Hercules Management Ltd. et al. v. Ernst & Young et al., (1997) 211 N.R. 352 (SCC)

• Judge: La Forest, Sopinka, Gonthier, Cory, McLachlin, Iacobucci and Major, JJ.
• Court: Supreme Court (Canada)
• Case Date: May 22, 1997
• Jurisdiction: Canada (Federal)
• Citations: (1997), 211 N.R. 352 (SCC);[1997] CarswellMan 198;31 BLR (2d) 147;146 DLR (4th) 577;115 Man R (2d) 241;211 NR 352;[1997] SCJ No 51 (QL);139 WAC 241;35 CCLT (2d) 115;[1997] 8 WWR 80;JE 97-1151;71 ACWS (3d) 169;1997 CanLII 345 (SCC);[1997] 2 SCR 165;(1997), 115 Man.R.(2d) 241 (SCC)

Hercules Mgt. Ltd. v. Ernst & Young (1997), 211 N.R. 352 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Hercules Managements Ltd., Guardian Finance of Canada Ltd., and Max Freed (appellants/applicants/plaintiffs) and Friendly Family Farms Ltd., Woodvale Enterprises Ltd., Arlington Management Consultants Ltd., Emarjay Holdings Ltd. and David Korn (plaintiffs) v. Ernst & Young and Alexander Cox (respondents/respondents/defendants) and Max Freed, David Korn and Marshall Freed (third parties) and The Canadian Institute of Chartered Accountants (intervener)

(24882)

Indexed As: Hercules Management Ltd. et al. v. Ernst & Young et al.

Supreme Court of Canada

La Forest, Sopinka, Gonthier, Cory, McLachlin, Iacobucci and Major, JJ.

May 22, 1997.

Summary:

Shareholders and investors, including the appellants, sued auditors in negligence and contract respecting the preparation of cor­porate audited statements. The auditors moved for summary judgment.

The Manitoba Court of Queen's Bench allowed the motion with respect to the ap­pellants and dismissed their actions on the basis that they raised no genuine issues for trial. By agreement, the claims of the re­maining shareholders and investors were adjourned sine die. The appellants appealed.

The Manitoba Court of Appeal, in a de­cision reported 102 Man.R.(2d) 241; 93 W.A.C. 241, dismissed the appeal. The appellants appealed.

The Supreme Court of Canada dismissed the appeal.

Company Law - Topic 2164

Shareholders - Shareholders' rights - Derivative actions - Individual share­holders sued auditors for negligent prepa­ration of audit reports claiming losses in their existing shareholdings through their inability to oversee management of the corporations - The Supreme Court of Canada affirmed that the claim should have been brought as a derivative action - Shareholders were not entitled to raise individual claims respecting a wrong done to a corporation - See paragraphs 58 to 63.

Fraud and Misrepresentation - Topic 2508

Misrepresentation - General principles - Negligent misrepresentation - The Supreme Court of Canada reviewed the law governing claims of negligent misrep­resentation and in particular claims against auditors - See paragraphs 19 to 41 - The court stated that "[a] prima facie duty of care will arise on the part of a defendant in a negligent misrepresentation action when it can be said (a) that the defendant ought reasonably to have foreseen that the plaintiff would rely on his representation and (b) that reliance by the plaintiff, in the circumstances, would be reasonable. Even though, in the context of auditors' liability cases, such a duty will often (even if not always) be found to exist, the problem of indeterminate liability will frequently result in the duty being negated by the kinds of policy considerations already discussed. Where, however, indeterminate liability can be shown not to be a concern on the facts of a particular case, a duty of care will be found to exist." - See para­graph 41.

Fraud and Misrepresentation - Topic 2508

Misrepresentation - General principles - Negligent misrepresentation - In the con­text of a negligent misrepresentation action, the Supreme Court of Canada stated that the first branch of the Anns/Kamloops test (the existence of a prima facie duty of care) necessitates an investigation into whether the parties can be said to be in a relationship of proximity or neighbourhood of proximity - The reasonableness of the plaintiff's reliance on the misrepresentation must be considered - Enquiries concerning (a) the defendant's knowledge of the identity of the plaintiff (or of the class of plaintiffs) and (b) the use to which the statements at issue were put may properly be conducted in the second branch of the Anns/Kamloops test when deciding whether or not policy con­siderations ought to negative or limit a prima facie duty that has already been found to exist - See paragraphs 22 to 30.

