Citation: Mullin v. PriceWaterhouseCoopers Date: 20031022 2003 PESCTD 82 Docket: S1-GS-19307 Registry: Charlottetown PROVINCE OF PRINCE EDWARD ISLAND IN THE SUPREME COURT - TRIAL DIVISION BETWEEN: PAUL J. D. MULLIN AND: PLANITIFF PRICEWATERHOUSECOOPERS and COOPERS & LYBRAND DEFENDANTS Before: The Honourable Chief Justice J. Armand DesRoches John F. Keaveny & Karen Campbell Stephen J. Kingston & Kevin J. Kiley Solicitors on behalf of the Plaintiff Solicitors on behalf of the Defendants Place and Date of Hearing Place and Date of Decision Charlottetown, Prince Edward Island September 12, 2003 Charlottetown, Prince Edward Island October 22, 2003
Citation: Mullin v. PriceWaterhouseCoopers 2003 PESCTD 82 S1-GS-19307 BETWEEN: AND: PAUL J. D. MULLIN PRICEWATERHOUSECOOPERS and COOPERS & LYBRAND Prince Edward Island Supreme Court - Trial Division Before: DesRoches C.J. (Chambers) Date of Hearing: September 12, 2003 Date of Decision: October 22, 2003 [19 Pages] PLANITIFF DEFENDANTS PRACTICE - Judgments and orders - Summary Judgment. TORTS - Neligence - Negligent misrepresentation - Duty of Care. Cases Referred to: Stevenson v. National Bank of Canada,[2000] P.E.I.J. No. 12 (PESCAD) No. 12; Standard Trust Co. (Liquidator of) v. Cattanach (1995), 24 O.R. (3d) 492 (Ont. Gen. Div.); Hercules Management Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165; Cooper v. Hobart, [2001] 3 S.C.R. 537; Fraser et al. v. Westminer Canada Ltd. et al., [2003] N.S.C.A. 76; Elliot v. Insurance Crime Prevention Bureau, [2002] N.S.J. No. 447; Edwards v. Law Society of Upper Canada, [2001] 3 S.C.R. 562; Regulation Referred to: Regulations, Legal Profession Act, S.P.E.I. 1992, Cap. 39, s. 37 Rules Referred to: Rules of Court, Province of Prince Edward Island 1996, Rule 20.01(3), 20.04(1), (2), (4) John F. Keaveny and Karen Campbell, solicitors on behalf of the Plaintiff Stephen J. Kingston & Kevin J. Kiley, solicitors on behalf of the Defendant
DesRoches C.J.: [1] The defendants have moved for summary judgment pursuant to Rule 20 in relation to those portions of the plaintiff s claim relating to services provided by the defendants or either of them to the former law firm of Farmer, MacLeod, MacMillan, Fortier ( FMMF ). The grounds for the motion are that there was never a contractual relationship between the plaintiff and the defendants or either of them as regards such services, and the defendants owed no duty of care to the plaintiff with regards to such services. Background [2] The plaintiff is a practising lawyer in Charlottetown. The defendant Coopers & Lybrand ( C & L ) carried on business as chartered accountants in the City to 1997. The defendant PriceWaterhouseCoopers ( PWC ) carried on business as chartered accountants in Charlottetown from 1997 to 1999. [3] In about November, 1995, the plaintiff and John Fortier, a former member of FMMF, began practising law together as associates. They later became partners and continued to carry on practise together until 1999 when Fortier was suspended by the Law Society ( Law Society ). He was later disbarred for professional misconduct and convicted for fraud and theft committed in relation to his law practice. [4] During the years 1993, 1994 and 1995 C & L performed various accounting services from FMMF. They prepared annual accountant s reports relating to the activities of FMMF which were submitted, as required by the Regulations to the Legal Profession Act, S.P.E.I. 1992, Cap. 39. These reports, known as Form 7 reports, are a condition precedent to a member of the Law Society being entitled to be issued an annual practising certificate. It is alleged by the plaintiff that none of these reports relating to Fortier s practice noted any exceptions in connection with his dealings with clients trust funds while a member of FMMF. [5] The accounting services provided by C & L to FMMF included not only the preparation of the annual accountants reports for submission by the law firm to the Law Society of Prince Edward Island, but also the preparation of annual non-audited financial statements and the preparation of a non-review financial statement for FMMF for a ten-month period ending in 1995 at the time of the winding up of the firm. C & L provided services to FMMF as a result of its retainer by the partnership, and it was paid by FMMF for such services. [6] C & L provided accounting services to the plaintiff s law firm for a number of years commencing 1995 up to and including 1997. PWC provided accounting services to the plaintiff s law firm in 1998 and 1999.
