CANADIAN CASES on the LAW of TORTS Fourth Series/QuatriÈme SÉrie Recueil De Jurisprudence Canadienne En ResponsabilitÉ Civile VOLUME 24 (Cited 24 C.C.L.T

CANADIAN CASES ON THE LAW OF TORTS Fourth Series/Quatrième série Recueil de jurisprudence canadienne en responsabilité civile VOLUME 24 (Cited 24 C.C.L.T. (4th))

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CARSWELL, A DIVISION OF THOMSON REUTERS CANADA LIMITED One Corporate Plaza Customer Relations 2075 Kennedy Road Toronto 1-416-609-3800 Toronto, Ontario Elsewhere in Canada/U.S. 1-800-387-5164 M1T 3V4 Fax 1-416-298-5082 www.carswell.com Contact www.carswell.com/contact Livent Inc. (Receiver of) v. Deloitte & Touche 177

[Indexed as: Livent Inc. (Receiver of) v. Deloitte & Touche] Livent Inc., Through its Special Receiver and Manager Roman Doroniuk, Plaintiff (Respondent/Appellant by Cross-Appeal) and Deloitte & Touche and Deloitte & Touche LLP, Defendants (Appellant/Respondent by Cross-Appeal) Ontario Court of Appeal Docket: CA C58659 2016 ONCA 11 G.R. Strathy C.J.O., R.A. Blair, P. Lauwers JJ.A. Heard: March 23-26, 2015 Judgment: January 8, 2016 Civil practice and procedure –––– Actions — Cause of action — Ex turpi causa non oritur actio (denial of right of action for illegality or immoral- ity) –––– GB and MG created and developed corporation L, which developed high-profile stage productions — In 1998 new management discovered GB and MG had been fraudulently manipulating financial records to inflate profitability to attract investors — L filed for insolvency protection, was placed in receivership and its assets sold — GB and MG were convicted of fraud — D company was auditor for L from 1989 to 1998 — L, through special receiver, sued D for negligence — Trial judge found D not negligent in respect of pre-1996 audits but negligent in respect of 1996 audit although negligence caused no damage — D found liable for damages arising from negligence in fall 1997 and spring 1998 — D appealed from judgment finding them negligent — L cross-appealed from portion of judgment finding that D was not negligent — D’s appeal and L’s cross-appeal dismissed — D’s submission that losses were not L’s losses impermissibly conflated damages sustained by corporation with distribution of damages, once recovered, to creditors — Trial judge did not err by failing to recognize that frauds perpetrated by L’s principals and senior managers permeated corporate structure such that L was identified with impugned conduct (corporate identification) or in rejecting argument that ex turpi causa doctrine should be applied to prevent L from profiting from own criminal acts — Ex turpi causa doctrine applies only where allowing plaintiff’s claim would introduce inconsistency into fabric of law and does not give court discretion to withhold civil remedy merely because plaintiff engaged in misconduct — Corporate identification doctrine not free-standing legal rule but rather facilitates application of rules of law to corporation where primary rules of attribution not available — Corporate identification doctrine could not be used to attribute frauds of GB and MG to L in order to allow ex turpi causa defence — To do so would deprive innocent participants of remedy for auditor’s negligence where services of auditor most important i.e. where fraud by high-level management — Nor would it be neces- 178 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

sary to invoke defence to maintain integrity of justice system — Actual fraudsters would not profit from wrongdoing nor would L — D was under obligation to have proper auditing procedures in place to reduce risk of not detecting material misstatements — Applying ex turpi causa would risk undermining value of public audit process and integrity of justice system. Civil practice and procedure –––– Disposition without trial — Settlement — Enforcement of terms –––– GB and MG created and developed corporation L, which developed high-profile stage productions — In 1998 new management discovered GB and MG had been fraudulently manipulating financial records to inflate profitability to attract investors — L filed for insolvency protection, was placed in receivership and its assets sold — GB and MG were convicted of fraud — D company was auditor for L from 1989 to 1998 — L, through special receiver, sued D for negligence — Trial judge found D not negligent in respect of pre-1996 audits but negligent in respect of 1996 audit although negligence caused no damage — D found liable for damages arising from negligence in fall 1997 and spring 1998 — D appealed from judgment finding them negligent — L cross-appealed from portion of judgment finding that D was not negligent — D’s appeal and L’s cross-appeal dismissed — U.S. bar orders did not preclude L from advancing its claim — Plaintiffs and causes of action in U.S. class action litigation were different — L’s plan of reorganization also confirmed that L’s assets included its claim against D and nothing in court orders approving settlements expressly or impliedly included L’s claims within scope of settled claims. Torts –––– Negligence — Duty and standard of care — Duty of care –––– GB and MG created and developed corporation L, which developed high-profile stage productions — In 1998 new management discovered GB and MG had been fraudulently manipulating financial records to inflate profitability to attract investors — L filed for insolvency protection, was placed in receivership and its assets sold — GB and MG were convicted of fraud — D company was auditor for L from 1989 to 1998 — L, through special receiver, sued D for negligence — Trial judge found D not negligent in respect of pre-1996 audits but negligent in respect of 1996 audit although negligence caused no damage — D found liable for damages arising from negligence in fall 1997 and spring 1998 — D appealed from judgment finding them negligent — L cross-appealed from portion of judgment finding that D was not negligent — D’s appeal and L’s cross-appeal dismissed — Where audit is of publicly-traded corporation, there is added public-interest dimension to auditor’s responsibilities — Close adherence to dictates of applicable securities regimes accompanied by careful attentiveness to need for accurate financial disclosure to securities regulators and public was required — Canadian Institute of Chartered Accountants Handbook, of guiding importance, stressed importance of continuously applying knowledge of client’s business, including professional skepticism — Given higher risk assessment of L’s environment, D had obligation to perform heightened audit pro- Livent Inc. (Receiver of) v. Deloitte & Touche 179 cedures — D’s own manuals set higher standard than assuming management’s good faith — Record supported trial judge’s findings — Prior to 1996, both parties’ experts agreed they could not conclude D should have discovered fraud — D recognized greater audit risk in 1996 and that level of professional skepticism had to be increased but failed to comply with generally accepted auditing standards (“GAAS”) in relation to 1996 audit, lent its name to Q2 1997 financial statements that did not comply with generally accepted accounting principles and provided clean audit opinion for 1997 audit year that did not comply with GAAS — Had D not done so, fraud would have been uncovered by fall 1997 or spring 1998 — No reason to interfere with trial judge’s finding that D ought to have resigned in fall of 1997 — D partner had raised resignation as possibility and there was loss of trust — D turned blind eye to warning signs and failed to exercise professional judgment reasonably. Torts –––– Negligence — Causation — Foreseeability and remoteness –––– GB and MG created and developed corporation L, which developed high-profile stage productions — In 1998 new management discovered GB and MG had been fraudulently manipulating financial records to inflate profitability to attract investors — L filed for insolvency protection, was placed in receivership and its assets sold — GB and MG were convicted of fraud — D company was auditor for L from 1989 to 1998 — L, through special receiver, sued D for negligence — Trial judge found D not negligent in respect of pre-1996 audits but negligent in respect of 1996 audit although negligence caused no damage — D found liable for damages arising from negligence in fall 1997 and spring 1998 — D appealed from judgment finding them negligent — L cross-appealed from portion of judgment finding that D was not negligent — D’s appeal and L’s cross-appeal dismissed — Trial judge did not err in finding that D’s resignation in fall 1997 would have precipitated L’s demise — If D had resigned with full and frank disclosure, careful and objective investigation into L’s financial statements would have revealed fraud — Trial judge did not err in concluding D ought not to be liable for losses attributable to L’s legitimate but unsuccessful ventures — He properly relied on expert evidence in reducing economic loss by 25 percent to reflect that D’s breaches of standard of care were not proximate cause of all of L’s losses — Nor did trial judge err in rejecting D’s proposition that auditor’s negligence permitting company to continue to stay in business could not be proximate cause of further losses accumulated by company staying in business — D knew GD and MG were using financial statements and comfort letters to obtain further financing — It was reasonably foreseeable risk that L would incur increased liabilities as result of its continuing resort to capital market offerings through use of financial statements founded on fraud or material misstatements that D ought to have discovered — Further losses were also foreseeable given D’s knowledge of money-losing nature of L’s business. 180 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

Torts –––– Negligence — Contributory negligence — Proof of contributory negligence — Duty of care — Miscellaneous –––– GB and MG created and developed corporation L, which developed high-profile stage productions — In 1998 new management discovered GB and MG had been fraudulently manipulating financial records to inflate profitability to attract investors — L filed for insolvency protection, was placed in receivership and its assets sold — GB and MG were convicted of fraud — D company was auditor for L from 1989 to 1998 — L, through special receiver, sued D for negligence — Trial judge found D not negligent in respect of pre-1996 audits but negligent in respect of 1996 audit although negligence caused no damage — D found liable for damages arising from negligence in fall 1997 and spring 1998 — D appealed from judgment finding them negligent — L cross-appealed from portion of judgment finding that D was not negligent — D’s appeal and L’s cross-appeal dismissed — Trial judge did not err in finding that D’s resignation in fall 1997 would have precipitated L’s demise — If D had resigned with full and frank disclosure, careful and objective investigation into L’s financial statements would have revealed fraud — Trial judge did not err in concluding D ought not to be liable for losses attributable to L’s legitimate but unsuccessful ventures — He properly relied on expert evidence in reducing economic loss by 25 percent to reflect that D’s breaches of standard of care were not proximate cause of all of L’s losses — Nor did trial judge err in rejecting D’s proposition that auditor’s negligence permitting company to continue to stay in business could not be proximate cause of further losses accumulated by company staying in business — D knew GD and MG were using financial statements and comfort letters to obtain further financing — It was reasonably foreseeable risk that L would incur increased liabilities as result of its continuing resort to capital market offerings through use of financial statements founded on fraud or material misstatements that D ought to have discovered — Further losses were also foreseeable given D’s knowledge of money-losing nature of L’s business. GB and MG created and developed corporation L, which developed high-profile stage productions. In 1998 new management discovered that GB and MG had been fraudulently manipulating the company’s financial books and records in order to inflate earnings and profitability so they could attract more money through capital markets. L filed for insolvency protection, was placed in receivership and its assets sold. GB and MG were convicted of fraud and forgery. D was the auditor for L from 1989 through 1998. L, through a special receiver, sued D for damages in contract and negligence arising out of D’s failure to follow generally accepted auditing standards (“GAAS”) and thereby discover material misstatements in L’s financial reporting. Aspects of the fraud included modifying L’s accounting software to facilitate the fraud, GB and MG taking kickbacks from service providers, manipulation of Livent Inc. (Receiver of) v. Deloitte & Touche 181 expense entries, manipulation of pre-production costs (“PPC”) and certain revenue transactions designed to enhance the bottom line. The fraudulent conduct was kept secret from D. D was aware of the revenue transactions but was misled by L’s senior employees as to their true nature. In 1990, D became aware of instances of financial information being withheld from it but continued to show no concern. When the fraud was discovered in 1998, D withdrew its original audit opinions for 1996 and 1997. Restated financial statements for those years identified over $98 million in accounting irregularities. L’s collapse generated various U.S. class actions brought by investors. The actions were settled and the U.S. judge supervising the class actions issued orders containing bar provisions and releases. The trial judge found that D was not negligent in respect of the pre-1996 audits but was negligent in respect of the 1996 audit although this negligence caused no damage. He found D liable for damages arising from negligence in Au- gust/September 1997 and the spring of 1998 and awarded L damages of $84,750,000 plus interest. D appealed, seeking to attribute wrongs committed by L’s officers and employees to the corporation, relying on the defence of ex turpi causa, and arguing that its negligence was not the proximate cause of damages. D also argued that since L was insolvent, it was L’s creditors that were hurt, not the company itself. L cross-appealed, arguing that the trial judge erred in failing to hold D liable for negligence in respect of the 1996 audit and in reducing damages by 25 percent to account for contingencies. Held: The appeal and cross-appeal were dismissed. D’s submission that the losses were not L’s losses impermissibly conflated damages sustained by the corporation with the distribution of those damages, once recovered, to creditors as part of the assets of the corporation. The trial judge did not err by failing to recognize that the frauds perpetrated by L’s principals and many senior managers permeated the corporate structure such that L was itself identified with the impugned conduct (corporate identification doctrine) or in rejecting D’s argument that the ex turpi causa doctrine should be applied to prevent L from profiting from its own criminal acts. The ex turpi causa doctrine applies only where allowing a plaintiff’s claim would introduce inconsistency into the fabric of the law. It does not give the court discretion to withhold a civil remedy for damages merely because the plaintiff has engaged in misconduct. The corporate identification doctrine is not a free-standing legal rule but rather facilitates the application of rules of law to a corporation where the primary rules of attribution are not available. The corporate identification doctrine could not be used to attribute the frauds of GB and MG to L in order to allow D to rely on the ex turpi causa defence. The 182 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th) corporate identification doctrine was not intended to apply to an action commenced by an aggrieved company against a third party for negligence. The fraud of the principals should not be attributed to the corporation for the purpose of applying the ex turpi causa doctrine in these circumstances. To do so would deprive the innocent participants of a remedy for auditor’s negligence where the services of an auditor are most important, that is, where there is fraud by high- level management. Nor would it be necessary to invoke the defence to maintain the integrity of the justice system. The actual fraudsters would not profit from their wrongdoing nor would L profit. D was under an obligation to have proper auditing procedures in place to reduce the risk of not detecting material misstatements. Applying the ex turpi causa doctrine in these circumstances would risk undermining the value of the public audit process and thereby the integrity of the justice system. The U.S. bar orders did not preclude L from advancing its claim. The plaintiffs and causes of action in the U.S. class action litigation were different. L’s plan of reorganization also confirmed that L’s assets included its claim against D and nothing in the court orders approving the settlements expressly or impliedly included L’s claims within the scope of the settled claims. Where, as in the case at bar, an audit is of a publicly-traded corporation, there is an added public-interest dimension to the auditor’s responsibilities. Close adherence to the dictates of all applicable securities regimes accompanied by a careful attentiveness to the need for accurate financial disclosure to securities regulators and the public was required. The Canadian Institute of Chartered Accountants Handbook, also of guiding importance, stressed the importance of continuously obtaining and applying knowledge of the client’s business, including the concept of professional skepticism. Given the “higher risk assessment” which the L environment could be, D had an obligation to perform heightened audit procedures. D’s own manuals set a higher standard than that of assuming management’s good faith. In certain circumstances, including the loss of trust in the client, an auditor has a duty to resign. The record supported the trial judge’s findings that D was not negligent pre- 1996 but was negligent thereafter, although the negligence relating to the 1996 audit did not give rise to damages. Prior to 1996, both parties’ experts agreed that they could not conclude that D “should have” discovered the fraud. D recognized that the audit risk in 1996 was “greater than normal” and that the level of professional skepticism had to be increased on all fronts. Nevertheless, D failed to comply with GAAS in relation to the 1996 audit of the PPC, lent its name to the Q2 1997 financial statements that did not comply with generally accepted accounting principles and provided a clean audit opinion for the 1997 Livent Inc. (Receiver of) v. Deloitte & Touche 183

audit year that did not comply with GAAS. Had D not done so, the fraud would have been uncovered by the fall of 1997 or the spring of 1998. There was no reason to interfere with the trial judge’s finding that D ought to have resigned in the fall of 1997. A D partner had raised resignation as a possibility and there was a loss of trust. D turned a blind eye to the warning signs and failed to exercise its professional judgment reasonably in the circumstances. The trial judge did not err in finding that D’s resignation in the fall of 1997 would have precipitated L’s demise. If D had resigned with full and frank disclosure, a careful and objective investigation into L’s financial statements would have revealed the fraud. The trial judge did not err in concluding that D ought not to be liable for the losses attributable to L’s legitimate but unsuccessful ventures. He properly relied on expert evidence in reducing the economic loss by 25 percent to reflect that D’s breaches of the standard of care were not the proximate cause of all of L’s losses. Nor did the trial judge err in rejecting D’s proposition that an auditor’s negligence permitting a company to continue to stay in business cannot be the proximate cause of further losses accumulated by the company staying in business. D knew that GD and MG were using the financial statements and comfort letters to obtain further financing. It was a reasonably foreseeable risk that L would incur increased liabilities as a result of its continuing resort to capital market offerings through the use of financial statements founded on fraud or material misstatements that D ought to have discovered. Further losses were also foreseeable given D’s knowledge of the money-losing nature of L’s business. The application of the doctrine of contributory negligence in the circumstances would amount to a back-door application of the doctrine of corporate identification. The fraudulent acts of GD and MG were not to be attributed to L for the purpose of assessing contributory negligence. Cases considered by R.A. Blair J.A.: Asiatic Petroleum Co. v. Lennard’s Carrying Co. (1915), [1915] A.C. 705, [1914-15] All E.R. Rep. 280, 13 Asp. Mar. Law Cas. 81, 31 T.L.R. 294 (U.K. H.L.) — followed Athey v. Leonati (1996), [1997] 1 W.W.R. 97, 140 D.L.R. (4th) 235, 81 B.C.A.C. 243, 132 W.A.C. 243, 31 C.C.L.T. (2d) 113, 203 N.R. 36, [1996] 3 S.C.R. 458, 1996 CarswellBC 2295, 1996 CarswellBC 2296, [1996] S.C.J. No. 102 (S.C.C.) — followed Bloor Italian Gifts Ltd. v. Dixon (2000), 2000 CarswellOnt 1781, 48 O.R. (3d) 760, 187 D.L.R. (4th) 64, 133 O.A.C. 338, 2000 G.T.C. 4130, 2 C.C.L.T. (3d) 73, [2000] O.J. No. 1771, 106 O.T.C. 78 (Ont. C.A.) — followed British Columbia v. Zastowny (2008), 2008 SCC 4, 2008 CarswellBC 214, 2008 CarswellBC 215, 53 C.C.L.T. (3d) 161, [2008] S.C.J. No. 4, (sub nom. X. v. 184 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

R.D.M.) 370 N.R. 365, 76 B.C.L.R. (4th) 1, [2008] 4 W.W.R. 381, (sub nom. Zastowny v. MacDougall) 290 D.L.R. (4th) 219, (sub nom. X v. R.D.M.) 250 B.C.A.C. 3, (sub nom. X v. R.D.M.) 416 W.A.C. 3, [2008] 1 S.C.R. 27 (S.C.C.) — followed Caparo Industries plc v. Dickman (1990), [1990] 1 All E.R. 568, [1990] 2 W.L.R. 358, [1990] 2 A.C. 605 (U.K. H.L.) — considered Capital Community Credit Union Ltd. v. BDO Dunwoody (2000), 2000 Cars- wellOnt 82, 4 B.L.R. (3d) 1, [2000] O.J. No. 65 (Ont. S.C.J.) — referred to Capital Community Credit Union Ltd. v. BDO Dunwoody (2001), 2001 Cars- wellOnt 3791, 151 O.A.C. 32, 18 B.L.R. (3d) 162, [2001] O.J. No. 4249, [2001] O.T.C. 334 (Ont. C.A.) — referred to CitX Corporation, Inc., Re (2006), 448 F.3d 672 (U.S. C.A. 3rd Cir.) — referred to Clements (Litigation Guardian of) v. Clements (2012), 2012 SCC 32, 2012 Car- swellBC 1863, 2012 CarswellBC 1864, [2012] 7 W.W.R. 217, 31 B.C.L.R. (5th) 1, 93 C.C.L.T. (3d) 1, 29 M.V.R. (6th) 1, 346 D.L.R. (4th) 577, (sub nom. Clements v. Clements) 431 N.R. 198, [2012] S.C.J. No. 32, (sub nom. Clements v. Clements) [2012] 2 S.C.R. 181, (sub nom. Clements v. Cle- ments) 331 B.C.A.C. 1, (sub nom. Clements v. Clements) 565 W.A.C. 1 (S.C.C.) — followed Dairy Containers Ltd. v. NZI Bank Ltd. (1995), [1995] 2 N.Z.L.R. 30 (New Zea- land H.C.) — referred to Danecker v. Danecker (2014), 2014 ONCA 239, 2014 CarswellOnt 3826 (Ont. C.A.) — considered Fomento Ltd. v. Selsdon Fountain Pen Co. (1957), [1958] 1 All E.R. 11, [1958] 1 W.L.R. 45 (U.K. H.L.) — considered Galoo Ltd. v. Bright Grahame Murray (1993), [1995] 1 All E.R. 16, [1994] 1 W.L.R. 1360 (Eng. C.A.) — distinguished Haig v. Bamford (1976), [1977] 1 S.C.R. 466, 72 D.L.R. (3d) 68, 9 N.R. 43, 27 C.P.R. (2d) 149, [1976] 3 W.W.R. 331, 1976 CarswellSask 116, 1976 Car- swellSask 112, [1976] S.C.J. No. 31 (S.C.C.) — referred to Hall v. Hebert (1993), [1993] 4 W.W.R. 113, 152 N.R. 321, 15 C.C.L.T. (2d) 93, 101 D.L.R. (4th) 129, 45 M.V.R. (2d) 1, [1993] 2 S.C.R. 159, 26 B.C.A.C. 161, 44 W.A.C. 161, 78 B.C.L.R. (2d) 113, 1993 CarswellBC 92, 1993 CarswellBC 1260, [1993] S.C.J. No. 51, EYB 1993-67102 (S.C.C.) — followed Hart Building Supplies Ltd. v. Deloitte & Touche (2004), 2004 BCSC 55, 2004 CarswellBC 51, [2004] B.C.J. No. 49, 41 C.C.L.T. (3d) 240 (B.C. S.C. [In Chambers]) — considered Hercules Management Ltd. v. Ernst & Young (1997), 1997 CarswellMan 198, 211 N.R. 352, 115 Man. R. (2d) 241, 139 W.A.C. 241, (sub nom. Hercules Managements Ltd. v. Ernst & Young) 146 D.L.R. (4th) 577, 35 C.C.L.T. (2d) Livent Inc. (Receiver of) v. Deloitte & Touche 185

115, [1997] S.C.J. No. 51, 31 B.L.R. (2d) 147, [1997] 2 S.C.R. 165, [1997] 8 W.W.R. 80, 1997 CarswellMan 199 (S.C.C.) — followed Hodgkinson v. Simms (1994), [1994] 9 W.W.R. 609, 49 B.C.A.C. 1, 80 W.A.C. 1, 22 C.C.L.T. (2d) 1, 16 B.L.R. (2d) 1, 6 C.C.L.S. 1, 97 B.C.L.R. (2d) 1, 117 D.L.R. (4th) 161, 171 N.R. 245, 57 C.P.R. (3d) 1, 5 E.T.R. (2d) 1, [1994] 3 S.C.R. 377, 95 D.T.C. 5135, 1994 CarswellBC 438, 1994 Car- swellBC 1245, [1994] S.C.J. No. 84, EYB 1994-67089 (S.C.C.) — considered Holman v. Johnson (1775), 98 E.R. 1120, 1 Cowp. 341, [1775-1802] All E.R. 98 (Eng. K.B.) — followed Housen v. Nikolaisen (2002), 2002 SCC 33, 2002 CarswellSask 178, 2002 Car- swellSask 179, [2002] S.C.J. No. 31, 286 N.R. 1, 10 C.C.L.T. (3d) 157, 211 D.L.R. (4th) 577, [2002] 7 W.W.R. 1, 219 Sask. R. 1, 272 W.A.C. 1, 30 M.P.L.R. (3d) 1, [2002] 2 S.C.R. 235, REJB 2002-29758, 2002 CSC 33 (S.C.C.) — followed Investors Funding Corporation of New York Securities Litigation, Re (1980), 523 F.Supp. 533 (U.S. Dist. Ct. S.D. N.Y.) — referred to Jetivia SA v. Bilta (U.K.) Ltd. (In Liquidation) (2015), [2015] 2 W.L.R. 1168, 2015 UKSC 23 (U.K. S.C.) — considered King, Re (1963), [1963] Ch. 459, [1963] 1 All E.R. 781 (Eng. C.A.) — considered Kingston Cotton Mill Co. (No. 2), Re (1896), [1896] 2 Ch. 279 (Eng. C.A.) — followed L. (H.) v. Canada (Attorney General) (2005), 2005 SCC 25, 2005 CarswellSask 268, 2005 CarswellSask 273, [2005] S.C.J. No. 24, 24 Admin. L.R. (4th) 1, 8 C.P.C. (6th) 199, 251 D.L.R. (4th) 604, 333 N.R. 1, [2005] 8 W.W.R. 1, 262 Sask. R. 1, 347 W.A.C. 1, EYB 2005-89538, [2005] 1 S.C.R. 401, 29 C.C.L.T. (3d) 1, REJB 2005-89538, 2005 CSC 25 (S.C.C.) — considered London & General Bank (No. 2), Re (1895), [1895] 2 Ch. 673, 44 W.R. 80, 2 Ark. 282,55, 12 R. 263,502 (Eng. C.A.) — referred to MacDonald Estate v. Martin (1990), [1991] 1 W.W.R. 705, 77 D.L.R. (4th) 249, 121 N.R. 1, (sub nom. Martin v. Gray) [1990] 3 S.C.R. 1235, 48 C.P.C. (2d) 113, 70 Man. R. (2d) 241, 1990 CarswellMan 384, [1990] S.C.J. No. 41, 1990 CarswellMan 233, 285 W.A.C. 241, EYB 1990-68602 (S.C.C.) — considered Madoff Securities International Ltd. (In Liquidation) v. Raven (2013), [2013] EWHC 3147 (Eng. Comm. Ct.) — considered Meridian Global Funds Management Asia Ltd. v. The Securities Commission (1995), [1995] 2 A.C. 500, [1995] 3 All E.R. 918, [1995] B.C.C. 942, [1995] 2 B.C.L.C. 116, [1995] 3 W.L.R. 41, [1995] UKPC 5 (New Zealand P.C.) — followed 186 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

Murano v. Bank of Montreal (1995), 31 C.B.R. (3d) 1, 20 B.L.R. (2d) 61, [1995] O.J. No. 883, 1995 CarswellOnt 50 (Ont. Gen. Div. [Commercial List]) — referred to Murano v. Bank of Montreal (1998), 163 D.L.R. (4th) 21, 111 O.A.C. 242, [1998] O.J. No. 2897, 1998 CarswellOnt 2841, 22 C.P.C. (4th) 235, 41 B.L.R. (2d) 10, 41 O.R. (3d) 222, 5 C.B.R. (4th) 57 (Ont. C.A.) — referred to Mustapha v. Culligan of Canada Ltd. (2008), 2008 SCC 27, 2008 CarswellOnt 2824, 2008 CarswellOnt 2825, 55 C.C.L.T. (3d) 36, [2008] S.C.J. No. 27, 293 D.L.R. (4th) 29, 375 N.R. 81, 238 O.A.C. 130, [2008] 2 S.C.R. 114, 92 O.R. (3d) 799 (note) (S.C.C.) — considered Official Committee v. RF Lafferty & Co. (2001), 267 F.3d 340 (U.S. C.A. 3rd Cir.) — referred to Pacific Acceptance Corp. v. Forsyth (1967), 92 W.N. (N.S.W.) 29 (New South Wales S.C.) — referred to Parmalat Securities Litigation, Re (2007), 501 F.Supp.2d 560 (U.S. Dist. Ct. S.D. N.Y.) — referred to Pineridge Capital Group Inc. v. Dunwoody & Co. (1999), 1999 CarswellBC 58, [1999] B.C.J. No. 56 (B.C. S.C.) — referred to R. v. McNamara (No. 1) (1985), 45 C.R. (3d) 289, (sub nom. Canadian Dredge & Dock Co. v. R.) 9 O.A.C. 321, (sub nom. Canadian Dredge & Dock Co. v. R.) 19 C.C.C. (3d) 1, (sub nom. Canadian Dredge & Dock Co. v. R.) 19 D.L.R. (4th) 314, (sub nom. Canadian Dredge & Dock Co. v. R.) 59 N.R. 241, (sub nom. R. v. Canadian Dredge & Dock Co.) [1985] 1 S.C.R. 662, 1985 CarswellOnt 939, 1985 CarswellOnt 96, [1985] S.C.J. No. 28 (S.C.C.) — followed Revelstoke Credit Union v. Miller (1984), [1984] 2 W.W.R. 297, 28 C.C.L.T. 17, 24 B.L.R. 271, 1984 CarswellBC 740, [1984] B.C.J. No. 2819 (B.C. S.C.) — considered Roman Corp. v. Peat Marwick Thorne (1992), 11 O.R. (3d) 248, 8 B.L.R. (2d) 43, 12 C.P.C. (3d) 192, 1992 CarswellOnt 149 (Ont. Gen. Div. [Commercial List]) — referred to Sasea Finance Ltd. v. KPMG (1999), [2000] 1 All E.R. 676, [2000] B.C.C. 989, [2000] 1 B.C.L.C. 236, [2000] Lloyd’s Rep. P.N. 2 (Eng. C.A.) — distinguished Schacht v. Brown (1983), 711 F.2d 1343 (U.S. C.A. 7th Cir.) — referred to Sherman v. Orenstein & Partners (2005), 2005 CarswellOnt 6995, 11 B.L.R. (4th) 233, 205 O.A.C. 75, [2005] O.J. No. 5161 (Ont. C.A.) — followed Standard Investments Ltd. v. Canadian Imperial Bank of Commerce (1985), 52 O.R. (2d) 473, 22 D.L.R. (4th) 410, 11 O.A.C. 318, 30 B.L.R. 193, 1985 CarswellOnt 146 (Ont. C.A.) — considered Livent Inc. (Receiver of) v. Deloitte & Touche 187

Standard Investments Ltd. v. Canadian Imperial Bank of Commerce (1986), 53 O.R. (2d) 663 (note), 65 N.R. 78 (note), 15 O.A.C. 237 (note), [1986] 1 S.C.R. vi (note), [1986] S.C.C.A. No. 29 (S.C.C.) — referred to Stone & Rolls Ltd. v. Moore Stephens Ltd. (2009), [2009] UKHL 39, [2009] 3 W.L.R. 455, [2009] 1 A.C. 1391 (U.K. H.L.) — considered Sydney Cooperative Society Ltd. v. Coopers & Lybrand (2002), 2003 NSSC 35, 2002 CarswellNS 566, 213 N.S.R. (2d) 115, 667 A.P.R. 115, [2002] N.S.J. No. 578 (N.S. S.C.) — referred to Temseel Holdings Ltd. v. Beaumonts Chartered Accountants (2002), [2002] EWHC 2642 (Eng. Comm. Ct.) — considered Thabault v. Chait (2008), 541 F.3d 512 (U.S. C.A. 3rd Cir.) — followed Ultramares Corp. v. Touche (1931), 255 N.Y. 170, 174 N.E. 441, 74 A.L.R. 1139 (U.S. N.Y. Ct. App.) — referred to 373409 Alberta Ltd. (Receiver of) v. Bank of Montreal (2002), 2002 SCC 81, 2002 CarswellAlta 1573, 2002 CarswellAlta 1574, [2003] 2 W.W.R. 1, 29 B.L.R. (3d) 1, (sub nom. Bank of Montreal v. Ernst & Young Inc.) 220 D.L.R. (4th) 193, (sub nom. 373409 Alberta Ltd. v. Bank of Montreal) 296 N.R. 244, 8 Alta. L.R. (4th) 199, 317 A.R. 349, 284 W.A.C. 349, [2002] 4 S.C.R. 312, [2003] R.R.A. 1, [2002] S.C.J. No. 82, REJB 2002-36137, [2002] A.C.S. No. 82, 2002 CSC 81 (S.C.C.) — considered Statutes considered: Business Corporations Act, R.S.O. 1990, c. B.16 Generally — referred to s. 149 — referred to s. 151(4) — referred to s. 153(1) — referred to s. 153(3) — referred to s. 155 — referred to Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 Generally — referred to Criminal Code, R.S.C. 1970, c. C-34 Generally — referred to Merchant Shipping Act, 1894 (57 & 58 Vict.), c. 60 s. 502 — considered Negligence Act, R.S.O. 1990, c. N.1 Generally — referred to s. 3 — considered Securities Act, R.S.O. 1990, c. S.5 Generally — referred to s. 1.1 [en. 1994, c. 33, s. 2] — considered s. 21.10(4) [en. 1994, c. 11, s. 358] — considered s. 78 — considered s. 78(2) — referred to 188 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

s. 78(3) — referred to Regulations considered: Business Corporations Act, R.S.O. 1990, c. B.16 General, R.R.O. 1990, Reg. 62 s. 40 — referred to s. 41 — referred to Securities Act, R.S.O. 1990, c. S.5 General, R.R.O. 1990, Reg. 1015 s. 1(3) — referred to s. 2(2) — referred to

APPEAL by auditor from judgment reported at Livent Inc. (Receiver of) v. Deloitte & Touche (2014), 2014 ONSC 2176, 2014 CarswellOnt 4365, 11 C.B.R. (6th) 12, 26 B.L.R. (5th) 15, 10 C.C.L.T. (4th) 182 (Ont. S.C.J. [Com- mercial List]), finding auditor negligent in its handling of respondent company’s finances; CROSS-APPEAL by company from portion of same judgment, finding no negligence in earlier dealings.

Peter Griffin, Jamie Spotswood, Matthew Fleming, for Appellant / Respondent by cross-appeal Peter F.C. Howard, Patrick O’Kelly, Aaron Kreaden, David Spence, for Respon- dent / Appellant by cross-appeal

R.A. Blair J.A.: Overview 1 Garth Drabinsky and Myron Gottlieb were flamboyant entertainment impresarios who, in the 1990s, created and developed a live entertainment empire known as Live Entertainment Corporation of Canada Inc., or Livent. The developer of high-profile stage productions such as The Phantom of the Opera, Show Boat, Kiss of the Spider Woman, Music of the Night, and Sunset Boulevard, Livent had every appearance of a healthy, dynamic, and successful business enterprise. 2 Financially, however, it was not. The Livent house of cards came tumbling down in 1998 when new management discovered that Drabin- sky and Gottlieb had been fraudulently manipulating the company’s financial books and records over a number of years in order to inflate the Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 189

earnings and profitability of the operation so they could attract over U.S.$200 million and $77.5 million through the capital markets.1 3 Livent filed for insolvency protection in Canada and the United States and was placed in receivership. Its assets were subsequently sold for a realization value of approximately U.S.$144 million. Drabinsky and Got- tlieb were ultimately convicted of fraud and forgery and sent to jail. 4 Deloitte & Touche (“Deloitte”) was the auditor for Livent and its predecessor from 1989 through to 1998, when the fraud was discovered. It issued clean audited financial statements throughout this period. In this action, Livent — through a Special Receiver appointed in the insolvency proceedings for various purposes, including bringing this claim — sues Deloitte for damages in contract and negligence arising out of Deloitte’s failure to follow generally accepted auditing standards (“GAAS”) and thereby discover material misstatements in Livent’s books, records and financial reporting attributable to the Drabinsky and Gottlieb fraud. 5 After a 68-day trial, Gans J. found that Deloitte was not negligent in respect of the pre-1996 audits. Nor was Deloitte liable in respect of the 1996 audit: while it was negligent, its negligence caused no damage to Livent. Deloitte was, however, liable for damages arising from negligence in August/September 1997 and the spring of 1998. He awarded Livent damages in the amount of $84,750,000 plus interest, totalling $118,035,770. 6 Deloitte appeals that judgment, alleging the trial judge made multiple legal errors. It argues that it should not be responsible for fraud committed by Livent. It seeks to attribute wrongs committed by Livent officers and employees to the corporation and to rely on the defence of ex turpi causa, sometimes referred to as the defence of illegality. Deloitte also argues that its negligence was not the factual or proximate cause of damages to Livent. While Livent became insolvent, it was in a money-losing business. And, since Livent is insolvent, it is Livent’s creditors that are hurt, not the company itself. 7 Livent rejects these arguments. In its cross-appeal, it submits that the trial judge erred in failing to hold Deloitte liable for negligence in respect of the 1996 audit and also in reducing the award of damages by 25 per cent to account for what he called “contingencies”.