Fraud and Misrepresentation - Topic 2533

Misrepresentation - Elements - Special relationships - In discussing the first branch of the Anns/Kamloops test (the existence of a prima facie duty of care) in the context of a negligent misrepresenta­tion action, the Supreme Court of Canada, stated that "... proximity can be seen to inhere between a defendant-representor and a plaintiff-representee when two cri­teria relating to reliance may be said to exist on the facts: (a) the defendant ought reasonably to foresee that the plaintiff will rely on his or her representation; and (b) reliance by the plaintiff would, in the particular circumstances of the case, be reasonable. To use the term employed by my colleague, Iacobucci, J., in Cognos, ... the plaintiff and the defendant can be said to be in a 'special relationship' whenever these two factors inhere." - See paragraph 24.

Fraud and Misrepresentation - Topic 2535

Misrepresentation - Elements - Reliance -[See Fraud and Misrepresentation - Topic 2533 ].

Fraud and Misrepresentation - Topic 2747

Misrepresentation - Negligent advice - Elements of liability - Special relationship - [See Fraud and Misrepresentation - Topic 2533 ].

Practice - Topic 230

Persons who can sue and be sued - In­dividuals and corporations - Status or standing - Shareholders - [See Company Law - Topic 2164 ].

Practice - Topic 5708.1

Judgments and orders - Summary judg­ments - Bar to application - Merit to claim and facts to substantiate claim - Manitoba Queen's Bench Rule 20.03(1) provided that "[w]here the court is satisfied that there is no genuine issue for trial with respect to a claim or defence, the court shall grant summary judgment according­ly." - The Supreme Court of Canada en­dorsed the procedure to be followed in a rule 20.03(1) motion as set out by the Manitoba Court of Appeal in Fidkalo v. Levin, namely "[t]he ques­tion to be de­cided on a rule 20 motion is whether there is a genuine issue for trial. Although a defendant who seeks dismissal of an action has an initial burden of showing that the case is one in which the existence of a genuine issue is a proper question for consideration, it is the plain­tiff who must then, according to the rule, establish his claim as being one with a real chance of success." - See paragraph 15.

Practice - Topic 5713

Judgments and orders - Summary judg­ments - Burden on defendant - [See Practice - Topic 5708.1 ].

Practice - Topic 5715

Judgments and orders - Summary judg­ments - Burden on applicant - [See Practice - Topic 5708.1 ].

Practice - Topic 5715.1

Judgments and orders - Summary judg­ments - Burden on respondent - [See Practice - Topic 5708.1 ].

Professional Occupations - Topic 1468

Accountants - Negligence - Audit - Gen­eral - In the context of a negligent mis­representation action, the Supreme Court of Canada stated that "... the possible repercussions of exposing auditors to in­determinate liability are significant. In applying the two-stage Anns/Kamloops test to negligent misrepresentation actions against auditors, therefore, policy con­siderations reflecting those repercussions should be taken into account. In the gen­eral run of auditors' cases, concerns over indeterminate liability will serve to negate a prima facie duty of care. But while such concerns may exist in most such cases, there may be particular situations where they do not. In other words, the specific factual matrix of a given case may render it an 'exception' to the general class of cases in that while (as in most auditors' liability cases) considerations of proximity under the first branch of the Anns/Kam­loops test might militate in favour of find­ing that a duty of care inheres, the typical concerns surrounding indeterminate li­ability do not arise." - See paragraph 36.

Professional Occupations - Topic 1468

Accountants - Negligence - Audit - Gen­eral - Individual shareholders (including a sole shareholder) sued auditors for negli­gent preparation of audit reports claiming damages for investment losses and losses in the value of existing shareholdings - In affirming an order granting summary judgment, the Supreme Court of Canada held that even though the auditors owed the shareholders (including the sole share­holder), qua individual claimants, prima facie duties of care, the duties were negated by policy considerations which were not obviated by the facts of the case - To come to the opposite conclusion would expose the auditors to the possibili­ty of indeterminate liability, since such a finding would imply that they owed a duty of care to any known class of potential plaintiffs regardless of the purpose to which they put the auditors' reports - See paragraphs 42 to 57.

Professional Occupations - Topic 1468

Accountants - Negligence - Audit - Gen­eral - [See first Fraud and Misrepresen­tation - Topic 2508 ].