Page: 2 [7] It is common ground that before becoming associated with Fortier, the plaintiff was not a member nor associated in any way with the law firm of FMMF. The partnership of FMMF was dissolved in 1995. [8] In this present action, the plaintiff claims damages from the defendants regarding losses he alleges he sustained as a result of Fortier s misconduct. He alleges the defendants were negligent in connection with accounting services provided to his law firm from 1995 to 1999 and also that C & L was negligent as regards services provided to FMMF from 1993 to the time of the winding up of the law firm in 1995. The plaintiff alleges in his statement of claim that C & L owed him a legal duty of care in relation to accounting services provided by it to FMMF. In the joint defence filed by the defendants, C & L specifically denies owing any legal duty of care to the plaintiff in respect of services provided by it to FMMF. [9] It appears the defendant C & L were the plaintiff s personal accountants in September, 1995 when he sought advice from one of the partners and direction as to the advisability of becoming associated with Fortier in the practice of law. The plaintiff claims he continued to rely on the defendants in the period October to November, 1995 when Fortier left FMMF and became associated with the plaintiff in the practice of law. The plaintiff claims that C & L acted as accountants and auditors during the dissolution of the FMMF firm in 1995 including the transfer of trust funds from FMMF to the plaintiff s law firm. In December, 1999 the defendant PWC reported to the Law Society that Fortier began to have trust account problems as early as 1993 while a member of the FMMF law firm, and a significant amount of money was missing from client trust funds in relation to files Fortier brought with him from FMMF into the plaintiff s law firm in October/November, 1995. Rule 20 [10] The law relating to Rule 20 is well known and need not be repeated in detail here. The relevant sections of Rule 20 read: 20.01(3) A defendant may, after delivering a statement of defence, move with supporting affidavit material or other evidence for summary judgment dismissing all or part of the claim in the statement of claim.... 20.04(1) In response to affidavit material or other evidence supporting a motion for summary judgment, a responding party
Page: 3 may not rest on the mere allegations or denials of his or her pleadings, but must set out, in affidavit material or other evidence, specific facts showing that there is a genuine issue for trial. (2) The court shall grant summary judgment if,... (a) The court is satisfied there is no genuine issue for trial with respect to a claim or defence; (4) Where the court is satisfied that the only genuine issue is a question of law, the court may determine the question and grant judgment accordingly. [11] The appropriate test recently has been stated as follows by McQuaid J.A. in Stevenson v. National Bank of Canada, [2000] P.E.I.J. No. 12 (PESCAD) at paragraph 12: The test for the application of Rule 20 has been stated many times by both divisions of this court and in doing so, the court has followed and applied decisions of the Ontario Courts where Civil Procedure Rule 20 is identical to the Rule 20 in the Civil Procedure Rules of this court. The test is to determine if there is a genuine issue for trial. Nevertheless, it is frequently a much easier task to state the test than it is to apply it to the pleading in issue. In considering the Ontario rule, the Supreme Court of Canada summarized the test. In Guarantee Co. Of North America v. Gordon Capital Corp. (1999), 178 D.L.R. (4th) 1 (SCC) Iacobucci and Bastarache JJ., writing for the court, stated at paragraph 27: The appropriate test to be applied on a motion for summary judgment is satisfied when the applicant has shown that there is no genuine issue of material fact requiring trial, and therefore summary judgment is a proper question for consideration by the court. See Hercules Managements Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, at para 15; Dawson v. Rexcraft Storage and Warehouse Inc. (1998), 164 D.L.R. (4 th ) 257 (Ont. C.A.), at pp. 267-68; Irving Ungerman Ltd. v. Galanis (1941), 4 O.R. (3d) 545 (C.A.), at pp. 550-51. Once the moving party has made this showing, the respondent must then establish his claim as being one with a real chance of success. Hercules, supra, at para. 15.
Page: 4 [12] It has been argued on behalf of the plaintiff that this is not an appropriate case for summary judgment. The parties agree the crux of this motion engages the issue of duty of care. This is a question mixed fact and law and the plaintiff submits there are numerous questions of material fact in dispute which can only be resolved after a full factual background has been presented at trial. [13] I do not accept this submission. In my view, there are sufficient known facts from which the court may determine whether a duty of care was owed to the plaintiff by the defendants as alleged in relation to the services provided by the defendants to FMMF. Indeed, the leading case in Canada which provides direction as to the scope of the class of third parties to whom accountants owe a duty of care, Hercules Management Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, came to the Supreme Court of Canada as the result of a motion for summary judgment brought by the defendants in the Manitoba Court of Queen s Bench under their Rule 20.03(1). Negligent Misrepresentation [14] The plaintiff s claim against C & L is framed in negligent misrepresentation. The elements necessary to establish negligent misrepresentation are well known and were succinctly stated by MacPherson J. in Standard Trust Co. (Liquidator of) v. Cattanach (1995), 24 O.R. (3d) 492 (Ont. Gen. Div.) as follows: There are five required elements for a successful negligent misrepresentation claim set out in the famous case of Hedley Byrne & Co. v. Heller & Partners Ltd., [1964] A.C. 465, [1963] All E.R. 575 (H.L.), and affirmed recently by the Supreme Court of Canada in Queen v. Cognos Inc., [1993] 1 S.C.R. 87 at p. 110, 99 D.L.R. (4th) 626: The required elements for a successful Hedley Byrne claim... (1) there must be a duty of care based on a "special relationship" between the representator and the representee; (2) the representation in question must be untrue, inaccurate, or misleading; (3) the representor must have acted negligently in making said misrepresentation; (4) the representee must have relied, in a reasonable manner, on said negligent misrepresentation; and (5) the reliance must have been detrimental to the representee in the sense that damages resulted. [15] The parties agree that elements (2), (3), and (5) are not in issue on this summary judgment motion. The plaintiff will have to establish those elements at trial. What is in issue on this motion is element (1); did the defendant C & L owe a duty of