1 Dollar figures are in Canadian currency, unless otherwise specified. 190 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

8 For the reasons that follow, I would dismiss the appeal and the cross- appeal.

Facts A. Livent 9 Drabinsky and Gottlieb’s goal was to create a vertically-integrated live entertainment empire that would generate and present high-profile musical and theatrical productions in the entertainment centres of the world. A vertically-integrated live entertainment company is one that as- sumes all the risks of and responsibilities for — and reaps all of the re- wards, if any, from — the entire development, production and performance of the theatrical works. In Livent’s case, this included the ownership and refurbishing of some of the theatres in which the works were performed. It was a costly, capital-intensive, high-risk/high-reward, and, as it turned out, cash-burning undertaking with a constant and voracious appetite for new funding. In the end, this turned out to be Livent’s undoing. 10 In 1989, Drabinsky and Gottlieb left the Cineplex organization after a very public but failed take-over bid attempt. In leaving, however, they purchased and took with them all of the assets and certain of the liabilities of Cineplex’s live entertainment division. The assets included the Pantages Theatre in Toronto and the rights to the production of Phantom. 11 The assets were acquired in the name of their partnership, the MyGar Partnership, which first retained Deloitte to audit its financial statements for the year ended December 31, 1989. The audit retainer continued until MyGar was rolled into Livent in 1993. Thereafter, Deloitte was retained annually as Livent’s auditor until the events leading up to this lawsuit occurred in 1998. 12 MyGar was initially successful, at least on the surface. It had a small number of shows and theatres. Phantom and the Joseph and the Amazing Technicolor Dreamcoat tour were popular. In May 1993, MyGar made a public offering and emerged as the public company, Livent. Two years later, Livent applied for registration with the U.S. Securities and Ex- change Commission in order to list its shares on the NASDAQ stock exchange. Deloitte prepared financial statements and comfort letters with respect to all of these initiatives. 13 By the end of 1995, Livent had six shows in various stages of presentation, including Show Boat, Phantom, Kiss, Music of the Night, and Sun- Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 191

set Boulevard. It also had five other shows under production, including Ragtime, and was spending significant amounts acquiring and renovating the Lyric and Apollo Theatres in New York and the Oriental Theatre in Chicago. By all accounts, Livent and its colourful principals, Drabinsky and Gottlieb, were the toast of the live entertainment milieu. 14 But the demand for new funding was constant, and in 1996 — described by the trial judge as “a watershed year” — the web began to un- ravel. Phantom in Toronto was nearing the end of its run. Sunset Boulevard was an artistic misfire and a financial flop. Livent was required to take an $18.5 million write-off on the show. The financial results for Kiss showed that critical acclaim did not necessarily translate into financial success, and Music of the Night was not meeting expectations. Show Boat, although spectacular, was losing money simply because it was such a costly production. In 1996 alone, Livent went to the markets to raise in excess of $96 million through debenture offerings and public and private placements of its common stock. 15 All the while — as far back as the early MyGar days — Drabinsky and Gottlieb (and a legion of employees who were complicit with them) had been misleading Deloitte, investors, and the public, through a pro- gressively complex and massive fraudulent scheme. 16 I pause to describe this scheme before continuing with the chronology.

B. The Fraudulent Scheme 17 As Deloitte emphasizes, the trial judge found that Livent “was rife with fraud”: para. 28. While Drabinsky and Gottlieb were at the centre of the exercise, many other officers and employees of Livent were knowing and willing participants. These included the Chief Operating Officer, the Chief Financial Officer, the Senior Vice-President of Finance, Livent’s General Counsel, the Director and Executive Vice-President, the Senior Vice-President North American Touring, members of the accounting staff and some members of Livent’s Audit Committee. Maria Messina, who until May 1996 was the lead Engagement Partner at Deloitte on the Livent file, was one of them. She left Deloitte and joined Livent at that time, first as Vice-President Finance and later as Chief Financial Officer. 18 There were various aspects of the fraud. The following summary is taken largely from the reasons of the trial judge. 192 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

(1) Livent’s Accounting Software is Modified 19 Livent’s Manager of Information Services altered Livent’s accounting software in various ways to facilitate the fraud. For example, the software was modified to (i) allow entries to the general ledger to be reversed or unposted and then posted to a different account or to a different accounting period, and (ii) permit staff to change the date on selected invoices. As the trial judge noted, it was “undisputed that the purpose of these modifications was to conceal Livent’s accounting manipulations and to ensure that no trail existed which could be uncovered by Deloitte during the course of the audit”: para. 29.

(2) Kickbacks 20 Between 1991 and 1993, Drabinsky and Gottlieb received approximately $7.5 million in direct or indirect kickbacks from certain Livent service providers through a system that saw the service providers present false or inflated invoices to Livent and then, after receipt of payment from Livent, forward an amount to Drabinsky and Gottlieb or one of their companies. The kickbacks were part of a plan to enable Drabinsky and Gottlieb to receive money from MyGar in excess of the limits on their “draws” under a loan agreement with RBC. 21 The kickbacks were not disclosed to Deloitte. Many of the false or inflated invoices related to theatre engineering investigation work for intended productions and a construction development project involving the lands associated with the Pantages Theatre in Toronto. To make matters worse, a significant percentage of these inflated amounts were capitalized as assets on the MyGar and Livent books, thus falsifying the financial strength of the companies and creating — as the trial judge observed — “a significant distortion to the balance sheet of each from the early days of the operation and well before the date of the IPO”: para. 34.

(3) Expense Rolls 22 Using the modified software referred to above, financial staff, at the behest of Drabinsky and Gottlieb, manipulated expense entries either by backing them out of particular accounting periods, from quarter to quarter or into another year-end, or by moving them into and charging them against other activities or productions. 23 These expense roll manipulations enabled the participants to colour the rosiness of Livent’s financial picture to their advantage, as needed. Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 193

(4) Amortization 24 In terms of dollar value, the largest aspect of the fraudulent scheme by far involved the manipulation of millions of dollars of pre-production costs (“PPC”) through their improper transfer from specific shows to fixed assets, or from show to show and, in particular, from one show to another that had not yet opened. 25 The PPC included all costs incurred to mount a production prior to its opening — for example, the costs associated with set design and construction, costume design and fabrication, pre-opening advertising, and salaries and related amounts paid to the cast, crew and musicians during rehearsals. 26 The improper transfer of the PPC permitted the manipulators either to amortize the PPC over an extended period of time or to avoid amortization in any particular period, depending on the need to show positive results. The overall effect was that Livent’s income was significantly overstated. In the trial judge’s words, this technique was “the watchword of the operation from about 1994 on to early 1998”, when the bubble burst: para. 41.

(5) Revenue Transactions 27 With the need to show that their plans for integrated growth were flourishing and as the demand for more funding intensified, Drabinsky and Gottlieb turned to a series of one-off revenue transactions in an effort to enhance the bottom line. These transactions involved the supposed sale of various assets to third parties, including Livent’s interests in the production rights of its shows, the sponsorship or naming rights associated with its theatres or the productions, and certain lands and density rights associated with the redevelopment and expansion of the Pantages Theatre in Toronto (the “Revenue Transactions”). 28 A common feature of the Revenue Transactions was that the income they generated was to be received over a period of time. There was a continuing tension between Livent and Deloitte, therefore, about when and in what amounts these income streams could be counted as income for the purposes of financial accounting. Many of the Revenue Transac- tions also had another theme in common: they were not true sales of assets, but were more in the nature of loans or financing agreements. 29 There were four Revenue Transactions in fiscal year 1996 and five in fiscal year 1997. As a result of them, Livent recorded approximately $40 million in income in those two years. 194 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

30 The most critical of the Revenue Transactions was an agreement entered into in May 1997 between Livent and Dundee Realty Corp. (“Dun- dee”) involving the transfer of Livent’s air rights over the Pantages Thea- tre and some associated lands for the purpose of building a new condominium-hotel tower and a new theatre. The consideration for the transfer was $7.4 million, but the agreement contained a “put” in favour of Dundee that enabled it to escape from the transaction for a number of reasons, including if construction had not commenced by December 1999. I shall refer to this agreement and its put — which proved to be central to the unravelling of the Livent enterprise — as the “Pantages Air Rights Agreement” and the “Put”. 31 Gottlieb insisted on including the revenue from this transaction in Livent’s second quarter (“Q2”) results for the 1997 year — something he needed to enhance the bottom line for purposes of a large public offering that was scheduled for the fall in the United States. This led to considerable controversy with Deloitte and a series of events which caused the trial judge to dub the Pantages Air Rights Agreement and the “infamous” Put as the “Achilles heel” of Deloitte’s defence in the action: para. 174. 32 I will return in more detail to this Agreement and the Put later. I note here, however, that although Deloitte was aware of the Revenue Transac- tions and spent some time examining them, it (like everyone else) was misled by the Livent players as to the true nature of the transactions.

C. Withholding of Other Information 33 There were other earlier instances of information being withheld from Deloitte — instances of which Deloitte became aware. 34 For example, an October 1990 memorandum revealed that Drabinsky and Gottlieb had withheld relevant financial information. The memorandum dated October 24, 1990 from a Deloitte Manager, Ron Cutway, to two Deloitte partners, Aaron Glassman and Leonard Barkin, reported that RBC had concerns about MyGar. Cutway reported that the bank was concerned that Drabinsky and Gottlieb had failed to report that MyGar was in default of its agreement with the bank. RBC had also complained that it “was not fully satisfied with their dealings with MyGar” and that Drabinsky and Gottlieb were “not proving to be as ‘above board’ with the bank as they should be” regarding cash flows and other financial information. Cutway concluded: Overall I feel we should conclude that the relationship between the client and the bank is not good and that we should be particularly Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 195

careful regarding the client’s verbal representations concerning his relationship with the bank and possibly concerning other matters as well. [Emphasis added.] 35 A naming agreement entered into between The North York Perform- ing Arts Centre Corporation and Livent in December 1991 carried with it a $7.5 million liability that was not disclosed to Deloitte during the 1991 audit. Deloitte learned about this agreement (and therefore about its non- disclosure) in or around November 1993, however. 36 The seeds for distrust had been sown, but Deloitte continued to show no concern. It would reap the produce of those seeds later on.

D. Discovery of the Fraud 37 The fraud was ultimately discovered after a new management team was put in place by new equity investors in June 1998. 38 On April 13, 1998, Livent announced that Lynx Ventures LP, an investment vehicle of Michael Ovitz, had agreed to invest U.S.$20 million in Livent in return for 12 per cent of Livent’s equity. It was also announced that Roy Furman, through Furman Selz Inc., would invest U.S.$2 million in Livent in exchange for 1.2 per cent of Livent’s equity. 39 The deal closed in June 1998 and new management subsequently took control. The new team included Robert Webster, a former KPMG partner who assumed responsibility for the financial aspects of the organization as Livent’s new Executive Vice-President. 40 On August 6, 1998, in response to an inquiry from Webster about budget overages, Messina and Tony Fiorino, Livent’s Theatre Controller, revealed to Webster that there had been a number of improper cost trans- fers to fixed asset accounts as well as between shows. 41 Later that day, Grant Malcolm, Livent’s Senior Production Control- ler, and Diane Winkfein, Livent’s Senior Corporate Controller, along with Messina and Fiorino, met with Webster. They disclosed additional accounting irregularities to him. 42 A press release was immediately issued disclosing the fraud and the suspension of Drabinsky and Gottlieb. Trading of Livent shares on the TSX and NASDAQ was suspended. 43 Deloitte withdrew its original audit opinions on Livent’s financial statements for the years 1996 and 1997. 196 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

44 KPMG was appointed to conduct an independent investigation and PricewaterhouseCoopers was retained as an independent accounting ad- visor for Livent’s Audit Committee. Deloitte conducted a re-audit. 45 On November 18, 1998, Livent issued restated financial statements for the fiscal years ended 1996 and 1997, and the first quarter of 1998. The restatements identified over $98 million in accounting irregularities.

E. Subsequent Events 46 The following day, November 19, 1998, Livent filed for insolvency protection in the United States and in Canada. Its assets were sold in the insolvency proceedings to SFX Entertainment Inc. for approximately U.S.$144 million. Drabinsky and Gottlieb were dismissed for cause. 47 In September 1999, Livent was placed in receivership and Ernst & Young was appointed Receiver and Manager. Two years later, in No- vember 2001, Roman Doroniuk was appointed the Special Receiver and Manager of Livent for various purposes, including a potential action against Deloitte. This action was commenced on February 28, 2002. 48 Livent’s collapse generated a number of U.S. class actions brought by certain investors against Deloitte and other defendants under U.S. securities laws. These actions were settled. As part of the settlement, the U.S. judge supervising the class actions issued orders containing bar provisions and releases. The effect of those bar provisions and releases is an issue on this appeal. 49 To complete the saga up to the point of this proceeding, Drabinsky and Gottlieb were convicted of two counts of fraud and one count of forgery in Ontario’s Superior Court of Justice. Their convictions were upheld on appeal, although the sentences imposed were reduced to five years’ imprisonment for Drabinsky and four years’ imprisonment for Gottlieb. 50 Further, Deloitte partners were the subject of proceedings before the Discipline Committee of the Institute of Chartered Accountants of On- tario. Three partners were disciplined for their actions relating to the audit of Livent’s 1997 financial statements. The decision of the Discipline Committee was upheld by this Court as well.

The Issues 51 I note that while Livent sued Deloitte in contract and tort, the main thrust of the argument at trial related to the negligence claim and Livent conceded that the damages would be the same in contract as in tort. For Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 197

that reason, the trial judge’s reasons focus on the tort analysis. However, he concluded that the contract claim succeeded for the same reasons as the tort claim. On the appeal and cross-appeal, argument focussed on the tort claim as well. 52 For the purposes of these reasons, the issues to be addressed are the following: (a) Were the losses sustained Livent’s losses or, instead, the losses of its creditors and other stakeholders? (b) Is Livent’s claim defeated by the doctrines of corporate identification (an aspect of corporate “attribution”) or ex turpi causa, or by the effect of the U.S. bar orders? (c) Did the trial judge extend the duty of care beyond the duty owed to Livent? (d) What are the purposes of an audit of a publicly-traded company and what is the standard of care to be applied in determining whether Deloitte was negligent? (e) Did Deloitte breach the standard of care? (f) If Deloitte did breach the standard of care, were Livent’s losses caused by Deloitte’s negligence? This involves a consideration of (i) the application of the “but for” test, and (ii) issues of remoteness and proximity, including the notions of normal business losses and “deepening insolvency”, and what the trial judge referred to as “contingencies”; (g) If Livent’s losses were caused by Deloitte’s negligence, what are those damages and should they be limited or minimized by operation of the doctrine of contributory negligence? (h) Did the trial judge err in failing to hold Deloitte liable for its breaches of the standard of care in relation to the 1996 audit (the cross-appeal)?

Analysis A. The Standard of Review 53 The standard of review on an appeal of this nature is not controversial. 54 The standard of review on pure questions of law is correctness, while that applicable to findings of fact, and questions of mixed fact and law that lie more towards the factual end of the spectrum, is palpable and 198 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

overriding error: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 (S.C.C.), at paras. 8, 10, 36. This latter deferential standard is equally applicable to inferences of fact, which a trial judge arrives at by sifting through the relevant facts, deciding their weight, and drawing factual conclusions: Housen, at paras. 22, 25. As the Supreme Court of Can- ada explained in L. (H.) v. Canada (Attorney General), 2005 SCC 25, [2005] 1 S.C.R. 401 (S.C.C.), at para. 74, it is not open to appellate courts to interfere with reasonable inferences drawn by the trial judge: Not infrequently, different inferences may reasonably be drawn from facts found by the trial judge to have been directly proven. Appellate scrutiny determines whether inferences drawn by the judge are “reasonably supported by the evidence”. If they are, the reviewing court cannot reweigh the evidence by substituting, for the reasonable inference preferred by the trial judge, an equally — or even more — persuasive inference of its own. This fundamental rule is, once again, entirely consistent with both the majority and the minority reasons in Housen. [Emphasis in original.] 55 All of these considerations underlie my approach to the analysis of the appeal and the cross-appeal.

B. Were the Losses Sustained Livent’s Losses or, Instead, The Losses of Its Creditors and Other Stakeholders? 56 A recurring theme in Deloitte’s submissions is that Livent is not claiming for its own losses, but rather is advancing a proxy claim, indirectly, for losses sustained by its creditors and investors that will be recoverable in Livent’s insolvency proceedings. For example, in its factum, Deloitte argues that: • the duty of care to an auditor’s client does not extend “to assuming economic responsibility for losses experienced by those standing behind it”; • the authorities “do not support imposing economic responsibility on auditors for losses beyond those actually suffered by the corporation”; • it is a mistake to assume that an auditor’s duty to its client “exists to the extent of all possible losses, however indeterminate, without regard to who exactly is experiencing those losses”; • “Livent itself lost nothing because of its frauds”; Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 199

• the trial judge incorrectly assumed that “investor losses are recoverable so long as the company lends its name to an action to recover investor losses on behalf of the investors”; and • “[t]he trial judge ... failed to apply these principles and granted an award of damages to Livent representing losses experienced not by it, but by its creditors.” 57 I reject Deloitte’s submission that the losses were not Livent’s losses. It impermissibly conflates damages sustained by the corporation with the distribution of those damages, once recovered, to creditors and other stakeholders, as part of the assets of the corporation, in the course of the proceeding under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (“CCAA”). The two legal constructs are quite different, with different rationales and purposes. To conflate them is to disregard the long-recognized principle of corporate law that a corporation is a legal entity separate and apart from its shareholders and stakeholders, and that the corporation alone has the right to sue for wrongs done to it: Hercules Management Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165 (S.C.C.), at para. 59. 58 In this respect, the debate on the appeal surrounding the impact of the Supreme Court of Canada’s decision in Hercules, and related authorities, is of little assistance. In Hercules, the Court affirmed that, generally speaking, auditors do not owe a duty of care to investors as individuals and that a claim for auditor’s negligence causing harm to the corporation rests with the corporation; it must be pursued either by the corporation or by way of a derivative action on behalf of the corporation. 59 Here, Deloitte relies on Hercules for the converse proposition: if the corporation must sue for damages caused to it by an auditor’s negligence, and third-party stakeholders may not assert such a claim, it follows that the corporation may not be used as “a passive receptacle of a cause of action against the auditor to pursue claims ‘for the benefit of’ anyone but itself.” As I have said, however, Livent is not suing here to recover losses sustained by anyone else. 60 The trial judge was clear that he was assessing damages sustained by the corporation. At para. 365, he stated: [I]t is clear and beyond doubt that Livent cannot advance a claim on behalf of stakeholders, such as shareholders and noteholders. The claim for breach of contract and for negligence is that of the corporation and no such cause of action rests with the shareholders or credi- 200 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

tors. The fact that some stakeholders might benefit from any recovery in this action does not, in my view, alter this conclusion. 61 And the trial judge summarized Livent’s theory of damages as follows, at para. 291: The plaintiff’s theory of damages can best be expressed in the following sentence: the measure of damage equals the change or increase in the losses sustained by Livent between the time of Deloitte’s breach and the time of Livent’s eventual CCAA filing, if not its insolvency. [Emphasis added.] 62 The damages experts — Ian Ratner for Livent and Stephen Cole for Deloitte — formulated that theory into the following equation: Loss (L) = Actual Liquidation Deficit (ALD) — Estimated Liquida- tion Deficit (ELD) or, L = ALD — ELD 63 In this formula, the Actual Liquidation Deficit or ALD is not in dispute. It represents the losses sustained by Livent after taking into account the amounts recovered on the sale of its assets to SFX Entertainment Inc. in August 1999, and is fixed at $418,830,000. The quantum of the Esti- mated Liquidation Deficit or ELD is contested, but is established by determining what the estimated loss on the sale of the assets would have been at the “Measurement Date” — namely, the date when (a) Deloitte breached its standard of care, (b) the fraud would have been discovered but for the breach, (c) if the fraud had been uncovered, Livent would have been unable to access the capital markets, and (d) this would, in turn, have led to a formal insolvency. 64 I will return to the formula later. For present purposes, it is important to note that both experts agreed that the formula generates a number that captures Livent’s economic loss. In his examination-in-chief on behalf of Deloitte, Cole stated: The new Ratner theory, as I said earlier, is the sum [referenced in an exhibit], and I should say at the outset that I believe that that is a quantification of Livent’s economic loss. I don’t believe it is a correct calculation, but it is focused on Livent the corporation...... His new theory will bring the court to the same place as what I have been advancing. They are very similar but for our different methods of computing fair market value. Both methods address the corpora- Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 201

tion’s loss and both methods recognize the penultimate importance of fair market value. [Emphasis added.] 65 I do not suggest that, in making this statement, Cole was conceding that, as a matter of law, Deloitte was responsible for Livent’s loss. What he was recognizing — as I see it — is that whatever loss the formula pro- duced was a loss sustained by Livent and not by anyone “standing behind” it, such as a creditor, investor, or shareholder. I agree and have no difficulty in concluding that the losses in question are Livent’s losses.

C. Is Livent’s Claim Defeated by the Doctrines of Corporate Identification (Attribution) or Ex Turpi Causa? 66 At trial, Deloitte took the position that Livent’s losses were not recoverable because they were caused by its own illegal acts. This submission was advanced on two separate, but somewhat overlapping bases. First, Deloitte argued that Livent’s claim is defeated by operation of the defence of illegality, also known as ex turpi causa. Secondly, it relied on the doctrine of corporate identification (sometimes referred to as the doctrine of “attribution”). As the trial judge noted, these submissions “achieved more than some prominence” during oral argument: para. 245. 67 The trial judge rejected both defences. He concluded that, for legal and policy reasons, neither the corporate identification nor the ex turpi causa doctrine should apply. It was not necessary to attribute the frauds to Livent in order to prevent the wrongdoers from profiting from their frauds or to protect the integrity of the legal system. None of the damages to be paid by Deloitte would directly or indirectly benefit a partici- pant in the frauds. Attributing the frauds to Livent would not serve the public policy objectives of either doctrine. 68 Deloitte submits the trial judge erred in arriving at these conclusions. It argues that the trial judge failed to recognize that the frauds perpetrated by Livent’s principals, Drabinsky and Gottlieb, and many senior managers and other employees, permeated the corporate structure such that Livent was itself identified with the impugned conduct. The frauds were not committed against Livent; they were committed by Livent. In addition, Deloitte was a victim of the frauds and the ex turpi causa doctrine should be applied to prevent Livent from profiting from its own criminal acts. 69 The analysis of these issues requires an examination of both the ex turpi causa doctrine and the corporate identification doctrine. When and 202 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

why does a party’s conduct bar recovery under the ex turpi causa doctrine? When and why is a corporation identified with the conduct of its “directing mind” in circumstances such as these? And does either doctrine afford Deloitte a defence to Livent’s claim? In answering these questions, I will review the case law in some detail, given the significance of these issues not only at trial, but also on appeal. 70 As I will explain, I agree with the trial judge that neither doctrine assists Deloitte.

(1) The Ex Turpi Causa Defence 71 The phrase ex turpi causa non oritur actio means “from a dishonourable cause an action does not arise”. The statement of Lord Mansfield in Holman v. Johnson (1775), 98 E.R. 1120 (Eng. K.B.), at p. 1121, has often been cited as authoritative: No Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff’s own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the Court says he has no right to be assisted. It is upon that ground the Court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. 72 The leading Canadian cases on ex turpi causa are the decisions of the Supreme Court of Canada in Hall v. Hebert, [1993] 2 S.C.R. 159 (S.C.C.), and British Columbia v. Zastowny, 2008 SCC 4, [2008] 1 S.C.R. 27 (S.C.C.). 73 In Hall, the plaintiff was injured when, in a drunken state, he lost control of his friend’s car and suffered serious head injuries. He sued his friend, the owner of the car, with whom he had been drinking, for giving him permission to drive the vehicle while drunk. The defendant raised the ex turpi causa defence. 74 The appeal concerned, amongst other things, the role of ex turpi causa in tort cases. The majority decision, written by McLachlin J., held that courts can bar recovery in tort on the basis of the plaintiff’s illegal or immoral conduct, but only to preserve the integrity of the legal system. That concern does not exist where the plaintiff’s claim is merely for compensation for personal injuries sustained due to the defendant’s neg- Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 203

ligence. She emphasized, at pp. 179-80, that the use of the ex turpi causa defence is limited: [T]here is a need in the law of tort for a principle which permits judges to deny recovery to a plaintiff on the ground that to do so would undermine the integrity of the justice system. The power is a limited one. Its use is justified where allowing the plaintiff’s claim would introduce inconsistency into the fabric of the law, either by permitting the plaintiff to profit from an illegal or wrongful act, or to evade a penalty prescribed by criminal law. Its use is not justified where the plaintiff’s claim is merely for compensation for personal injuries sustained as a consequence of the negligence of the defendant. 75 The majority of the Court declined to apply the defence in the circumstances of that case. 76 In Zastowny, the Supreme Court affirmed Hall, describing the ex turpi causa doctrine as a matter of judicial policy designed to preserve the integrity of the justice system by preventing inconsistency in the law. 77 The case involved a prisoner who was sexually assaulted by a prison official while he was in jail. The prisoner sued and was awarded general and aggravated damages, the cost of future counselling, and compensation for past and future wage loss. At issue was whether he was barred from receiving compensation for wages lost due to incarceration. 78 Quoting from Hall, Rothstein J. described the issue, at para. 20, as “under what circumstances should the immoral or criminal conduct of a plaintiff bar the plaintiff from recovering damages to which he or she would otherwise be entitled[?]” He summarized the applicable principles and approach derived from Hall, which I in turn summarize as follows: • Because the application of the ex turpi causa doctrine invalidates otherwise valid and enforceable actions in tort, its application must be based on a firm doctrinal foundation, must be made subject to clear limits and should occur “in very limited circumstances.” • The only justification for its application is to preserve the integrity of the legal system. This concern is only in issue where a damages award in a civil suit would allow a person to profit from illegal or wrongful conduct or would permit evasion or rebate of a penalty prescribed by the criminal law. This would create inconsistency in the law by punishing conduct through the criminal law, on the one hand, and by rewarding it on the other. 204 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

• The ex turpi causa doctrine generally does not preclude an award of damages in tort because such awards tend to compensate the plaintiff rather than amount to “profit”. • The ex turpi causa doctrine is a defence in a tort action. The plaintiff’s illegal conduct does not give rise to a judicial discretion to negate or refuse to consider the duty of care which goes to the relationship between a plaintiff and a defendant. It is independent of that relationship. The defendant may have caused harm by acting wrongly or negligently, but the “responsibility for this wrong is suspended only because concern for the integrity of the legal system trumps the concern that the defendant be responsible.” • Treating the ex turpi causa doctrine as a defence places the onus on the defendant to prove the illegal or immoral conduct that precludes the plaintiff’s action. And as a defence, it allows for segre- gation between claims for personal injury and claims that would constitute profit from illegal or immoral conduct, or the evasion of, or a rebate of, a penalty provided by the criminal law. 79 The Supreme Court concluded that permitting the plaintiff to recover the wages he lost while in prison would introduce an inconsistency in the fabric of the law, which would compromise the integrity of the justice system. In effect, the plaintiff would be indemnified for the consequences of committing illegal acts for which he had been found crimi- nally responsible. 80 The application of the ex turpi causa doctrine has therefore been strictly limited in Canada. It will apply only where allowing a plaintiff’s claim would introduce inconsistency into the fabric of the law — by “giving with one hand what it takes away with the other”: per McLachlin J. in Hall, at p. 178, quoted with approval by Rothstein J. in Zastowny, at para. 22. 81 I now turn to the corporate identification doctrine, since the issue is whether the frauds of Drabinsky and Gottlieb can be attributed to Livent for the purposes of invoking the ex turpi causa defence.

(2) Corporate Identification Doctrine (a) Corporate Attribution Rules 82 By way of introduction, it is helpful to understand how the corporate identification doctrine meshes with other rules of corporate attribution. Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 205

83 As the Privy Council noted in Meridian Global Funds Management Asia Ltd. v. The Securities Commission, [1995] 2 A.C. 500 (New Zealand P.C.), at p. 506, a variety of rules are used to determine which acts should be attributed to a corporation. A corporation’s “primary” rules of attribution are typically found in its corporate constitution. For instance, the articles of association may specify that a majority vote of shareholders shall be a decision of the company. There are also primary rules of attribution found in business law and general rules of attribution — such as agency law — that apply equally to natural persons. 84 As the Privy Council explained at p. 507, “[t]he company’s primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations.” It is only in exceptional cases — for instance, where a rule of law precludes attribution on the basis of the general principles of agency or vicarious liability — that these principles are not sufficient. For example, a rule may be stated in language primarily applicable to a natural person or require some state of mind. It is in these special circumstances that the doctrine of corporate identification comes into play.

(b) Genesis and Development of the Corporate Identification Doctrine 85 The corporate identification doctrine has its origins in two distinct and unrelated fields, criminal law and maritime law. In criminal law, the doctrine arose from the need to resolve the issue of whether, and in what circumstances, a corporation could be subject to criminal liability for a mens rea offence (an offence requiring a guilty mind). In shipping law, it arose from the need to determine whether a ship-owning corporation could take advantage of a defence, or limit its liability by statute, when the events giving rise to the claim occurred without the “actual fault or privity” of the owner of the ship. These concepts, a guilty mind and fault or privity, are not readily applicable to a corporation, which is a legal fiction. 86 I now turn to the two leading cases on corporate identification.

(i) Lennard’s Carrying 87 The seminal case on corporate identification is the House of Lord’s decision in Asiatic Petroleum Co. v. Lennard’s Carrying Co., [1915] A.C. 705 (U.K. H.L.). Under s. 502 of the Merchant Shipping Act, 1894 (U.K.), 57 & 58 Vict., c. 60, a ship owner had no liability for loss or 206 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

damage to goods caused by a fire on board the ship where the damage occurred “without his actual fault or privity”. The issue could be resolved easily enough where the owner was a person, but how could a corporation be actually at fault for, or privy to, the cause of the damage? 88 Cargo owners sued the ship owner in question after the ship caught fire as a result of defective boilers and the cargo was destroyed. The ship was owned by one limited company and managed by another. The managing director of the latter company, John M. Lennard, was registered as the ship’s manager and took part in its active management on behalf of the ship’s owner. He knew, or at least ought to have known, that the ship’s boilers were defective. 89 The House of Lords concluded that the ship’s owner could not avoid liability based on s. 502. In what has become a famous passage, Viscount Haldane described the nature of a corporation and its directing mind, at p. 713: My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. That person may be under the direction of the shareholders in general meeting; that person may be the board of directors itself, or it may be, and in some companies it is so, that that person has an authority co-ordinate with the board of directors given to him under the articles of association, and is appointed by the general meeting of the company, and can only be removed by the general meeting of the company. 90 Viscount Haldane went on to find, at pp. 713-14, that in the case of a corporation, the requisite fault or privity was not based on the corporation’s vicarious liability for the acts of its employees, but rather was the fault of “somebody for whom the company is liable because his action is the very action of the company itself.” Since Lennard was the “directing mind” of the ship-owning company, his fault or privity in relation to the cause of the fire was the company’s fault or privity and it could not escape liability. 91 While the House of Lords explained its decision as a matter of statutory interpretation, the decision has been read as establishing a “general principle of corporate liability”: R. v. McNamara (No. 1), [1985] 1 S.C.R. 662 (S.C.C.) [hereinafter Canadian Dredge], at p. 678. It is not Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 207

evident, however, that Lennard’s Carrying was intended to state principles of general application. 92 In Meridian Global Funds, the Privy Council recognized, at p. 506, that “there has been some misunderstanding of the true principle upon which that case was decided.” It emphasized, at p. 507, that the decision in Lennard’s Carrying was a matter of statutory interpretation and that fashioning a special rule of attribution is context-specific: [T]here will be many cases in which ... the court considers that the law was intended to apply to companies and that ... insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy. [Emphasis in original.] 93 Despite this caution, Lennard’s Carrying has been followed and referred to in a long line of cases, including the leading Canadian case on corporate identification, Canadian Dredge.

(ii) Canadian Dredge 94 Canadian Dredge involved an appeal by four corporations convicted of fraud and conspiracy under the Criminal Code, R.S.C. 1970, c. 34, as a result of bid rigging. They contended that they were not liable because their managers, who were responsible for the bidding, were acting in fraud of the corporations, were acting for their own benefit, or were acting contrary to instructions. Some of the appellants also challenged the existence of any theory of corporate criminal liability for mens rea offences. 95 The Court stated the specific question to be resolved, at p. 669: Is the criminal liability of a corporation, when it is based on the misconduct of a directing mind of the corporation, affected because the person who is the directing mind is at the same time acting, in whole or in part, in fraud of the corporation, or wholly or partly for his own benefit or contrary to instructions that he not engage in any illegal activities in the course of his duties? 96 In answering this question, Estey J. traced the history of the identification theory, including the decision in Lennard’s Carrying, and ex- 208 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

plored its development in various jurisdictions. He described the theory in the following way, at pp. 682-83: [The identification theory] produces the element of mens rea in the corporate entity, otherwise absent from the legal entity but present in the natural person, the directing mind. This establishes the “identity” between the directing mind and the corporation which results in the corporation being found guilty for the act of the natural person, the employee.... In order to trigger its operation and through it corporate criminal liability for the actions of the employee (who must generally be liable himself), the actor-employee who physically committed the offence must be the “ego”, the “centre” of the corporate personality, the “vital organ” of the body corporate, the “alter ego” of the employer corporation or its “directing mind”...... It is the wrongful action of the ‘primary’ representative which by attribution to the corporation creates ‘primary’ rather than ‘vicarious’ liability, according to the identification theory. 97 The difficult question for the Court to answer was the “appropriate outer limit of the attribution of criminal conduct of a directing mind when he undertakes activities in fraud of the corporation or for his own benefit”: p. 701. Estey J. ultimately drew the following boundaries, at pp. 713-14: Where the criminal act is totally in fraud of the corporate employer and where the act is intended to and does result in benefit exclusively to the employee-manager, the employee-directing mind, from the outset of the design and execution of the criminal plan, ceases to be a directing mind of the corporation and consequently his acts could not be attributed to the corporation under the identification doctrine...[T]he identification doctrine only operates where the Crown demonstrates that the action taken by the directing mind (a) was within the field of operation assigned to him; (b) was not totally in fraud of the corporation; and (c) was by design or result partly for the benefit of the company. 98 In this case, Deloitte submits that this test is satisfied and so the wrongful acts of Livent’s directing minds should be attributed to Livent.

(iii) Application of Canadian Dredge 99 Canadian Dredge has been applied in a number of different contexts. In particular, Deloitte points to the fact that it has been applied in the non-statutory, civil context. Deloitte also points to the fact that the corporate identification doctrine has been used as a shield as well as a sword. Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 209

In other words, rather than using the corporate identification doctrine to impose liability on a corporation, as was the case in Canadian Dredge, it has been used to shield a defendant from liability to a corporation. Deloitte relies on two cases in support of these submissions. 100 First, Deloitte relies on this Court’s decision in Standard Investments Ltd. v. Canadian Imperial Bank of Commerce (1985), 52 O.R. (2d) 473 (Ont. C.A.), leave to appeal refused, [1986] S.C.C.A. No. 29 (S.C.C.), as an example of a case in which the Canadian Dredge test has been applied in the non-statutory, civil context. 101 In that case, two bank customers sued the bank for breach of fiduciary duty based on the conduct of the bank’s president and chairman. After considering Lennard’s Carrying and Canadian Dredge, Goodman J.A. stated, at p. 493: In my view the identification doctrine is equally applicable in a civil action where the plaintiff seeks to establish liability on the part of a defendant corporation on the basis of an alleged breach of fiduciary duty (without reliance on the principle of respondeat superior). It is my further view that in such a case the onus on the plaintiff can be no higher than that placed on the Crown in a case of alleged corporate criminal responsibility. 102 It was found that the knowledge, intentions and acts of the president and chairman were those of the corporation for the purpose of determining whether the corporation had committed a breach of its fiduciary duty to its customer. 103 I do not find Standard Investments of particular assistance, beyond its demonstration that Canadian Dredge can apply in the civil context to attribute knowledge or state of mind to a corporate defendant. It also demonstrates that attribution is not the end of the analysis, but rather a step in determining the legal consequences of the knowledge or state of mind. However, it does not deal with a situation where, as here, a defendant attempts to avoid liability by attributing the acts of corporate individuals to a plaintiff. 104 Deloitte also places significant reliance on the Supreme Court of Can- ada’s decision in 373409 Alberta Ltd. (Receiver of) v. Bank of Montreal, 2002 SCC 81, [2002] 4 S.C.R. 312 (S.C.C.), for the proposition that corporate identification may be used as a shield. 105 The case involved two private corporations. Douglas Lakusta was the sole shareholder, director and officer of 373409 Alberta Ltd. and Legacy Holdings Ltd. He received a cheque payable to 373409, but altered the 210 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

cheque by adding Legacy as a payee. He deposited it into Legacy’s account without endorsing it. The bank credited Legacy’s account with the amount, which Lakusta subsequently withdrew. 106 After 373409 went into liquidation, its Receiver and Manager brought an action in conversion against the bank for having accepted 373409’s unendorsed cheque for deposit into Legacy’s account. A lending institu- tion’s liability in conversion depends on finding that (1) payment on the cheque was made to someone other than the rightful holder of the cheque, and (2) such payment was not authorized by the rightful holder. In that case, the sole question was whether the bank was authorized by 373409 to deal with the cheque as it did. 107 The Supreme Court concluded that 373409, through Lakusta, authorized the bank to deposit the proceeds of the cheque into Legacy’s account. In effect, Lakusta, qua shareholder and director, authorized Lakusta, qua officer, to deposit 373409’s funds into Legacy’s account. 108 While Major J. noted, at para. 22, that Lakusta’s actions may have been wrongful vis-`a-vis 373409’s creditors, his actions were not in fraud of the corporation itself: In Canadian Dredge & Dock Co. v. The Queen, [1985] 1 S.C.R. 662, it was held at p. 713, that where a criminal act “is totally in fraud of the corporate employer and where the act is intended to and does result in benefit exclusively to the employee-manager”, that act cannot be attributed to the corporation. In this appeal, Lakusta’s diver- sion of money from 373409 to Legacy may very well have been wrongful vis-`a-vis the corporation’s creditors. However, Lakusta’s action was not in fraud of the corporation itself. Since Lakusta directed the funds into Legacy’s account with the full authorization of 373409’s sole shareholder and director, being himself, that action was not fraud in respect of 373409. 109 Because 373409, through Lakusta, authorized the bank to deposit the cheque’s proceeds into Legacy’s account, the bank was not liable in conversion. 110 The trial judge in this case commented on this decision. He noted that it did not involve an action by an “affected” company against a third party for a breach of duty or contract. He stated that “[p]roperly understood, 373409 Alberta Ltd. did not involve [the] corporate identification doctrine at all”: fn. 167. Rather, the case depended on the “primary rules” of attribution in corporate law, where the actions of the sole shareholder and director are attributed to the corporation. Canadian Dredge Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 211

was only used to explain why the wrongfulness of Lakusta’s actions with respect to the creditors did not prevent his actions from being attributed to the corporation for the purpose of determining whether the bank was authorized to deal with the cheque. 111 I agree that the Supreme Court’s decision in 373409 Alberta was more concerned with conventional rules of attribution than with the corporate identification theory. The Supreme Court found that Lakusta was the sole officer of 373409 and its only agent. He was acting within the scope of the authority granted to him by 373409 and his action in in- structing the bank to deposit the cheque’s proceeds into Legacy’s account was attributable to the corporation on agency principles. I therefore find the case of little assistance.