Professional Occupations - Topic 1501

Accountants - Duty to third parties - General - [See first and second Pro­fessional Occupations - Topic 1468 ].

Professional Occupations - Topic 1504

Accountants - Duty to third parties - Shareholders and investors - [See second Professional Occupations - Topic 1468 ].

Professional Occupations - Topic 1504

Accountants - Duty to third parties - Shareholders and investors - Contractual duties - Shareholders sued auditors for failing to live up to their contractual obli­gations respecting the preparation of cor­porate audited reports - In affirming an order granting the auditors summary judg­ment, the Supreme Court of Canada stated that the auditors' engagement to prepare audited statements for the shareholders' benefit did not create a contractual re­lationship between them and the share­holders - In any event, the shareholders' pretrial request to amend their pleadings to include a claim for breach of contract was denied and no appeal was brought from that decision - Accordingly, the claim was not properly before the court - See para­graph 16.

Professional Occupations - Topic 1504

Accountants - Duty to third parties - Shareholders and investors - Statutory duties - Shareholders sued an auditor and others, asserting that the auditor breached a duty owed to the individual shareholders by contravening the independence require­ment of s. 155 of the Manitoba Cor­porations Act - The shareholders asserted that because s. 155(6) gave a single share­holder a veto power, the individual share­holders had a personal right to sue the auditor if damage resulted from the breach of the independence requirement - As­suming without deciding that the auditor breached s. 155, the Supreme Court of Canada affirmed that the section did not, in and of itself, give rise to a cause of action in negligence or to a duty of care in tort - See paragraph 17.

Cases Noticed:

Fidkalo v. Levin (1992), 76 Man.R.(2d) 267; 10 W.A.C. 267 (C.A.), refd to. [para. 5].

Foss v. Harbottle (1843), 2 Hare 461; 67 E.R. 189 (H.L.), refd to. [para. 10].

Caparo Industries v. Dickman et al., [1990] 1 All E.R. 568; 108 N.R. 81 (H.L.), refd to. [para. 11].

Hercules Management Ltd. et al. v. Clark­son Gordon Inc. et al. (1994), 91 Man.R.(2d) 216 (Q.B.), refd to. [para. 16].

Saskatchewan Wheat Pool v. Canada, [1983] 1 S.C.R. 205; 45 N.R. 425, refd to. [para. 17].

Queen (D.J.) v. Cognos Inc., [1993] 1 S.C.R. 87; 147 N.R. 169; 60 O.A.C. 1, refd to. [para. 18].

Anns v. Merton London Borough Council, [1978] A.C. 728 (H.L.), refd to. [para. 19].

Murphy v. Brentwood District Council, [1991] 1 A.C. 398; 113 N.R. 81 (H.L.), refd to. [para. 19].

Sutherland Shire Council v. Heyman (1985), 60 A.L.R. 1 (H.C.), refd to. [para. 19].

Nielsen v. Kamloops (City) and Hughes, [1984] 2 S.C.R. 2; 54 N.R. 1; [1984] 5 W.W.R. 1; 10 D.L.R.(4th) 641; 29 C.C.L.T. 97; 8 C.L.R. 1, refd to. [para. 19].

Hofstrand Farms Ltd. v. B.D.C. Ltd., [1986] 1 S.C.R. 228; 65 N.R. 261, refd to. [para. 19].

Canadian National Railway Co. et al. v. Norsk Pacific Steamship Co. and Tug Jervis Crown et al., [1992] 1 S.C.R. 1021; 137 N.R. 241, refd to. [para. 19].

London Drugs Ltd. v. Brassart and Vanwinkel, [1992] 3 S.C.R. 299; 143 N.R. 1; 18 B.C.A.C. 1; 31 W.A.C. 1, refd to. [para. 19].

Winnipeg Condominium Corp. No. 36 v. Bird Construction Co. et al., [1995] 1 S.C.R. 85; 176 N.R. 321; 100 Man.R.(2d) 241; 91 W.A.C. 241, refd to. [para. 19].

Edgeworth Construction Ltd. v. Lea (N.D.) & Associates Ltd. et al., [1993] 3 S.C.R. 206; 157 N.R. 241; 32 B.C.A.C. 221; 53 W.A.C. 221, refd to. [para. 20].

Scott Group Ltd. v. McFarlane, [1978] 1 N.Z.L.R. 553 (C.A.), refd to. [para. 20].

Donoghue v. Stevenson, [1932] A.C. 562, refd to. [para. 24].