Page: 5 care to the plaintiff in relation to the services it provided to FMMF during the period 1993 up to the winding up of the law firm in 1995? As will be appreciated later in these reasons, the answer to the above question necessarily involves a consideration of element (4), the issue of reasonable reliance. I will confine my analysis at this stage to the so-called Form 7 reports. Duty of Care [16] Both parties rely upon the leading case regarding duty of care in relation to allegations of negligent misrepresentations by accountants, Hercules Management Ltd. v. Ernst & Young, supra.. In assessing the impact of this judgment it is useful to briefly review the facts. The plaintiff Hercules Management, was one of a number of shareholders in Northguard Acceptance Ltd. ( NGA ) which, together with Northguard Holdings Ltd. ( NGH ), carried on the business of lending and investing money on the security of real property mortgages. Ernst & Young was originally hired by NGA and NGH in 1971 to perform annual audits of their financial statements and to provide audit reports to the companies shareholders. Both NGA and NGH went into receivership in 1984, and a number of shareholders of NGA brought an action against Ernst & Young alleging the audit reports for the years 1980, 1981 and 1982 were negligently prepared, and that in reliance on these reports they suffered various financial losses. The motions judge granted a motion for summary judgment with respect to four plaintiffs, including Hercules Management Ltd., and dismissed their claims on the basis they raised no genuine issue for trial. An appeal to the Manitoba Court of Appeal was unanimously dismissed. The primary issue facing the Supreme Court of Canada was whether Ernst & Young owed a duty of care to the plaintiff shareholders in relation to their investment decisions. The Court dismissed the appeal. [17] La Forest J., who delivered the judgment of the Court, enunciated the test to be applied at pp. 184-185: 19 It is now well established in Canadian law that the existence of a duty of care in tort is to be determined through an application of the two-part test first enunciated by Lord Wilberforce in Anns v. Merton London Borough Council, [1978] A.C. 728 (H.L.), at pp. 751-52: First one has to ask whether, as between the alleged wrongdoer and the person who has suffered damage there is a sufficient relationship of proximity or neighbourhood such that, in the reasonable contemplation of the former, carelessness on his part may be likely to cause damage to the latter in which case a prima facie duty of care arises. Secondly, if the first question is answered affirmatively, it is necessary to consider whether there are any
Page: 6 considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed or the damages to which a breach of it may give rise...... 20. In Kamloops, supra, at pp. 10-11, Wilson J. restated Lord Wilberforce's test in the following terms: (1) is there a sufficiently close relationship between the parties (the [defendant] and the person who has suffered the damage) so that, in the reasonable contemplation of the [defendant], carelessness on its part might cause damage to that person? If so, (2) are there any considerations which ought to negative or limit (a) the scope of the duty and (b) the class of persons to whom it is owed or (c) the damages to which a breach of it may give rise? [18] The Supreme Court of Canada has provided guidance as to the application of the first stage of the test in Cooper v. Hobart, [2001] 3 S.C.R. 537 wherein McLachlin C.J. and Major J. writing for the Court state at pp. 551-553: 30 In brief compass, we suggest that at this stage in the evolution of the law, both in Canada and abroad, the Anns analysis is best understood as follows. At the first stage of the Anns test, two questions arise: (1) was the harm that occurred the reasonably foreseeable consequence of the defendant's act? and (2) are there reasons, notwithstanding the proximity between the parties established in the first part of this test, that tort liability should not be recognized here? The proximity analysis involved at the first stage of the Anns test focuses on factors arising from the relationship between the plaintiff and the defendant. These factors include questions of policy, in the broad sense of that word. If foreseeability and proximity are established at the first stage, a prima facie duty of care arises. At the second stage of the Anns test, the question still remains whether there are residual policy considerations outside the relationship of the parties that may negative the imposition of a duty of care. It may be, as the Privy Council suggests in Yuen Kun Yeu, that such considerations will not often prevail. However, we think it useful expressly to ask, before imposing a new duty of care, whether despite foreseeability and proximity of relationship, there are other policy reasons why the duty should not be imposed. 31 On the first branch of the Anns test, reasonable foreseeability of the harm must be supplemented by proximity. The question is what is meant by proximity. Two things may be said. The first is that "proximity" is generally used in the authorities to characterize the type of relationship in which a