(3) Use of the Corporate Identification Doctrine to Apply the Ex Turpi Causa Defence 112 Two things are apparent from the foregoing cases on the ex turpi causa defence and the corporate identification doctrine. 113 First, under Canadian law, the ex turpi causa defence does not give the court discretion to withhold a civil remedy for damages merely because the plaintiff has engaged in misconduct. The overriding concern is whether permitting recovery would give rise to inconsistency in the law and thereby damage the integrity of the legal system. 114 Secondly, the corporate identification doctrine, which has been applied in both the civil and the criminal context, both as a sword and as a shield, is not a free-standing legal rule. It is a mechanism to facilitate the application of rules of law, either statutory or common law, to a corporation where the primary rules of attribution are not available. I agree with the proposition, expressed by the Privy Council in Meridian Global Funds, that the application of the mechanism must be tailored to the terms of the particular substantive rule it serves. 115 In this case, the question is whether the corporate identification doctrine can be used to attribute the frauds of Drabinsky and Gottlieb to Livent, allowing Deloitte to rely on the ex turpi causa defence. I now turn to case law dealing with that very issue — the use of the corporate identification doctrine to apply the ex turpi causa defence. 116 The parties point to three cases in which the issue was the use of the corporate identification doctrine to attribute wrongdoing to a corporation for the purposes of applying the ex turpi causa defence. 212 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

117 First, Deloitte relies on Hart Building Supplies Ltd. v. Deloitte & Touche, 2004 BCSC 55, 41 C.C.L.T. (3d) 240 (B.C. S.C. [In Cham- bers]), a decision the trial judge in this case described as being “almost on all fours”: para. 255. Deloitte says the trial judge erred in not following Hart Building, “the only case on point in the Canadian jurisprudence” and which is “squarely against” Livent’s position. 118 Hart Building sued its auditor, Deloitte, for failing to detect that Cal- vin Larson — the corporation’s president, general manager, director and minority shareholder — had fraudulently overstated its inventory. Deloitte argued that Larson’s actions were the actions of Hart Building and that the corporation was not entitled to profit from its own fraud. 119 After setting out the criteria established in Canadian Dredge for the application of the corporate identification doctrine, the trial judge in Hart Building commented that Canadian courts have applied the doctrine where it was established either that the directing mind intended to benefit the corporation as well as himself or herself, or that the corporation did, in fact, obtain some benefit, even if the ultimate consequences for the corporation were disastrous. 120 She found that Larson was the directing mind of Hart Building and he had acted within his authority in dealing with the inventory and with Deloitte. Larson’s intention was to allow Hart Building to survive until economic conditions had improved and this was to the benefit of the corporation. 121 She rejected the submission that the corporate identification doctrine should not be applied because doing so would deny compensation to Hart Building, a victim of Deloitte’s negligence. Deloitte was a victim of Larson’s deception and to allow recovery would permit Hart Building to benefit from its own fraud. She concluded, at paras. 63-64: Larson was Hart’s directing mind and its alter ego. Hart may not benefit from its own fraud. Hart, in the person of Larson, deliberately misrepresented the true state of its financial affairs to Deloitte, in contravention of the agreement it entered into with Deloitte by virtue of the representation letters Larson, acting on behalf of Hart, signed. Hart knew that the audited financial statements were incorrect, because Hart provided false information with the knowledge and intention that the auditors would rely on that false information in preparation of the statements. Hart did not rely on the audited statements because Hart’s directing mind knew those statements were incorrect. The identification doctrine applies in these circumstances and Hart’s action must be dismissed. Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 213

122 The trial judge in the case before this Court declined to follow Hart Building. He referred to an article by Professor Darcy L. MacPherson that questioned the application of the doctrine to actions against third parties and raised policy arguments against its use to shield an auditor from liability for negligence in the preparation of the statutorily-mandated audit: see Darcy L. MacPherson, “Emaciating the Statutory Au- dit — A Comment on Hart Building Supplies Ltd. v. Deloitte & Touche” (2005) 41 Can. Bus. L.J. 471. 123 The trial judge concluded that “the corporate identification doctrine was not intended to and does not apply to an action commenced by an aggrieved company against a third party for negligence or breach of contract”: para. 261. He concluded, as well, that on a proper analysis, the issue was not whether the fraud of the principals should be attributed to the corporation for all purposes, but rather whether it should be attributed to the corporation for the purposes of applying the ex turpi causa doctrine. 124 I think the trial judge was right in declining to follow Hart Building, which is not binding in any event. The trial judge in Hart Building applied the ex turpi causa doctrine without actually identifying it, and without considering the issue identified by the Supreme Court in Hall and Zastowny — namely, whether the application of the doctrine was necessary to preserve the integrity of the justice system. 125 However, to the extent that the trial judge in this case was suggesting that the corporate identification doctrine could never be used to attribute thoughts or actions to a corporation for the purposes of allowing a third party to rely on a defence such as ex turpi causa, I should not be taken as agreeing with that general proposition. The application of an attribution rule is contextual and will depend on the circumstances of the case. 126 The second case referred to by the parties was the House of Lords’ decision in Stone & Rolls Ltd. v. Moore Stephens Ltd., [2009] UKHL 39, [2009] 1 A.C. 1391 (U.K. H.L.), one of the Court’s last decisions before being replaced by the Supreme Court of the United Kingdom. In Deloitte’s submission, the trial judge erred in relying on Lord Mance’s dissenting opinion. Livent, on the other hand, submits that the case is distinguishable, as it involved a one-person company, although it also submits that Lord Mance’s dissenting opinion is persuasive. 127 Stone and Rolls Ltd. (“S & R”) was beneficially owned, controlled and managed by Zvonko Stojevic. He used the company to engage in frauds on a number of banks, including a Czech bank. Substantial sums 214 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

were fraudulently extracted from the banks, channelled through S & R and paid to Stojevic and other fraudsters. The Czech bank successfully sued Stojevic and S & R, obtaining judgment for more than U.S.$94 million. S & R was unable to pay the damages and went into liquidation. 128 The company’s liquidators sued the company’s auditor, Moore Ste- phens, in contract and negligence for failure to detect the fraud. It was acknowledged that if the claim against the auditor succeeded, the major beneficiary would be the Czech bank, which had no direct claim against the audit firm. The firm denied negligence and brought an application to have the claim struck on the basis of ex turpi causa. 129 The trial judge held that the actions and state of mind of Stojevic could be attributed to S & R, but since detection of fraud was the “very thing” the auditor was engaged to undertake, the firm was not entitled to rely on that fraud to support an ex turpi causa defence. 130 Moore Stephens appealed to the Court of Appeal. The Court concluded that S & R was to be attributed with responsibility for the fraudulent activities of Stojevic, since S & R was a “villain”, not a “victim”. Because S & R relied on the illegal conduct to found its claim against its auditor, ex turpi causa was a defence to the claim. 131 In a split decision, the House of Lords dismissed the appeal. 132 The majority, in three separate sets of reasons, agreed in the result that the auditor could invoke the ex turpi causa defence. 133 Lord Phillips, who delivered the lead opinion, observed at para. 86, that “all whose interests formed the subject of any duty of care owed by Moore Stephens to S & R, namely the company’s sole will and mind and beneficial owner Mr. Stojevic, were party to the illegal conduct that forms the basis of the company’s claim.” However, Lord Phillips was not persuaded that ex turpi causa “would necessarily defeat S & R’s claim if S & R were a company with independent shareholders that had been ‘high-jacked’ by Mr Stojevic”: para. 63. 134 In dissent, Lord Scott concluded Stojevic’s actions should not be attributed to S & R for the purposes of an action by S & R against its auditor. He was not satisfied that the ex turpi causa doctrine was engaged because, as the company was insolvent, Stojevic would not benefit from his misconduct. Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 215

135 Lord Mance, who was also in dissent, agreed, at para. 275, that the ex turpi causa doctrine should not apply: [T]his appeal should be allowed on the ground that Moore Stephens’s duty was to the company, that it is not sufficient for Moore Stephens to argue that every relevant emanation of the company consisted of Mr. Stojevic as its directing mind and sole shareholder, if Moore Ste- phens failed in breach of duty to the company to detect the continuing scheme of fraud being pursued by Mr. Stojevic and to detect that the company was (in fact, due to such scheme of fraud) insolvent or potentially so. In that context, Moore Stephens cannot attribute to the company itself, for the purpose of invoking against it the maxim ex turpi causa, the knowledge of and involvement in the fraud of Mr. Stojevic which (it is for present purposes to be assumed) they ought to have detected and reported to regulators or other proper authorities in the company’s interests. What would have happened upon such detection and report is simply a matter of causation. 136 He expressed concern that the view espoused by the majority “will weaken the value of an audit and diminish auditors’ exposure in relation to precisely those companies most vulnerable to management fraud”: para. 276. As discussed below, I share his concern about weakening the integrity of the audit system. 137 Given its multiple sets of reasons, it has been said that “it is notori- ously difficult to extract a ratio from the judgments” in Stone & Rolls: Madoff Securities International Ltd. (In Liquidation) v. Raven, [2013] EWHC 3147 (Eng. Comm. Ct.), at para. 315. Indeed, in Jetivia SA v. Bilta (U.K.) Ltd. (In Liquidation), 2015 UKSC 23, [2015] 2 W.L.R. 1168 (U.K. S.C.), a subsequent decision of the U.K. Supreme Court, Lords Toulson and Hodge concluded, at para. 154, that “Stone & Rolls should be regarded as a case which has no majority ratio decidendi. It stands as authority for the point which it decided, namely that on the facts of that case no claim lay against the auditors, but nothing more.” With some qualifications, Lords Neuberger, Clarke, and Carnwath were of the view that Stone & Rolls should, borrowing the words of Lord Denning M.R. in King, Re, [1963] Ch. 459 (Eng. C.A.), at p. 483, be put “on one side in a pile and marked ‘not to be looked at again’”: Bilta, at para. 30. Lord Mance himself observed that the correctness in law of the outcome in Stone & Rolls might “one day fall for reconsideration”: para. 50. 138 In view of these qualifications, I find Stone & Rolls to be of limited assistance. I also agree that the case is distinguishable in that it involved a one-person company. 216 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

139 Thirdly, it remains to consider the judgment of the U.K. Supreme Court in Bilta, referred to above. That decision, affirming the judgment of the Court of Appeal, was released after the argument of the appeal in this case. This Court invited and received additional submissions on the decision. 140 Bilta (U.K.) Ltd. was an English company. Its directors, Muhammad Nazir and Chetan Chopra, who was the sole shareholder, used the company to perpetrate a Value-Added Tax or VAT fraud. It was alleged that Jetivia SA, a Swiss company, and its managing director, Urs Brunschweiler, had knowingly assisted the Bilta directors in their breach of fiduciary duty. This resulted in Bilta owing the tax authorities more than £38 million and becoming insolvent. Bilta’s liquidators then commenced proceedings against Jetivia, Brunschweiler, Nazir and Chopra for conspiracy to defraud, breach of fiduciary duty, dishonest assistance, and fraudulent trading. 141 Jetivia and Brunschweiler applied for their claims to be struck out or summarily dismissed on the grounds that they were precluded by ex turpi causa. The argument was that Bilta could not sue them because the wrongful acts of Bilta’s directors should be attributed to the company. 142 The High Court dismissed the application for summary dismissal, and Jetivia and Brunschweiler appealed. The Court of Appeal dismissed the appeal and the Supreme Court unanimously dismissed a further appeal. 143 The Supreme Court’s judgment by the seven-member Court consisted of four separate sets of reasons. There was considerable disagreement on the scope of the ex turpi causa defence, but some unanimity on the doctrine of attribution. Lord Neuberger, summarizing his views and those of five of his colleagues, stated the following proposition on attribution, at para. 7: Where a company has been the victim of wrongdoing by its directors, or of which its directors had notice, then the wrongdoing, or knowledge, of the directors cannot be attributed to the company as a defence to a claim brought against the directors by the company’s liqui- dator, in the name of the company and/or on behalf of its creditors, for the loss suffered by the company as a result of the wrongdoing, even where the directors were the only directors and shareholders of the company, and even though the wrongdoing or knowledge of the directors may be attributed to the company in many other types of proceedings. Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 217

144 This proposition is not difficult to accept. Directors cannot tag a corporation with their own misdeeds to set up a defence to a suit by the company’s liquidators. 145 The Court did, however, disagree about the approach to the ex turpi causa defence, having what Lord Neuberger described, at para. 13, as a “spectrum of views.” His own view was that the case was not a proper one for the resolution of the issue. 146 In view of the well-established Canadian jurisprudence on the ex turpi causa doctrine, I derive little assistance from Bilta on this point. 147 In conclusion, I find Hart Building, Stone & Rolls and Bilta of little assistance in determining whether the trial judge erred in refusing to allow Deloitte to rely on the ex turpi causa defence through the mechanism of the corporate identification doctrine. 148 I now turn to an analysis of the trial judge’s application of the corporate identification and ex turpi causa doctrines on the facts of this case and my conclusions in that regard.

(4) Conclusion on Attribution and Ex Turpi Causa 149 In my view, the trial judge did not err in concluding that Deloitte could not rely on the corporate identification doctrine or the ex turpi causa doctrine to excuse itself from liability. 150 The trial judge properly identified the question to be answered. He recognized that the question was “not whether Gottlieb and Drabinsky’s fraud should be attributed to the corporation for all purposes”: para. 263 (emphasis in original). Rather, the question was “whether their fraud should be attributed to Livent for purposes of applying the ex turpi causa doctrine”: para. 263 (emphasis in original). He recognized that he was obliged to determine whether declining to apply the doctrine would undermine the justice system. 151 The trial judge was not persuaded that attributing Drabinsky and Got- tlieb’s frauds to Livent would serve the purposes of the ex turpi causa doctrine on the facts of this case. He stated, at para. 270: In the case at bar, the plaintiff corporation had innocent shareholders and directors who were not party to the fraudulent schemes of Got- tlieb and Drabinsky. Hence, if Livent were to recover damages from Deloitte, none of that money would provide any benefit, direct or indirect, to anyone who participated in the fraud. No wrongdoer would therefore be allowed to profit from his wrong or to evade a criminal sanction, and therefore the integrity of the legal system 218 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

would not be called into question. In these circumstances, therefore, I am not persuaded that the purpose of the ex turpi causa doctrine would be served by attributing the fraud to the company. 152 He also noted that attributing the frauds to the company in the circumstances of the case would deprive the innocent participants of a remedy for auditor’s negligence in a situation where the services of an auditor are most important — where there is fraud by high-level management. 153 The trial judge quoted with approval, at para. 272, Lord Mance’s observation, made at para. 241 of Stone & Rolls in dissent, that the “very thing” an auditor undertakes is to exercise reasonable care in relation to the possibility of financial impropriety. Lord Mance said: Leaving aside situations in which the directing mind(s) is or are the sole beneficial shareholder(s), it is obvious ... that an auditor cannot, by reference to the maxim ex turpi causa, defeat a claim for breach of duty in failing to detect managerial fraud at the company’s highest level by attributing to the company the very fraud which the auditor should have detected. It would lame the very concept of an audit — a check on management for the benefit of shareholders — if the higher the level of managerial fraud, the lower the auditor’s responsibility. When Lord Bridge noted in Caparo Industries plc v Dickman [1990] 2 AC 605, 626E that shareholders’ remedy in the case of negligent failure by an auditor to discover and expose misappropriation of funds by a director consisted in a claim against the auditors in the name of the company, he cannot conceivably have had in mind that it would make all the difference to the availability of such a claim whether the director was or was not the company’s directing mind. The fact that a “very thing” that an auditor undertakes is the exercise of reasonable care in relation to the possibility of financial impropriety at the highest level makes it impossible for the auditor to treat the company itself as personally involved in such fraud, or to invoke the maxim ex turpi causa in such a case. [Emphasis added.] 154 The policy underlying the ex turpi causa doctrine is, as I have discussed, to maintain the integrity of the justice system by preventing a wrongdoer from profiting from his or her wrongdoing or evading a criminal sanction. As noted above, there may be cases where the doctrine could be applied as a defence in a civil action brought by a corporate plaintiff and cases where the wrongdoing of the directing mind(s) of a plaintiff corporation could be attributed to the corporation for the purposes of invoking the ex turpi causa doctrine. Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 219

155 However, I reject Deloitte’s submission that the trial judge erred in failing to apply the corporate identification doctrine, despite finding that the test from Canadian Dredge had been met, and further erred in finding that Livent’s cause of action was not barred by the ex turpi causa defence. 156 In my view, even if the Canadian Dredge test were to be applied in the context of this case such that the fraudsters’ acts are attributed to Livent, there is no basis for invoking the ex turpi causa defence through attribution because invoking the defence is not required to maintain the integrity of the justice system in these circumstances. The actual fraudsters will not profit from their wrongdoing and have not evaded criminal sanction. Nor will Livent profit from the wrongdoing. As I will explain, Livent in fact suffered a loss. 157 In addition, I am not persuaded that the three-step Canadian Dredge test — which was developed in a much different context than the one here — is necessarily the complete answer where a defendant seeks to attribute illegal or wrongful acts to a corporate plaintiff for the purposes of invoking the ex turpi causa defence in a civil action, as Deloitte seeks to do here. As I have explained, the application of the corporate identification doctrine must be tailored to the terms of the particular substantive rule it serves. 158 In my view, even if the Canadian Dredge factors are satisfied, there are at least two additional factors that are relevant to the inquiry. The first is whether applying attribution for the purposes of ex turpi causa is consistent with the contract or relationship between the plaintiff and the defendant, including contractual or other duties owed by the defendant to the plaintiff. The second is whether doing so is necessary to preserve the integrity of the justice system — an overriding consideration in the ex turpi causa context. 159 In the circumstances of this case, the contractual relationship between Deloitte and Livent was shaped by the statutory, regulatory and professional standards governing Deloitte as an auditor of a public company, which I detail below. 160 In addition, I note that under the engagement letters, which formed part of the contract between Deloitte and Livent, Deloitte undertook to evaluate the fairness of the presentation of the financial statements in conformity with generally accepted accounting principles (“GAAP”) and to conduct its audits in accordance with GAAS. It is true that, under those same letters, Livent acknowledged that it was responsible for de- 220 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

signing effective internal controls, properly recording transactions in the accounting records, making appropriate accounting estimates, safeguard- ing assets and ensuring the overall accuracy of the financial statements. Nonetheless, in accordance with GAAS, Deloitte was under an obligation to have proper auditing procedures in place to reduce the risk of not detecting material misstatements to an appropriately low level. To borrow the words of Lord Mance, one of the “very things” Deloitte was retained to do was to exercise reasonable care in relation to detecting fraud. This is underscored by the fact that Deloitte knew at all material times that the financial statements it prepared were being used to solicit investment in Livent. 161 With respect to the second inquiry — whether attribution is necessary to preserve the integrity of the justice system — as found by the trial judge, no wrongdoer would profit and no criminal sanction would be evaded if Livent were awarded damages. In short, it is unnecessary to apply the ex turpi causa doctrine to preserve the integrity of the justice system. Indeed, it could be said in these circumstances that the opposite would be true. I find perceptive Lord Mance’s view in Stone & Rolls, referred to above, that “[i]t would lame the very concept of an audit” if the auditor could, “by reference to the maxim ex turpi causa, defeat a claim for breach of duty in failing to detect managerial fraud at the company’s highest level by attributing to the company the very fraud which the auditor should have detected”: para. 241. 162 Furthermore, applying the ex turpi causa doctrine in these circumstances would risk undermining the value of the public audit process, and thereby the integrity of the justice system as well. I agree with the trial judge’s observation, at para. 271, that applying the ex turpi causa doctrine on these facts would have a perverse effect: Indeed, to attribute the fraud to the company in these circumstances would have the perverse effect of depriving the innocent participants in the enterprise of a remedy for the negligence of its auditor in precisely those cases where the services of an auditor are most critical — namely, the detection of wrongdoing by high-level management. That proposition is, in my opinion, part of the underlying rationale of the leading auditors’ negligence cases in Canada and the U.K. ... [T]he leading decisions in both jurisdictions contemplate a corporation bringing an action against its auditor for failure to detect wrongdoing by directors. 163 In the end result, there is no reason to interfere with the trial judge’s conclusion that Deloitte cannot rely on the corporate identification doc- Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 221

trine for the purposes of invoking the ex turpi causa defence to escape liability for its negligence.

D. The U.S. Bar Orders 164 Nor am I persuaded that the U.S. bar orders preclude Livent from advancing its claim. 165 As I have explained, Deloitte takes the position that this action is really brought on behalf of Livent’s stakeholders. It submits that the Re- ceiver’s claims should be dismissed because the stakeholders have already received compensation through settlements of investor class actions in the United States. Building on this argument, it also submits claims that Livent’s action is barred by releases and bar orders made by a U.S. court in approving the settlements of the class actions brought on behalf of Livent’s shareholders and noteholders. 166 The settlements were embodied in orders of the United States District Court for the Southern District of New York. The terms of the orders were similar. These terms: • approved the settlements as fair and reasonable and in the best interests of the class; • discharged Deloitte and barred all future claims against it in, arising out of, or relating to, the actions; • released Deloitte of all claims belonging to the representative plaintiffs and members of the classes; • released Deloitte of all claims by others arising out of the claims settled by the classes; and • barred the classes or anyone claiming on their behalf from pursuing the settled claims, directly or indirectly, in any other forum. 167 The trial judge rejected Deloitte’s position on this issue. He gave two reasons. 168 First, the U.S. class action litigation was entirely different from this proceeding. The plaintiffs and causes of action were different. The class actions were brought under U.S. securities legislation permitting investors to recover their personal financial losses from Deloitte as a result of misrepresentations in Livent’s financial statements. The claims in this action were brought by Livent, as distinct from its stakeholders, and the cause of action was for negligence in the performance of the auditor’s duties, not negligent misrepresentation. 222 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

169 Secondly, Deloitte’s submission was contrary to Livent’s plan of reorganization, which courts in Canada and the U.S. approved and to which Deloitte is deemed to have consented. The plan confirmed that Livent’s assets included its claim against Deloitte. 170 I agree with the trial judge’s conclusion and his reasons. 171 Nothing in the court orders approving the settlements expressly or impliedly includes Livent’s claims in this action within the scope of the settled claims. Livent was a defendant in the class actions. The settlements contained no release or bar of Livent’s claims against Deloitte. As a matter of interpretation, the orders do not address Livent’s claims. Deloitte does not argue otherwise. 172 Deloitte is therefore driven to argue that this is really an action brought on behalf of Livent’s stakeholders, who have already been compensated in the class actions. I have previously rejected that submission. 173 I therefore reject this ground of appeal.

E. Did the Trial Judge Extend the Duty of Care Beyond the Duty Owed to Livent? 174 The trial judge found that the duty of care question could “be answered in the affirmative without too much difficulty”: para. 49. He noted that in the wake of the Supreme Court’s decision in Hercules, “there can be little doubt that auditors owe a duty of care to the company for the benefit of the corporate collective, the shareholders”: para. 50. 175 Deloitte, however, argues that, in effect, the trial judge extended an auditor’s duty of care to its client to include economic responsibility for losses experienced by those standing behind it. In doing so, it raises the “spectre of indeterminate liability” — an issue that has been the subject of discussion in a number of cases: see e.g. Ultramares Corp. v. Touche, 174 N.E. 441 (U.S. N.Y. Ct. App. 1931), per Cardozo C.J., at p. 444; Caparo Industries plc v. Dickman, [1990] 1 All E.R. 568 (U.K. H.L.), at pp. 576-77; Haig v. Bamford (1976), [1977] 1 S.C.R. 466 (S.C.C.), at p. 484; and Hercules, at paras. 31-41. 176 I reject Deloitte’s argument on this point. 177 There can be no real dispute that Deloitte owed a duty of care to its client, Livent, to conduct the audit in accordance with the applicable standard of care. 178 While issues of remoteness remain to be addressed below, for duty of care purposes, once it is accepted that the cause of action being asserted Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 223

belongs to Livent and is not being advanced for the benefit of third-party stakeholders, policy concerns about imposing an “indeterminate liability” on auditors — much touted by Deloitte in its argument — fall away. 179 I now turn the issue of the standard of care.

F. What Are the Purposes of an Audit of a Publicly-Traded Company and What is the Standard of Care to be Applied in Determining Whether Deloitte Was Negligent? 180 The trial judge considered the standard of care for the relevant period at some length. In assessing the standard of care, he considered the evolution of case law dealing with auditor’s negligence. He also heard days of expert evidence. D. Paul Regan testified as an expert on behalf of Livent, while Ken Froese and David Yule gave expert evidence on behalf of Deloitte. Amongst other things, they made reference to the Handbook of the Canadian Institute of Chartered Accountants (the “CICA Hand- book”), the Institute of Chartered Accountants of Ontario Member’s Handbook (the “ICAO Member’s Handbook”) and its Council Interpreta- tions, and Deloitte’s audit manuals for the relevant period (the “Deloitte Manuals”). 181 Recognizing that an auditor has a duty to exercise, at a minimum, the skill and care which a reasonably competent and cautious auditor would exercise in the same circumstances, the trial judge grappled with the more difficult task of determining the requisite standard of skill and care to be exercised in this particular case. 182 Deloitte does not appear to challenge the trial judge’s analysis on standard of care other than on the question of the duty of an auditor to resign. Nevertheless, in this section I will review the standard of care analysis in some detail, since it informs the subsequent discussion on negligence, causation and damages. 183 Before turning to the standard of care analysis, it is important to understand the purposes of an audit in the context of a publicly-traded company.

(1) Purposes of an Audit of a Publicly-Traded Company 184 Courts, including the trial judge in this case, have recognized that audits fulfil two key objectives: (i) to ensure that the financial information presented by management provides a fair and accurate picture of the financial affairs of the corporation and of any changes in the financial position of the corporation; and (ii) to provide shareholders with informa- 224 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

tion for the purpose of overseeing the management and affairs of the corporation (including the ability to measure the level of honesty with which management performs its duties). In this regard, Lord Oliver made the following observation in Caparo Industries, at p. 583: It is the auditor’s function to ensure, so far as possible, that the financial information as to the company’s affairs prepared by the directors accurately reflects the company’s position in order, first, to protect the company itself from the consequences of undetected errors or, possibly, wrongdoing ... and, second, to provide shareholders with reliable intelligence for the purpose of enabling them to scrutinise the conduct of the company’s affairs and to exercise their collective powers to reward or control or remove those to whom that conduct has been confided. 185 The Supreme Court of Canada adopted this statement of the objectives of an audit in the Canadian context in Hercules, at paras. 48-49. The same purposes are amply reflected elsewhere in the case law, and they remain central to the auditing function in the corporate context: see e.g. London & General Bank (No. 2), Re, [1895] 2 Ch. 673 (Eng. C.A.), at pp. 682-83; Fomento Ltd. v. Selsdon Fountain Pen Co. (1957), [1958] 1 All E.R. 11 (U.K. H.L.), at p. 23; Pacific Acceptance Corp. v. Forsyth (1967), 92 W.N. (N.S.W.) 29 (New South Wales S.C.), at p. 53; Roman Corp. v. Peat Marwick Thorne (1992), 11 O.R. (3d) 248 (Ont. Gen. Div. [Commercial List]), at p. 260; and Capital Community Credit Union Ltd. v. BDO Dunwoody (2000), 4 B.L.R. (3d) 1 (Ont. S.C.J.), at paras. 223- 27, aff’d (2001), 151 O.A.C. 32 (Ont. C.A.). See also William A. Mac- donald, Report of the Commission to Study the Public’s Expectations of Audits (Toronto: Canadian Institute of Chartered Accountants, 1988), at pp. 1-2. 186 In the case of publicly-traded corporations, however, an audit has a third important and broader objective involving the responsibilities of securities regulators and the interests of the investing public. It is not only the corporation and its existing shareholders who need and rely on the auditors’ reports. Securities regulators and members of the investing public also rely on them for disclosure of a fair and accurate picture of the financial position of the corporation. The auditors’ standard of care in such circumstances must reflect this reality as well. 187 This role of an audit of a publicly-traded company is reinforced by s. 1.1 of the Securities Act, R.S.O. 1990, c. S.5, which provides that one of the Act’s purposes is to foster fair and efficient capital markets by protecting investors from unfair, improper or fraudulent practices, and to Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 225

maintain public confidence in those markets. An auditor must be alive to the impact of its reports in this context. 188 It follows that the auditor of a publicly-traded company acquires an added layer of responsibilities that is not necessarily present where the audit is performed in relation to a private corporation or private individuals.

(2) Articulating the Standard of Care 189 The general standard of care applicable to an auditor’s work was described near the turn of the 19th century in Kingston Cotton Mill Co. (No. 2), Re, [1896] 2 Ch. 279 (Eng. C.A.), at p. 288: It is the duty of an auditor to bring to bear on the work he has to perform that skill, care, and caution which a reasonably competent, careful, and cautious auditor would use. What is reasonable skill, care, and caution must depend on the particular circumstances of each case. 190 This formulation has stood the test of time and been adopted in cases too numerous to list. The secret of its longevity lies in its contextual adaptability. While the general formulation of the standard of care remains the same, the “particular circumstances” of a case encompass not just the factual setting in which the audit is conducted, but also the statutory and regulatory framework and the professional requirements prevailing at the time. Facts vary and the governing statutory, regulatory and professional requirements evolve over time, but they all contribute to the setting in which the standard is to be applied in any particular case. Where, as here, the audit is of a publicly-traded corporation — and thus there is an added public-interest dimension to the auditor’s responsibilities — the setting calls, in addition to everything else, for close adherence to the dictates of all applicable securities regimes accompanied by a careful attentiveness to the need for accurate financial disclosure to securities regulators and the public. 191 I will review what the standard of care was at the relevant time. For the purposes of this appeal, the relevant period is 1996 to 1998.

(3) The Standard of Care Framework: 1996-1998 (a) Statutory and Regulatory Framework 192 Livent appointed Deloitte as its auditor to fulfill its obligations under the Securities Act. At the material time, s. 21.10(4) of the Securities Act required Livent to appoint an auditor to prepare and submit annual au- 226 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

dited financial statements prepared in accordance with GAAP, as well as other regulatory filings, to the Ontario Securities Commission. 193 As a reporting issuer, Livent was required to file comparative financial statements prepared in accordance with GAAP after its financial year-end: Securities Act, s. 78. Along with the comparative financials, it was required to file an auditor’s report prepared “in accordance with the regulations” and the auditor was required to make “such examinations” necessary to prepare the report: ss. 78(2) and (3). 194 The regulations under the Securities Act directed an auditor conducting an audit required by that Act to prepare its report in accordance with GAAS: R.R.O. 1990, Reg. 1015, ss. 1(3), 2(2). 195 A public corporation, such as Livent, listed on the NASDAQ stock market in the United States was subject to similar legislative requirements. 196 At the relevant time, National Policy Statements (“NPS”) — which were issued by the Canadian Securities Administrators and adopted by the Ontario Securities Commission — applied to the Livent audits as well. Amongst other things, the NPS made clear that an auditor’s report containing one or more reservations (i.e. a qualified opinion, an adverse opinion, or a denial of opinion) would generally not satisfy the requirements of the securities legislation: NPS No. 50, Part 5 (Reservations in an Auditor’s Report Filed by an Investment Fund). 197 In addition, Livent was subject to requirements under Ontario’s Busi- ness Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”). It was obliged to appoint an auditor for the purposes of reporting on the financial health of the company: OBCA, s. 149. As Livent’s auditor, Deloitte was required (i) annually to examine and verify the fairness and accuracy of its financial statements as prepared by management in accordance with GAAP, and (ii) to prepare an auditor’s report in accordance with GAAS: OBCA, ss. 153(1), 155; and R.R.O. 1990, Reg. 62, ss. 40-41. Deloitte also had an obligation to inform Livent’s directors if it was notified or became aware of an error or misstatement in a financial statement that was, in its opinion, material: OBCA, s. 153(3).

(b) The CICA Handbook 198 Deloitte’s role as Livent’s auditor was also subject to the professional standards applicable to auditors as set out in the CICA Handbook and the ICAO Handbook at the time. Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 227

199 The Supreme Court of Canada has said that rules set by a self-governing professional body are “of guiding importance in determining the nature of the duties flowing from a particular professional relationship”: Hodgkinson v. Simms, [1994] 3 S.C.R. 377 (S.C.C.), at p. 425. Further, “[t]hese rules must be taken as expressing the collective views of the profession as to the appropriate standards to which the profession should adhere”: MacDonald Estate v. Martin, [1990] 3 S.C.R. 1235 (S.C.C.), at p. 1244. 200 In the auditing context, this Court has held that the CICA Handbook “is of great assistance” to courts in determining the requisite standard and “a persuasive guide to the applicable standard of care”: Bloor Italian Gifts Ltd. v. Dixon (2000), 48 O.R. (3d) 760 (Ont. C.A.), at paras. 27, 31; and Sherman v. Orenstein & Partners (2005), 11 B.L.R. (4th) 233 (Ont. C.A.), at para. 33. 201 The trial judge reviewed the relevant provisions in the CICA Hand- book in considerable detail, focusing on those sections dealing with “Au- dit of Financial Statements” (s. 5000), “Knowledge of the Entity’s Busi- ness” (s. 5140) and “Auditor’s Responsibility to Detect and Communicate Misstatements” (s. 5135). 202 Given their significance, I will review the standards from the CICA Handbook in effect at the relevant time in some detail.

(i) The Objective of an Audit 203 At the time, the CICA Handbook provided that the objective of an audit of financial statements was to express an opinion as to whether the statements presented fairly, in all material respects, the financial position, results of operations, and changes in financial position in accordance with GAAP: s. 5000.01. Deloitte certainly accepted this purpose, as it was explicitly stated in Deloitte’s engagement letters to Livent.

(ii) Knowledge of the Client 204 The CICA Handbook stressed the importance of continuously obtaining and applying knowledge of the client’s business. The trial judge summarized the salient points stipulated in s. 5140 of the CICA Hand- book, entitled “Knowledge of the Entity’s Business”, at para. 92: (i) Auditors must obtain and apply knowledge of the client’s business continuously and cumulatively. The knowledge obtained from the moment of the decision to accept the engagement, together with knowledge amassed over the course of 228 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

the subsequent audit periods, must be updated to ensure that it reflects the current circumstances of the client. (ii) Knowledge obtained when planning an audit for the current period must be refined and supplemented as the audit progresses. (iii) As a corollary, the planning and execution of an audit must reflect the auditor’s knowledge of the client. (iv) Knowledge of the client’s business affects multiple components of the audit, including determining materiality levels, assessing the inherent risk associated with the audit, understanding and obtaining sufficient information in respect of the client’s internal controls, identifying the nature and sources of available audit evidence, designing audit procedures, and understanding the substance of transactions. (v) Assessing whether sufficient appropriate audit evidence has been obtained, including evidence related to significant management representations. 205 As the trial judge noted, at para. 93, “an auditor is required to assess the information accumulated during the course [of] the audit to determine whether or not decisions made during the planning stage remain appropriate.” Amongst other things, the CICA Handbook instructed auditors, in making this assessment, to identify and consider the business environment of the client, the characteristics of ownership and management, and the operating characteristics of the client.