Candler v. Crane, Christmas & Co., [1951] 2 K.B. 164 (C.A.), refd to. [para. 27].

Hedley Byrne & Co. v. Heller & Partners Ltd., [1964] A.C. 465 (H.L.), refd to. [para. 27].

Haig v. Bamford et al., [1977] 1 S.C.R. 466; 9 N.R. 43, refd to. [para. 27].

Ultramares Corp. v. Touche (1931), 174 N.E. 441 (N.Y.C.A.), refd to. [para. 31].

Rosenblum (H.) Inc. v. Adler (1983), 461 A.2d 138 (N.J.), refd to. [para. 35].

Glanzer v. Shepard (1922), 135 N.E. 275 (N.Y.C.A.), refd to. [para. 38].

Roman Corp. v. Peat Marwick Thorne (1992), 11 O.R.(3d) 248 (Gen. Div.), refd to. [para. 48].

Roman Corp. v. Peat Marwick Thorne (1993), 12 B.L.R.(2d) 10 (Ont. Gen. Div.), refd to. [para. 48].

Prudential Assurance Co. v. Newman Industries Ltd., [1982] 1 All E.R. 354 (C.A.), refd to. [para. 59].

Goldex Mines Ltd. v. Revill (1974), 7 O.R.(2d) 216 (C.A.), refd to. [para. 62].

Statutes Noticed:

Corporations Act, S.M. 1976, c. C-225, sect. 149(1) [para. 42]; sect. 155(1), sect. 155(2), sect. 155(6) [para. 12]; sect. 163(1) [para. 42].

Rules of Court (Man.), Queen's Bench Rules, rule 20.03(1) [para. 15].

Authors and Works Noticed:

Cheffins, Brian R., Auditors' Liability in the House of Lords: A Signal Canadian Courts Should Follow (1991), 18 C.B.L.J. 118, pp. 125, 126, 127, 129, 130, 131 [para. 34].

Cherniak, Earl A., and Stevens, Kirk F., Two Steps Forward or One Step Back? Anns at the Crossroads in Canada (1992), 20 C.B.L.J. 164, generally [para. 29]; pp. 169, 170 [para. 32].

Feldthusen, Bruce, Economic Negligence (3rd Ed. 1994), pp. 62, 63 [para. 43]; 93, 94, 95, 96, 97 [para. 29]; 98, 99, 100 [paras. 29, 40].

Finn, P.D., Essays on Torts (1989), pp. 36, 37 [para. 23].

Fleming, John G., The Negligent Auditor and Shareholders (1990), 106 L.Q.R. 349, p. 351 [para. 23].

Ivankovich, Ivan F., Accountants and Third Party Liability -- Back to the Future (1991), 23 Ottawa L. Rev. 505, pp. 518 [para. 29]; 520, 521, 530 [para. 34].

McHugh, M.H., Neighbourhood, Proximity and Reliance in Finn, P.D., Essays on Torts (1989), pp. 36, 37 [para. 23].

Sexton, J. Edgar, and Stevens, John W., Accountants' Legal Responsibilities and Liabilities, in Professional Responsibility in Civil Law and Common Law, Meredith Memorial Lecture, McGill University (1985), pp. 101, 102 [para. 35].

Stapleton, Jane, Duty of Care and Economic Loss: A Wider Agenda (1991), 107 L.Q.R. 249, generally [para. 21].

Wiener, Howard B., Common Law Liabilty of the Certified Public Ac­countant for Negligent Misrepresentation (1983), 20 San Diego L. Rev. 233, gen­erally [para. 33].

Counsel:

Mark M. Schulman, Q.C. and Brian A. Crane, Q.C., for the appellants;

Robert P. Armstrong, Q.C. and Thor J. Hansell, for the respondents;

W. Ian C. Binnie, Q.C. and Geoff R. Hall, for the intervener.

Solicitors of Record:

Schulman & Schulman, Winnipeg, Mani­toba, for the appellants;

Aikins, MacAulay, Thorvaldson, Winni­peg, Manitoba, for the respondents;

McCarthy, Tétrault, Toronto, Ontario, for the intervener.

This appeal was heard on December 6, 1996, before La Forest, Sopinka, Gonthier, Cory, McLachlin, Iacobucci and Major, JJ., of the Supreme Court of Canada.

On May 22, 1997, La Forest, J., delivered the following reasons for judgment in both official languages.