditor made use of financial documentation "for precisely the purpose or transaction for which it was prepared",⁷ they can expect the Court to hold them accountable for negligent conduct that presents a detriment to their client's investors and shareholders. This statement was previously made by the Ontario Court of Appeal in Livent Inc. (Receiver of) v. Deloitte & Touche,⁸ a decision with nearly identical issues to the case at bar.

In addition, one can feasibly extrapolate this principle for application to other occupations. Claims have been made against lawyers by non-clients for providing poor legal advice to a company, which then passed on this misrepresentation to others to their detriment.⁹ Simply put, if the professional in question governs themselves negligently and negatively impacts another's clients, there may be consequences.

¹ 2017 ONSC 3958.
² Cooper v Hobart, 2001 SCC 79.
³ Hercules Managements Ltd v Ernst & Young, [1997], 2 SCR 165, para 50..
⁴ Supra note 2 at 29.
⁵ Supra note 2 at 8.
⁶ Supra note 3.
⁷ Ibid at 46.
⁸ 2016 ONCA 11.
⁹ Lipson v Cassels Brock & Blackwell LLP, 2013 ONCA 65.

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