(iii) Management’s Good Faith and Professional Skepticism 206 The CICA Handbook dealt with the concept of management’s good faith and the related concept of professional skepticism, which are particularly significant in this case given the trial judge’s finding that one of Deloitte’s shortcomings was its failure to exercise sufficient professional skepticism. 207 The Handbook recognized at s. 5000.05 that “the assumption of management’s good faith [was] a fundamental auditing postulate”, which meant that “in the absence of evidence to the contrary, the auditor [could] accept accounting records and documentation as genuine and representations as complete and truthful” (emphasis added). At the same time, “[t]he assumption of management’s good faith [was] not a source of audit evidence nor a substitute for the requirement to obtain sufficient appropriate audit evidence to afford a reasonable basis to support the content of the auditor’s report.” Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 229

208 Sections 5000.06 and 5135.05 dealt with the need to approach the audit with an attitude of professional skepticism. I set them out in their entirety, given their significance in this case: Section 5000.06 An attitude of professional scepticism means the auditor assesses the validity of evidence obtained and is alert to evidence which contra- dicts the assumption of management’s good faith. For example, the auditor is alert to evidence which may indicate accounting records and documentation have been altered or representations are false. It does not mean the auditor is obsessively sceptical or suspicious. Without an attitude of professional scepticism, the auditor may not be alert to circumstances which should lead him or her to be suspicious and he or she may then draw inappropriate conclusions from evidence gathered. Section 5135.05 An attitude of professional scepticism is inherent in applying due care in accordance with the general standard ... Such an attitude is necessary for proper consideration of factors which increase the risk of material misstatements and evaluation of evidence obtained. The auditor recognizes that conditions observed and evidence obtained, including information from previous audits, need to be evaluated with an attitude of professional scepticism to assess the risk of material misstatement. In particular, an attitude of professional scepticism means the auditor is alert to: (a) factors which increase the risk of material misstatement ... (b) circumstances which make him or her suspect the financial statement are materially misstated; (c) conditions observed or evidence obtained which con- tradicts the assumption of management’s good faith. The auditor needs to be aware of factors which increase the possibility of management misrepresentation. For example, management can direct subordi- nates to record transactions or conceal information in a manner that can materially misstate financial statements. [Emphasis added.] 209 These provisions echoed the sentiments expressed long ago in Kingston Cotton Mill Co. (No. 2), Re to the effect that an auditor “is a watch-dog, but not a bloodhound”, and is entitled to rely on the representations made by “tried servants of the company in whom confidence is 230 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

placed by the company” and to assume they are honest, provided the auditor takes reasonable care, but that “[i]f there is anything calculated to excite suspicion”, the auditor “should probe it to the bottom”: pp. 288- 89. 210 Lord Denning expressed similar views regarding the need for professional skepticism in Fomento, at p. 23: An auditor is not to be confined to the mechanics of checking vouch- ers and making arithmetical computations. He is not to be written off as a professional “adder-upper and subtractor”. His vital task is to take care to see that errors are not made, be they errors of computa- tion, or errors of omission or commission, or downright untruths. To perform this task properly, he must come to it with an inquiring mind — not suspicious of dishonestly, I agree — but suspecting that someone may have made a mistake somewhere and that a check must be made to ensure that there has been none. [Emphasis added.]

(iv) The Detection of Material Misstatements 211 The CICA Handbook affirmed that the auditor was responsible for detecting material misstatements in financial statements or other financial information. It defined misstatements as either “errors” (i.e., uninten- tional misstatements) or “fraud and other irregularities” (i.e., intentional misstatements): ss. 5135.01-5135.02. 212 The CICA Handbook recognized — as did the trial judge — that fraud may be very difficult to detect. However, given the difficulty in detecting fraud, the Handbook stressed the need to have proper auditing procedures in place to reduce the risk of not detecting material misstatements to an appropriately low level, and, in particular, the need to adapt the auditing plan where circumstances made the auditor suspect the financial statements were materially misstated: ss. 5135.07-5135.17. 213 For instance, in circumstances involving “higher risk assessment” — as Deloitte recognized the Livent environment to be — the CICA Hand- book imposed an obligation to perform heightened audit procedures providing more reliable evidence: s. 5135.07. This included recognizing the need for more extensive supervision and the use of personnel with more experience and training: s. 5135.08. The CICA Handbook also stipulated that where there was a reason to suspect the financial statements were materially misstated, the auditor was required to perform procedures to confirm or dispel that suspicion: s. 5135.14. Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 231

214 These provisions were consistent with the common law, which affirmed that until a suspicion is dispelled — until the auditor has “probe[d] it to the bottom” — the auditor cannot make an unqualified auditor’s report. Even where the auditor may be following or attempting to follow GAAS, it may not be excused from liability where the auditor “has an opportunity to acquire or is exposed to knowledge or information which might affect [its] opinion but [it] fails to recognize and act on that information”: Revelstoke Credit Union v. Miller, [1984] 2 W.W.R. 297 (B.C. S.C.), at p. 303. 215 Subsequent authorities considering the same applicable standards have confirmed that where the auditor uncovers “significant weaknesses” during the course of the audit, it has a duty to inform the directors of the client company: BDO Dunwoody, at paras. 231-32. See also Pineridge Capital Group Inc. v. Dunwoody & Co. [1999 CarswellBC 58 (B.C. S.C.)], 1999 CanLII 5925, at paras. 26-27; and Sydney Cooperative Society Ltd. v. Coopers & Lybrand (2002), 2003 NSSC 35, 213 N.S.R. (2d) 115 (N.S. S.C.), at paras. 148-49.

(c) The Deloitte Manuals 216 As noted earlier in these reasons, Deloitte had its own manuals on how to conduct an audit in accordance with GAAS — the “Deloitte Manuals” — which set a standard of care Deloitte must be presumed to accept as reasonable: see Dairy Containers Ltd. v. NZI Bank Ltd., [1995] 2 N.Z.L.R. 30 (New Zealand H.C.), at p. 54. 217 Amongst other things, the Deloitte Manuals dealt with the detection of fraud and error. Interestingly, it appears Deloitte set a higher standard for itself than that of assuming management’s good faith. Article 1.37 of the particular Manual in effect for the years subsequent to 1995 neither assumed that management was dishonest nor assumed unquestioned honesty. It stated: We neither assume that management is dishonest nor assume unquestioned honesty. Rather, we exercise professional skepticism and recognize that conditions observed and evidential matter obtained, including information from prior audit engagements, need to be objectively evaluated to determine whether the financial statements are presented fairly in all material respects. 232 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

218 Article 17 of the same Manual is significant as well. It dealt with circumstances where control tests indicated “the possible existence of fraud or error” (emphasis added). Article 17.75 stated: If the results of our tests of controls indicate the possible existence of fraud or error, we should consider the potential effect on the financial statements. If we believe the indicated fraud or error or risk thereof could have a material effect on the financial statements, we should perform appropriate modified or additional procedures. 219 Subsequent provisions in the same Article fleshed out how to approach the “appropriate modified or additional procedures.” In particular, Article 17.77 did not allow Deloitte auditors to assume that an instance of fraud or error was an isolated occurrence. Article 17.78 noted the auditor’s responsibility to “confirm or dispel a suspicion of fraud or error”, and to discuss the matter with management if the suspicion could not be dispelled.

(d) Resignation by an Auditor 220 It is important to note one final issue related to the standard of care before turning to breaches of the standard of care. As noted above, Deloitte takes issue with the trial judge’s finding that it ought to have resigned in August/September 1997 or April 1998 at the latest. 221 Where an auditor suspects fraud or error and management does not assist the auditor in dispelling the suspicion, the auditor is left with three options: • to issue an unqualified audit report and risk breaching the standard of care owed to the client, the applicable legislation, and possibly the contract with the client; • to issue a reservation of opinion, which will generally not satisfy the client’s need for an unqualified audit report under the legislation; or • to resign. 222 If the auditor chooses the second option and the client elects to discharge the auditor, then the incoming auditor must request that the outgoing auditor explain the reasons for the replacement, thus putting the new auditor on notice of the former’s suspicions: OBCA, s. 151(4). 223 In addition to requirements under the OBCA, Part 4 of NPS No. 31 (Change of Auditor of a Reporting Issuer), which was in effect at the relevant time, imposed reporting obligations on reporting issuers where Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 233

an auditor resigned or was discharged. The reporting issuer was required to prepare and deliver a “Reporting Package” to its shareholders, the securities administrators, and the incoming and outgoing auditor: NPS No. 31, ss. 4(1)-4(3). Where the change of auditor followed a reportable event — defined as a disagreement, unresolved issue or consultation — the reporting issuer was required to describe the information contained in the Reporting Package, including the outgoing auditor’s reasons for its resignation or discharge, in a press release: NPS No. 31, ss. 3.3, 4.4. 224 At the relevant time, the resignation of auditors was addressed in the ICAO Member’s Handbook. According to Council Interpretation 201.1 in the ICAO Member’s Handbook, issued June 1993, an auditor could and, as a matter of professional judgment, should resign in certain circumstances, including where there was a loss of trust in the client. Paragraphs 10, 12, and 15 of Council Interpretation 201.1 provided: The auditor should never lightly resign an appointment before reporting and should not resign at all before reporting if there is reason to suspect that the auditor’s resignation is required by reason of any impropriety or concealment, upon which it is the auditor’s duty to report. Subject to that general statement, however, there may be exceptional circumstances in a particular case that would justify the auditor’s resignation. This will be a matter of individual judgment in each case. As a general rule, the proper course for an appointed auditor to follow is the completion of the auditor’s statutory duties: having been appointed by the shareholders the auditor should report, as required in the legislation. The auditor should cease to act on behalf of a client only after a successor has been properly appointed and the auditor has been relieved or disqualified. An auditor should not voluntarily cease to act on behalf of a client after commencement of an audit engagement except for good and sufficient reason. Reasons may include: (a) loss of trust in the client; (b) the fact that the auditor is placed in a situation of conflict of interest or in circumstances where the auditor’s objectivity could reasonably be questioned; or (c) inducement by the client to perform illegal, unjust or fraudulent acts. [Emphasis added.] 225 As discussed below, this document was introduced into evidence and expert evidence was led on the resignation issue. 234 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

(4) Conclusion on Standard of Care 226 The foregoing discussion underlies the analysis of whether Deloitte breached the standard of care, to which I now turn.

G. Did Deloitte Breach the Standard of Care? 227 The trial judge conducted his analysis of, and made his findings on, whether Deloitte had performed the Livent audits in accordance with GAAS and whether, if it had done so, the fraud or other irregularities would have been detected, over four general time periods: (i) the pre- 1996 audits; (ii) the 1996 audit; (iii) the Q2 and third quarter (“Q3”) 1997 engagement; and (iv) the 1997 audit. He found that Deloitte had fallen below the applicable standard of care in relation to both the Q2 and Q3 1997 engagement and the 1997 audit, and that it was therefore negligent, by having (at least): • improperly dealt with such audit items as the PPC and certain of the Revenue Transactions, including the Pantages Air Rights Agreement and its accompanying Put; • failed to put a proper audit plan and the necessary auditing procedures in place to detect possible misstatements or irregularities, when it knew that Livent was a “high risk” client whose principals pushed the envelope (and, in fact, characterized the 1996 audit as such); • become too close to the client and lost its required level of “professional skepticism”; • succumbed to the demands of Gottlieb to change the audit team to one more open to Livent’s approach and, having done so, failed to put a team in place that had sufficient knowledge of the Livent audit history and the aggressive characteristics of its two flamboyant principals and that was, in the trial judge’s words, at para. 210, simply “not up to the task”; • failed to respond with the appropriate professional skepticism following Gottlieb’s incurably deceitful presentation to the Livent audit committee; • failed to resign in such circumstances; and • allowed its name be associated with the announced “settlement” of auditing differences in September 1997, when it knew that the press release announcing the resolution was misleading. Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 235

228 Deloitte does not appear to challenge the negligence findings set out above, with one exception: it submits that the trial judge erred in finding that it was obliged to resign as auditor in August/September 1997. 229 In my view, the record amply supports the trial judge’s findings that Deloitte was negligent in its conduct of the 1997 audit and the Q2 and Q3 1997 engagement. Indeed, the evidence to that effect is overwhelm- ing. The trial judge’s findings on negligence and the consequences of the negligence are lengthy and complex. I review them in the following passages, as they are key to my analysis on causation and damages, as well as to the issues on the cross-appeal, set out below.

(1) Pre-1996 Audits 230 The trial judge found that Deloitte met the requisite standard of care in the preparation of Livent’s annual audits up to and including the 1995 audit year. This was at least partly because both parties’ experts agreed that they could not conclude any higher than that Deloitte “may have”, not “should have”, discovered the fraud in the pre-1996 timeframe, and partly because the level of professional skepticism expected to be applied to the audit was lower in Canada during this period than in the U.S. (Livent’s expert was an American.) 231 The trial judge was not persuaded that Deloitte had fallen below the accepted standards for the pre-1996 audits, despite Livent’s arguments about the improper amortization of the PPC in that period, the need to take into account what was known to be Drabinsky and Gottlieb’s aggressive approach to accounting matters and their general reputation as enfants terribles, and the level of staff experience applied to the audits.

(2) 1996 Audit 232 The trial judge found that Deloitte failed to meet its standard of care and to complete the 1996 audit in accordance with GAAS in the way in which it dealt with two areas of the audit: (i) the PPC; and (ii) the Musi- cians’ Pension Surplus Receivables in relation to two of Livent’s productions, the Kiss tour in New York and Show Boat in New York. In addition, although he ultimately found that Deloitte did not fall below the required standard in dealing with the 1996 Revenue Transactions prior to 236 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

mid-July 1997, he nonetheless concluded that the criticisms related to the treatment of those transactions were not without merit.2 233 In the end, however, the trial judge concluded that these breaches did not cause Livent any compensable damages. That said, the seeds for the troubles to come were germinating during this period. 234 Livent contests the trial judge’s conclusion on the cross-appeal, which I address in detail below. 235 As I have noted, the trial judge found that 1996 was something of a watershed year for Livent and, as a consequence, Deloitte. Financially speaking, Livent was ever in need of new money to finance its productions, which involved significant upfront costs, and real estate investments in Chicago, New York, Vancouver and Toronto. The trial judge described Livent’s financial position in 1996, at para. 134: Livent was always casting a covetous eye to the capital markets, seeking to raise money either by way of debenture offerings or through public or private placements of its common stock. In 1996 alone, it raised in excess of $96 million, with an increase in liabilities, net of production trade accounts, of almost $70 million from 1995. Revenues from productions were not keeping pace with the demands of the operation and it became apparent that Livent was going to have to look away from its core business to fund its debt burden, at the very least. Indeed, in 1996 Livent took an $18.5 million write-off in respect of the Sunset Boulevard production, which was by no means insignificant. [Footnote omitted.] 236 It was also significant during this period — at least from Deloitte’s perspective — that it had to re-staff its Livent audit team after Messina left Deloitte to join Livent. In her place, Deloitte appointed John Cres- satti as the new Engagement Partner. While there was some carryover from the old team, including senior manager Christopher Craib, Cressatti

2 I note that the trial judge concluded, at para. 170, that “as of middle of July, [Deloitte] could not be faulted for the work it did in respect of the Revenue Transactions and the conclusions it reached.” However, at para. 140, he had stated that “Deloitte failed to meet its standard of care in the way it dealt with PPC, the Musicians’ Pension Surplus Receivable and the Revenue Transac- tions.” Reading his reasons as a whole, I am satisfied that the trial judge did not find a breach with respect to Deloitte’s audit of the Revenue Transactions as of mid-July 1997. Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 237

had no experience dealing with Livent and was a relatively new audit partner. 237 Deloitte recognized that the audit risk at this time was “greater than normal” — a Deloitte euphemism for “high risk”. The trial judge noted, at para. 136, that in preparing the 1996 audit plan in which the overall assessment of the engagement risk was so defined, the Livent audit team was confronted with the following realities: • Livent faced internal and external business and industry risks. • It had entered into a number of material and unique revenue-generating transactions, which created reporting issues. • It was publicly-traded in both Canada and the U.S. and attracted a high level of scrutiny and public observation. • Livent management was sensitive to reported net earnings levels, and was aggressive in arriving at its bottom line. • The valuation of the PPC was subject to management estimation and financial projections. In addition, resultant amortization and/or write-offs of the PPC were known to have a significant impact on net earnings. 238 And while not specifically identified as an engagement risk for 1996, previous audit planning memos underscored that Drabinsky and Gottlieb were very demanding and expected timely, high-quality service at relatively low cost. The trial judge described the pressures on the Livent audit team, at para. 137: It was previously understood that the pressures on the audit partners were and would be significant. Deloitte recognized that its tax group in particular might be able to provide additional services to Livent, although there was a strained relationship in that area, which had to be safeguarded in some fashion. Whether this inherent conflict between the Firm’s professional obligations, on the one hand, and its attempts to earn additional fees and satisfy the demands of its client, on the other, drove the audit agenda was never directly addressed in evidence, but sometimes appeared to be the elephant in the room. [Footnote omitted.] 239 It was also recognized in planning the 1996 audit that the level of professional skepticism had to be increased on all fronts. It was anticipated in the audit planning memo that there would be more than normal Engagement Partner involvement, if not the utilization of two audit partners, to ensure compliance with the audit plan. At the same time, however, the planning materiality level for 1996 was set at $1,670,000, an 238 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

increase of roughly 30 per cent from the previous year. The trial judge was puzzled by that change since it meant that “less drilling down would be undertaken by the audit staff even though there were some new and looming issues, as the planning memo suggested”: para. 139. 240 With that backdrop in mind, I turn to the trial judge’s analysis with respect to the three areas referred to above — namely the PPC, the Musi- cians’ Pension Surplus Receivables, and the 1996 Revenue Transactions.

(a) 1996 Audit — The PPC 241 The trial judge observed that the “PPC should have been front and center in the Deloitte collective mindset when it came to the completion of the 1996 audit”: para. 143. He concluded that “Deloitte’s approach to the 1996 PPC audit cannot be said to have been in accordance with GAAS by any measure”: para. 152. Indeed, it did not even comply with Deloitte’s own undertaking in its audit plan for the year to “[o]btain operating projections for each production” and to “compare projected results with historical results where data available”: paras. 146-48. Deloitte was aware that the Livent productions had performed poorly in 1996, and that “after amortization of PPC, the Livent shows lost, in the aggregate, $22.9 million, while they were projected to earn a net income of $20.6 million, a variance or swing of 218%”: para. 148. Nonetheless, except for isolated instances, Deloitte failed: (i) to obtain and review the 1996 budgets; (ii) to do more than accept management’s estimates as to potential revenue for any one show (which led it into the realm of “audit by conversation”); (iii) to test the accuracy of those estimates against recently experienced results (which were available and which would have cast doubt on the accuracy of the estimates); or, (iv) to test the reasonableness of Livent’s forecasting by looking at past forecasts against actual results. In the end, when Deloitte did its after-the-fact corrective audit, an $11 million charge was taken against 1996 net income in respect of the PPC not sufficiently amortized in the year, in addition to a $3.1 million adjustment for the PPC improperly recorded or moved from account to account between various productions. 242 There was ample evidence to support the trial judge’s findings with respect to Deloitte’s failure to comply with GAAS in relation to the 1996 audit of the PPC. Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 239

(b) 1996 Audit — Musicians’ Pension Surplus Receivables 243 Under New York law, Livent was required to use musicians represented by a local union for its performances in New York, and to remit a percentage of box office revenues to the union on account of the musicians’ pension entitlements. Livent told Deloitte, however, that the union was entitled to receive less under its collective agreement than what Livent had remitted and so Livent was entitled to record the difference as a credit and a receivable. Livent did not disclose that the union disputed this interpretation. 244 The trial judge concluded that it was acceptable for Deloitte to have accepted Livent’s representation for the 1995 audit, but not for the 1996 audit. Instead of decreasing, which one would have expected had Livent’s representation been accurate, the receivable remained the same for one show (the Kiss tour in New York) and increased for the other (Show Boat New York). Deloitte ignored this evidence, which the trial judge found “was a red flag and should have been recognized as such, especially considering that the audit risk for the 1996 audit was set as ‘high’”: para. 162. Deloitte’s expert acknowledged in cross-examination at trial that this aspect of the audit did not conform to GAAS.

(c) 1996 Audit — Revenue Transactions 245 I described the Revenue Transactions in general terms above. As explained, they were designed to enhance the veneer of Livent’s profitability in order to attract much-needed cash funding and involved the “sale” to third parties of various Livent assets. A common feature of these transactions was that the income they generated was to be received over a period of time and so there was a continuing tension about when and in what amounts these income streams could be counted for the purposes of financial accounting. Many of the transactions also had another theme in common: they were not true sales of assets, but were more in the nature of loans or financing agreements. 246 There were four of these Revenue Transactions in fiscal year 1996 and five in fiscal year 1997. As a result of them, Livent recorded approximately $40 million in income in those two years. 247 Deloitte’s treatment of the Revenue Transactions in the 1996 audit was subject to some criticism. Nevertheless, the trial judge was not prepared to find that, even if Deloitte had taken appropriate measures, the fraud or other irregularities in relation to these transactions would have been discovered, given the deceit that permeated the Livent organization 240 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

at the time. He concluded that Deloitte could not be faulted for its treatment of the Revenue Transactions prior to mid-July 1997. 248 The criticisms of the 1996 audit treatment of the Revenue Transac- tions are significant, however, because they signal a flaw that would ultimately prove to be Deloitte’s undoing: Deloitte was becoming too accommodating to its client — something driven by the threat of losing its high-profile and high-flying client — and in the process had lost its professional objectivity and its required attitude of professional skepticism. As I will explain, Deloitte yielded to Livent pressures and lent its name to the Q2 1997 financial statements that did not comply with Canadian GAAP and provided a clean audit opinion for the 1997 audit year that did not comply with GAAS. Had Deloitte not done so, the trial judge found that the fraud would have been uncovered in August/September 1997 or, at the very latest, in April 1998. 249 Deloitte’s audit planning memorandum for the 1996 audit acknowledged that Livent had entered into multiple “material and unique revenue-generating transactions” in 1995 and 1996, which motivated management to select reporting methods that were “less favourable than potential alternatives” — whatever that meant, as the trial judge observed: para. 163. 250 It is not necessary to review the 1996 Revenue Transactions here. The trial judge ultimately concluded, although “not without some misgivings,” that Livent was not liable for its performance of the 1996 audit with respect to the Revenue Transactions, even though criticisms of Deloitte’s treatment of them had merit: para. 170. Suffice it to say that a considerable amount of Deloitte partner and staff time and resources were devoted to the debate over the amount of revenue from these transactions to be included in revenue for the 1996 audit year. After much back-and-forth between Deloitte (including representatives of Deloitte U.S.) and Gottlieb and other senior Livent financial personnel, Deloitte finally accepted over $30 million in revenue from these transactions as income for 1996 from a Canadian GAAP perspective. In contrast, Deloitte U.S. accepted only $16 million for U.S. GAAP purposes. 251 In assessing the Revenue Transactions, the trial judge relied heavily on what was known at trial as the “Wardell Chronology”. This was a memorandum prepared by Bob Wardell, an Advisory Partner on the Livent file, in July 1997 in preparation for a meeting between Martin Calpin, Deloitte’s National Risk Management Partner, and Gottlieb who, the memorandum suggests, was continually threatening to drop Deloitte Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 241 as Livent’s auditor. Deloitte’s concern about losing Livent as a client is evidenced by the following comments from the Wardell Chronology as summarized by the trial judge, at para. 168: Gottlieb was not pleased that Deloitte was questioning Livent management on the agreements and felt that Deloitte U.S. was dragging its feet in agreeing with the inclusions of the same amounts [i.e. the approximate $30 million accepted by Wardell from a Canadian GAAP perspective] for U.S. GAAP purposes. He threatened to pull the account if Deloitte did not accept Livent’s accounting treatment of the transactions. At the end of March [1997], Wardell met with two other senior partners of Deloitte, Bruce Richmond and Paul Cobb. The latter was responsible for the Dundee Bancorp audit. Wardell “was concerned not only with the impact these events were having with respect to our relationships with Livent, an important public client, but also the possible fallout to Dundee Bancorp given Myron’s relationship with Ned Goodman and his position as Chairman of Dundee’s audit committee”.3 The U.S. Partners were unmoved by the arguments. In June [1997], Rod Barr, a senior Canadian partner in the National Office and a spe- cialist on SEC matters, was asked by his American counterparts to weigh in on the argument. He reviewed the transactions but remained adamant that the Canadian position was flawed and “would NOT withstand the scrutiny of a professional skeptical challenge”. In this prophetic memo, he raised four areas of concern [to the U.S. partners], which ultimately formed the basis of the plaintiff’s criticism of Deloitte in respect of the transactions: (a) Was Deloitte certain that there were no side deals “or other relationships among the counterparties” that would alter the nature of the agreements? (b) Why were the agreements silent on refundability? (c) What analysis had been undertaken to ensure that the counterparties had the ability to meet their commit- ments under the agreements? (d) What audit procedures were actually undertaken to check on the legitimacy of the agreements, since the

3 I note, as an aside, that it was a Dundee company that was involved in the Pantages Air Rights Agreement and the Put, discussed in more detail below. 242 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

U.S. partners were under the impression that much of the work comprised an audit by conversation, only? Wardell was not persuaded that the complaints and warnings articulated by Barr were warranted. While he was more inclined to accept that the deals reached were obtained because of the “level of sophis- tication, business acumen and negotiating skills of Messrs. Drabinsky [and] Gottlieb”, a position which he believed was lost on his U.S. partners, he was in large measure, relying on the “written and verbal representations from Livent’s senior in-house counsel and all senior executives”, including his former partner Messina, that there were no undisclosed agreements or amendments. He went on to observe: “If we were not prepared to accept such representations, it seems to me we should resign as auditors as we effectively would be questioning the fundamental integrity of our client”. [Underlining in original; emphasis added in italics; footnotes omitted.] 252 The trial judge concluded his review of the Wardell Chronology by noting, at para. 169, how Deloitte gave in to Gottlieb’s forceful, if not bullying, tactics: As previously suggested, the Wardell Chronology was prepared as an aide m´emoire for Martin Calpin in preparation for a meeting that was scheduled to take place with Gottlieb in late July, during which Got- tlieb wanted to discuss “relationship and client services issues”. Got- tlieb clearly believed that the best defence was a good offence and, as I assess the evidence, bullied the Deloitte partners to bend to his po- sitions, with the added leverage of his connection to Dundee Bancorp and its CEO, Ned Goodman, which he threw in for good measure. [Emphasis added.] 253 In other words, Deloitte’s thinking about the substantive issues was, at least to some degree, influenced by strong pressure from Gottlieb.

(3) 1997 Engagements 254 In 1997, the seeds of trouble took root. Unfortunately, Deloitte continued to mistake the weeds for flowers when a little digging in the exercise of its professional skepticism obligation and the application of its accumulated audit knowledge would have revealed the underlying rot. 255 The 1997 year has two components for purposes of the analysis: (i) the Q2 and Q3 engagement; and (ii) the 1997 audit. 256 Because of their central role in what occurred in relation to the 1997 year — recall the trial judge referred to them, at para. 174, as “the Achil- les heel of Deloitte’s defence” — I now return in more detail to the Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 243

Pantages Air Rights Agreement and the controversial Put, and the circumstances surrounding them.

(a) Q2/Q3 1997 and the Put — Part One 257 As explained above, the Pantages Air Rights Agreement purported to transfer Livent’s air rights above the Pantages Theatre and adjoining lands to Dundee for a price of $7.4 million. The parties initially entered into a letter agreement dated May 22, 1997. Attached to the letter agreement was a term sheet, which included the Put in favour of Dundee enabling Dundee to withdraw from the arrangement in certain circumstances. The parties subsequently entered into a more formal “Master Agreement”, which was said to be effective as of June 30, 1997, although the transaction did not close until August 15, 1997. 258 The controversy over the Put first flared up in August 1997. 259 Deloitte had a number of concerns about the Pantages Air Rights Agreement, including that the Put effectively allowed Dundee to exit the Agreement without paying the balance of $4.9 million on the transfer price. On August 1st, Wardell and Peter Chant, who were Advisory Part- ners on the Livent file, met with Gottlieb, Messina and Gord Eckstein, Livent’s Senior Vice-President of Finance. Wardell and Chant advised them that it would not be appropriate to recognize the gain from the transfer of the air rights in Q2 1997 — something that Livent was intent on accomplishing in order to shore up its Q2 financial statements for the purposes of a planned debenture offering in fall 1997. 260 On August 6th, Messina informed Wardell that Gottlieb was pushing to have $6 million included in Q2 and to have no public disclosure of its inclusion. That same day, Wardell called Gottlieb to express concern that Gottlieb would even consider that course of action. He warned Gottlieb that if Livent were to include a material gain on the air rights transaction in Q2, Deloitte would not be able to provide the comfort letters needed for the debenture offering in the fall. 261 Gottlieb ignored Wardell’s warning. Instead, he went to the Livent Audit Committee and tabled draft consolidated financial statements for Q2 and the six months ending June 30, 1997, which included a $6 million gain on the sale of the air rights. Deceitfully, he did not inform the Audit Committee about Deloitte’s concerns, and the Audit Committee approved the financial statements. No one from Deloitte was present at the meeting. 244 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

262 When Wardell and Chant learned what had happened shortly thereafter, they were understandably upset. Gottlieb was advised that Deloitte was going to exercise its statutory right as an auditor to insist that an Audit Committee meeting be convened. Deloitte sent Gottlieb a letter on August 25th formally advising that, in its view, the Q2 results as reported were materially misstated. 263 Gottlieb responded, before the Audit Committee met, by purporting to eliminate at least some of Deloitte’s concerns by having Livent’s lawyer delete any reference to the Put in the Master Agreement. Livent’s solicitors and Dundee provided misleading information that the Put had been removed and that there was a firm deal for the sale of the air rights as at June 30, 1997. In spite of these assurances, Deloitte remained concerned. 264 As it turned out, Deloitte’s concerns were justified. Assurances from Livent’s external counsel and from Dundee aside, and unbeknownst to Deloitte, Livent and Dundee had entered into a covert side agreement on August 15th that contained the Put that Deloitte had been advised was “intentionally deleted” from the Master Agreement. 265 There were intense discussions over this period of time, but in the end Deloitte’s opposition was overcome. 266 The Audit Committee met on August 26th, 27th and 29th. Deloitte presented its concerns and advised that it would resign if Livent did not reverse the revenues. Deloitte argued that the sale revenues could not be reported in Q2, even though the Put had been removed from the Master Agreement as of August 15th, for three reasons: (i) no tangible consideration had passed prior to June 30th; (ii) the transaction had not closed as of that date; and (iii) the appropriate GAAP guidelines would not permit revenue recognition. 267 To buttress its position in the debate, Livent sought second opinions from KPMG and from an accounting professor from the Ivey Business School. Both supported Livent’s position that the transaction was, argua- bly, properly reportable in Q2. As the trial judge observed, “[t]he matter appeared to come down to whether or not Deloitte would resign as auditors or whether or not some accommodation could or should be negotiated”: para. 187. With the two opinions in hand that supported their position, Gottlieb and Eckstein were content to let Deloitte resign should it decide to do so. However, others within the Livent camp were concerned that Deloitte’s resignation might negatively affect other sponsorship deals and the debenture offering planned for the fall. Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 245

268 Ultimately, a compromise was reached. It involved Livent’s issuing of the following press release on September 2nd: Livent Inc. announced today that in contemplation of a possible issuance of U.S. $100 million debt securities in the United States, it has adjusted its accounting treatment for non-theater real estate transactions in order to be consistent with U.S. GAAP. This adjustment, which has no effect on prior years’ income, will result in the recognition of income before income taxes of $4.8 million ($0.17 per share) in the third quarter of 1997 rather than in the second quarter, as previously announced. The adjustment is in connection with the sale by the Company of air rights to a real estate developer pursuant to a binding contractual arrangement in place prior to the end of the second quarter. 269 The effect of moving the $4.8 million from Q2 1997 to Q3 was that $1.2 million was still left in Q2 when, on the evidence pertaining to Ca- nadian GAAP, it ought not to have been. As well, the press release did not tell the whole story, and left the reader with the mistaken view that the decision to revise the financials was driven by a technical U.S. GAAP issue, rather than by Deloitte’s concerns about the appropriate- ness of recognizing the revenue at all. The trial judge was also troubled by Deloitte countenancing a press release suggesting there was a binding deal at the end of Q2 when — even on Livent’s version — there had been a material amendment in August by, minimally, dropping the Put. 270 Even after the compromise, however, Gottlieb remained unhappy. He pressured Deloitte to change the audit team. Deloitte yielded to this pressure. Instead of treating Gottlieb’s request as a “red flag” warranting a review of the entire relationship from Deloitte’s perspective, rather than from the client’s perspective, Deloitte changed the composition of the team almost entirely. That left the audit role to be conducted by a new set of senior partners and a support and field staff that had little or no history of the file or the client relationship. 271 The trial judge commented that he was “not sure the Livent-Dundee and Goodman-Gottlieb relationships were not forming part of the backdrop against which this decision was made”: para. 195. 272 In the end, the trial judge took Deloitte to task at para. 196 for being too accommodating to Livent: Whatever might have been Deloitte’s motivation to continue as auditor, I have concluded that it was too accommodating at this point and put itself in a most curious if not fatal position by changing the audit team, virtually from top to bottom. 246 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

273 In addition, the trial judge found that “Deloitte should have remained firm in its resolve to sever its relationship with Livent at the end of Au- gust 1997 at the earliest, but no later than the end of Q3, or September 30th, at the latest”: para. 201. In his view, the “red flags were certainly aflutter by that time”: para. 201. However, while Deloitte, “even with the change of audit teams, was clearly aware that Livent’s management was more than merely pushing the envelope from a GAAP perspective, it seemed to turn a blind eye to the warning signs”: para. 201. 274 In reaching those conclusions, he made a number of key findings: • there was a complete breakdown in the Deloitte/Livent relationship when Gottlieb placed the Q2 statements before the Audit Committee in early August 1997 without advising the Committee of Deloitte’s concerns, an inexcusable action that could not — once discovered — simply be negotiated away: para. 202; • with this knowledge, and with or without knowledge of the other Revenue Transactions, Deloitte’s “collective professional skepticism should have been elevated at this point when they had reason to question the integrity of Gottlieb”: para. 204; • someone at Deloitte should have questioned Dundee’s president and Deloitte’s external counsel about why the Put was apparently “intentionally deleted”: para. 204; • the situation deteriorated even further when Deloitte agreed to the September 2nd press release when it knew or ought to have known that it was misleading: para. 205; and • to make matters worse, Gottlieb subsequently sought to include the present value of a new Revenue Transaction involving AT&T in the Q3 results: para. 206. 275 The trial judge also found that Deloitte fell below the standard of care in accepting the revenue from the Pantages Air Rights Agreement for inclusion in the Q3 results and in a manner that was inconsistent with the September 2nd press release. He accepted the evidence of Livent’s expert “that it was not open for Livent to recognize a gain on the sale of Air Rights in Q3 1997 when it had issued a press release that stated unequiv- ocally that it was backing out the gain to accord with U.S. GAAP — and then did not adhere to the restrictions described by U.S. GAAP”: para. 198. In fact, Douglas Barrington, Deloitte’s Vice-Chairman at the time in question, accepted this conclusion in cross-examination, acknowledging Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 247

that “[i]f you adopted U.S. GAAP and it didn’t qualify, then it shouldn’t be in Q3”: para. 198. 276 As I have noted, Deloitte does not seriously challenge the trial judge’s negligence findings save one. It takes issue with the finding that it had an obligation to sever its relationship with Livent during this time period and that, by failing to do so, it was negligent. It contends that the evidence did not support the finding that it ought to have resigned in August/September 1997, and that an auditor’s decision to resign is a matter of professional judgment and is owed deference by the courts. 277 I reject these submissions. In my view, there is no reason to interfere with the trial judge’s finding that Deloitte ought to have resigned in Au- gust/September 1997. 278 One of Deloitte’s own partners, Wardell, had raised resignation as a possibility in July 1997 and it was very much on the table at the August 1997 meetings. 279 Contrary to Deloitte’s submission, there was ample evidence to support the trial judge’s finding that Deloitte ought to have resigned. As discussed above, Council Interpretation 201.1 in the ICAO Member’s Handbook, which was in effect at the relevant time, stated that a “loss of trust in the client” provided “good and sufficient reason” for resignation. Deloitte’s expert, Ken Froese, testified that an auditor’s resignation was governed by the Council Interpretations. He agreed that resignation could be appropriate in a situation where “you have a loss of trust in the client sufficient that you don’t have confidence in their integrity or what they’re telling you”, although his opinion was that in the circumstances involving Gottlieb’s presentation to the Audit Committee without re- vealing Deloitte’s concerns, “it could go either way”. 280 The trial judge found, however, that there was, or should have been, a complete breakdown of the relationship between Deloitte and Livent in August/September 1997. In support of that conclusion, the trial judge pointed to the “red flags” alerting Deloitte to the fact “Livent’s management was more than merely pushing the envelope from a GAAP perspective”: para. 201. And, as noted above, the trial judge also pointed to Got- tlieb’s conduct in purposefully placing the Q2 statements before the Audit Committee when he knew they contained information “which Deloitte presaged amounted to material misstatements” (an act the trial judge described as “inexcusable” and “not simply one which could be negotiated away): para. 202. These findings, which support his conclusion that Deloitte ought to have resigned, were open to the trial judge. 248 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

281 Nor do I think the finding should be overturned on the basis of deference to the exercise of an auditor’s professional judgment. Professional judgment must be exercised reasonably in the circumstances; it is not a panacea for laundering professional negligence. Here, the trial judge found, as he was entitled to do on the record, that Deloitte simply turned a blind eye to the warning signs. It is clear from reading his reasons as a whole that he did not accept that Deloitte had exercised its professional judgment reasonably in the circumstances. I agree with that conclusion. 282 In summary, there is no reason to interfere with the trial judge’s findings with respect to Deloitte’s treatment of the Pantages Air Rights Agreement and the Put for Q2 and Q3 1997 or his conclusions about Deloitte’s failure to meet the requisite standard of care in relation to them, including its duty to resign.