Page: 7 duty of care may arise. The second is that sufficiently proximate relationships are identified through the use of categories. The categories are not closed and new categories of negligence may be introduced. But generally, proximity is established by reference to these categories. This provides certainty to the law of negligence, while still permitting it to evolve to meet the needs of new circumstances. 32 On the first point, it seems clear that the word "proximity" in connection with negligence has from the outset and throughout its history been used to describe the type of relationship in which a duty of care to guard against foreseeable negligence may be imposed. "Proximity" is the term used to describe the "close and direct" relationship that Lord Atkin described as necessary to grounding a duty of care in Donoghue v. Stevenson, supra, at pp. 580-81: Who then, in law is my neighbour? The answer seems to be -- persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.... I think that this sufficiently states the truth if proximity be not confined to mere physical proximity, but be used, as I think it was intended, to extend to such close and direct relations that the act complained of directly affects a person whom the person alleged to be bound to take care would know would be directly affected by his careless act. 33 As this Court stated in Hercules Managements Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, at para. 24, per La Forest J.: The label "proximity", as it was used by Lord Wilberforce in Anns, supra, was clearly intended to connote 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 plaintiff's legitimate interests in conducting his or her affairs. 34 Defining the relationship may involve looking at expectations, representations, reliance, and the property or other interests involved. Essentially, these are factors that allow us to evaluate the closeness of the relationship between the plaintiff and the defendant and to determine whether it is just and fair having regard to that relationship to impose a duty of care in law upon the defendant. 35 The factors which may satisfy the requirement of proximity are
Page: 8 diverse and depend on the circumstances of the case. One searches in vain for a single unifying characteristic. As stated by McLachlin J. (as she then was) in Canadian National Railway Co. v. Norsk Pacific Steamship Co., [1992] 1 S.C.R. 1021, at p. 1151: "[p]roximity may be usefully viewed, not so much as a test in itself, but as a broad concept which is capable of subsuming different categories of cases involving different factors" (cited with approval in Hercules Managements, supra, at para. 23). Lord Goff made the same point in Davis v. Radcliffe, [1990] 2 All E.R. 536 (P.C.), at p. 540:... it is not desirable, at least in the present stage of development of the law, to attempt to state in broad general propositions the circumstances in which such proximity may or may not be held to exist. On the contrary, following the expression of opinion by Brennan J in Sutherland Shire Council v Heyman (1985) 60 ALR 1 at 43-44, it is considered preferable that 'the law should develop categories of negligence incrementally and by analogy with established categories'. [19] When a case falls within a situation where the defendant s act foreseeably causes physical harm to the plaintiff or the plaintiff s property, or an analogous situation, then reasonable foreseeability is established and a prima facie duty of care may be imposed. In my opinion, there was not such a situation in this case; this case does not fall within any of the existing categories of negligence law in which proximity has been recognized. The question, then, is whether the legal test of proximity is met in the circumstances of this case in relation to the services provided by C & L to FMMF during the period 1993-1995 in the preparation of the Form 7 reports. [20] In order to find a duty of care foreseeability is not enough; there must also be proximity, a close and direct relationship between the plaintiff and C & L, such that it is just to impose a duty of care in the circumstances. A very helpful analysis very recently has been provided by Cromwell J.A. of the Nova Scotia Court of Appeal in Fraser et al. v. Westminer Canada Ltd. et al., [2003] N.S.C.A. 76, a decision rendered on July 22 of this year. At paragraph 79 of the judgment the learned justice writes: While there is no precise definition of what constitutes such a close and direct relationship, the gist of the requirement is that there should be "such close and direct relations that the act complained of directly affects a person whom the person alleged to be bound to take care would know would be directly affected by his careless act.": Donoghue v. Stevenson, [1932] A.C. 562 (H.L.) at 581. In both D'Amato v. Badger, [1996] 2 S.C.R. 1071 at para. 49 and in McLachlin, J.'s judgment in Norsk at paras. 48-53, a number of indicators of proximity are referred to. They include the relationship between the parties, physical "propinquity" (nearness in space), assumed or imposed obligations and the existence of a close causal connection
Page: 9 between the act and the harm suffered. [21] The plaintiff acknowledges there was no direct relationship between him and C & L during the relevant period of time. He was not a member or an associate of the FMMF law firm. There was no physical closeness. Neither he nor C & L has assumed any mutual obligations towards each other. It was not until some time in 1995 that the plaintiff sought and received professional services from C & L, and this was at or about the time of the winding up of FMMF. In summary form, the defendant C & L argues the lack of proximity on the following grounds: a) the plaintiff is a stranger to FMMF; he was neither a partner in nor was he associated with FMMF during the time C & L were providing accounting services to FMMF; b) C & L had no contract with the plaintiff as regards accounting services provided by C & L to FMMF; its contract was exclusively with FMMF; c) C & L was paid by FMMF for accounting services and not by the plaintiff; d) C & L reported to FMMF as regards accounting services provided to that law firm, and not to the plaintiff; e) there is no evidence of any representation by C & L to the plaintiff as regards its services to FMMF; f) there is no evidence of any reliance by the plaintiff upon any reports prepared by C & L for FMMF; and g) there is no evidence the plaintiff used the accounting services provided by C & L to FMMF for any purpose, let alone for the purpose for which they were intended. [22] While the plaintiff agrees with propositions a), b) and c), he disputes d), e), f) and g). [23] As I understand the plaintiff s position, it is that as a member of the legal profession and of the Law Society he relied upon the Form 7 trust audit accountant s reports prepared by C & L for FMMF for the years 1993, 1994 and 1995. The plaintiff maintains that by extension, C & L reported to all members of the Law Society, including himself. I do not accept this proposition. Section 37 of the Regulations
