Tracing The Limits Of Auditors' Liability Post-Livent: The Ontario Court Of Appeal Considers An Auditor's Duty To Third Parties In Lavender v. Miller Bernstein LLP

Overview

In Lavender v. Miller Bernstein LLP1, the Ontario Court of Appeal has overturned a lower court decision that imposed liability on an auditor for losses suffered by its client's clients as a result of a negligently performed audit. In reaching this result, the Court of Appeal applied guidance from the Supreme Court of Canada's recent decision in Deloitte & Touche v. Livent Inc. (Receiver of)2 for recognizing novel duties of care in the context of auditor's negligence claims. As the outcome in Lavender illustrates, the principles articulated in Livent set a high bar for establishing that an auditor owes a duty of care to a party other than its own client, and in that way will serve to guard against the spectre of indeterminate liability.

Background

The defendant in Lavender was the auditor of a now defunct securities dealer. The plaintiffs were a class of investors who held investment accounts with the securities dealer, which was required by the Ontario Securities Commission (the "OSC") to segregate the investors' assets and maintain a level of free net capital. As part of its annual filings to the OSC, the securities dealer filed Form 9 reports that falsely stated it was in compliance with the regulatory segregation and minimum capital requirements. When the OSC discovered the breach of its regulatory requirements, it suspended the securities dealer's registration and obtained an order placing the securities dealer into receivership. Unfortunately, by the time the OSC intervened, the securities dealer had already used the unsegregated assets for its own purposes. Its clients, the investors, lost millions.

Under the statutory regime that existed at the time, the Form 9 reports had to be audited each year in accordance with generally accepted auditing standards, as well as auditing standards published by the OSC. A class action against the auditor commenced on behalf of the investors was certified in 2010. In 2017, the representative plaintiff moved for summary judgment on various of the common issues, including whether the auditor owed a duty of care to the class members when it audited the Form 9 reports.

Decision Below

In the Ontario Superior Court of Justice,3 the motion judgewho did not have the benefit of the Supreme Court's decision in Livent, which was released after his decisiongranted summary judgment in favour of the class. He held that the auditor owed the class a duty of care to conduct the audit of the Form 9 reports...