(b) 1997 Audit and the Put — Part Two 283 In the trial judge’s view, “[t]he 1997 audit was beset with problems right from the get-go”: para. 210. He held that Deloitte failed to comply with GAAS and with its legal professional obligations in four general areas. 284 First, the new team, put in place at Gottlieb’s insistence, “was not up to the task”: para. 210. It had little or no history with the client or senior management. It was still reeling from the previous Q2 and Q3 1997 engagement, which had been thrust on it quickly. It had to deal with five new Revenue Transactions put together by Drabinsky and Gottlieb. Fi- nally, it had to cope with a last-minute requirement, just before audit sign-off, that the capitalized PPC for the year be reduced by $27.5 million in order to accommodate the demands of Ovitz and Furman as a condition of their share purchases. 285 Secondly, the 1997 audit plan was inadequate and displayed little independent thought. It lacked any cautionary instructions to assist the new team, which was “charged with the responsibility of auditing a ‘greater than normal’ risk audit client that had more than a modest history of aggressive, if not questionable, accounting practices”: para. 211. 286 Thirdly, issues relating to the treatment of the PPC for 1997 and the treatment of the five new “unusual” Revenue Transactions should have compelled Deloitte to withhold a clean audit. The trial judge was particularly nonplussed over how Deloitte could have been prepared to sign off on the “final” PPC numbers put forward by management just prior to the Audit Committee meeting on April 9, 1998, yet do a complete U-turn Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 249

and agree to sign off on PPC numbers that were written down by an additional $27.5 million, simply because that was a condition of the Ovitz and Furman share transaction. 287 Finally, Deloitte fell below the standard of care in its treatment of the uncovered Put. Having learned that the Put, which it had been told had been “intentionally deleted”, was alive and well and in full force, Deloitte was obliged to conduct a full and thorough investigation of the entire Livent file. As the trial judge found, “[o]n April 3, Deloitte knew that management, at its highest level, was involved in a fraud, and therefore the assumption of management’s good faith was, by definition, contradicted”: para. 233. In such circumstances, as the CICA Handbook and the Deloitte Manual indicated at the time, the auditor was required to adapt the audit plan, to perform heightened audit procedures, and to bring an attitude of professional skepticism to the process. Deloitte did not do any of this in relation to the revelation of the continuing Put. 288 The trial judge concluded that, the Put issue aside, Deloitte was obliged to withhold a clean audit opinion for the 1997 audit year, given the other issues noted above. 289 Since it was the Put that garnered most of the trial judge’s attention, however, I return in more detail to the second part of the Put controversy.

(i) The Put — Part Two 290 On or about April 2, 1998 (before the final 1997 audit sign-off), Dun- dee’s President, Michael Cooper, told Bob Savaria, the Deloitte Engage- ment Partner on the Dundee audit, that Dundee took the position that the Put was still operative. Savaria delivered this news to the Deloitte partners on the Livent audit, who then convened a meeting. The meeting included various Deloitte partners on the Livent file and the Dundee file, as well as legal counsel. 291 Chant attended the meeting. He was one of Deloitte’s senior Advisory Partners on the Livent file at the time and he was upset. He made a number of forceful points to his partners before leaving the meeting in an angry huff. First, he emphasized that Gottlieb had misled them on three separate occasions. Secondly, he argued that if this were Deloitte U.S., they would have already terminated their relationship with Livent. Thirdly, he warned that Deloitte should terminate its relationship with Livent. Finally, in his view the Put had not been “intentionally deleted”, but rather had been removed from the Master Agreement and inserted 250 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

into a separate confidential agreement to deceive Deloitte back in August 1997. 292 After Chant left the meeting, the remaining partners decided to for- mulate a plan to investigate the matter further, which included speaking to Drabinsky and Gottlieb. 293 Barrington and Tony Power, Deloitte’s new Lead Client Services Partner on the team, met with Drabinsky, who expressed ignorance of the whole matter. Gottlieb, who then joined the meeting, provided the following explanation, quoted by the trial judge, at para. 219: Myron agreed that there was a side agreement but it was only temporary, a bridging situation. He said that when he talked to Cooper about removing the put, Cooper agreed that they didn’t need it but that he couldn’t make the decision on his own, that it would have to go to his CEO for clearance. Therefore he suggested the temporary side agreement to protect himself. Myron said that Cooper came back to him later and said that he had received clearance and said “the agreement doesn’t exist; it was never there; so tear it up”. So Marvin [sic] tore it up “it was as simple as that, I swear to God”. We will now get documentation of this position from both sides. 294 Surprisingly, given what had already transpired, Barrington and Power were satisfied with Gottlieb’s facile explanation. Barrington subsequently prepared a memo setting out the terms on which Deloitte would continue working with Livent. It included a list of steps to be taken for Deloitte to accept that the Put had been eliminated. In particular, Deloitte wanted: (1) a copy of the secret Put agreement signed on August 15, 1997; (2) confirmation in writing that the Put agreement was cancelled in Q3; (3) an opinion from Livent’s legal counsel that the document was an effective cancellation of the Put in Q3; and (4) full disclosure of those facts to the Audit Committee in Deloitte’s presence. 295 Deloitte subsequently took the position that it had been provided with a satisfactory explanation regarding the Put based on the following events: • Gottlieb told Barrington and Power that he had ripped up his copy of the Put, at some unspecified time and date, when Cooper told him it was no longer needed. • Ned Goodman, Dundee Bancorp’s CEO, wrote Gottlieb a letter dated April 4th that said that the Put agreement had been can- Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 251

celled sometime in August, a fact which he had not communicated to Cooper because of the “pace of business and travel”. • On April 7th, counsel for Livent drafted an agreement that effectively said that if the Put had been alive, it was now “officially” dead. 296 But that was not the end of the Put. 297 According to Gottlieb, the Put remained alive and well. As noted by the trial judge, Gottlieb wrote to Cooper on April 7th — the same date as the agreement purporting to eliminate the Put — confirming that the Put agreement “is binding and effective and remains so in favour of Dundee Realty Corporation as if it has never been cancelled”: para. 227. Indeed, the Put was subsequently memorialized in yet another agreement dated May 27, 1998 with modest changes from the August 15, 1997 version. In a cover letter from Gottlieb to Goodman enclosing the agreement, Got- tlieb asked that the agreement be kept in a sealed envelope in a safe or safety deposit box. 298 As noted above, the trial judge concluded that “[o]n April 3, Deloitte knew that management, at its highest level, was involved in a fraud, and therefore the assumption of management’s good faith was, by definition, contradicted”: para. 233. He described Deloitte’s plan to deal with the elimination of the Put as “well short of reasonable, both in terms of its design and its execution” and Deloitte’s investigation — which the trial judge said at best “appeared to have been an audit by conversation” — as “[falling] well short of generally accepted auditing standards and its legal standard of care”: paras. 231, 234. 299 The trial judge’s conclusions were well-supported by the record.

(4) Conclusion on Breach of Standard of Care 300 From the history of the relationship, Deloitte knew that Drabinsky and Gottlieb were aggressive entrepreneurs who pushed the envelope in terms of accounting and financial measures. As early as the Cutway memo in 1990 and the non-disclosure respecting the naming agreement (known by the 1993 audit), at least some within Deloitte had concerns about Drabinsky and Gottlieb “not proving to be as ‘above board’ ... as they should be”. 301 Additional red flags emerged during the following years. These red flags should have heightened Deloitte’s awareness of the need to apply an objective attitude of professional skepticism, but apparently did not. 252 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

By August/September 1997, the red flags were fully “aflutter” and included: • the fact that the audit environment for the 1996 audit had been classified as “high risk”; • the 218 per cent variance in the 1996 audit between Livent’s $22.9 million loss after amortization of the PPC and the projected net income of $20.6 million; • the frequent resort to unusual Revenue Transactions and the insis- tent inclusion of questionable revenues from those transactions in income; • the inconsistency in the Musicians’ Pension Surplus Receivables from the 1995 audit to the 1996 audit; • Gottlieb’s known deceit in failing to disclose Deloitte’s reservations about including the gain from the Pantages Air Rights Agreement in Q2 1997 to the Audit Committee in August 1997; • Gottlieb’s insistence that Deloitte change the composition of the audit team in order to make it more compatible with Livent’s accounting strategies; and finally, • Gottlieb’s constant resort to the severance-of-the-relationship trump card. 302 By April 1998, in the course of conducting the 1997 audit, there was yet another red flag — the revelation that the Put continued to exist and that management had clearly lied to Deloitte in that regard. 303 All of these factors supported the trial judge’s finding that Deloitte had failed to meet its professional standard of care as of Au- gust/September 1997 or, at the latest, April 1998, and that Deloitte was therefore negligent. 304 I turn now to what follows from these findings of negligence.

H. Were Livent’s Losses Caused by Deloitte’s Negligence? (1) Backdrop 305 The trial judge’s causation analysis must be understood against the backdrop of Livent’s theory of liability and damages, which the trial judge accepted. 306 In Livent’s submission, had Deloitte conducted its audits and financial statement engagements in accordance with the requisite standard of care, Deloitte would have discovered the fraud and other material mis- Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 253

statements earlier. In the alternative, had Deloitte resigned, as it should have done in August/September 1997, the fraud would have been discovered by its successor, or at least Deloitte’s reasons for resignation — loss of trust in Livent’s management — would have had to be disclosed to regulators and the public. As a result, Deloitte would not have been able to give clean audit opinions or otherwise endorse interim unaudited financial statements with “comfort letters” from the point of the discovery onwards. Without the clean audit opinions and comfort letters, Livent would no longer have been able to access the capital markets to satisfy its insatiable appetite for cash, and no further losses would have been incurred because Livent would have become insolvent at that point. Livent’s measure of damages therefore equals the change or increase in the losses it sustained — i.e., the difference in its net asset/liability position — between the time of Deloitte’s breach and the time of Livent’s eventual CCAA filing (L = ALD — ELD). 307 As outlined above, the trial judge found that Deloitte had not fallen below the requisite standard of care in relation to the 1995 or earlier audits. He concluded that Deloitte had failed to meet the standard of care with respect to: (i) certain aspects of the 1996 audit; (ii) the work performed regarding the interim unaudited six-month Q2 and Q3 1997 financial statements; and (iii) the 1997 audit. He found, however, that even if Deloitte had fulfilled its duty of care with respect to the 1996 audit year, it would not have resulted in Livent being denied access to the capital markets at that time, thereby triggering the “but for” test for causation for that period.4 With respect to 1997, however, he found that the “but for” test was met: if Deloitte had fulfilled its duty with respect to the Q2 and Q3 1997 engagement and the 1997 audit, Livent would no longer have been able to access the markets. 308 In support of his conclusion on causation with respect to 1997, the trial judge found that: • Deloitte knew at all material times that Drabinsky and Gottlieb were using the financial statements certified by it, and the comfort letters provided, to assist them in convincing third parties to invest money in or extend credit to Livent (indeed, Deloitte admitted that Drabinsky and Gottlieb used the false and misleading financial re-

4 As noted earlier in these reasons, Livent argues on the cross-appeal that the trial judge erred in failing to find liability in relation to the 1996 audit. I will address this argument below. 254 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

sults of Livent they had caused to be promulgated to induce stakeholders to invest in or extend credit to Livent); • the use of fraudulently misstated financial statements to induce people to invest in a company was an entirely predictable (i.e., reasonably foreseeable) outcome; • while the fraudsters may not have been directly stealing money from the company, they nonetheless caused Livent to improperly incur greater liabilities than it would otherwise have incurred; • Deloitte should have resigned from the audit at the end of August 1997 or, at the latest, September 30, 1997; or, at the very least, • Deloitte should not have given a clean comfort letter respecting the fall 1997 debenture offering or a clean audit opinion respecting the 1997 financial statements; • had either of these events occurred, Livent’s access to the capital markets to fill its voracious need for cash through debt or equity financing, would have been foreclosed; and, as a result, • Livent would have been required to shut down its business and seek insolvency protection before it incurred the subsequent increase in liabilities arising from its continued financing ventures (liabilities which, reasonably foreseeably, could not be offset by Livent revenues, given the cash-burn nature of the Livent operations at the time). 309 Deloitte raises a number of issues on causation and damages. It challenges the trial judge’s findings on, and analysis of, factual causation. It also raises a number of issues related to remoteness or proximate cause and damages. In particular, it contends that: • the trial judge failed to apply the “but for” test properly, as he did not expressly consider what would have occurred if Deloitte had complied with the standard of care; • the damages claimed are too remote to be attributed to Deloitte’s conduct because they flow not from Deloitte’s negligence, but rather from “the vicissitudes in Livent’s business to which Livent was always exposed and which Deloitte had no part in causing”; • Canadian courts ought not to give effect to the notion of “deepening insolvency” adopted in some U.S. jurisdictions; • Deloitte’s liability ought to have been reduced to nil as a result of the “contingencies” the trial judge applied; and Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 255

• Livent’s contributory negligence should bar it from recovering (or, at least, recovering everything). 310 As I will explain, I reject each of these submissions.

(2) Factual or “But for” Causation 311 As the Supreme Court of Canada has recently confirmed in Clements (Litigation Guardian of) v. Clements, 2012 SCC 32, [2012] 2 S.C.R. 181 (S.C.C.), the test for showing causation is the “but for” test — a factual inquiry to be applied in a robust and common sense fashion. The test requires the court to be satisfied, on a balance of probabilities, that “but for” the defendant’s negligence the injury would not have occurred (i.e., the defendant’s negligence was necessary to bring about the injury): see paras. 8-10, per McLachlin C.J. The Court made the following observation, at para. 10: A common sense inference of “but for” causation from proof of negligence usually flows without difficulty. Evidence connecting the breach of duty to the injury suffered may permit the judge, depending on the circumstances, to infer that the defendant’s negligence probably caused the loss. 312 It is not necessary that the defendant’s negligence be the sole cause of the injury, as explained by Major J. in Athey v. Leonati, [1996] 3 S.C.R. 458 (S.C.C.), at para. 17: As long as a defendant is part of the cause of an injury, the defendant is liable, even though his act alone was not enough to create the injury. There is no basis for a reduction of liability because of the existence of other preconditions: defendants remain liable for all injuries caused or contributed to by their negligence. [Emphasis in original.] 313 Deloitte takes issue with the trial judge’s “but for” analysis as it relates to the trial judge’s finding that, had it resigned in August/September 1997, the fraud would have been discovered. In particular, the trial judge found that disclosure of the reasons for resigning “might very well have sounded the death knell to the proposed debenture offering”, signalling the end of Livent’s access to the capital markets: para. 188. 314 Deloitte submits that the trial judge’s comment that Deloitte’s resignation “might very well” have prevented the proposed debenture offering from proceeding does not constitute a finding that the offering would not have occurred. 315 Deloitte also submits that the resignation would not have led to the discovery of the fraud or have prevented the fall 1997 debenture offering 256 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

from proceeding because all it would have revealed — had it been disclosed to the regulators and a subsequent auditor — was that there had been a simple accounting dispute over whether revenue associated with the Pantages Air Rights Agreement could be recognized in Livent’s Q2 financial statements. 316 Furthermore, Deloitte contends that, even if it had resigned, a replacement auditor would have been found and would have given the fall 1997 comfort letter and the clean 1997 audit opinion, thus enabling Livent to continue beyond Q3 1997. 317 In my view, none of these arguments has merit. 318 I do not accept that the trial judge made no finding as to what would have happened had Deloitte resigned in the August/September period. I read his comment that disclosure to the regulator or successor auditor “might very well have sounded the death knell” as a finding on a balance of probabilities that disclosure would have ended Livent’s access to the capital markets. 319 Nor am I persuaded by the argument that disclosure of the reasons for resignation would have been as benign as Deloitte submits. While it may be accurate to say that the resignation would not have been as a result of the fraud — given how things stood at the time — it is not accurate to say that the reason for the resignation, if fully disclosed, would have been simply an accounting dispute over the inclusion of a revenue item in the financial statements. The disclosed reason would have had to have been a loss of trust in the client based on the lack of integrity of at least Gottlieb, one of the two driving forces of the company. The impact of that type of disclosure would inevitably have had more impact on regulators, the successor auditor, and potential investors than a mere “accounting dispute” over revenue inclusion. 320 These conclusions undermine the submission that a replacement auditor would likely have emerged and continued to depict the same laun- dered image of Livent’s operations. Disclosure to the regulators, the public and the subsequent auditor that the reasons for resignation included genuine questions about the integrity of Livent would have set red flags even more aflutter and would have required a very close, more careful and objective investigation into Livent’s financial statements — one that involved the requisite application of “an attitude of professional skepticism”. Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 257

321 I am not persuaded that the trial judge erred in his finding, at para. 241, that Deloitte’s resignation in August/September 1997 would have precipitated Livent’s demise: I have first concluded that Deloitte should have pulled the plug on its relationship with Livent at the end of August or, at the very latest, September 1997. In my view, had matters come to a head on either of those two dates, then Deloitte would have been obliged to make “full and frank” disclosure not only to the Audit Committee but to the regulators, the results of which would have put Livent in the position it found itself in 11 months hence. 322 I agree with the trial judge that it is more likely than not that a careful and objective investigation into Livent’s financial statements, pursued with “an attitude of professional skepticism”, would have revealed the fraud, with the same consequences that followed when the fraud was actually discovered a year later. 323 I now turn to the issue of remoteness or proximate cause.

(3) Remoteness/Proximate Cause 324 As explained in Mustapha v. Culligan of Canada Ltd., 2008 SCC 27, [2008] 2 S.C.R. 114 (S.C.C.), at para. 12, the remoteness inquiry asks whether “the harm [is] too unrelated to the wrongful conduct to hold the defendant fairly liable”. The test for determining whether the harm is too remote is reasonable foreseeability: Mustapha, at paras. 12-13. 325 The trial judge dealt with remoteness at paras. 308-26 of his reasons. There, he addressed two English cases — Galoo Ltd. v. Bright Grahame Murray (1993), [1995] 1 All E.R. 16 (Eng. C.A.), and Sasea Finance Ltd. v. KPMG (1999), [2000] 1 All E.R. 676 (Eng. C.A.) — which I will discuss below. Relying on those cases, as well as the evidence before him, he found that most, but not all, of Livent’s losses were attributable to the improper increase in liabilities caused by Deloitte’s negligence. At para. 318, he stated: On the one hand, Livent’s losses after the Measurement Date are largely attributable to the very fraud which Deloitte should have detected. The fraudsters may not have been directly stealing from the company, but they did directly cause the company to improperly incur greater liabilities than it would otherwise have incurred. The use of fraudulently misstated financial statements to induce people to invest in a company is entirely predictable. Livent’s losses — to the extent they are attributable to this improper increase in liabilities — cannot be said to be too remote. 258 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

[Emphasis added.] 326 The trial judge recognized, however, that not all of Livent’s losses ought to be visited on Deloitte. He found that “Deloitte ought not to be liable for the losses attributable to Livent’s legitimate but unsuccessful ventures”: para. 319. Accordingly, he reduced the net economic loss number of $113 million as at August 31, 1997 (which I will discuss below) by 25 per cent to reflect that Deloitte’s breaches of the standard of care were not the proximate cause of all of the losses sustained by Livent. 327 In reaching that number, he relied on expert evidence regarding “contingencies”, which related to the “vagaries” of the business Livent was in. 328 Deloitte submits that the trial judge made a number of errors in his analysis of remoteness and damages. I will address each of the alleged errors in turn.

(a) Normal Business Losses and Deepening Insolvency 329 In arguing that it should not bear the losses sustained by Livent, Deloitte raises two, and in some ways overlapping, themes. Deloitte argues, first, that the trial judge erred in applying a doctrine known as “deepening insolvency” that has received mixed application in various U.S. jurisdictions, but that has not, as yet, been applied in Canadian jurisprudence. Secondly, it submits that any alleged negligence on its part did not cause Livent’s loss; rather, any losses sustained by Livent from continuing in business were caused by the money-losing nature of its business, which Deloitte had no part in causing. 330 At the heart of each submission is the argument that an auditor’s negligence permitting a corporation to continue operating a money-losing business may create the opportunity for losses to continue or accumulate, but is not the proximate cause of those losses, which continue to be attributable to the decisions of management. 331 For this proposition, Deloitte relies on several American authorities that criticize the notion of “deepening insolvency”: see e.g. CitX Corporation, Inc., Re, 448 F.3d 672 (U.S. C.A. 3rd Cir. 2006); and Parmalat Securities Litigation, Re, 501 F.Supp.2d 560 (U.S. Dist. Ct. S.D. N.Y. 2007). “Deepening insolvency” has been defined in American writings and jurisprudence as “the artificial prolongation of a corporation’s existence past the point of insolvency”, or “an injury to [a debtor’s] corporate property from the fraudulent expansion of corporate Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 259

debt and prolongation of corporate life”: John Tully, “Plumbing the Depths of Corporate Litigation: Reforming the Deepening Insolvency Theory” (2013) U. Ill. L. Rev. 2087, at p. 2089; and CitX Corporation, Inc., Re, at p. 677, citing Official Committee v. RF Lafferty & Co., 267 F.3d 340 (U.S. C.A. 3rd Cir. 2001). 332 Deloitte also relies on the English Court of Appeal’s decision in Galoo, which deals with a somewhat similar fact situation to the one in this case. 333 In my view, the U.S. and English cases relied on by Deloitte do not undermine the conclusion that its negligence was the proximate cause of those losses attributable to the improper increase in net liabilities. 334 The theory of deepening insolvency was an important issue at trial. As noted by the trial judge, “[a] significant amount of time was devoted by both sides... to the concept of ‘deepening insolvency’”: para. 344. At the end of the day, however, the trial judge was not persuaded that the notion of deepening insolvency “assist[ed] the defendant in reducing the damages”: para. 352. 335 Deloitte submits, however, that the trial judge did, in effect, apply the concept of deepening insolvency and erred in doing so. I do not agree and, in my view, the concept of deepening insolvency provides little, if any, assistance in this case. 336 American authorities supporting the doctrine (either as a cause of action or a theory of damages) have done so on the basis that third-party negligence permitting management to prolong the life of a corporation past insolvency and accumulate additional debt beyond its ability to pay may constitute recoverable harm to the corporation: see e.g. Investors Funding Corporation of New York Securities Litigation, Re, 523 F.Supp. 533 (U.S. Dist. Ct. S.D. N.Y. 1980); Schacht v. Brown, 711 F.2d 1343 (U.S. C.A. 7th Cir. 1983); Thabault v. Chait, 541 F.3d 512 (U.S. C.A. 3rd Cir. 2008); and Lafferty. 337 American authorities criticizing and declining to apply the doctrine have done so on the basis that an insolvent corporation is not necessarily harmed by, but may even benefit from, entering into additional debt transactions and that a company’s insolvency is deepened not by the debt or investment itself, but rather by management’s misuse of the opportunity created by them: see e.g. CitX Corporation, Inc., Re; and Parmalat. 338 I do not think it necessary, or useful, in this case to determine whether “deepening insolvency” is to be recognized as a cause of action or a the- 260 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

ory of damages in Canada. It is a label that describes many of the same considerations that underlie the debate about whether the damages that Livent claims are available under traditional tort and contract principles. In my view, they are, and in this respect I agree with the statement of the Court of Appeals for the Third Circuit in Thabault, at p. 523, that “traditional damages, stemming from actual harm of a defendant’s negligence, do not become invalid merely because they have the effect of increasing a corporation’s insolvency.” 339 To qualify as “actual harm of a defendant’s negligence,” the injury sustained must have been a reasonably foreseeable risk or consequence of the breach, however. This brings me to the debate surrounding Galoo and subsequent related authorities from the U.K. 340 Galoo Ltd. and its parent company sued their auditor alleging that it had negligently failed to discover their continued insolvency. The Galoo companies argued that, had they known they were insolvent, they would have ceased trading and would not have incurred further liabilities or trading losses. Two kinds of harm were alleged: (i) the acceptance of increased debt; and (ii) continued trading losses. The Court of Appeal concluded on the facts as pleaded — Galoo was a pleadings case — that the statement of claim disclosed no reasonable cause of action. 341 Galoo is somewhat analogous to the present case factually and in terms of the arguments raised against the auditor. Perhaps signalling why Deloitte argues Galoo is “on all fours” with this case, Glidewell L.J. summarized the plaintiffs’ submissions on the trading losses head of damages as follows, at p. 24: (a) If they had not acted in breach of their duty in contract or tort, [the auditor] would have detected the fraud during their audit of the 1985 accounts. (b) In that case, [the Galoo companies] would have been put into liquidation in mid-1986 and thus ceased to trade at that date. (c) If the companies had ceased to trade, they would neither have incurred any further trading losses nor paid the dividend in 1988. (d) Therefore the trading losses and the loss caused by the dividend payment were caused by the breach of duty by [the auditor]. 342 Deloitte submits that, unless this Court determines that Galoo should not be followed in Ontario, the appeal should be allowed. I would not incorporate Galoo into the law of Ontario. But there are a number of reasons why Galoo does not assist Deloitte, in any event. 343 First, the circumstances of the losses in Galoo are distinguishable. With respect to the first head of damages, the Galoo companies claimed Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 261

that they had suffered a loss merely because they had continued to accept loans. The Court recognized that the acceptance of new debt could not, in and of itself, amount to a loss causing damages. It was balance sheet neutral in the sense that, on acceptance of the loan, the company had both the money to use and the obligation to repay it. As for the trading losses, the Galoo companies alleged that the opportunity to incur trading losses from their continued operations resulted in compensable damages. The Court rejected this claim because the auditor’s negligence did no more than create the occasion (i.e., the continued operations of the business) for the harm to occur, but did not cause the harm itself — “in the sense in which the word ‘cause’ is used in law”: p. 30. It relied on an Australian decision, Alexander v. Cambridge Credit Corp. Ltd. (1987), 9 NSWLR 310, which held that, as a matter of common sense, allowing a company to continue in existence did not, without more, cause losses oc- casioned by the ordinary risks associated with carrying on business. 344 Here, however, that “more” is present and was pleaded. Livent has alleged that Deloitte’s negligence resulted in the issuance of clean comfort letters and audit opinions, which Livent then relied upon to access the capital markets and improperly incur increased liabilities. Deloitte’s breaches did not merely create the opportunity for Livent to continue in existence, but rather assisted it in improperly taking on further liabilities that it could not repay, due to the cash-burn nature of its business. As I will explain in more detail below, Livent has drawn the causal nexus — missing in Galoo — between Deloitte’s breach and Livent’s loss. 345 Secondly, Galoo is also distinguishable on the basis of its legal analysis, which differs from the prevailing law in Canada. The Galoo Court rejected the application of the “but for” test and instead applied what can best be described as a “common sense” application of an “effective” or “dominant” cause test: pp. 28-30. In Canadian law, the negligent act need only be “a” cause of the reasonably foreseeable injury; it need not be an “effective” or “dominant” cause: see Athey v. Leonati. 346 Finally, Galoo is not binding on this Court and, in any event, does not even appear to reflect the law in the United Kingdom at this point. 347 For example, in Sasea, a subsequent case from the English Court of Appeal, the losses resulted from certain defalcations by a principal of the company that should have been detected by the auditors, but were not. The Court declined to give effect to the argument that the auditor’s negligence only created the opportunity for the company’s losses, but did not cause them. 262 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

348 The Court in Temseel Holdings Ltd. v. Beaumonts Chartered Ac- countants, [2002] EWHC 2642 (Eng. Comm. Ct.), also declined to follow Galoo. The Temseel Court rejected a motion to dismiss a negligence claim against an auditor. It was alleged that the auditor had failed to detect that the directors had overestimated the profit margins of certain transactions, leading the company to continue to engage in those transactions on the same basis, which resulted in losses to the company. Galoo was distinguished, at para. 52, on the basis that “[t]he complaint made by the company [was] not simply that it was allowed to continue trading, but rather that in reliance upon the figures which had been supplied to it and represented to be correct it continued to trade in a particular manner” (emphasis added). Livent did so in the present case as well. 349 The most recent commentary from the United Kingdom touching on this subject is contained in the U.K. Supreme Court’s decision in Bilta, referred to above in the context of the doctrines of attribution and ex turpi causa, with which it was primarily concerned. In discussing the issue of loss or damage in their joint reasons, Lords Toulson and Hodge relied on remarks by Lord Mance in Stone & Rolls to the effect that “to cause a deficit to a company making it insolvent is to cause it loss”: Bilta, at para. 176. (Lord Mance was on the Bilta Court and gave separate reasons, but did not comment on this point). Lords Toulson and Hodge rejected the defendant’s submission that Bilta had suffered no loss “since it began life with negligible assets and never acquired any lawful assets, so it had none to lose”: Bilta, at para. 176. They concluded, at para. 178: A company’s profit and loss account and its balance sheet may be positive or negative. When the directors caused Bilta to incur VAT liabilities, and simultaneously caused it to misapply money which should have been paid to HMRC, leaving the company with large liabilities and no means of paying them, the directors caused it to suffer a recognisable form of loss. [Emphasis added.] 350 Although Bilta is not an auditor’s negligence case, the damage/loss issue is comparable to this case. 351 In the end, I do not accept Deloitte’s broad proposition that an auditor’s negligence permitting a company to continue to stay in business when, had the negligence not occurred, the business would have ceased operations, merely creates the opportunity for the business to accumulate further losses, but cannot be the proximate cause of those losses. As this Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 263

case demonstrates, there are circumstances where the auditor’s knowledge and the factual matrix can establish the necessary causal nexus between the auditor’s breach and the client’s losses. 352 As discussed above, a public company, such as Livent, is required by statute to have audited financial statements to access the capital markets in Canada and the U.S. Moreover, in the course of a public offering, an issuer, such as Livent, will provide comfort letters in conjunction with its offering memoranda. The comfort letters, prepared by the issuer’s auditor, relate to the issuer’s latest unaudited interim financial statements. Presumably, without such comfort letters, the markets are less likely to respond positively to the offering. 353 As recognized by the trial judge, Drabinsky and Gottlieb were more than a little aggressive in ensuring that Livent’s financial statements reflected its performance in the rosiest of all lights. The trial judge also found that “Deloitte knew at all material times that Gottlieb and Drabin- sky were using the financial statements to assist them in convincing third parties to invest money in or extend credit to Livent”: para. 280. 354 Given this knowledge, it was a reasonably foreseeable risk that Livent would incur increased liabilities as a result of its continuing resort to capital market offerings through the use of financial statements founded on fraud or other material misstatements that Deloitte, in the reasonable exercise of its duties, ought to have discovered. 355 In addition, Deloitte had knowledge regarding the cash-burn nature of Livent’s business and the record of losses being accumulated in the various productions — knowledge derived through Deloitte’s audit history and its ongoing relationship with Livent’s principals. Consequently, it was also reasonably foreseeable and predictable that there would not be offsetting profits or assets to balance against the increased liabilities. 356 In these circumstances, the losses related to what the trial judge described, at para. 318, as the “improper increase in liabilities” did not flow from “the vicissitudes of Livent’s business ... which Deloitte had no part in causing”, as Deloitte has suggested. They flowed reasonably from Deloitte’s failure to do its job properly, which would have stopped the bleeding. 357 Before concluding on the issues of factual causation and proximate cause, I turn to Deloitte’s final argument relating to the trial judge’s remoteness/proximate cause analysis — that concerning contingencies. 264 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

(b) Contingencies 358 Deloitte submits that the trial judge’s erroneous approach to causation reflects itself in his recognition of a 25 per cent discount for what he called contingencies. On its cross-appeal, Livent also takes issue with the contingencies analysis. 359 As explained above, the trial judge took into account evidence of contingencies in his remoteness analysis. While he used the term contingencies, I do not think he was referring to that term in the traditional sense in which it is used in tort law (where “contingencies” generally refers to future events or considerations that may affect the quantum of damages awarded). Rather, the trial judge was using the term to refer to the evidence he had heard relating to the “vagaries” or the money-losing nature of Livent’s business. In the end, nothing much turns on the terminology used by the trial judge to describe what he was dealing with here. 360 The focus of the parties’ differences on the contingencies point is not the 25 per cent reduction figure chosen by the trial judge. Instead, both parties argue that the trial judge erred in applying any contingencies factor. 361 Livent submits that there should be a zero per cent reduction for contingencies because, on the basis of Athey v. Leonati and the “but for” test, Deloitte’s negligence does not have to be the sole cause of Livent’s losses, but only “a” cause, and further that, once it is foreseeable Deloitte’s breach would result in an increase in net liabilities to Livent, the full extent of the losses need not be foreseen for purposes of the remoteness analysis. 362 Deloitte submits, on the other hand, that there should be a 100 per cent reduction — i.e., no damages — because the losses all flowed from the inherent vicissitudes of Livent’s risky business and were not attributable to Deloitte’s breach of its standard of care. In the jargon of the litigation, these kinds of losses were loosely referred to as “trading losses” (after the reference to such losses in that fashion in Galoo). 363 I reject these arguments. In my view, there is no reason to interfere with the trial judge’s conclusion that there should be a 25 per cent reduction to reflect the fact that Deloitte’s negligence was not the proximate cause of all the increase in Livent’s net liabilities during the period between Deloitte’s breach and the CCAA proceeding (referred to by the trial judge as the “delta” period). Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 265

364 In arriving at this conclusion, the trial judge recognized an inherent difficulty with the “contingencies” analysis. At para. 319, he stated: [T]he basic measure of damages in this case — the increase in liquidation deficit that would not have occurred but for Deloitte’s negligence — does not permit me to readily ascertain how much of the damage ought to be seen as a result of the normal vagaries of Livent’s business, and therefore too remote to be recoverable. 365 He turned to the evidence of Stephen Cole for some assistance in this regard. In particular, he relied on Cole’s evidence regarding the vagaries of the industry, which he summarized, at para. 320: Cole opined that Livent engaged in a very risky business, which was fraught with perils right from the start of the enterprise. He suggested that the following factors contributed to Livent’s total economic loss: (a) the inherent risks of the Broadway theater and musical productions industry; (b) the pursuit of a high-risk integrated operating strategy (i.e. all aspects of the production and distribution of a show were carried out by Livent); (c) the financial failure of several large-scale productions, which were not backstopped by successful productions; (d) the investment in and construction of multiple theaters, which was lost when the theatres were liquidated; and (e) the carrying and financing charges associated with the aforesaid activities. [Footnote omitted.] 366 The trial judge admitted he wrestled with the issue of determining the remoteness question through a contingencies analysis. He observed further that the application of a contingencies analysis “[did] not admit of precise calculation” and was not “an all or nothing proposition because the concepts are more than a little ‘soft’ and difficult if not impossible to pin down”: para. 325. 367 Despite those challenges, he ultimately concluded, at paras. 324-26, that there should be a 25 per cent reduction to reflect the fact — as he put it — that “it would not be fair and reasonable to visit the entire delta at Deloitte’s door” and that “the consequence of certain of the ‘trading losses’ should not be borne by Deloitte”: I have struggled through this area, with some misgivings. It is my assessment of the evidence, heard throughout the course of the entire trial, including the evidence of Cole, that the raw number should be reduced by 25%. In my opinion, the percentage chosen reflects the change in the environment in which Livent was functioning after year-end 1995, and would account for the “trading losses” that would be generated from the unprofitable but legitimate theatre business. 266 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

368 By “the change in the environment in which Livent was functioning after year-end 1995”, I take the trial judge to be referring to the cumula- tive effect of the increased financial stress on Livent arising from, amongst other things: (a) the exponentially increasing expenditures associated with at least 11 different shows in various stages of presentation and production, and with the cost of acquiring and renovating at least three theatres in the United States; (b) the downturn beginning in the “watershed” year of 1996 resulting from Phantom in Toronto nearing the end of its run, and the financial failure of such shows as Sunset Boulevard, Kiss, and Show Boat; (c) the escalating demand for funding accompanying these developments; and (d) the increasing pressure from Drabinsky and Gottlieb and their juggling to keep all of these balls in the air. 369 The trial judge explained it in this fashion, at para. 323: As best as I have been able to distill the welter of material thrown my way, there was a change in Livent’s game plan from about the middle of 1995 to the day of reckoning in August 1998. Unfortunately for Livent, this change in game plan was coupled with a change in its operating fortunes during this period, driven by internal and external forces. While the general business strategy remained essentially the same throughout, namely the establishment of a vertically-integrated theatre and production company, the growth in expenditures in both productions and theatre construction was exponential, and not incremental. That increase might have been manageable except for the fact that Livent suffered significant losses from several of its own productions, which, had things rolled out as anticipated, it might have self-financed some or a larger portion of the enterprise, without relying on the capital markets or its creditors as a primary source of funds. 370 Thus, the trial judge distinguished between losses generated from Livent’s unprofitable, but legitimate theatre business, operating within the changed environment, and those losses attributable to Deloitte’s negligence. 371 In grappling with the remoteness question, the trial judge found some assistance in comparing Galoo, Sasea, and this case on a spectrum of factual situations involving auditor’s negligence. I think this comparison is helpful as well. At one end of the spectrum, Sasea involved losses that were directly caused by the very fraud that the auditor negligently failed to detect — namely, the embezzlement of funds from the company. In that case, the auditor was liable. At the other end of the spectrum, Galoo Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 267

was a case where the only nexus between the auditor’s negligence and the resulting loss was that the breach allowed the company to stay in business. The claim was struck. This case is somewhere between those two cases on the spectrum, however. Here, as the trial judge found, at para. 318: On the one hand, Livent’s losses after the Measurement Date are largely attributable to the very fraud which Deloitte should have detected. The fraudsters may not have been directly stealing from the company, but they did directly cause the company to improperly incur greater liabilities than it would otherwise have incurred. The use of fraudulently misstated financial statements to induce people to invest in a company is entirely predictable. Livent’s losses — to the extent they are attributable to this improper increase in liabilities — cannot be said to be too remote. [Emphasis added.] 372 As noted earlier in these reasons, the trial judge summarized Livent’s theory of damages at para. 291: “[T]he measure of damage equals the change or increase in the losses sustained by Livent [during the delta period]” (emphasis added). However, while the Measurement Date is the triggering moment for the measurement of damages, it does not follow that Deloitte is responsible for any and all losses sustained by Livent during the delta period. What Livent is entitled to recover is “the increase in liquidation deficit that would not have occurred but for Deloitte’s negligence”, but not those losses that, to paraphrase Mustapha, are too remote to hold Deloitte fairly liable. In short, Deloitte is only responsible for those losses that are reasonably foreseeable as a result of its negligence. 373 As I have explained, it was a reasonably foreseeable risk that Livent would incur increased liabilities as a result of its continuing resort to the capital markets through the use of financial statements founded on fraud or other material misstatements that Deloitte ought to have discovered. In addition, Deloitte had knowledge of the record of losses being accumulated in the various productions and the cash-burn nature of Livent’s business, and consequently could have reasonably foreseen that there would not be offsetting profits or assets to balance against the increased liabilities. 374 In the result, Livent suffered enhanced losses, which were reasonably foreseeable, as a function of Deloitte’s negligence permitting Livent to resort again to the capital markets and to acquire investment liabilities which inevitably would not be offset by assets because of the cash-burn nature of its business. 268 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

375 On the other hand, the losses resulting from the vicissitudes of Livent’s money-losing business during the delta period are simply unrelated to Deloitte’s negligent acts. As the trial judge recognized, Deloitte should not be responsible for losses generated by the unprofitable, but legitimate theatre business operating within the changed environment from 1996 onwards. 376 Finally, on the cross-appeal, Livent submits that to apply a contingencies factor to reduce the quantum of damages “amounts to a back door application of the doctrine of contributory negligence”. 377 The trial judge rejected that argument. I agree with the trial judge. As explained above, “contingencies” in this context refers to the “vagaries” of Livent’s inherently unprofitable business. “Contributory negligence” refers to the apportionment of liability and damages arising from the negligent acts, according to the degree of fault of the plaintiff in relation to those acts. The two concepts are different. I will deal with the issue of contributory negligence below.