Page: 10 reads: 37. (1) As a condition precedent to being entitled to be issued an annual certificate in any year, each member shall file with the Secretary-Treasurer a statutory declaration in Form 6 and, if appropriate, a report in Form 7 using printed forms to be provided in respect of each year by the Society. (2) A statutory declaration in Form 6 shall be filed by each member referring to the member s fiscal year which ended next before the month of April in the then current year declaring that during that fiscal year the member has not in connection with his or her practice received any money in trust which has not otherwise been referred to in a report filed as required by the Regulations. (3) The report in Form 7 shall refer to the member s fiscal year which ended next before the month of April in the then current year and be signed by a public accountant as defined in the Public Accounting and Auditing Act, R.S.P.E.I. 1988, Cap. P-28, hereinafter referred to as the reporting accountant. (4) The report in Form 7 shall bear the executed certificate of the member, or in the case of a firm, of a partner of the firm authorized by all the partners in the firm certifying that (a) (b) (c) the reporting accountant has been provided with whatever information and explanations the accountant required; to the knowledge and belief of the member signing the certificate, the books, records and accounts maintained by the member and provided for the reporting accountant s review fully disclosed the trust obligations to clients; and to the knowledge and belief of the said member or firm, the member has complied with Section 44 of the Legal Profession Act and Regulations made thereunder. (5) (a) All relevant Forms 6 and 7 shall be submitted to the Secretary-Treasurer on or before the 1 st day of July in each year, and shall be submitted with the annual fees payable to the Society.
Page: 11 (b) (c) Where a member does not submit the relevant trust account forms (Forms 6 and/or 7 as required) by the first day of July in each year, the member is automatically suspended from membership in the Society and the Secretary-Treasurer shall notify all Provincial Judges and the Prothonotary that, not having been issued with an annual certificate, the member is not entitled to practice. Where a member has been suspended pursuant to clause (5)(b) for not submitting the relevant trust account forms, the member shall be reinstated upon payment of a reinstatement fee of three hundred dollars and submission of the relevant trust account forms. (6) Notwithstanding subsections (1) and (3), Council may by resolution waive in respect of any year the requirement for any member to file Form 7. (7) The Secretary-Treasurer shall submit to the Society s Auditors for review all Forms 7 indicating non-compliance by a member with Section 44 of the Legal Profession Act and this Regulation and may refer any Forms 7 the Secretary-Treasurer deems appropriate directly to the Chairman of the discipline committee. (8) The Society s Auditors shall examine all Forms 7 indicating noncompliance as aforesaid, make such inquiries as they may think appropriate and deliver the Forms 7 to the Chairman of a discipline committee with a report of the significance of the non-compliance in each case. (9) Upon receipt of the report described in subsections (7) or (8), the Chairman of a discipline committee may conduct further inquiries or request an explanation from the members or firms which are in noncompliance with Section 44 of the Act. (10) The Chairman shall report to Council the results of the said inquiries under subsection (9) and shall then determine whether an investigation should be initiated under Section 26. [24] The applicable requirement for the Form 7 report contained in s. 37 of the Regulations clearly provides the obligation is on each member or firm to file with the Secretary-Treasurer a report in Form 7. No where in the Regulations is there a requirement for the Secretary-Treasurer to inform all members of the contents of the
Page: 12 filed Form 7. Such a proposal would be strongly opposed by the members for obvious reasons. Indeed, in his affidavit the plaintiff admits by implication that he never saw the Form 7 reports filed by FMMF for the years 1993, 1994 and 1995 when he states: 11. THAT I am informed by Jim Wyatt, as aforesaid, and do verily believe, that no exceptions were noted in relation to the annual Accountant s Reports of any of the associates or partners of the law firm of Farmer MacLeod MacMillan Fortier at any time from 1993 until 1995. [25] The first step of the Hercules Management test is intended to establish whether the defendant owed a prima facie duty of care to the plaintiff. This first step itself involves two elements; the representor must in the circumstances reasonably foresee the potential plaintiff and the fact that the plaintiff might rely on the representations, and the reliance by the plaintiff must be reasonable. [26] In the circumstances described above, I conclude that, to the extent reasonable foreseeability is required, the facts of this case do not establish such foreseeability in relation to the services provided to FMMF by C & L in the preparation of the Form 7 reports during the period in question. [27] Furthermore, the Law Society is a body corporate (s. 2, Legal Profession Act) and is a separate legal entity from its members. In such circumstances, as counsel for the defendant correctly points out in my view, any representation made to the Law Society is not a representation to its members any more than a representation to a corporation is a representation to its shareholders. If indeed there was any deficiency in the