Ontario Court Of Appeal Affirms Dismissal Of Action Against Auditors Because Of Failure To Prove Damages

The Court of Appeal for Ontario recently addressed the issue of auditor's liability, post-Livent1, in Fairfield Sentry Ltd. v PricewaterhouseCoopers LLP, 2018 ONCA 696. The Court of Appeal's decision highlights the importance of putting one's best foot forward on a motion for summary judgment, and the risk of not responding to some of the issues addressed by the other side's experts.

This case arose out of the "Ponzi" scheme orchestrated by Bernard Madoff through his company, Bernard L. Madoff Investment Securities LLC ("BLMIS"). The Plaintiffs ("Funds") were funds that invested, directly or indirectly, in BLMIS. The Funds' court-appointed liquidators brought an action against Pricewaterhouse Coopers LLP, the Funds' auditors, asserting that PwC should have uncovered Madoff's Ponzi scheme no later than in April 2017, and that, as a result, PwC breached its contract or was negligent in performing the audits of the Funds' financial statements for the years 2016 and 2017.

PwC moved for summary judgement dismissing the action on the basis that the Funds had not suffered any damages. Liability was assumed for the purpose of the motion. In first instance, Newbould J. granted summary judgment and dismissed the action. The Funds appealed, raising various grounds of appeal related to questions of fact and questions of mixed fact and law.

The Court of Appeal reiterated that, absent an error of law, the exercise of powers under Rule 20 of the Rules of Civil Procedure attracts deference. Palpable and overriding error is the standard of review for questions of mixed fact and law (when there is no extricable error in principle), and for findings or inferences of fact.

The Court reviewed in detail the evidence adduced by the parties on the issue of damages, including the expert evidence. The method used by the parties for assessing whether the Funds had suffered any damages by reason of PwC's alleged negligence was the method set out in the Court of Appeal's decision in Livent2, i.e., Loss = Actual Liquidation Deficit - Estimated Liquidation Deficit.

The Funds' liquidators' position was that the motion judge had failed to consider whether additional evidence from them was necessary to address the issue on the motion. In their view, the record as it stood did not eliminate the possibility that the Funds could recover damages, so the motion judge could not grant summary judgment.

The Court of Appeal rejected this submission: the motion judge was entitled to...