(4) Conclusion on Causation 378 To conclude, Deloitte’s negligence caused Livent to continue to operate in circumstances in which it was reasonably foreseeable both that the company would continue to accumulate increased liabilities through its access to the capital markets, but also — perhaps even more significantly — that it would have no means of paying down those liabilities because of the cash-burn nature of Livent’s money-losing business. 379 Deloitte’s negligence did not merely create the opportunity for Livent to stay in business (Galoo). It created the opportunity for Livent to stay in business and for the fraudsters to continue to take Livent to the capital markets, thus enhancing the losses that would otherwise have been incurred had Livent remained in business during the delta period. The enhanced liabilities resulted from Deloitte’s negligence (Sasea, Temseel, and Bilta), would not have been incurred “but for” that negligence (Cle- ments and Athey v. Leonati), were a foreseeable risk of Livent’s continuing in business, and the harm incurred was therefore not “too unrelated to the wrongful conduct to hold [Deloitte] fairly liable” (Mustapha). 380 In reaching this conclusion, I recognize the need for the law not to overreach by exposing auditors of public companies to unreasonable obligations. In my view, however, where the proper factual and legal connection between the breach and the losses exists — i.e., where it is reasonably foreseeable that the losses will be sustained and where, “but for” Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 269

the negligence, the company would not have incurred them — the auditor’s breach can be the cause of those losses and give rise to compensable damages. 381 I now turn to issues relating to the quantum of damages.

I. Damages (1) Measure and Quantum of Damages 382 The parties agree that it does not matter whether this case is viewed as a breach of contract case or a tort case. They do not dispute the trial judge’s conflation of the measure of damages in tort and in contract in the circumstances. Subject to the limiting factors discussed below, Livent is to be put in the same position it would have been in had the tort or breach of contract never been committed. 383 Nor do the parties quarrel with the use of the formula “Loss (L) = Actual Liquidation Deficit (ALD) — Estimated Liquidation Deficit (ELD)”, determined as of the Measurement Date, as defined earlier in these reasons, for the purpose of calculating Livent’s economic loss. 384 As noted earlier, the ALD is not in dispute and is fixed at $418,830,000. It represents the losses sustained by Livent after taking into account the amounts received on the sale of its assets. Much evidence was led about the calculation of the ELD, however. The experts differed. There was no agreement on what the appropriate Measurement Date was. The experts prepared their calculations based on Measurement Dates of March 1997 and March 1998 and, ultimately, at the trial judge’s request, Cole (Deloitte’s expert) prepared a calculation based on a Mea- surement Date of August 31, 1997. 385 In addition, central to the differences between the experts on the ELD valuation was their approach to establishing the value of Livent’s assets as at the Measurement Date. Ratner, for Livent, compared the actual amount realized from the sale of Livent’s assets against the adjusted book value of those same assets. Cole, on the other hand, estimated the fair market value of Livent’s assets as at the Measurement Dates to arrive at what he thought the assets would have netted had they been disposed of at those moments in time. The practical impact of the different approaches was that the higher the value placed on the assets at a given Measurement Date, the lower the ELD, and therefore the higher the damages. 270 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

386 The trial judge found that neither of the experts’ approaches was “un- assailable” and, accordingly, that their respective numbers “could [not] be accepted without modification”: para. 303. Acknowledging that “but for choosing a mid-point between the two” (Livent’s suggestion), he was “at a loss to settle upon a principled approach for preferring one set of numbers over another”, he in effect split the difference: para. 303. He found that the “raw numbers” for a Measurement Date of March 1997 (about the time the 1996 audit was completed) and March 1998 (within days of the discovery of the Put) were, respectively, $155 million and $53.9 million, based on the mid-point between the Ratner and Cole calculations for those dates. 387 Deloitte argues that it was not open to the trial judge to take an un- principled approach to fixing the quantum of damages by simply choosing the mid-point between the experts’ numbers. 388 I do not accept this argument. As the trial judge observed, “[t]he assessment of damages is as often as not a mug’s game” (para. 274) and trial judges are obliged to do the best they can on the evidence, short of failing to analyze the evidence at all or simply guessing: see e.g. Murano v. Bank of Montreal (1995), 20 B.L.R. (2d) 61 (Ont. Gen. Div. [Commer- cial List]), at pp. 120-23, rev’d in part on other grounds (1998), 41 O.R. (3d) 222 (Ont. C.A.). 389 I do not think that the decision of this Court in Danecker v. Danecker, 2014 ONCA 239 (Ont. C.A.), assists Deloitte in this respect. There, the trial judge had simply averaged the numbers of the experts without conducting any analysis of the evidence. That is not the case here, where the trial judge engaged in a lengthy consideration and analysis of both experts’ evidence and their respective approaches. Having reviewed all of the evidence, including that of Cole and Ratner, he concluded that neither approach could be accepted without modification. It does not follow that he was thus required to assess the damages at zero. I see no palpable and overriding error in the circumstances. 390 The next step for the trial judge was to settle on a Measurement Date. Ultimately, he landed on August 31, 1997 because of his views outlined above as to Deloitte’s breaches in the August/September period of that year. Recognizing that both experts’ ELDs had decreased between March 1997 and March 1998 as one moved closer to the ALD, the trial judge then turned to Cole’s re-worked estimate of the economic loss as of Au- gust 31, 1997 (approximately $100 million). He compared that number with Cole’s estimate as at March 1997 ($136 million), and applied the Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 271

ratio between those two estimates (73.5 per cent) to the “raw number” of $155 million that he had arrived at in the fashion explained above. This gave the trial judge a net economic loss number for August 31, 1997 of $113 million, which is the figure he reduced by 25 per cent on account of contingencies. I see no error in this approach. 391 I turn now to the issue of contributory negligence.

(2) Contributory Negligence 392 The trial judge observed that “the purpose of an audited statement, namely to [ensure] that the interests of shareholders are safeguarded by giving them the means to supervise management, would be undermined if an auditor’s responsibility were reduced in proportion to the egregious- ness of the misconduct which it failed to detect”: para. 340. I agree with that statement in the context of this case: the application of the doctrine of contributory negligence in the circumstances here would, in my view, amount to a back-door application of the doctrine of corporate identification, which I rejected earlier. 393 Deloitte’s argument is that s. 3 of the Negligence Act, R.S.O. 1990, c. N.1, governs and that the trial judge had no option but to give effect to this provision. Section 3 states: In any action for damages that is founded upon the fault or negligence of the defendant if fault or negligence is found on the part of the plaintiff that contributed to the damages, the court shall apportion the damages in proportion to the degree of fault or negligence found against the parties respectively. [Emphasis added.] 394 It is clear from this provision, however, that the fault or negligence contributing to the damages must be “fault or negligence ... on the part of the plaintiff”. Here, I have concluded — as did the trial judge — that the fraudulent acts of Drabinsky and Gottlieb are not to be attributed to Livent for the purposes of the ex turpi causa defence. I agree with Livent’s counsel that to apply that same conduct to Livent for the purpose of assessing contributory negligence in this case “is just the attribution/illegality argument under another name” and that, in the absence of attribution, “[t]he requirements of the Negligence Act are not met”. 395 Deloitte argues nonetheless that the “innocent” representatives of Livent were at least equally negligent in failing to take steps that would have led to the discovery of the fraud. It submits that the trial judge erred in his assertion that “[he] did not hear any evidence to suggest that the 272 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

innocent members of the Board or the Company’s shareholders knew or ought to have known, or were warned, that something was amiss at any time relevant to the audits in question”: para. 341. 396 In this respect, Deloitte relies principally on information that had been provided to the then-Chair of Livent’s Audit Committee regarding the inclusion of revenue from the Pantages Air Rights Agreement in Au- gust 1997, the recognition of what was known as the AT&T transaction in Q3 1997, and Deloitte’s discovery of the side agreement containing the Put in April 1998. It does not follow that conveying this information to the Chair of the Audit Committee — whom the trial judge found was “basically the last honest man standing” (para. 101) — constituted a warning, or even knowledge, that something was amiss during the period relevant to the audits in question. The trial judge was alive to and reviewed all of the pertinent evidence in assessing whether any “innocent” director or shareholder “failed to take steps to minimize, if not avert, the harm done, whose want of care could be attributed to the Company”: para. 337. He concluded that there was not. I see no basis for interfering with that finding. 397 Deloitte argued that it was unfair for it to be wholly responsible for the damages sustained by Livent when it was Livent’s own principals that perpetrated the fraud and Deloitte had relied on information obtained from other third parties such as Dundee and Livent’s solicitors. The reality is that Deloitte did not need to stand alone at trial. It could have taken third-party proceedings for contribution against the fraudsters, Dundee and the solicitors, but it chose for its own undisclosed reasons not to do so. Although this point is not dispositive — as the trial judge recognized — it works against Deloitte’s “unfairness” argument. 398 I would not interfere with the trial judge’s decision not to apply the doctrine of contributory negligence in the circumstances.

J. The Cross-Appeal: Did the Trial Judge Err in Failing to Hold Deloitte Liable for its Breaches of the Standard of Care in Relation to the 1996 Audit? 399 On the cross-appeal, Livent raises two issues: (1) Having found that Deloitte breached the standard of care in its audit of the 1996 financial statements and having quantified the damages at $155 million, did the trial judge err in not awarding Livent the damages that resulted from this breach? Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 273

(2) Regardless of whether damages are awarded from August 1997 or an earlier date, did the trial judge err in applying a 25 per cent reduction to Livent’s damages to account for contingencies? 400 I begin with the observation that what Livent endeavours to persuade this Court to do on the cross-appeal is, for the most part, to revisit and reweigh the trial judge’s findings of fact, the inferences he drew from those facts, and the conclusions of mixed fact and law to which he came based on those findings and inferences. I would decline to do so. In its arguments relating to the cross-appeal, Livent has not shown any palpable and overriding error with respect to the trial judge’s factual findings, the inferences he drew from those findings, or the conclusions reached as a result of those findings and inferences.

(1) Contingencies 401 I have dealt with the contingencies issue above and for the reasons already expressed there, this ground of appeal cannot succeed. Accord- ingly, this portion of the reasons will deal only with the first question.

(2) Damages and the 1996 Audit 402 As noted above, the trial judge found that Deloitte failed to meet the standard of care by not completing the 1996 audit in accordance with GAAS in its treatment of: (i) the PPC; and (ii) the Musicians’ Pension Surplus Receivables in relation to the Kiss tour of New York and Show Boat in New York. However, he was “not persuaded that [Deloitte’s] negligence had caused any compensable harm as of the signing of the opinion in 1997” for the 1996 financial statements: para. 173. He reached that conclusion based on his finding that a confrontation with management over the PPC and the Musicians’ Pension Surplus Receivables — even if those misstatements had been discovered as they should have been — would not “have revealed instances of fraud or other irregularities sufficient to close Livent down”: para. 171. 403 Livent contests the trial judge’s decision on this issue. Not surprisingly, it accepts his findings that Deloitte breached the standard of care in relation to the 1996 audit. However, it submits that the trial judge erred in finding that no compensable damages flowed from those breaches. Why? Because, says Livent in broad-brush terms, if the trial judge had assessed the impact of Deloitte’s deficient conduct relating to the 1996 audit with sufficient rigour, he would have concluded that a competent auditor, acting in accordance with the standard of care, should 274 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

have exercised heightened professional skepticism, probed deeper, made other auditing adjustments, and discovered fraud or material misstatements of such a magnitude that no clean audit opinion could have been issued. 404 Had that occurred, Livent’s “house of cards” would have tumbled down by March 1997, about the time the 1996 audit was completed. In- deed, Livent speculates that had the audit been performed in a competent fashion following detection of the breaches with respect to the PPC and the Musicians’ Pension Surplus Receivables, the effect would have been dramatic: instead of recording a net profit of approximately $11 million for 1996, Livent could well have taken a net loss of over $20 million. Livent submits that this would have been the result had proper adjustments been made for the misstatements regarding the PPC and the Musi- cians’ Pension Surplus Receivables (said to be approximately $15 million) and other misstatements conceded by Deloitte (amounting to an additional $3 million), together with what Livent claims should have been assessed for misstatements relating to the Revenue Transactions (roughly another $20 million). 405 For these reasons, Livent accepts the trial judge’s finding that the amount of $155 million is a fair estimation of the economic loss it claims to have sustained as of March 1997, but submits that he erred in not awarding that full amount in damages. 406 In advancing this broad submission, Livent alleges that the trial judge committed three errors. In its view, he erred: (a) in finding that the discovery of fraud was a necessary precondition to a damages award; (b) in failing to analyze the impact of the necessary intermediate audit steps Deloitte was obliged to undertake on discovery of material misstatements; and (c) in failing to assess the probable impact of properly revised financial statements on Livent’s access to capital markets. 407 Although there is some overlap in the analysis of these alleged errors, I will deal with each in turn.

(a) Discovery of Fraud not a Precondition of Liability 408 Livent submits that the trial judge considered only one of the three routes to liability advanced by it at trial in relation to the 1996 audit year: the failure to detect fraud. Livent claims it advanced two other routes to Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 275

liability as well, which the trial judge ignored — namely, the failure to comply with auditing standards and the failure to probe to the bottom when suspicions ought to have been aroused. 409 I do not accept this submission. 410 I agree with Livent that, as a general principle, auditors may be exposed to liability in the absence of fraud. There is no need for a plaintiff to prove that the auditor ought to have discovered fraud as a threshold for establishing liability and damages: see e.g. BDO Dunwoody. However, the trial judge did not impose fraud as a precondition for liability in this case. 411 While he did place some emphasis on discovery of the fraud, it is apparent from the trial judge’s thorough review of Deloitte’s conduct in relation to the 1996 audit — summarized earlier in these reasons — that he was alive to the potential impact of other “irregularities” (i.e., other intentional misstatements apart from fraud: CICA Handbook, ss. 5135.01-5135.02). Indeed, in encapsulating his reasoning for not finding compensable damages in this context, the trial judge said, at para. 171: While I have concluded that Deloitte did not conduct an audit in accordance with GAAS in respect of the PPC and Musicians’ Pension Surplus Receivable accounts, I am not satisfied that a confrontation with management over these accounts as deductions from revenue would similarly have revealed instances of fraud or other irregularities sufficient to close Livent down. [Emphasis added.] 412 Amongst the “other irregularities” reviewed by the trial judge were the material misstatements in the PPC amortization numbers and the quantums of the alleged Musicians’ Pension Surplus Receivables. 413 Finally, it is worth noting that, in his conclusion on the 1996 audit, the trial judge linked his analysis regarding compensable damages to the broader causation analysis set out later in his reasons. In this latter section, he dealt with both the “but for” test and issues of remoteness and proximity. In dealing with the “but for” test, he made it clear that “the actionable breaches that must be taken into account in the causation analysis include every breach of the standard of care”: para. 286 (emphasis added). In dealing with remoteness/proximate cause, he addressed Deloitte’s position “that any audit failures on its part did not cause loss to Livent”: para. 310 (emphasis added). 414 For these reasons, I am not persuaded that the trial judge made a finding of fraud a precondition to a finding of damages, as Livent asserts. 276 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

(b) Necessary Intermediate Audit Steps 415 Livent submits that the trial judge failed to ask himself what a competent auditor would have been required to do next if, during the course of the audit, the auditor had discovered misstatements of the magnitude he found Deloitte ought to have uncovered during the 1996 audit (i.e., the approximate $15 million referred to above). What a competent auditor would have been required to do, according to Livent, is captured in the following five auditing steps Livent says are found in the CICA Hand- book then in effect: (1) to determine whether the misstatements that it detected were made intentionally or unintentionally; (2) if intentional misstatements were uncovered or potentially present, to probe to the bottom with heightened professional skepticism to either dispel or confirm suspicion of fraud; (3) to reconsider the audit plan when faced with material misstatements to determine whether audit procedures ought to be expanded in order to gain comfort that other material misstatements had not gone undetected; (4) to step back to consider whether all of the misstatements detected suggested a pattern which would mandate a re-examination of the entire audit through a lens of higher professional scrutiny; and (5) to quantify the known and likely misstatements in order to be able to conclude whether the statements were materially misstated. 416 I shall refer to these five steps as the proposed “intermediate audit steps”. 417 Livent’s basis for proposing the intermediate audit steps is founded on an approach to the “but for” test advocated in the academic writings of Professors Philip Osborne and David Robertson: see Philip H. Os- borne, The Law of Torts, 4th ed. (Toronto: Irwin Law, 2011); and David W. Robertson, “The Common Sense of Cause in Fact” (1997) 75 Tex. L. Rev. 1765. That approach recognizes that “[t]he application of the but for test rarely calls for close or precise analysis” and that “[m]ost frequently, courts merely identify the test and draw a conclusion”: Osborne, at p. 53. However, to enhance clarity and certainty in the “but for” analysis, the authors suggest that the application of the test involves a number of distinct steps. In a passage adopted by the trial judge at para. 286 of his Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 277

reasons, Professor Osborne — whose work draws on that of Professor Robertson — says, at p. 53: [T]he application of the but for test involves a number of discrete steps. First, the harm that is alleged to have been caused by the defendant must be identified. Second, the specific act or acts of negligence by the defendant must be isolated. Third, the trier of fact must mentally adjust the facts so that the defendant’s conduct satisfies the standard of care of the reasonable person, being sure to leave all other facts the same. Fourth, it must be asked if the plaintiff’s harm would have occurred if the defendants had been acting with reasonable care. [Footnote omitted.] 418 The intermediate audit steps proposed by Livent arise out of the third of these “discrete steps.” In substance, the third Osborne step requires the trier of fact to step back, isolate the specific acts of negligence, and “mentally adjust the facts so that the defendant’s conduct satisfies the standard of care of the reasonable person”. This backward-looking exercise is described by Professor Robertson as “using the imagination to create a counterfactual hypothesis” or “counterfactual inquiry”, thereby “asking what would have happened under a factual scenario that never actually existed”: Robertson, at p. 1770, fn. 21 (emphasis in original). 419 The parties have not provided this Court with any jurisprudence directly adopting what I will call the “mental adjustment” or “counterfactual inquiry” approach articulated by Professors Osborne and Robertson as an aspect of the application of the “but for” test. However, the trial judge and the parties seem to have accepted it as a working theory, and as part of the conceptual “but for” framework. I am prepared to accept its application for the purposes of this case. 420 In substance, Livent’s argument is that the trial judge’s failure to engage in the mental adjustment/counterfactual inquiry exercise caused him to miss the link between Deloitte’s breaches of the standard of care for the 1996 audit and Livent’s damages. I disagree. 421 What the mental adjustment/counterfactual inquiry exercise contemplates, in my view, is that the trial judge — to the best of his or her ability — will carefully assess the evidence to determine what would likely have occurred had the defendant complied with the standard of care. Re- call Professor Osborne’s acknowledgement that “[t]he application of the but for test rarely calls for close or precise analysis.” In the context of this case, the question to be answered was what would likely have occurred if Deloitte had discovered the material misstatements pertaining to the 1996 audit that the trial judge found ought to have been discovered 278 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

(i.e., the misstatements regarding the PPC and the Musicians’ Pension Surplus Receivables)? 422 In my view, the trial judge specifically addressed this question and, based on his findings, answered it. Although Livent does not agree with those findings, or the conclusions drawn from them, the trial judge in effect applied the mental adjustment/counterfactual inquiry analysis and, in doing so, demonstrated that he was alive to the principal issues raised by Livent’s proposed intermediate audit steps. 423 Livent dismisses the trial judge’s findings on the basis that he “made a rolled-up hypothetical assumption to arrive at a ‘but for’ world where Deloitte presumably provides a clean opinion because Gottlieb would ‘have yielded to the suggested write-offs rather than pull the plug on the enterprise’”: para. 173. It seeks to characterize the factual findings underlying the trial judge’s conclusion as “conclusory assumptions”. Specifi- cally, it articulates three “conclusory assumptions”: (1) Drabinsky and Gottlieb would have “yielded to the suggested write-offs” with respect to the material misstatements regarding the PPC and the Musicians’ Pension Surplus Receivables “rather than pull the plug on the enterprise”: para. 173; (2) “a confrontation with management over these accounts as deductions” would not “have revealed instances of fraud or other irregularities sufficient to close Livent down”: para. 171; and (3) the 1998 write-offs “speak volumes in terms of the pragmatism of Drabinsky and Gottlieb”: para. 173. 424 However, the factual findings made by the trial judge, and the inferences and conclusions based on them, are not “conclusory assumptions”. What Livent’s submission overlooks is that the mental adjustment/counterfactual inquiry exercise called for in these circumstances is by nature an exercise in developing a “hypothetical assumption” (“rolled-up” or not), and the trial judge explicitly addressed his mind to what Deloitte would have done next, had it discovered the material misstatements. While the trial judge may not have articulated his analysis in a way that specifically addressed the five intermediate audit steps now proposed by Livent, he arrived at the end point by finding that the 1996 financial statements were “materially misstated”, but that their discovery would not have resulted in Deloitte’s failing to give a clean audit opinion for 1996. Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 279

425 In this respect, he made the following specific findings, at para. 173: [W]hen an auditor uncovers items or misstatements that, individually or collectively, would exceed materiality, rather than simply withholding a clean opinion, the issues are first discussed with management to see if some middle reporting ground can be achieved. In the instant case, and even though it was often “Gottlieb’s way or the highway”, I have no reason to conclude that, when push came to shove, Gottlieb as the pragmatist would not have yielded to the suggested write-offs rather than pull the plug on the enterprise. His hubris and the conceit of Drabinsky, and their collective view that their frauds would not be discovered, would have driven that agenda. [Emphasis added.] 426 Experts for both Livent and Deloitte agreed that upon discovery of a material misstatement in the financial statements, an auditor will inform the client of the error and push the client to correct it. For example, Livent’s expert, Paul Regan, testified that, upon discovery of a material error, the auditor informs the client and the client either records the cor- rected entry or “[i]f the client fails to record those entries, given the materiality of these known errors on the financial statements, you qualify your opinion and you don’t give a clean opinion on those financial statements.” 427 In addition to the foregoing evidence, the trial judge found that the detection of the PPC overstatement from 1996, had it occurred, would not itself have brought to light the more serious issue of the “amortization rolls”: para. 172. He also compared the 1996 audit with the later circumstances leading to the Ovitz and Furman acquisitions in 1998 where Drabinsky and Gottlieb were prepared to take massive write-offs before the deal was done — which, the trial judge said, “[spoke] volumes in terms of the pragmatism of Drabinsky and Gottlieb”: para. 173. This comparison, too, reinforced his view that, even with the detection of the 1996 misstatements, a confrontation with management would not have led to the discovery of “fraud or other irregularities sufficient to close Livent down”: para. 171. 428 While Livent quarrels with the trial judge’s resort to the comparison with the Ovitz and Furman transactions, I see no error in his looking at what actually happened at that time for some assistance in considering what would have happened in 1997. He was dealing with the same Livent actors pursuing their same goals in the Livent universe. 280 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

429 Although not specifically referred to by the trial judge in this context, his finding that Livent would, in the end, have yielded to Deloitte’s demands (had they been made, as they should have been) is consistent with what happened in other instances where concessions were made as well. In 1996, for example, when Deloitte pushed for a write-down for the PPC in relation to Sunset Boulevard, Livent agreed and, after discussions, assented to an $18.5 million charge against income. Subsequently, in 1997, after the great debate over the inclusion of revenue from the air rights transaction, Livent ultimately agreed to include most of it in Q3 and not Q2. 430 All the findings of the trial judge on this issue were grounded in the evidence. I see no error in the “hypothetical assumption” about the “‘but for’ world” which the trial judge accepted, and no basis for overturning his finding as to what would likely have occurred had Deloitte complied with the standard of care and detected the material misstatements regarding the PPC and the Musicians’ Pension Surplus Receivables during the 1996 audit.

(c) Livent’s Access to the Capital Markets 431 The 1996 financial statements incorporated the material misstatements identified by the trial judge and, in Livent’s view, other material misstatements as well. Livent’s final submission on the cross-appeal is that, in the revised audit scenario, the trial judge failed to consider how the 1996 financial statements, had they been properly prepared, would have affected the covenants in Livent’s secured loans and its access to the capital markets generally. 432 Livent had acquired two new secured lenders as at December 1996 — CIBC and the trustee of a $72.5 million debenture — to whom it owed approximately $96.8 million by the end of March 1997. Livent argues that, even at a conservatively estimated re-visited loss of approximately $3.4 million for 1996 — the loss that would have resulted had the proper adjustments been made for the misstatements regarding only the PPC and the Musicians’ Pension Surplus Receivables — it would have been in breach of its loan covenants. This would have made it difficult for Livent to borrow more money, something that was a constant need, particularly in view of the accelerating cash-burn nature of its business at that time. 433 There are at least two difficulties with this submission. It is raised for the first time on appeal and Livent led no evidence at trial to the effect that any breach of its loan covenants would have had an impact on its Livent Inc. (Receiver of) v. Deloitte & Touche R.A. Blair J.A. 281

ability to borrow more money or on its access to the debt or equity markets. 434 In any event, the trial judge found that — in the absence of a discovery of the fraud — the reporting of significant losses had not prevented Livent from accessing the capital markets. His findings are supported by the evidence. 435 For instance, apart from the Ovitz-Furman transactions referred to above — that generated U.S.$22 million in private placements in the face of a $44 million loss position — James Pattison and Conrad Black (two Livent directors) were prepared to advance a further U.S.$12.2 million, following an additional PPC write-down of $23.6 million in Q1 1998. It was open to the trial judge to consider what would have happened in respect of the 1996 audit, with these facts in mind. He did so, at para. 284: [E]ven if Deloitte had uncovered inadvertent errors in the years prior to year-end 1996, I am persuaded that Livent would likely still have been able to access the capital markets for share underwritings and debt placement. This proposition is underscored by the events of the spring of 1998, when Ovitz and Furman insisted on a massive PPC write down, throwing Livent into a huge loss position. Regardless of this swing in fortunes, it was still able to complete the underwriting. Indeed, the situation repeated itself in the months following the Ovitz-Furman closing and after a further write down of PPC and a further anticipated Q2 loss. Messrs. Black and Pattison seemingly beat a path to Drabinsky’s door to dump additional millions into Livent’s lap. The fraud to that point had not been uncovered and access to the capital markets had not been denied, accordingly. Regard- less of the newly recorded losses, Drabinsky’s star was still shining brightly on the horizon. 436 It stands to reason that, if Livent could attract investment in the spring 1998 after already recording a $44 million loss, it could have done so after recording a $3.4 million — or perhaps even higher — loss for year- end 1996. The trial judge’s observation, at footnote 2, that “the [cachet] associated with Drabinsky was clearly the allure that attracted the investors” is supported by the record, including the testimony of Livent’s witness, Robert Webster, who characterized Drabinsky as “the creative heart and soul of the company”, the person with whom the company was identified in the public market, and the person whose “skill set was integral” to the decisions of investors. Drabinsky’s star was shining in March 1997 when the 1996 audit was being completed as well. 282 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

437 The probable impact of revised financial statements on Livent’s access to the capital markets was precisely the issue that troubled the trial judge and that he sought to resolve in respect of the 1996 audit. He addressed it directly, as well as in the context of his causation analysis and the mental adjustment/counterfactual inquiry exercise already described above. I would not interfere with his conclusions on this issue.

(3) Conclusion on the Cross-Appeal 438 In the end, Livent seeks to have this Court substitute different findings of fact for those arrived at by the trial judge in respect of his conclusion that no compensable damages flowed from the breaches of the standard of care that he identified in relation to the 1996 audit year. In my view, his findings, and the inferences and conclusions he drew from them, were well-founded on the evidence. I would dismiss the cross- appeal.

Disposition 439 For all the foregoing reasons, the appeal and the cross-appeal are dismissed. 440 Counsel advised that the parties have resolved the issue of costs.