Form 7 reports prepared by C & L for FMMF and filed with the Law Society by the law firm, the cause of action would lie with FMMF or the Law Society, and not with the Law Society s members. This is an application of the so-called Rule in Foss v. Harbottle which is explained in Hercules Managements Ltd., supra as follows at p. 211: The rule in Foss v. Harbottle provides that individual shareholders have no cause of action in law for any wrongs done to the corporation and that if an action is to be brought in respect of such losses, it must be brought either by the corporation itself (through management) or by way of a derivative action. The legal rationale behind the rule was eloquently set out by the English Court of Appeal in Prudential Assurance Co. v. Newman Industries Ltd. (No. 2), [1982] 1 All E.R. 354, at p. 367, as follows: The rule [in Foss v. Harbottle] is the consequence of the fact that a corporation is a separate legal entity. Other consequences are limited liability and limited rights. The company is liable for its contracts and torts; the
Page: 13 shareholder has no such liability. The company acquires causes of action for breaches of contract and for torts which damage the company. No cause of action vests in the shareholder. When the shareholder acquires a share he accepts the fact that the value of his investment follows the fortunes of the company and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting. The law confers on him the right to ensure that the company observes the limitations of its memorandum of association and the right to ensure that other shareholders observe the rule, imposed on them by the articles of association. If it is right that the law has conferred or should in certain restricted circumstances confer further rights on a shareholder the scope and consequences of such further rights require careful consideration. To these lucid comments, I would respectfully add that the rule is also sound from a policy perspective, inasmuch as it avoids the procedural hassle of a multiplicity of actions. [28] My conclusion is supported by the finding of Coughlan J. of the Nova Scotia Supreme Court in Elliot v. Insurance Crime Prevention Bureau, [2002] N.S.J. No. 447. In that case, the plaintiff s house had been destroyed by fire. The defendant, several individual investigators and the fire marshall investigated the fire on behalf of the plaintiff s insurer. Based on their finding, the insurer denied coverage. The plaintiff successfully sued his insurer then sought damages against the defendant. An application to strike out the statement of claim was allowed on the grounds it failed to disclose a cause of action because there was no existing duty of care. Justice Coughlan stated at paragraph 8: The defendants had no contractual relationship with the plaintiffs. They had no relationship with the plaintiffs other than through the first action. The plaintiffs claim the defendants were negligent in investigating and reporting in respect of the fire loss, knowing Royal would rely on their reports. There is not the necessary proximity between the defendants and the plaintiffs to give rise to a cause of action. If the defendants were negligent, Royal would have a cause of action but not the plaintiffs. The defendants do not owe a duty of care to the plaintiffs. [29] For all of the above reasons, I am persuaded by counsel for the defendants argument that there was no representation by C & L to the plaintiff as regards the Form 7 reports. There was no close and direct relationship between the two as regards that service provided to FMMF by C & L. The plaintiff was a stranger to that service. It follows that without representation there can be no reliance. Furthermore, there was no proximity, and without proximity there is no duty of care. Without a
Page: 14 duty of care, there is no liability as between C & L and the plaintiff in relation to the accounting services provided to FMMF by C & L regarding to the Form 7 reports. Policy Considerations [30] Having decided the first part of the Anns/Kamloops test as above, there technically is no need to go on to consider the second step of the test, that is the policy considerations. However, in case I am not correct in my analysis of the first step, I will now consider the second step: are there any considerations which ought to negate or limit (a) the scope of the duty and (b) the class of persons to whom it is owed or (c) the damages to which a breach of it may give rise? [31] The second step of the Hercules Management test is to determine whether imposing a prima facie duty of care potentially would result in very wide, even indeterminate, liability. The reasons for concern about potential indeterminate liability was eloquently explained by Justice Cardozo in Ultramares Corp. v. Touche, (1931) 174 N.E, 441 (U.S.N.Y.): If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class. The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences. [32] In Hercules Management, La Forest J. restated the concern as follows at p. 194:...deterrence of negligent conduct is an important policy consideration with respect to auditors liability. Neverthesless, I am of the view that, in the final anaylsis, it is outweighed by the socially undesirable consequences to which the imposition of indeterminate liability on auditors might lead. Indeed, while indeterminate liability is problematic in and of itself inasmuch as it would mean that successful negligence actions against auditors could, at least potentially, be limitless, it is also problematic in light of certain related problems to which it might give rise. [33] The scope of the analysis in the second step was explained by Cromwell J.A. in Fraser v. Westminer, supra at paragraphs 100 and 101: [100] We must remember that at the second step of the Anns/Kamloops analysis, we are not merely concerned with the facts of the present case,
Page: 15 but with its policy implications. The question of indeterminacy is not simply how many plaintiffs have sued or for that matter how many potential plaintiffs there might be on the specific facts. The question is whether the imposition of the duty of care asserted by the appellants would lead to potentially indeterminate liability if applied generally. [101] This point is well illustrated by Bow Valley Huskey (Bermuda) Ltd. v. Saint John Shipbuilding Ltd., [1997] 3 S.C.R. 1210. In considering the question of whether a prima facie duty of care should be negatived by the policy consideration of indeterminate liability, the Court looked to the implications for other cases of imposing the proposed duty. This involved asking the question of what other category or categories of relationships would fall within the scope of the proposed duty. The Court concluded as follows: 62... If the defendants owed a duty to warn the plaintiffs, it is difficult to see why they would not owe a similar duty to a host of other persons who would foreseeably lose money if the rig was shut down as a result of being damaged. Other investors in the project are the most obvious persons who would also be owed a duty, although the list could arguably be extended to additional classes of persons. What has been referred to as the ripple effect is present in this case. 63 No sound reason to permit the plaintiffs to recover while denying recovery to these other persons emerges. To hold otherwise would pose problems for defendants, who would face liability in an indeterminate amount for an indeterminate time to an indeterminate class.... [34] The plaintiff submits that the baseline issue in this respect is that of indeterminate liability, and in Hercules, supra, La Forest J. held that indeterminate liability will not adhere in circumstances where:...the defendant knew the identity of the plaintiff (or class of plaintiffs) who would rely on the statement at issue, but also because the statement itself was used by the plaintiff for precisely the purpose or transaction for which it was prepared. [para. 46] [35] The plaintiff maintains that C & L knew the class of persons who would rely on the Form 7 reports, that is members of the Law Society and persons who were likely to lodge their property with a P.E.I. lawyer from time to time. Furthermore, the plaintiff states he used or relied upon the reports for precisely the same purpose for which such reports were and are intended, that is to determine and report on whether a member of the Law Society has either complied or failed to comply with the rules and practice requirements imposed upon lawyers who hold client s property in trust
Page: 16 situations. [36] In my view, the plaintiff s position is not an adequate response to the policy concerns. Clearly, Hercules rejects the known plaintiff/ascertained class as a complete answer to the concern about indeterminacy. As pointed out by Cromwell J.A. in Westminer, supra, while the fact of such knowledge may make the class determinate, it gives no guarantee that it will be small. More fundamentally, liability (or not) depending on such a test would be arbitrary (see para. 113 of Westminer). [37] Clearly, to hold that mere knowledge by C & L that members of the Law Society and persons who were likely to lodge their property with a P.E.I. lawyer from time to time might rely on the Form 7 report is no answer to the indeterminacy concern. There is no logical basis to distinguish the plaintiff from any other member of the Law Society or, for that matter, from any other member of the public who might have been clients of Fortier, or who even might have been thinking of retaining him as counsel or of forming a business association with him. [38] Furthermore, I do not accept the plaintiff s proposition that he used or relied upon the Form 7 reports filed by FMMF during the years 1993, 1994 and 1995. These reports were not submitted to him; he did not receive a copy. The reports are filed with the Law Society, a separate legal entity from its members. The evidence leads to the conclusion that the plaintiff did not see the reports filed by FMMF for the years 1993, 1994 and 1995. The Form 7 reports are intended to be used by the Law Society to regulate its members. They are not produced for the purpose of being used by members of the Law Society to determine whether to enter into a business relationship with any other member, or by members of the public to decide whether to retain a particular lawyer. [39] The words of La Forest J. in Hercules Management are very instructive with regards to the purpose for which the Form 7 reports were prepared by C & L for FMMF. Speaking in that case of audit reports, the learned Justice wrote at pp. 209-210: As regards the second aspect of the appellants' claim concerning the losses they suffered in the diminution in value of their equity, the analysis becomes somewhat more intricate. The essence of the appellants' submission here is that the shareholders would have supervised management differently had they known of the (alleged) inaccuracies in the 1980-82 reports, and that this difference in management would have averted the demise of the audited corporations and the consequent losses in existing equity suffered by the shareholders. At first glance, it might appear that the appellants' claim implicates a use of the audit reports which is commensurate with the purpose for which the reports were prepared, i.e., overseeing or supervising management. One might argue on this basis that
Page: 17 a duty of care should be found to inhere because, in view of this compatibility between actual use and intended purpose, no indeterminacy arises. In my view, however, this line of reasoning suffers from a subtle but fundamental flaw. As I have already explained, the purpose for which the audit reports were prepared in this case was the standard statutory one of allowing shareholders, as a group, to supervise management and to take decisions with respect to matters concerning the proper overall administration of the corporations. In other words, it was, as Lord Oliver and Farley J. found in the cases cited above, to permit the shareholders to exercise their role, as a class, of overseeing the corporations' affairs at their annual general meetings. The purpose of providing the auditors' reports to the appellants, then, may ultimately be said to have been a "collective" one; that is, it was aimed not at protecting the interests of individual shareholders but rather at enabling the shareholders, acting as a group, to safeguard the interests