G.R. Strathy C.J.O.:

I agree

P. Lauwers J.A.:

I agree Appeal and cross-appeal dismissed. Midwest Properties Ltd. v. Thordarson 283

[Indexed as: Midwest Properties Ltd. v. Thordarson] Midwest Properties Ltd., Plaintiff (Appellant) and John Thordarson and Thorco Contracting Limited, Defendants (Respondents) Ontario Court of Appeal Docket: CA C56758 2015 ONCA 819 K. Feldman, C.W. Hourigan, M.L. Benotto JJ.A. Heard: June 1, 2015 Judgment: November 27, 2015 Environmental law –––– Liability for environmental harm — Toxic real estate –––– M Ltd. and T Ltd. owned adjoining properties in industrial area — T Ltd. stored large volumes of waste petroleum hydrocarbons (PHC) on its property for decades and as result PHC had contaminated soil and groundwater on its property — From 1988-2011 T Ltd. was in almost constant breach of license and/or compliance orders issued by Ministry of Environment and Climate Change — Groundwater flowing from T Ltd.’s property contaminated M Ltd.’s property — M Ltd. discovered contamination after it acquired its property in 2007 — M Ltd. brought action against T Ltd. and its owner, relying on breach of s. 99(2) of Environmental Protection Act, nuisance and negligence — Trial judge found T Ltd. not liable under any causes of action, concluding that M Ltd. failed to prove PHC contamination lowered value of its property — Trial judge held that because Ministry had already ordered T Ltd. and owner to remediate M Ltd.’s property, remedy under s. 99(2) was not available — M Ltd. appealed and Ministry intervened — Appeal allowed — Trial judge erred in her interpretation and application of private right of action contained in s. 99(2) of Act — Trial judge’s interpretation of s. 99(2) was inconsistent with wording of legislation and with binding authority on proper interpretative approach to Act, and her interpretation was inconsistent with purpose of Act — There was no language in s. 99(2) to support trial judge’s conclusion that party could not advance claim under section if owner or party in control of pollutant was already subject to Ministry order — It was clear that order and recovery under s. 99(2) were not mutually exclusive — Trial judge erred in law in concluding that M Ltd. had not proven recoverable damages under s. 99 — There was really no dispute regarding costs of remediation — Future remediation costs for M Ltd.’s property were recoverable and M Ltd. was entitled to judgment for full amount of its estimated costs — Owner of T Ltd. had control of PHC for purpose of s. 99(2) — Section 99(8) provides that liability under s. 99(2) was joint and several. 284 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

Environmental law –––– Liability for environmental harm — Nuisance — Liability in particular cases — Miscellaneous –––– M Ltd. and T Ltd. owned adjoining properties in industrial area — T Ltd. stored large volumes of waste petroleum hydrocarbons (PHC) on its property for decades and as result PHC had contaminated soil and groundwater on its property — From 1988-2011 T Ltd. was in almost constant breach of license and/or compliance orders issued by Ministry of Environment and Climate Change — Groundwater flowing from T Ltd.’s property contaminated M Ltd.’s property — M Ltd. discovered contamination after it acquired its property in 2007 — M Ltd. brought action against T Ltd. and its owner, relying on breach of s. 99(2) of Environmental Protection Act, nuisance and negligence — Trial judge found T Ltd. not liable under any causes of action, concluding that M Ltd. failed to prove PHC contamination lowered value of its property — Trial judge held that because Ministry had already ordered T Ltd. and owner to remediate M Ltd.’s property, remedy under s. 99(2) of Act was not available — M Ltd. appealed and Ministry intervened — Appeal allowed — Trial judge erred in dismissing nuisance and negligence claims on basis that damage had not been established — There was uncontradicted evidence that established diminution of value of M Ltd.’s property and human health risk — Trial judge committed palpable and overriding error in not considering that evidence and in reaching unsupported finding that damage had not been proven — Owner of T Ltd. could not rely on corporate veil principle to avoid personal liability for commission of these torts — There was no question that owner was intimately and equally involved in conduct which was both nuisance and negligent. Environmental law –––– Liability for environmental harm — Negli- gence –––– M Ltd. and T Ltd. owned adjoining properties in industrial area — T Ltd. stored large volumes of waste petroleum hydrocarbons (PHC) on its property for decades and as result PHC had contaminated soil and groundwater on its property — From 1988-2011 T Ltd. was in almost constant breach of license and/or compliance orders issued by Ministry of Environment and Climate Change — Groundwater flowing from T Ltd.’s property contaminated M Ltd.’s property — M Ltd. discovered contamination after it acquired its property in 2007 — M Ltd. brought action against T Ltd. and its owner, relying on breach of s. 99(2) of Environmental Protection Act, nuisance and negligence — Trial judge found T Ltd. not liable under any causes of action, concluding that M Ltd. failed to prove PHC contamination lowered value of its property — Trial judge held that because Ministry had already ordered T Ltd. and owner to remediate M Ltd.’s property, remedy under s. 99(2) of Act was not available — M Ltd. appealed and Ministry intervened — Appeal allowed — Trial judge erred in dismissing nuisance and negligence claims on basis that damage had not been established — There was uncontradicted evidence that established diminution of value of M Ltd.’s property and human health risk — Trial judge committed palpable and overriding error in not considering that evidence and in reaching un- Midwest Properties Ltd. v. Thordarson 285 supported finding that damage had not been proven — Owner of T Ltd. could not rely on corporate veil principle to avoid personal liability for commission of these torts — There was no question that owner was intimately and equally involved in conduct which was both nuisance and negligent. Environmental law –––– Liability for environmental harm — Miscellane- ous –––– M Ltd. and T Ltd. owned adjoining properties in industrial area — T Ltd. stored large volumes of waste petroleum hydrocarbons (PHC) on its property for decades and as result PHC had contaminated soil and groundwater on its property — From 1988-2011 T Ltd. was in almost constant breach of license and/or compliance orders issued by Ministry of Environment and Climate Change — Groundwater flowing from T Ltd.’s property contaminated M Ltd.’s property — M Ltd. discovered contamination after it acquired its property in 2007 — M Ltd. brought action against T Ltd. and its owner, relying on breach of s. 99(2) of Environmental Protection Act, nuisance and negligence — Trial judge found T Ltd. not liable under any causes of action, concluding that M Ltd. failed to prove PHC contamination lowered value of its property — Trial judge held that because Ministry had already ordered T Ltd. and owner to remediate M Ltd.’s property, remedy under s. 99(2) of Act was not available — M Ltd. appealed and Ministry intervened — Appeal allowed — Trial judge erred in law in concluding that award of punitive damages was not appropriate — T Ltd.’s history on non-compliance was its orders and its utter indifference to environmental conditions of its property and surrounding areas, demonstrated wanton disregard for its environmental obligations — This was type of conduct that warranted punitive sanction by court — M Ltd. was awarded punitive damages in amounts of $50,000 against T Ltd. and $50,000 against owner of T Ltd.. Torts –––– Nuisance — Liability — Particular nuisance — Miscellane- ous –––– M Ltd. and T Ltd. owned adjoining properties in industrial area — T Ltd. stored large volumes of waste petroleum hydrocarbons (PHC) on its property for decades and as result PHC had contaminated soil and groundwater on its property — From 1988-2011 T Ltd. was in almost constant breach of license and/or compliance orders issued by Ministry of Environment and Climate Change — Groundwater flowing from T Ltd.’s property contaminated M Ltd.’s property — M Ltd. discovered contamination after it acquired its property in 2007 — M Ltd. brought action against T Ltd. and its owner, relying on breach of s. 99(2) of Environmental Protection Act, nuisance and negligence — Trial judge found T Ltd. not liable under any causes of action, concluding that M Ltd. failed to prove PHC contamination lowered value of its property — Trial judge held that because Ministry had already ordered T Ltd. and owner to remediate M Ltd.’s property, remedy under s. 99(2) of Act was not available — M Ltd. appealed and Ministry intervened — Appeal allowed — Trial judge erred in dismissing nuisance and negligence claims on basis that damage had not been established — There was uncontradicted evidence that established diminution of 286 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

value of M Ltd.’s property and human health risk — Trial judge committed palpable and overriding error in not considering that evidence and in reaching unsupported finding that damage had not been proven — Owner of T Ltd. could not rely on corporate veil principle to avoid personal liability for commission of these torts — There was no question that owner was intimately and equally involved in conduct which was both nuisance and negligent. Torts –––– Negligence — Effect of wrongful conduct –––– M Ltd. and T Ltd. owned adjoining properties in industrial area — T Ltd. stored large volumes of waste petroleum hydrocarbons (PHC) on its property for decades and as result PHC had contaminated soil and groundwater on its property — From 1988-2011 T Ltd. was in almost constant breach of license and/or compliance orders issued by Ministry of Environment and Climate Change — Groundwater flowing from T Ltd.’s property contaminated M Ltd.’s property — M Ltd. discovered contamination after it acquired its property in 2007 — M Ltd. brought action against T Ltd. and its owner, relying on breach of s. 99(2) of Environmental Protection Act, nuisance and negligence — Trial judge found T Ltd. not liable under any causes of action, concluding that M Ltd. failed to prove PHC contamination lowered value of its property — Trial judge held that because Ministry had already ordered T Ltd. and owner to remediate M Ltd.’s property, remedy under s. 99(2) of Act was not available — M Ltd. appealed and Ministry intervened — Appeal allowed — Trial judge erred in dismissing nuisance and negligence claims on basis that damage had not been established — There was uncontradicted evidence that established diminution of value of M Ltd.’s property and human health risk — Trial judge committed palpable and overriding error in not considering that evidence and in reaching unsupported finding that damage had not been proven — Owner of T Ltd. could not rely on corporate veil principle to avoid personal liability for commission of these torts — There was no question that owner was intimately and equally involved in conduct which was both nuisance and negligent. Remedies –––– Damages — Exemplary, punitive and aggravated damages — Grounds for awarding exemplary, punitive and aggravated damages — Miscellaneous –––– M Ltd. and T Ltd. owned adjoining properties in industrial area — T Ltd. stored large volumes of waste petroleum hydrocarbons (PHC) on its property for decades and as result PHC had contaminated soil and groundwater on its property — From 1988-2011 T Ltd. was in almost constant breach of license and/or compliance orders issued by Ministry of Environment and Climate Change — Groundwater flowing from T Ltd.’s property contaminated M Ltd.’s property — M Ltd. discovered contamination after it acquired its property in 2007 — M Ltd. brought action against T Ltd. and its owner, relying on breach of s. 99(2) of Environmental Protection Act, nuisance and negligence — Trial judge found T Ltd. not liable under any causes of action, concluding that M Ltd. failed to prove PHC contamination lowered value of its pro- Midwest Properties Ltd. v. Thordarson 287 perty — Trial judge held that because Ministry had already ordered T Ltd. and owner to remediate M Ltd.’s property, remedy under s. 99(2) of Act was not available — M Ltd. appealed and Ministry intervened — Appeal allowed — Trial judge erred in law in concluding that award of punitive damages was not appropriate — T Ltd.’s history on non-compliance was its orders and its utter indifference to environmental conditions of its property and surrounding areas, demonstrated wanton disregard for its environmental obligations — This was type of conduct that warranted punitive sanction by court — M Ltd. was awarded punitive damages in amounts of $50,000 against T Ltd. and $50,000 against owner of T Ltd.. Cases considered by C.W. Hourigan J.A.: ADGA Systems International Ltd. v. Valcom Ltd. (1999), [1999] O.J. No. 27, 39 C.C.E.L. (2d) 163, 168 D.L.R. (4th) 351, 41 B.L.R. (2d) 157, 117 O.A.C. 39, 44 C.C.L.T. (2d) 174, 43 O.R. (3d) 101, 1999 CarswellOnt 29 (Ont. C.A.) — considered Antrim Truck Centre Ltd. v. Ontario (Ministry of Transportation) (2013), 2013 SCC 13, 2013 CarswellOnt 2354, 2013 CarswellOnt 2355, 26 R.P.R. (5th) 1, 99 C.C.L.T. (3d) 1, 355 D.L.R. (4th) 666, 73 C.E.L.R. (3d) 1, 441 N.R. 342, 108 L.C.R. 157, 301 O.A.C. 281, [2013] S.C.J. No. 13, [2013] 1 S.C.R. 594 (S.C.C.) — considered Bell ExpressVu Ltd. Partnership v. Rex (2002), 2002 SCC 42, 2002 CarswellBC 851, 2002 CarswellBC 852, 100 B.C.L.R. (3d) 1, [2002] 5 W.W.R. 1, [2002] S.C.J. No. 43, 212 D.L.R. (4th) 1, 287 N.R. 248, 18 C.P.R. (4th) 289, 166 B.C.A.C. 1, 271 W.A.C. 1, 93 C.R.R. (2d) 189, [2002] 2 S.C.R. 559, REJB 2002-30904, 2002 CSC 42 (S.C.C.) — considered Bisson v. Brunette Holdings Ltd. (1993), 15 C.E.L.R. (N.S.) 201, 19 C.L.R. (2d) 214, 1993 CarswellOnt 275, [1993] O.J. No. 3378 (Ont. Gen. Div.) — considered Canadian Tire Real Estate Ltd. v. Huron Concrete Supply Ltd. (2014), 2014 ONSC 288, 2014 CarswellOnt 6103, 45 R.P.R. (5th) 214, 88 C.E.L.R. (3d) 93 (Ont. S.C.J.) — considered Cie pétrolière Impériale c. Québec (Tribunal administratif) (2003), 2003 SCC 58, 2003 CarswellQue 2315, 2003 CarswellQue 2316, [2003] S.C.J. No. 59, (sub nom. Imperial Oil Ltd. v. Quebec (Minister of the Environment)) 231 D.L.R. (4th) 577, 5 Admin. L.R. (4th) 1, 310 N.R. 343, 5 C.E.L.R. (3d) 38, (sub nom. Imperial Oil Ltd. v. Quebec (Minister of the Environment)) [2003] 2 S.C.R. 624, REJB 2003-49134, [2003] A.C.S. No. 59, 2003 CSC 58 (S.C.C.) — considered Desrosiers v. Sullivan (1986), 40 C.C.L.T. 66, 76 N.B.R. (2d) 271, 192 A.P.R. 271, 1986 CarswellNB 74, [1986] N.B.J. No. 156 (N.B. C.A.) — considered Desrosiers v. Sullivan (1987), 40 C.C.L.T. 66n, 79 N.B.R. (2d) 90 (note), 201 A.P.R. 90 (note), 80 N.R. 315n, [1987] S.C.C.A. No. 201 (S.C.C.) — referred to 288 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

Deumo v. Fitzpatrick (2008), 2008 CarswellOnt 4543, 39 C.E.L.R. (3d) 299 (Ont. S.C.J.) — distinguished Hollick v. Metropolitan Toronto (Municipality) (1999), 1999 CarswellOnt 4135, 32 C.E.L.R. (N.S.) 1, (sub nom. Hollick v. Toronto (City)) 46 O.R. (3d) 257, 127 O.A.C. 369, 181 D.L.R. (4th) 426, 7 M.P.L.R. (3d) 244, 41 C.P.C. (4th) 93, [1999] O.J. No. 4747, 91 O.T.C. 320 (Ont. C.A.) — considered Hollick v. Metropolitan Toronto (Municipality) (2001), 2001 SCC 68, 2001 CarswellOnt 3577, 2001 CarswellOnt 3578, [2001] S.C.J. No. 67, (sub nom. Hollick v. Toronto (City)) 205 D.L.R. (4th) 19, (sub nom. Hollick v. Toronto (City)) 56 O.R. (3d) 214 (headnote only), 24 M.P.L.R. (3d) 9, 277 N.R. 51, 13 C.P.C. (5th) 1, 42 C.E.L.R. (N.S.) 26, 153 O.A.C. 279, (sub nom. Hollick v. Toronto (City)) [2001] 3 S.C.R. 158, REJB 2001-26157, 56 O.R. (3d) 214 (note), 56 O.R. (3d) 214, 2001 CSC 68 (S.C.C.) — referred to Horne v. New Glasgow (Town) (1953), [1954] 1 D.L.R. 832, 1953 CarswellNS 37 (N.S. S.C.) — referred to Hosking v. Phillips (1850), 154 E.R. 801, 3 Exch. 168 (Eng. Exch.) — referred to Jens v. Mannix Co. (1978), [1978] 5 W.W.R. 486, 89 D.L.R. (3d) 351, 5 C.C.L.T. 225, 1978 CarswellBC 470 (B.C. S.C.) — referred to Lord (Litigation Guardian of) v. Downer (1999), 1999 CarswellOnt 3128, (sub nom. Lord v. Downer) 125 O.A.C. 168, 47 C.C.L.T. (2d) 142, 179 D.L.R. (4th) 430, [1999] O.J. No. 3661, 40 C.P.C. (4th) 100, 82 O.T.C. 240 (Ont. C.A.) — referred to Montreal Trust Co. of Canada v. ScotiaMcLeod Inc. (1995), 129 D.L.R. (4th) 711, 9 C.C.L.S. 97, 23 B.L.R. (2d) 165, 87 O.A.C. 129, (sub nom. ScotiaMcLeod Inc. v. Peoples Jewellers Ltd.) 26 O.R. (3d) 481, 1995 Cars- wellOnt 1203, [1995] O.J. No. 3556 (Ont. C.A.) — followed Mortgage Insurance Co. of Canada v. Innisfil Landfill Corp. (1996), 20 C.E.L.R. (N.S.) 37, 3 O.T.C. 44, 2 C.P.C. (4th) 143, 1996 CarswellOnt 1843, [1996] O.J. No. 1760 (Ont. Gen. Div. [Commercial List]) — considered Mustapha v. Culligan of Canada Ltd. (2008), 2008 SCC 27, 2008 CarswellOnt 2824, 2008 CarswellOnt 2825, 55 C.C.L.T. (3d) 36, [2008] S.C.J. No. 27, 293 D.L.R. (4th) 29, 375 N.R. 81, 238 O.A.C. 130, [2008] 2 S.C.R. 114, 92 O.R. (3d) 799 (note) (S.C.C.) — referred to R. v. Castonguay Blasting Ltd. (2013), 2013 SCC 52, 2013 CarswellOnt 14069, 2013 CarswellOnt 14070, [2013] S.C.J. No. 52, 24 C.L.R. (4th) 1, 78 C.E.L.R. (3d) 1, (sub nom. Ontario (Minister of the Environment) v. Castonguay Blasting Ltd.) 449 N.R. 266, (sub nom. Ontario (Minister of the Environment) v. Castonguay Blasting Ltd.) 310 O.A.C. 1, 365 D.L.R. (4th) 1, 6 C.R. (7th) 30, 303 C.C.C. (3d) 322, (sub nom. Castonguay Blasting Ltd. v. Ontario (Environment)) [2013] 3 S.C.R. 323 (S.C.C.) — considered R. v. Consolidated Maybrun Mines Ltd. (1998), 1998 CarswellOnt 1476, 1998 CarswellOnt 1477, 123 C.C.C. (3d) 449, 225 N.R. 41, 158 D.L.R. (4th) 193, Midwest Properties Ltd. v. Thordarson 289

108 O.A.C. 161, 38 O.R. (3d) 576 (note), [1998] S.C.J. No. 32, [1998] 1 S.C.R. 706, 7 Admin. L.R. (3d) 23, 26 C.E.L.R. (N.S.) 262, 38 O.R. (3d) 576 (S.C.C.) — considered Rylands v. Fletcher (1868), L.R. 3 H.L. 330, [1861-73] All E.R. Rep. 1 at 12, 37 L.J. Exch. 161, 19 L.T. 220, 33 J.P. 70, [1868] UKHL 1 (U.K. H.L.) — considered Smith v. Inco Ltd. (2011), 2011 ONCA 628, 2011 CarswellOnt 10141, 62 C.E.L.R. (3d) 93, 107 O.R. (3d) 321, 88 C.C.L.T. (3d) 1, 284 O.A.C. 13, 340 D.L.R. (4th) 602, [2011] O.J. No. 4386 (Ont. C.A.) — considered Smith v. Inco Ltd. (2012), 2012 CarswellOnt 4932, 2012 CarswellOnt 4933, 435 N.R. 392 (note), 300 O.A.C. 401 (note), [2012] 1 S.C.R. xii (note) (S.C.C.) — referred to Tridan Developments Ltd. v. Shell Canada Products Ltd. (2000), 2000 Carswell- Ont 1969, 35 R.P.R. (3d) 141, [2000] O.J. No. 1741 (Ont. S.C.J.) — considered Tridan Developments Ltd. v. Shell Canada Products Ltd. (2002), 2002 Carswell- Ont 1, 154 O.A.C. 1, 57 O.R. (3d) 503, [2002] O.J. No. 1, [2002] O.T.C. 364 (Ont. C.A.) — referred to Tridan Developments Ltd. v. Shell Canada Products Ltd. (2002), 2002 Carswell- Ont 3960, 2002 CarswellOnt 3961, 303 N.R. 397 (note), 177 O.A.C. 399 (note), [2002] S.C.C.A. No. 98 (S.C.C.) — referred to United Canadian Malt Ltd. v. Outboard Marine Corp. of Canada Ltd. (2000), 2000 CarswellOnt 1445, 48 O.R. (3d) 352, 34 C.E.L.R. (N.S.) 116, [2000] O.J. No. 1554 (Ont. S.C.J.) — considered Whiten v. Pilot Insurance Co. (2002), 2002 SCC 18, 2002 CarswellOnt 537, 2002 CarswellOnt 538, [2002] I.L.R. I-4048, 20 B.L.R. (3d) 165, [2002] S.C.J. No. 19, 209 D.L.R. (4th) 257, 283 N.R. 1, 35 C.C.L.I. (3d) 1, 156 O.A.C. 201, [2002] 1 S.C.R. 595, REJB 2002-28036, 58 O.R. (3d) 480 (note), 2002 CSC 18 (S.C.C.) — referred to Statutes considered: Environmental Protection Act, R.S.O. 1990, c. E.19 Generally — referred to Pt. X — referred to s. 1(1) “adverse effect” — considered s. 91(1) — considered s. 99 — considered s. 99(1) — considered s. 99(2) — considered s. 99(2)(a) — considered s. 99(2)(a)(i) — considered s. 99(2)(a)(iii) — considered s. 99(2)(b) — considered s. 99(3) — considered 290 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

s. 99(8) — considered Environmental Protection Act, 1971, Act to amend, S.O. 1971-72, c. 106 Generally — referred to Limitations Act, 2002, S.O. 2002, c. 24, Sched. B Generally — referred to s. 17 — considered

APPEAL from judgment reported at Midwest Properties Ltd. v. Thordarson (2013), 2013 ONSC 775, 2013 CarswellOnt 2183, 73 C.E.L.R. (3d) 303 (Ont. S.C.J.), dismissing action for breach of Environmental Protection Act, nuisance and negligence.

Evert Van Woudenberg, for Appellant Frank Zechner, Christopher Du Vernet, for Respondents Sandra Nishikawa, Isabelle O’Connor, for Intervener, Minister of the Environ- ment and Climate Change

C.W. Hourigan J.A.: A. Overview 1 The appellant, Midwest Properties Ltd. (“Midwest”), and the respondent, Thorco Contracting Limited (“Thorco”), own adjoining properties in an industrial area of Toronto. 2 Thorco has stored large volumes of waste petroleum hydrocarbons (“PHC”) on its property for several decades. As a result of Thorco’s storage practices, PHC has contaminated the soil and groundwater on its property. From 1988-2011, Thorco was in almost constant breach of its license and/or compliance orders issued by the Ontario government ministry now known as the Ministry of the Environment and Climate Change (the “MOE”). 3 Groundwater flows from Thorco’s property into Midwest’s property, and this has contaminated the latter with significant concentrations of PHC. Midwest discovered the contamination after it acquired its property in December 2007. Midwest sued Thorco and its owner, John Thordar- son, relying upon three causes of action: breach of s. 99(2) of the Envi- ronmental Protection Act, R.S.O. 1990, c. E.19 (the “EPA”), nuisance, and negligence. 4 The trial judge held that the respondents were not liable under any of the causes of action. She found that Midwest failed to prove that it had suffered damages, in particular because it had not proven that the PHC contamination lowered the value of its property. In addition, she ruled Midwest Properties Ltd. v. Thordarson C.W. Hourigan J.A. 291

that because the MOE had already ordered the respondents to remediate Midwest’s property, a remedy under s. 99(2) was not available to Mid- west. In that regard, the trial judge found that the EPA should not be interpreted in an “expansive manner” that might permit double recovery. 5 Midwest appeals and seeks judgment for the cost to remediate its property, approximately $1.3 million. The MOE intervenes in this appeal to contest the trial judge’s finding that its order to remediate precludes recovery under s. 99(2) of the EPA. 6 In my view, the trial judge erred in her interpretation and application of the private right of action contained in s. 99(2) of the EPA. This private right of action was enacted over 35 years ago and is designed to overcome the inherent limitations in the common law in order to provide an effective process for restitution to parties whose property has been contaminated. The trial judge’s interpretation of the section is inconsistent with the plain language and context of this provision; it undermines the legislative objective of establishing a distinct ground of liability for polluters. This is remedial legislation that should be construed purpos- ively. It is important that courts not thwart the will of the Legislature by imposing additional requirements for compensation that are not contained in the statute. 7 The trial judge also erred in law in concluding that Midwest could not succeed in nuisance or negligence because it was unable to prove damage, and in her assessment of punitive damages, as in my view the conduct of the respondents in the circumstances clearly merits a punitive award. 8 For the reasons that follow, I would allow the appeal and grant judgment to Midwest.

B. Facts (1) Background 9 Midwest acquired the industrially-zoned property and building located at 285 Midwest Road in Toronto in 2007. It or a related company uses 285 Midwest for the manufacture and distribution of clothing. Prior to its purchase of 285 Midwest, Midwest obtained a Phase I Environmen- tal Audit on the property from TS Environmental Services, primarily consisting of a visual inspection of the property to identify any potential contamination. At that time, Midwest did not have the soil or ground- 292 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

water at the property tested for contamination as the Phase I report indicated that a Phase II report was not required. 10 Mr. Thordarson has controlled Thorco since 1969. Thorco acquired 1700 Midland Avenue in 1973. On the approximately 1.1 acre property, Thorco’s business activities related to the servicing of petroleum handling equipment and the lining of tanks, and as a corollary to this business, Thorco began storing various materials and wastes on the property in 1974. 11 After purchasing 285 Midwest, Midwest became interested in acquiring all or part of the adjoining property at 1700 Midland to expand its operations. Mr. Thordarson provided Midwest with two reports on the property by XCG Consultants Ltd.: a Phase I Environmental Site Assess- ment completed in 1999, and an update of that report completed in 2001. He also gave Midwest permission to access 1700 Midland for further environmental study. As it was aware that PHC storage was taking place at 1700 Midland, Midwest hired Pinchin Environmental Ltd. to conduct both Phase I and Phase II environmental studies on the property. These reports disclosed PHC contamination at 1700 Midland.

(2) PHC Storage and Contamination at 1700 Midland 12 Thorco had been storing waste PHC, among other things, on 1700 Midland since 1974, but only applied for a Certificate of Approval from the MOE to store wastes on the property in 1983. In 1988, the MOE issued a Certificate of Approval allowing for two storage tanks, 56 drums, and the storage of 22,520 gallons of waste. Mr. Thordarson’s evidence at trial revealed that, even in 1988, the amount of waste PHC stored on the property well exceeded 22,520 gallons. 13 By 1996, according to a “Field Observation Report” from the MOE, Thorco was exceeding its Certificate of Approval by 53,000 gallons and was not storing the waste material according to MOE guidelines. At that time, an MOE “Field Order” was issued requiring Thorco to remove the excess waste, store the waste material on its property according to MOE guidelines, and immediately cease accepting waste at 1700 Midland until the conditions in the 1988 Certificate of Approval were satisfied. 14 Another “Field Observation Report” noted in 1997 that: “This site has been out of compliance with Certificate of Approval ... dated April 18, 1988 since its issuance. To date, there has not been satisfactory progress by Thorco Contracting Ltd. to bring this site into compliance.” That report further noted that, at that time, Thorco had approximately 38 tanks Midwest Properties Ltd. v. Thordarson C.W. Hourigan J.A. 293

and bins containing material, along with an undisclosed number of drums containing “heavy sludge” or oily water, and approximately 85,496 gallons of waste on its property. Thorco was again ordered to, among other things, dispose of excess waste, store waste properly, and stop accepting more waste. Thorco was also ordered to submit financial assurance in the amount of $85,496 to the MOE. 15 Thorco’s first report obtained from XCG Consultants reveals that, by 1999, there were approximately 420,000 litres (roughly 111,000 gallons) of waste PHC on 1700 Midland, stored in 20 above ground storage tanks. 16 In 2000, Thorco and Mr. Thordarson were convicted by the Ontario Court (Provincial Division) of EPA offences, including counts of failing to dispose of all wastes in excess of the maximum permitted quantities specified in the Certificate of Approval obtained in 1988, failing to submit financial assurance in the amount of $85,496 to the MOE, and failing to ensure the proper storage of materials on 1700 Midland. A court order issued, ordering, among other things, the removal of significant quantities of oil and water, solid catalyst, and oil sludge, and requiring compliance with the 1988 Certificate of Approval. 17 Thorco’s updated report from XCG Consultants shows that as of Au- gust 2001, Thorco had only reduced its inventory to approximately 172,000 litres (roughly 45,000 gallons). Mr. Thordarson’s evidence at trial was that he began to wind down the business operations of Thorco in 2002. A “Provincial Officer Report” of the MOE notes that as of March 2003, wastes were still not being stored in compliance with the 1988 Certificate of Approval, and that approximately 15 tonnes of hydrocarbon sludge remained on site in violation of the order of the Ontario Court (Provincial Division). In 2008, while further MOE inspections revealed that Thorco and Mr. Thordarson had significantly reduced the volume of waste on site, a report indicated that, “Most notable, is the Company’s continual reluctance to store subject waste properly, so as to prevent spills to the natural environment. The company’s storage of subject waste and chemical storage poses a significant risk of impairing the natural environment.” 18 A new MOE order issued in 2008, and while some improvements had been made by 2009, approximately 10,000 litres of waste remained in “non-approved storage tanks.” As of January 4, 2011, all liquid waste had been removed from 1700 Midland, but during that year concerns still remained about a waste storage pit on the property, unsecured against the infiltration of precipitation, that continued to generate oily water. 294 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

19 All indications, from the 2000 court order and numerous MOE reports, are that PHC was entering the ground at 1700 Midland for many years, if not decades. The court order stated that several containers were not secured against the infiltration of precipitation, were of questionable integrity, and were even “leaking oily water.” An MOE inspection report in 2008 noted many risks that the materials on site would contaminate the environment, or were already doing so. Among other things, that report noted the following: • “At the time of inspection, oily water was spilling from the opening of tank #44 to the ground....” • “A second tank ... had an access hatch cut into the side of the tank.... [w]aste oily water was also level with the tank opening.... The tank contents were also slowly leaking to the ground at the time of inspection.” • “A mini roll-off bin was observed in the south-east portion of the yard. The bin contained full pails of paints, solvents, seal- ants and various other waste chemicals.... The bin was full of stormwater and was overflowing to the ground at the time of inspection.” • “Pooled stormwater saturated the southern portion of the site adjacent to the Outdoor Storage Pit.... A light sheen was evident on the surface of this stormwater. Cross contamination with oil from the outdoor storage pit is highly likely. Risk of off-site movement is probable.” [Emphasis in original.] 20 Officer Mitchell of the MOE, the author of the reports beginning in 2008, testified at trial that during one inspection in 2008 he observed an “outdoor waste processing pit” in which waste furnace oil had breached a containment structure and mixed with storm water immediately adjacent to 285 Midwest. That processing pit was, in Officer Mitchell’s words, “absolutely kind of the worst way of holding back waste, hydrocarbon, fuel, oil and the such.” He further testified at trial that the storage practices at 1700 Midland were “probably some of the worst I have seen.” His 2011 report notes that, “Many years of processing oily waste in this unapproved manner has resulting in ongoing petroleum hydrocarbon spills to the surrounding soils.... Soil samples collected outside the pit confirm the presence of petroleum hydrocarbons.” Significantly, the summary section of that report notes the following: The outdoor waste processing pit has been the source of a spill of petroleum hydrocarbons to the natural environment. This was confirmed on September 7, 2011 as grab samples collected in and around Midwest Properties Ltd. v. Thordarson C.W. Hourigan J.A. 295

the waste processing pit confirm the presence of petroleum hydrocarbons. The release of petroleum hydrocarbons in this manner may cause an adverse effect.... 21 The Phase II Environmental Site Assessment of 1700 Midland, com- missioned by Midwest and completed by Pinchin Environmental, confirmed the contamination of the property when measurements were taken in 2008. Pinchin Environmental drilled several monitoring wells at various locations on both 1700 Midland and 285 Midwest to conduct its environmental studies. The measurements taken at these wells were partly concerned with measuring the concentration of PHC “fractions” in the groundwater and soil. 22 The 2011 MOE standards broke PHC into different “fractions”: F1 to F4. These fractions differ based on the number of carbon atoms in the molecules, and indicate the volatility and mobility of the PHC: F1 is volatile and mobile, whereas F4 is not. More volatile fractions get into the air and pose a risk to human health, and the MOE standards reflect this difference, with less strict standards for higher fractions. 23 On 1700 Midland, six monitoring wells showed results that exceeded MOE standards for PHC in groundwater. Two monitoring wells showed results that exceeded MOE standards for PHC in soil.

(3) PHC Contamination at 285 Midwest 24 Learning of the contamination at 1700 Midland from the Pinchin En- vironmental studies, Midwest then obtained a Phase II report on its own property. This report and subsequent studies revealed PHC contamination of the soil and groundwater at 285 Midwest that exceeded MOE guidelines. 25 Measured from 2008 to 2012, the concentrations of several PHC fractions exceeded MOE standards at a number of monitoring wells on 285 Midwest. At two locations, monitoring wells 101 and 102, “free product”, “pure hydrocarbon”, or “free phase hydrocarbon” was observed in 2011 and 2012. The appearance of “free product” indicates that the PHC concentration at that location was so high that the PHC could no longer remain entirely dissolved in groundwater. Monitoring well 106, installed inside the building at 285 Midwest, detected an F2 fraction exceeding MOE standards. Midwest’s expert testified at trial that this result indicated a risk that volatile PHC could enter the building and pose a health risk to the occupants. 296 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

26 Moreover, evidence at trial established that the situation at 285 Mid- west was getting worse over time. While tests of monitoring well 101 in 2011, and monitoring well 102 in 2008, showed that the PHC was still dissolved in groundwater, tests of these same monitoring wells revealed “free product” in monitoring well 101 in 2012, and in monitoring well 102 in 2011. Midwest’s expert testified that the discovery of free product PHC indicated that conditions at 285 Midwest were much worse than previously thought.

(4) Financial Impact of PHC Contamination on Midwest 27 Three experts on environmental assessment gave expert evidence at trial on the financial impact of PHC contamination: Andy Vanin and Robert Tossell, of Pinchin Environmental, for Midwest, and Thomas Kolodziej, of XCG Consultants, for the respondents. 28 Mr. Vanin was qualified as an expert on “environmental site assessment”, but stated that he also had expertise in whether a mortgage lender would finance a contaminated property. He testified that the owner of a property contaminated with PHC has two concerns: (1) potential third- party liability as a result of offsite migration through groundwater, and (2) diminution of the value of the property and the ability to use the property as collateral. He continued, “this is not a property that any lender would probably want in their books.” 29 Mr. Tossell was qualified as an expert in environmental assessment and rehabilitation, and agreed that he did not profess to be an expert in “corporate finance matters, mortgaging or corporate lending, [or] bank- ing practices.” He testified that “[a]ny contaminated property comes with stigma” that reduces the interest of some prospective purchasers, and that “if you want to sell your property it’s likely you’re going to have to comply” with MOE standards. On cross-examination, Mr. Tossell stated that a property owner could have trouble getting financing for contaminated property. 30 Mr. Kolodziej acknowledged that the willingness of a prospective purchaser of land possibly contaminated with PHC, even after successfully completing a risk assessment, “depends on the risk tolerance of the potential buyer”. According to him, some buyers “thrive” on properties with a risk assessment attached “to find a better deal.” 31 Midwest’s expert evidence was that the reasonable costs of remediating 285 Midwest would be $1,328,000. Mr. Tossell testified that removing “pure phase hydrocarbon” is a “challenge to a remediator.” Further Midwest Properties Ltd. v. Thordarson C.W. Hourigan J.A. 297

migration of free product to 285 Midwest would be “more expensive to deal with.” On behalf of the respondents, Mr. Kolodziej opined that Mid- west’s expert estimates were “high” and that “it’s difficult really to judge”, because there was “not enough data to make such a far-reaching or so definite or absolute statements as far as the costs.” The respondents did not, however, lead positive evidence on the costs of remediating 285 Midwest.

(5) The MOE Order to Remediate 285 Midwest 32 On January 16, 2012, Officer Mitchell issued a report which noted, in part, the following: An Environmental Subsurface Investigation and Restoration Program needs to be conducted to delineate the full vertical and horizontal extent of petroleum hydrocarbons spilled near the Waste Processing Pit.... The Environmental Subsurface Investigation and Restoration Program shall include a plan to restore the natural environment in accordance with section 93(1) of the EPA. 33 This report was followed by an order, issued on January 19, 2012, including the following directives to Thorco and Mr. Thordarson: • “the Orderees shall retain the services of one or more Quali- fied Person(s) to prepare and complete an Environmental Subsurface Investigation and Restoration Program....” • “provide written confirmation to the undersigned Provincial Officer that the Qualified Person(s) have been retained....” • “provide a written copy of the proposed Environmental Sub- surface Investigation and Restoration Program for the Site to the undersigned Provincial Officer for written acceptance.” • “Within 30 days of receiving written acceptance by the undersigned Provincial Officer, implement the Environmental Subsurface Investigation and Restoration Program at the site.” 34 At trial, Officer Mitchell was asked whether that order applied only to 1700 Midland. He replied: “No. That was intended to basically go wher- ever they believe or demonstrated the contamination to go to.” He further testified that he believed that, based on his previous experience at the site, “the contamination had likely moved south towards 285 Midwest.” Finally, he testified that, while Thorco and Mr. Thordarson had done some things required by the order at the time of trial, the work was not being done within the specified timeframes and that, as a result, Thorco and Mr. Thordarson were in breach of the order. 298 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

35 The trial judge found, at para. 20 of her reasons, that the respondents had in fact been ordered to remediate 285 Midwest. 36 As of the date of the appeal, no work had been undertaken by Thorco and Mr. Thordarson to remediate 285 Midwest.

C. Reasons for Decision of the Trial Judge 37 The trial judge accepted, at para. 8, Midwest’s expert evidence establishing that groundwater would flow from 1700 Midland onto 285 Mid- west, and that as a result, the known contamination at 1700 Midland would migrate onto, and has contaminated, 285 Midwest. She rejected, at para. 9, the respondent’s submission that the contamination at 285 Mid- west could have been caused by another property. She found, however, that “There is ... no evidence as to when such contamination has occurred.” 38 The trial judge dismissed Midwest’s claim under s. 99(2) of the EPA. She referred to the discussion of damages under s. 99(2) in Mortgage Insurance Co. of Canada v. Innisfil Landfill Corp. (1996), 2 C.P.C. (4th) 143 (Ont. Gen. Div. [Commercial List]), at para. 11, noting that the court in that case had not referred to the type of damages claimed by Midwest (namely, the fact that MOE standards were exceeded at certain locations on the property), nor had it addressed damages for the cost of remediation. She noted, at para. 20, that the MOE had already ordered the respondents to remediate 285 Midwest and that “the EPA cannot be interpreted ... in an expansive manner that allows damages contemplated by section 99 to include damages for the cost of remediation in circumstances where such remediation has already been ordered under the EPA.” 39 The trial judge rejected, at para. 22, Midwest’s arguments that it should not have to wait an excessive amount of time for its property to be remediated under the MOE order, and that there was no guarantee that the property would actually be remediated by the respondents under the MOE order, on the basis that there was no evidence before the court as to how long remediation would take. She further held that an award of damages equivalent to the cost of remediation in these circumstances would create the opportunity for double recovery if the property were subsequently remediated in accordance with the MOE order. Finally, the trial judge held, at para. 23, that Midwest had not introduced evidence of loss or damage required under s. 99(2)(a)(i), such as actual loss in property Midwest Properties Ltd. v. Thordarson C.W. Hourigan J.A. 299

value, inability to use or operate its business on the property, or business losses. 40 The trial judge dismissed Midwest’s nuisance claim on the basis that it had failed to prove damages. She noted, at para. 27, that, because there was no evidence of the environmental state of 285 Midwest at the time it was acquired in 2007, Midwest could not prove that there was any chemical alteration in the soil and groundwater on its property. She held that Midwest would have to prove that there was an increase in the contamination level of the property. The trial judge also dismissed Midwest’s negligence claim on the basis that Midwest had failed to prove damages. Finally, the trial judge dismissed Midwest’s claim for punitive damages.

D. Issues 41 This appeal raises the following issues: (i) Did the trial judge err in finding that recovery under s. 99(2) of the EPA is precluded where the MOE has ordered a defendant to remediate a plaintiff’s land? (ii) Did the trial judge err in finding that no compensable “loss or damage” under s. 99(2) of the EPA was established in the circumstances of this case? (iii) Is Mr. Thordarson personally liable under the EPA? (iv) Did the trial judge err in dismissing the nuisance and negligence claims? (v) Did the trial judge err in dismissing the claim for punitive damages?