of the corporations themselves. On the appellants' argument, however, the purpose to which the 1980-82 reports were ostensibly put was not that of allowing the shareholders as a class to take decisions in respect of the overall running of the corporation, but rather to allow them, as individuals, to monitor management so as to oversee and protect their own personal investments. Indeed, the nature of the appellants' claims (i.e. personal tort claims) requires that they assert reliance on the auditors' reports qua individual shareholders if they are to recover any personal damages. In so far as it must concern the interests of each individual shareholder, then, the appellants' claim in this regard can really be no different from the other "investment purposes" discussed above, in respect of which the respondents owe no duty of care. [40] The purpose for which the Form 7 reports were prepared in this case was to allow FMMF to satisfy the requirements of s. 37 of the Regulations. These reports are submitted by a law firm to the Secretary-Treasurer of the Law Society to assist in the supervision of the activities of the members of the Law Society vis-a-vis trust accounts. They are not aimed at protecting the interests of individual members of the Law Society, but rather at enabling that corporate body to safeguard the interests of members of the public who are clients of individual members of the Law Society. [41] The plaintiff has argued that the material facts and circumstances of the instant case satisfy both steps of the test enunciated in Hercules, supra, and relies upon the judgment in Standard Trust Co. (Liquidator of) v. Cattanach, supra, in which a motion to strike a statement of claim as not disclosing a reasonable cause of action was dismissed. In that case, however, MacPherson J. considered it a stretch to say that a special relationship existed between an auditor of a financial institution and depositors, but nevertheless allowed the claim of Canada Deposit Insurance Corporation as subrogee of depositors to continue against the auditors. It must be noted, however, that Standard Trust was decided prior to the more recent guidance
Page: 18 provided by the Supreme Court of Canada in Hercules, Cooper and Edwards v. Law Society of Upper Canada, [2001] 3 S.C.R. 562. [42] In my opinion, the spectre of indeterminate liability would loom large if a duty of care was recognized as between C & L and the plaintiff as a member of the Law Society in relation to the Form 7 reports prepared for FMMF by C & L during the years 1993, 1995 and 1995. I look upon the plaintiff s submissions relating to the concern about indeterminacy much as Cromwell J.A. viewed the submissions of the appellants in Westminer when he stated at para 119: In my respectful view, these submissions give insufficient weight to the law's concern about creating duties of care which will give rise to potentially indeterminate liability. This is generally regarded as the primary policy consideration underlying the law's reluctance to impose a duty of care in relation to acts causing purely economic harm: see Fleming, supra at p. 196. They also, in my view, overplay the possible policy justifications for the imposition of the sort of sweeping duty of care for which the appellants contend. [43] Without detailing in these reasons my analysis concerning the annual nonaudited financial statements prepared for FMMF by C & L during the years 1993, 1994 and 1995, I can state my conclusions are similar to those set out above. These financial statements would not have been seen by the plaintiff so it cannot be said he relied upon them. In any event, there was no relationship of proximity between the plaintiff and C & L in relation to those reports. I conclude there was no duty of care owed to the plaintiff by C & L in relation to those financial statements. [44] I also reach the same conclusion with respect to the preparation by C & L for FMMF of a winding up report or financial statement for the ten month period ending in 1995 at the time of the winding up of the firm. As stated in the plaintiff s statement of claim, the purpose of this report was to determine the financial state of affairs at the closing of the firm, and to calculate and determine the division of assets and liabilities as between the members of the firm, including a review of the firm s trust accounts. [45] There is no indication in the plaintiff s affidavit evidence submitted in response to this motion that the plaintiff ever saw or was provided with a copy of that report. There is a basis in the plaintiff s affidavit for concluding that in 1995, prior to becoming associated with Fortier, the plaintiff requested an opinion from C & L as to the advisability of becoming associated with Fortier in the practice of law. The plaintiff states he was assured this was a prudent business and professional step. There is little doubt that in that situation there existed at least a prima facie duty of care. However, as stated above, there is no basis for imposing a duty of care in relation to the report prepared by C & L for FMMF at the time of the firm s winding up
Page: 19 in 1995. Conclusion [46] For all of the above reasons, the defendants motion for summary judgment with regards to those portions of the plaintiff s statement of claim relating to services provided by the defendants or either of them to the law firm of FMMF during the years 1993, 1994 and 1995 is granted. [47] The plaintiff shall amend his statement of claim to remove the allegations relating to the services provided by C & L to FMMF during those years. The amended statement of claim shall be served on the defendants and filed with the Court by December 1, 2003 after which the defendants may amend their statement of defence as necessary. [48] Notwithstanding this judgment, evidence relating to the services provided by C & L to FMMF during the 1993, 1994 and 1995 may yet be admissible at the trial of this action. It will be for the trial judge to decide the relevance and admissibility of that evidence. [49] The defendants shall have their costs of the motion to be assessed by the Prothonotary on the Partial Indemnity Scale in accordance with Rule 58 of the Rules of Court. October 22, 2003 C.J.