E. Analysis (i) Interaction Between the MOE Order and the s. 99 Claim 42 Midwest brought a claim against the respondents under s. 99(2) of the EPA, which provides: (2) Her Majesty in right of Ontario or in right of Canada or any other person has the right to compensation, (a) for loss or damage incurred as a direct result of, (i) the spill of a pollutant that causes or is likely to cause an adverse effect, (ii) the exercise of any authority under subsection 100 (1) or the carrying out of or attempting to 300 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

carry out a duty imposed or an order or direction made under this Part, or (iii) neglect or default in carrying out a duty imposed or an order or direction made under this Part; (b) for all reasonable cost and expense incurred in respect of carrying out or attempting to carry out an order or direction under this Part, from the owner of the pollutant and the person having control of the pollutant. 43 In my view, the trial judge’s interpretation of s. 99(2) is inconsistent with the wording of the legislation and with binding authority on the proper interpretive approach to the EPA. Moreover, having regard to the history and purpose of the statutory private right of action found in s. 99(2), it is clear that her interpretation is also inconsistent with its purpose. 44 I turn first to the history of this part of the EPA. Section 99(2) is found in Part X of the EPA, which was introduced in 1979 and pro- claimed into force on November 29, 1985. There is very little case law interpreting s. 99(2), and none of the reported cases have addressed the purpose of this provision in any depth. However, the legislative context and background provide some guidance as to the provision’s objective. Part X, which is commonly referred to as the “Spills Bill”, is aimed at two main goals. 45 The first goal is to minimize the harm caused through the discharge of pollutants by requiring prompt reporting and clean-up by the party that owned or controlled the pollutant, regardless of fault. The second goal is to ensure that parties that suffer damage through the discharge of pollutants are compensated by establishing a statutory right to recovery from parties that owned and controlled the pollutant: Mario D. Faieta et al., Environmental Harm: Civil Actions and Compensation (Markham, ON: Butterworths, 1996), at p. 144. These objectives, and others, were stated expressly by the Hon. Dr. Harry Parrot, then Minister of the Environ- ment, on the introduction of a revised Bill 24, An Act to amend the Envi- ronmental Protection Act, 1971, into the Legislature: Ontario, Legisla- tive Assembly, Official Report of Debates (Hansard), 31st Parl., 3rd Sess., No. 8 (27 March 1979), at p. 255. 46 An early commentator understood Part X to “superimpose liability over the common law, where intent, fault, reasonable use, escape, extent Midwest Properties Ltd. v. Thordarson C.W. Hourigan J.A. 301

of damage, duty of care and foreseeability are not an issue. Rather, the ownership and control of the spill pollutant is the primary question”: J.W. Harbell, “Common Law Liability for Spills”, in Stanley M. Makuch, ed., The Spills Bill: Duties, Rights and Compensation (Toronto: Butterworths, 1986), at p. 25. This is consistent with the Minister of the Environment’s comments at the introduction of the revised bill, where he noted that one of the intentions of the bill was “To establish liability for compensation for damage resulting from a spill and for the cost of cleanup which clarifies and extends the right to compensation at common law” (emphasis added). 47 The Minister of Environment also made the following comments on first reading of the bill that eventually became Part X: I believe those who create the risk should pay for restoration as a reasonable condition of doing business; it is not up to an innocent party whose land or property has been damaged. At present, persons manufacturing and handling contaminants are not legally responsible in the absence of fault or other legal ground of liability. Common law and the existing provisions of the Environmental Protection Act are inadequate in spelling out the necessary procedures to control and clean up spills and restore the natural environment. Ontario, Legislative Assembly, Official Report of Debates (Hansard), 31st Parl., 2nd Sess., No. 151 (14 December 1978), at p. 6178. [Empha- sis added.] 48 The modern principle of statutory interpretation requires that courts read legislative provisions “in their entire context and in their grammati- cal and ordinary sense harmoniously with the scheme of the Act, the ob- ject of the Act, and the intention of Parliament”: Bell ExpressVu Ltd. Partnership v. Rex, 2002 SCC 42, [2002] 2 S.C.R. 559 (S.C.C.), at para. 26. 49 In my view, the trial judge’s interpretation undermines the legislative objective of establishing a separate, distinct ground of liability for polluters. It permits a polluter to avoid its no-fault obligation to pay damages solely on the basis that a remediation order is extant. The purposes of the EPA would be frustrated if a defendant could use an MOE order as a shield. Such an interpretation would also discourage civil proceedings, and may even discourage MOE officials from issuing remediation orders for fear of blocking a civil suit. 50 In addition to violating the general rules of statutory interpretation, the trial judge’s interpretation of s. 99(2) is also inconsistent with the 302 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

specific principles applicable to interpretation of the EPA. The trial judge stated explicitly, at para. 20 of her reasons, that s. 99(2) should not be interpreted expansively. This is inconsistent with the interpretive approach to the EPA mandated by the Supreme Court of Canada. 51 In R. v. Consolidated Maybrun Mines Ltd., [1998] 1 S.C.R. 706 (S.C.C.), at para. 54, the Supreme Court held that the preventative and remedial purposes of the EPA must “be borne in mind in interpreting the scheme and procedures established by the Act.” Similarly, in R. v. Castonguay Blasting Ltd., 2013 SCC 52, [2013] 3 S.C.R. 323 (S.C.C.), at para. 9, the Supreme Court held as follows: The EPA is Ontario’s principal environmental protection statute. Its status as remedial legislation entitles it to a generous interpretation (Legislation Act, 2006, S.O. 2006, c. 21, Sch. F, s. 64; R. v. Canadian Pacific Ltd., [1995] 2 S.C.R. 1031 (S.C.C.), at para. 84). ... [E]nvironmental legislation embraces an expansive approach to ensure that it can adequately respond “to a wide variety of environmen- tally harmful scenarios, including ones which might not have been foreseen by the drafters of the legislation”. Because the legislature is pursuing the objective of environmental protection, its intended reach is wide and deep. [Emphasis added, citations removed.] 52 The trial judge’s interpretation of s. 99(2) is also inconsistent with the plain language and context of this provision. It ignores the fact that under the EPA, a person can, as a result of a spill, be subject to various remedial or preventative orders. These consequences are complementary, not exclusive of one another. 53 There is no language in s. 99(2) to support the trial judge’s conclusion that a party cannot advance a claim under this section if the owner or party in control of the pollutant is already subject to an MOE order. On the contrary, s. 92(2)(a)(iii) specifically provides for recovery of loss or damage incurred as a result of a defendant’s neglect or default in carrying out its obligations under the EPA. These “obligations under the EPA” must include obligations imposed under a remediation order. Conse- quently, it is clear that an MOE order and recovery under s. 99(2) are not mutually exclusive. 54 The trial judge was concerned that an award of remediation damages under s. 99 could permit Midwest to achieve double recovery: “Midwest cannot be entitled to a double recovery arising from the same legislation, which would result if their property is remediated pursuant to the MOE order and this Court concurrently awards a sum equivalent to Midwest’s proposed remediation” (para. 22). Midwest Properties Ltd. v. Thordarson C.W. Hourigan J.A. 303

55 Given the fact that the respondents have not cleaned up their property, or 285 Midwest, since being ordered to do so in 2012, I believe the chances of them now moving with alacrity to remediate the property before Midwest takes its remediation action is remote. In my view, the possibility of double recovery should not prevent an order for damages for the remediation of contaminated property under s. 99(2) where the MOE has already ordered the remediation of the property. In any event, the MOE intervened in this appeal and agreed that it would be forced to redirect its remediation order in the event that the respondents were ordered to pay remediation damages to Midwest. Therefore, the potential for double recovery in this case has been eliminated.

(ii) Failure to Prove Damages 56 The trial judge also dismissed, at para. 23, Midwest’s s. 99(2) claim on the ground that it “did not introduce evidence of damage or loss pursuant to section 99 of the EPA, such as actual loss in property value or its inability to use its property or operate its business on its property, or business losses.” The respondents assert three arguments in support of the trial judge’s conclusion on damages. 57 First, the respondents argue that any damages awarded to Midwest should be measured by the diminution in the value of Midwest’s property rather than by the cost of remediation. 58 The respondents note that, while Mr. Vanin and Mr. Tossell suggested that there would be negative financial impacts from the contamination, neither was qualified as an expert in mortgages or property valuation. Midwest also did not tender any appraisal reports or property valuations. Therefore, the respondents submit that there is no basis to conclude that the value of Midwest’s property has been adversely affected, and accordingly, no basis on which to award damages. 59 I would not give effect to these arguments. 60 There is a significant debate in the case law about whether diminution in value or restoration costs is the appropriate measure of damages in cases of environmental harm: see Faieta et al., at p. 293. 61 At common law, the traditional view was that damages for any type of injury to property should be measured by the diminution in value caused by the injury: see Hosking v. Phillips (1850), 154 E.R. 801, 3 Exch. 168 (Eng. Exch.). More recently, courts have awarded damages based on restoration costs, even if those costs exceed the amount of the decrease in property value: see Katherine M. van Rensburg, “Decon- 304 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

structing Tridan: A Litigator’s Perspective” (2004) 15 J. Envtl. L. & Prac. 85, at p. 89; see e.g. Jens v. Mannix Co. (1978), 89 D.L.R. (3d) 351 (B.C. S.C.); Horne v. New Glasgow (Town) (1953), [1954] 1 D.L.R. 832 (N.S. S.C.). 62 The restoration approach is superior, from an environmental perspective, to the diminution in value approach. Since the cost of restoration may exceed the value of the property, an award based on diminution of value may not adequately fund clean-up: Bruce Pardy, Environmental Law: A Guide to Concepts (Markham, ON: Butterworths, 1996), at p. 223. 63 In its Report on Damages for Environmental Harm, the Ontario Law Reform Commission canvassed a number of methods for calculating damages. Ultimately, it recommended the adoption of methodologies, like the restoration approach, that “best ensure that the environment is returned to its pre-contaminated condition”: Ontario Law Reform Com- mission, Report on Damages for Environmental Harm (Toronto: Ontario Law Reform Commission, 1990), at p. 56. The Commission concluded, at p. 55, that “the ultimate goal of the courts should be to ensure that the environment is put in the same position after the mishap as it was before the injury.” 64 Two relatively recent cases reflect the trend toward awarding remediation damages. In Tridan Developments Ltd. v. Shell Canada Products Ltd. (2000), 35 R.P.R. (3d) 141 (Ont. S.C.J.), aff’d (2002), 57 O.R. (3d) 503 (Ont. C.A.), leave to appeal refused, (2002), 177 O.A.C. 399 (note) (S.C.C.), a property neighbouring a gas station was contaminated with gasoline after a leak in a fuel line. Since the defendant polluter admitted liability, the only issue at trial was the assessment of damages. The plaintiff sought to recover the cost of returning its property to “pristine” condition. It also claimed “stigma” damages measured as the diminution in the value of its property. The defendant argued that the plaintiff had suffered no damages due to the spill, or that alternatively, its damages should be limited to the cost of remediating the property to the MOE’s minimum standards. The trial judge awarded damages as requested by the plaintiff. On appeal, this court overturned the stigma damage award but upheld the trial judge’s decision to order damages for the cost of future remediation. 65 The respondents argue Tridan does not apply because the defendant in that case admitted it was liable. There is no merit in this argument. Midwest Properties Ltd. v. Thordarson C.W. Hourigan J.A. 305

The damages analysis in Tridan is relevant regardless of whether liability was admitted or found by the court. 66 The second case is Canadian Tire Real Estate Ltd. v. Huron Concrete Supply Ltd., 2014 ONSC 288, 88 C.E.L.R. (3d) 93 (Ont. S.C.J.). It also involved PHC contamination by a neighbour. Justice Leitch ordered the defendant to pay $3.6 million, which was the estimated cost for future remediation, as damages for nuisance, negligence, trespass and strict liability. She found that this award would place the plaintiff in the position it was in prior to the tortious conduct. 67 Neither Tridan nor Canadian Tire involved a claim under s. 99(2) of the EPA. There is no reported case where a court has awarded damages for the cost of future remediation under this section. Nonetheless, in my view, awarding damages under s. 99(2) based on restoration cost rather than diminution in property value is more consistent with the objectives of environmental protection and remediation that underlie this provision. 68 This approach to damages reflects the “polluter pays” principle, which provides that whenever possible, the party that causes pollution should pay for remediation, compensation, and prevention: see Pardy, at p. 187. As the Supreme Court has noted, the polluter pays principle “has become firmly entrenched in environmental law in Canada”: Cie pétrolière Impériale c. Québec (Tribunal administratif), 2003 SCC 58, [2003] 2 S.C.R. 624 (S.C.C.), at para. 23. In imposing strict liability on polluters by focusing on only the issues of who owns and controls the pollutant, Part X of the EPA, which includes s. 99(2), is effectively a statutory codification of this principle. 69 Further, a plain reading of s. 99(2) of the EPA suggests that parties are entitled to recover the full cost of remediation from polluters. Pursu- ant to s. 99(2)(a), a party is entitled to recover all “loss or damage” resulting from the spill. Section 99(1) provides that “loss or damage” includes personal injury, loss of life, loss of use or enjoyment of property and pecuniary loss, including loss of income. Section 99(2)(b) provides that a party has a “right to compensation for all reasonable cost and expense incurred in respect of carrying out or attempting to carry out an order or direction under this Part, from the owner of the pollutant and the person having control of the pollutant.” In my view, under either part of s. 99(2), polluters must reimburse other parties for costs they incur in remediating contamination. 70 In summary, restricting damages to the diminution in the value of property is contrary to the wording of the EPA, the trend in the common 306 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

law to award restorative damages, the polluter pays principle, and the whole purpose of the enactment of Part X of the EPA. It would indeed be a remarkable result if legislation enacted to provide a new statutory cause of action to innocent parties who have suffered contamination of their property did not permit the party to recover the costs of remediating their property, given the EPA’s broad and important goals of protecting and restoring the natural environment. 71 The second argument advanced by the respondents is that compensation under s. 99(2) is dependent upon the establishment of an actionable nuisance, which requires proof of physical injury to the land or substantial interference with the use or enjoyment of the land in order to claim damages. In support of that position they rely upon the decision of this court in Hollick v. Metropolitan Toronto (Municipality) (1999), 46 O.R. (3d) 257 (Ont. C.A.), aff’d 2001 SCC 68, [2001] 3 S.C.R. 158 (S.C.C.). 72 According to the respondents, there was no such evidence before the court. They say the fact that certain contaminants exceed MOE standards is not evidence of physical harm to the property. They also argue that there was no evidence tendered of health risks, impacts to individuals at Midwest’s property, or interference with potable water. 73 I am not persuaded that, in order to succeed in its claim under s. 99(2), Midwest is required to prove an actionable nuisance. As noted above, the purpose of enacting s. 99(2) was to provide a flexible statutory cause of action that superimposed liability over the common law. In so doing, the Legislature recognized the inherent limitations of the common law torts of nuisance and negligence. This new cause of action eliminated in a stroke such issues as intent, fault, duty of care, and foreseeability, and granted property owners a new and powerful tool to seek compensation. 74 The interpretation urged upon us by the respondents, that under this new cause of action a plaintiff could only recover if it could first prove that the defendant’s conduct constituted a nuisance at common law, is entirely incongruous with the purpose of the enactment of s. 99(2). The Legislature is presumed to know the law. If the Legislature wanted to define the new cause of action in a manner consistent with the existing common law of nuisance it could have done so. It did not. 75 I am also not persuaded that Hollick is authority for the proposition that proof of common law nuisance is a prerequisite for a claim under s. 99. The issue in that case was whether a putative class action should be certified. The plaintiff had pleaded nuisance, negligence, Rylands v. Midwest Properties Ltd. v. Thordarson C.W. Hourigan J.A. 307

Fletcher [[1868] UKHL 1 (U.K. H.L.)], and s. 99 of the EPA. While Carthy J.A. indicated that “No one of these claims can be established unless a nuisance is proved”, in my view, this comment should be taken as indicating that the claims in the proceeding were dependent on the proof of an underlying “nuisance” in the colloquial sense. 76 In Hollick the court was not dealing with the merits of a s. 99 claim, but instead considering whether there were sufficient common issues to justify class certification. Ultimately, the court concluded that there were not because there was not sufficient commonality on the issues relating to the source and impact of the pollution. In contrast, in this case there is no issue that there was a spill of a pollutant as that term is defined in s. 91(1) and that the spill caused an adverse effect by, among other things, causing damage to property as defined in s. 1(1). 77 Third, the respondents argue that Midwest has not demonstrated that its property was clean when it was purchased in December 2007. They say that the time at which the property was contaminated is relevant to the application of the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B. The respondents submit that Midwest has an obligation to establish that the contamination occurred within the two year limitation period and that, in the case of an ongoing contamination, they are only responsible for pollution that is proven by Midwest to have occurred during that period (i.e. two years). 78 I would not give effect to this argument. First, the respondents ignore s. 17 of the Limitations Act, 2002, which provides that “There is no limitation period in respect of an environmental claim that has not been discovered.” Here there is no question that Midwest commenced its action within two years of buying the property and discovering the contamination. 79 Second, the respondents are not absolved from liability under s. 99(2) on the basis that Midwest cannot state what level of contamination occurred before and after they purchased the property. There is no requirement under the EPA for them to do so. Further, the respondents should not be able to use their lengthy history of pollution and non-compliance as a shield to limit the amount of damages they now owe. 80 For the foregoing reasons, I would find that the trial judge erred in law in her conclusion that Midwest had not proven recoverable damages under s. 99 of the EPA. As noted above, there is really no dispute on the evidence regarding the costs of the remediation. Midwest led expert evidence that the reasonable costs of remediating its property would be 308 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

$1,328,000 and the respondents, while challenging that expert evidence, did not lead positive evidence on the costs of remediating Midwest’s property. In my view, the future remediation costs for Midwest’s property are recoverable and Midwest is entitled to judgment for the full amount of its estimated costs, being $1,328,000.

(iii) Personal Liability Under the EPA 81 The trial judge found that the respondents were not liable under the EPA. Understandably, she did not consider whether Mr. Thordarson had any personal liability under the statute. Given my conclusions above regarding the EPA, the issue of personal liability now arises. 82 Section 99(2) of the EPA establishes a right to compensation from “the owner of the pollutant and the person having control of the pollutant.” The term “owner of the pollutant” is defined in s. 91(1) as “the owner of the pollutant immediately before the first discharge of the pollutant, whether into the natural environment or not, in a quantity or with a quality abnormal at the location where the discharge occurs.” Thorco falls squarely within this definition. 83 Mr. Thordarson relies on the “corporate veil” principle set out by this court in Montreal Trust Co. of Canada v. ScotiaMcLeod Inc. (1995), 26 O.R. (3d) 481 (Ont. C.A.), at paras. 25-26, to argue that he is not personally liable. I disagree. 84 Section 99(2) provides that an action lies against the owner of the pollutant and the person who controls the pollutant. “Person having control of a pollutant” is defined in s. 91(1) as “the person and the person’s employee or agent, if any, having the charge, management or control of a pollutant immediately before the first discharge of the pollutant, whether into the natural environment or not, in a quantity or with a quality abnormal at the location where the discharge occurs.” This definition, and the use of the word “and” in s. 99(2), indicates that the party or entity that owns the pollutant and the person or people, including employees and agents, who manage or control the pollutant can all be held liable under this provision. In other words, parties with control of a pollutant cannot rely on separate ownership of the pollutant to shield themselves from liability. 85 The question remains whether Mr. Thordarson had “control” of the PHC. Mr. Thordarson is Thorco’s principal, and had sole control of Thorco during the relevant time period. As noted above, Thorco owned the PHC. Midwest Properties Ltd. v. Thordarson C.W. Hourigan J.A. 309

86 There are two reported cases involving claims against corporate principals, directors or officers under s. 99(2). In Bisson v. Brunette Holdings Ltd. (1993), 15 C.E.L.R. (N.S.) 201 (Ont. Gen. Div.), the plaintiffs brought an action under s. 99(2) against a neighbouring gas station and the person who was its principal shareholder, manager, and president, after gasoline leaked onto their property. Although the individual defendant was ultimately able to rely on the due diligence defence in s. 99(3), the court found, at para. 32, that he “had the charge, management, and control of the gasoline, on the company’s behalf, immediately prior to its escape, and that therefore he falls squarely within the definition” in s. 91(1) of a “person having control of a pollutant.” 87 On the other hand, in United Canadian Malt Ltd. v. Outboard Marine Corp. of Canada Ltd. (2000), 48 O.R. (3d) 352 (Ont. S.C.J.), s. 99(2) claims against current and former directors of the corporate defendant and its American parent company were struck on the ground that the pleaded facts did not suggest these individuals had charge, management or control of the pollutants. The individual defendants only became “em- broiled in the issues after the contamination problem was found to exist, and subsequently with respect to the attempts to remedy the problem” (para. 32). 88 These cases make clear that a finding that a corporate principal, director, or officer is a “person having control of a pollutant” will be dependent on the factual circumstances of the case. In my view, the present case is similar to Bisson. Like the corporate defendant in Bisson, Thorco is a small business whose day-to-day operations are effectively controlled by one person — Mr. Thordarson. His evidence at trial established that it was he who applied for the Certificate of Approval from the MOE and that he was responsible for both the material being brought on to 1700 Midland and its storage on the property. 89 In light of the evidence and the similarities to Bisson, in this case Mr. Thordarson had control of the PHC for the purpose of s. 99(2). As for the allocation of damages between Thorco and Mr. Thordarson, s. 99(8) provides that liability under s. 99(2) is joint and several.

(iv) Nuisance and Negligence Claims 90 Given that the compensatory damages sought under the common law causes of action are the same as those sought under the EPA, it is unnecessary to decide the issue of whether the trial judge erred in dismissing the appellant’s claims in nuisance and negligence in order to determine 310 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

the entitlement of the appellant to compensatory damages. However, the issue becomes relevant to the question of the availability of punitive damages because this court has held that where a statutory cause of action provides for compensatory damages only, a court cannot award punitive damages, which are, by their nature, non-compensatory: see Lord (Litigation Guardian of) v. Downer (1999), 125 O.A.C. 168 (Ont. C.A.). Thus, in order to determine whether punitive damages are available it is necessary to first decide whether the trial judge erred in dismissing the nuisance and negligence claims. 91 The trial judge dismissed Midwest’s nuisance claim on the basis that it had failed to prove damages. She noted that, because there was no evidence of the environmental state of 285 Midwest at the time it was acquired in 2007, Midwest could not prove that there was any chemical alteration in the soil and groundwater on its property. She held that Mid- west would have to prove that there was an increase in the contamination level of the property. The trial judge then cited Innisfil Landfill, where the court approved, at para. 9, of the following statements of law: Actual damage must be proven to succeed in nuisance.... No special damages (for alleged devaluation of property) can be advanced on the basis of mere speculation that a prospective purchaser might be apprehensive about the impact of the alleged nuisance on the property.... An interference with the health of the plaintiffs thereby interfering with their enjoyment of the lands would fall within the essence of nuisance. 92 She further cited Smith v. Inco Ltd., 2011 ONCA 628, 107 O.R. (3d) 321 (Ont. C.A.), leave to appeal refused, [2012] 1 S.C.R. xii (note) (S.C.C.), in part for the proposition that: [A]ctual, substantial, physical damage to the land in the context of this case refers to nickel levels that at least posed some risk to the health or wellbeing of the residents of those properties. Evidence that the existence of the nickel particles in the soil generated concerns about potential health risks does not, in our view, amount to evidence that the presence of the particles in the soil caused actual, substantial harm or damage to the property. The claimants failed to establish actual, substantial, physical damage to their properties as a result of the nickel particles becoming part of the soil. Without actual, substantial, physical harm, the nuisance claim as framed by the claimants could not succeed. 93 The trial judge then concluded that Midwest had not proven damage in nuisance. Midwest Properties Ltd. v. Thordarson C.W. Hourigan J.A. 311

94 The trial judge also dismissed Midwest’s negligence claim on the basis that it had failed to prove damage. She referred again to Mortgage Insurance Co. of Canada, at para. 9, for the proposition that, “A fundamental requirement of negligence is the constituent element of there being shown actual damage suffered by the plaintiff as a result of the defendant’s breach of a duty of care towards the plaintiff.” 95 The respondents submit that the trial judge was correct in dismissing both causes of action. They argue the fact that certain contaminants in the soil exceed the relevant MOE guidelines is not evidence of physical harm or damage to the property. The latter cannot be inferred from the former; evidence of actual harm or interference with use is required. 96 The respondents further submit that there is no evidence of any im- pairment of the use that the appellant is making of its property, no harm or material discomfort to any person, no adverse impact on the health of any person, no evidence that the property is unfit for continued use as a commercial/industrial property for the manufacture of clothing, and no evidence of interference with the normal conduct of business at the property. 97 With respect to the financial impact of the contamination, the respondents submit that while Mr. Vanin and Mr. Tossell suggested that there would be a negative financial impact, neither of those expert witnesses was qualified as an expert in mortgages, property valuation or property appraisals. 98 In my view, the trial judge erred in dismissing these claims on the basis that damage had not been established. There was uncontradicted evidence at trial that established a diminution in the value of the appellant’s property and a human health risk. Nowhere in her reasons did the trial judge consider the evidence. Instead she made findings that damage had not been established without reference to the evidence at trial. 99 With respect to property values, Messrs. Vanin and Tossell testified that PHC contamination would lower the value of property and/or make it more difficult to obtain financing. Although not professional apprais- ers, they were experts in the environmental assessment of realty. They have expert knowledge of the relationship between particular contaminants and their general effect on property values. While the experts did not quantify the loss, quantification of damages is not required to establish that Midwest has suffered damage compensable under the law of nuisance and negligence. 312 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

100 With respect to health risks, Mr. Tossell testified that the F1 and F2 fractions for PHC are volatile and constitute a risk to human health and the environment. Soil and groundwater sampling at 285 Midwest showed results which exceeded the permitted concentrations at several locations on the property. Monitoring well 106, installed underneath the building at 285 Midwest to assess the condition for the occupants of the building, showed an F2 reading over the MOE limit. Mr. Tossell testified that there is a risk that the volatile PHC will get into the building and that this is a potential health risk to the occupants. 101 The fact that the contamination of the property with PHC presented a health risk to the employees of Midwest is evidence of physical and material harm or injury to the property. Again we are not concerned with the quantification of the loss, because any damages would be subsumed in the compensatory damages awarded under the EPA. The point is that there was uncontradicted evidence that the appellant had suffered damage in terms of physical and material harm or injury to the property and diminution in the value of its property. 102 This situation is distinguishable from the facts in Inco where there was nickel contamination but no evidence that the change in the chemical composition of the soil posed any health risk to the occupants or di- minished the value of the plaintiffs’ property at the time of the contamination. 103 The respondents also submit that the trial judge was correct in finding that damage had not been established because Midwest could not prove that there had been any contamination after it acquired its property. This conclusion is unsupportable because it is contrary to the evidence regarding the worsening condition of 285 Midwest. 104 There was uncontradicted evidence that after December 2007 there was a qualitative difference in the PHC contamination. In monitoring well 102, free product was not detected in 2008, but was detected in 2011; in monitoring well 101, free product was not detected in 2011 but was detected in 2012. The evidence of Mr. Tossell was that it was more expensive and challenging for a remediator to remove free product. Thus the evidence established that the PHC contamination grew worse and more expensive to fix after the appellant acquired 285 Midwest in 2007. 105 In my view, the trial judge erred in dismissing the claims in nuisance and negligence on the basis that the appellant had not established any damage. There was uncontradicted evidence that supported a finding that damage had been suffered. The trial judge committed a palpable and Midwest Properties Ltd. v. Thordarson C.W. Hourigan J.A. 313

overriding error in not considering that evidence and in reaching the unsupported finding that damage had not been proven. 106 It is also clear that the other elements of the torts of nuisance and negligence are made out on the facts of this case. Nuisance is a substantial and unreasonable interference with the plaintiff’s use or enjoyment of land: Antrim Truck Centre Ltd. v. Ontario (Ministry of Transportation), 2013 SCC 13, [2013] 1 S.C.R. 594 (S.C.C.), at para. 18. While the jurisprudence prior to Antrim established that physical or material harm to land was presumptively unreasonable, in Antrim the Supreme Court held, at para. 51, that the reasonableness of the interference must be assessed in all cases. The court, however, also held that where actual physical damage is at issue, the reasonableness analysis will likely be brief: An- trim, at para. 50. 107 Such is the case here. The invasion of PHC onto Midwest’s property, to the point that the product is of such a concentration that it can no longer dissolve in groundwater and is found to pose a risk to human health, cannot be classified as trivial, insubstantial, or reasonable. The interference becomes all the more unreasonable when the significant cost to Midwest to remediate the contamination and undo the damage to the soil and groundwater on its property is considered. This is not the kind of interference with the use or enjoyment of property that society, through the law of nuisance, expects a property owner such as Midwest to bear in the name of being a good neighbour. 108 Midwest’s claim in negligence is also made out. Beyond proof of damage, to succeed in a negligence action, the plaintiff must demonstrate that the defendant owed it a duty of care, that the defendant breached the standard of care, and that the damage was caused, legally and factually, by that breach: Mustapha v. Culligan of Canada Ltd., 2008 SCC 27, [2008] 2 S.C.R. 114 (S.C.C.), at para. 3. 109 A landowner owes a duty to adjoining landowners to avoid acts or omissions that may cause harm to those adjoining landowners: Canadian Tire, at para. 299. There can be no serious suggestion on the facts of this case that Thorco actually complied with the standard of care expected of a reasonable landowner. The evidence established that the respondents were never in compliance with the Certificate of Approval issued by the MOE in 1988 with respect to the limits on waste material or required storage practices. On the contrary, excessive amounts of waste materials were stored on 1700 Midland in conditions that easily allowed the contents to be infiltrated by rainwater and escape to the natural environment. 314 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

110 The trial judge found, at paras. 8-9 of her reasons, that the expert evidence established that the contamination at 285 Midwest was caused by the migration of the known contamination at 1700 Midland, through the flow of groundwater, onto 285 Midwest. 111 While the respondents were only convicted of failing to comply with an MOE order once, the series of reports from Officer Mitchell, beginning in 2008, disclose a repeated pattern of what can only be described as utter disregard for the effect that the deficient storage practices of chemicals stored on the property could have on the surrounding environment, including 285 Midwest. 112 In conclusion, the appellant established an entitlement to damages under both nuisance and negligence. The trial judge erred in dismissing these claims. 113 Mr. Thordarson cannot rely on the “corporate veil” principle in Sco- tiaMcLeod to avoid personal liability for the commission of these torts. It is well-established in the law of Ontario that “employees, officers and directors will be held personally liable for tortious conduct causing physical injury, property damage, or a nuisance even when their actions are pursuant to their duties to the corporation”: ADGA Systems International Ltd. v. Valcom Ltd. (1999), 43 O.R. (3d) 101 (Ont. C.A.), at para. 26. 114 As noted above, Thorco is a small business whose day-to-day operations are effectively controlled by Mr. Thordarson, and there is no question that he was intimately and equally involved in the conduct which was both a nuisance and negligent. 115 The following passage from Desrosiers v. Sullivan (1986), 76 N.B.R. (2d) 271 (N.B. C.A.), leave to appeal refused, (1987), 79 N.B.R. (2d) 90 (note) (S.C.C.), has often been quoted and is equally applicable in the circumstances of this case: The question here is whether Mr. Sullivan, who was the manager and principal employee of the company that committed the nuisance, may be responsible along with the company. I see no reason why, because of his involvement in creating and maintaining the nuisance, Mr. Sul- livan should not also be responsible. Here, as the trial Judge found, Mr. Sullivan was the principal employee of the company and the person responsible for its day-to-day operations and on that basis he was responsible for both creating and maintaining the nuisance...... The question here, as I have pointed out, is not whether Mr. Sullivan was acting on behalf of or even if he “was” the company, but Midwest Properties Ltd. v. Thordarson C.W. Hourigan J.A. 315

whether a legal barrier, here a company, can be erected between a person found to be a wrongdoer and an injured party thereby reliev- ing the wrongdoer of his liability. In my opinion, once it is determined that a person breaches a duty owed to neighbouring landowners not to interfere with their reasonable enjoyment of their property, liability may be imposed on him and he may not escape by saying that as well as being a wrongdoer he is also a company manager or employee. 116 As a result, I would hold Thorco and Mr. Thordarson jointly and severally liable to Midwest.

(v) Punitive Damages 117 The trial judge held, at para. 36 of her reasons, that an award of punitive damages would be made only “in exceptional cases for malicious, oppressive and high-handed misconduct that offends the court’s sense of decency.” She further noted that findings that the respondents’ conduct was wrong in law, caused or permitted the deposit of contaminants onto 285 Midwest, or caused damage, would be insufficient to warrant an award of punitive damages. 118 The trial judge distinguished one case cited by Midwest, Deumo v. Fitzpatrick (2008), 39 C.E.L.R. (3d) 299 (Ont. S.C.J.), where the conduct of the defendant was “reckless, destructive, persistent, pervasive and heedless of their neighbours’ physical integrity and property rights”, concluding that the evidence in the present case did not support such a finding. 119 Midwest submits that punitive damages should be awarded where conduct is high-handed, malicious, arbitrary or highly reprehensible, and in cases where a defendant consciously, deliberately, and callously disre- gards a neighbour’s rights. They argue that the respondents’ conduct was severe, lasted decades, had a profit motive, and was undeterred by MOE orders. 120 The respondents submit that punitive damages are exceptional and Midwest has not demonstrated that the respondents’ behaviour was malicious or otherwise deserving of punishment, particularly during the relevant period of time contemplated by the Limitations Act, 2002. Their position is that mere contamination of Midwest’s property is not a sufficient basis to ground a punitive damages claim. 121 In my view, the trial judge erred in law in concluding that an award of punitive damages was not appropriate in this case. The general objectives 316 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

of punitive damages are to punish, to deter, and to denounce a defendant’s conduct: Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595 (S.C.C.), at para. 68. An award of punitive damages should be rationally connected to one of these objectives: Whiten, at para. 71. Factors relevant to determining the rational limits of a punitive damage award include whether the defendant persisted in the conduct over a lengthy period of time, whether the defendant was aware that what he or she was doing was wrong, and whether the defendant profited from the conduct: Whiten, at para. 113. 122 On the facts of this case a punitive damages award was clearly warranted. Thorco’s history of non-compliance with its Certificate of Ap- proval and MOE orders, and its utter indifference to the environmental condition of its property and surrounding areas, including Lake Ontario, demonstrates a wanton disregard for its environmental obligations. This conduct has continued for decades and is clearly driven by profit. Mr. Thordarson testified at trial that one of the reasons he did not comply with the 22,520 gallon limit on waste in the Certificate of Approval, when that certificate was issued in 1988, was that he was not aware of an economical way of doing so. 123 The 1999 report from XCG Consultants informed the respondents that it would cost approximately $43,000 to dispose of the inventory of PHC and catalyst at the property, and recommended that “soil and groundwater should be investigated to assess potential soil impacts and rule out groundwater impacts on-site.” Thorco and Mr. Thordarson made a business decision not to invest this modest sum, or conduct further investigations. Instead they permitted the level of contamination and the costs of remediation to increase exponentially. 124 This is the type of conduct by a defendant that warrants punitive sanction by the court. I would award Midwest punitive damages in the amounts of $50,000 against Thorco and $50,000 against Mr. Thordarson.

F. Disposition 125 I would allow the appeal, set aside the judgment of the trial judge and substitute judgment against both respondents jointly and severally for $1,328,000 in damages under s. 99 of the EPA. Given that the respondents are liable in nuisance and negligence, I would also award Midwest $50,000 in punitive damages against each of the respondents. 126 With respect to costs of the appeal, Midwest sought costs on a partial indemnity scale of $74,894 and the respondents sought costs on that Midwest Properties Ltd. v. Thordarson M.L. Benotto J.A. 317 scale of $56,250. Midwest as the successful party is entitled to its costs, which I would fix at $70,000, inclusive of all fees, disbursements and applicable taxes. With respect to the trial costs, at the conclusion of the appeal the parties were unable to agree on the quantum of costs awarded at trial or what the appropriate quantum of Midwest’s costs of the trial would be if it were successful on this appeal. In my view, given the result of the appeal, Midwest is also entitled to its costs of the trial. If the parties are unable to agree on these costs, they may file brief written submissions on costs within 10 days of the release of these reasons.

K. Feldman J.A.:

I agree

M.L. Benotto J.A.:

I agree Appeal allowed. 318 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

[Indexed as: Hemeon v. South West Nova District Health Authority] Alicia Hemeon and Willa Magee, Plaintiffs v. South West Nova District Health Authority, a body corporate, Defendant Nova Scotia Supreme Court Docket: 398067 2015 NSSC 287 Arthur W.D. Pickup J. Heard: July 24, 2015 Judgment: October 14, 2015 Civil practice and procedure –––– Discovery — Discovery of documents — Application for order for production — Miscellaneous –––– Plaintiffs commenced proposed class action alleging that former employee of defendant committed tort of intrusion upon seclusion by accessing plaintiffs’ medical records in unauthorized manner at hospital — Plaintiffs claimed defendant was vicariously liable, and independently negligent for way in which it administered its medical records system — Defendant argued that disclosure of one of representative plaintiff’s, H, medical records was necessary to determine elements of tort — Defendant brought motion for production of medical records of plaintiff H to confirm statement made at discoveries that she now tried to attend different hospitals and avoid hospital where breach allegedly happened — Motion dismissed — Determining elements of tort of intrusion upon seclusion would essentially be policy decision — It was not clear how subjective experience of single representative plaintiff influenced such policy decision — Defendant offered no clear explanation or basis for claim that H’s individual distress was relevant to common issue of whether aggregate damages were available — In context of class proceedings distress of class member was irrelevant to common issues. Cases considered by Arthur W.D. Pickup J.: Abdulrahim v. Air France (2010), 2010 ONSC 3953, 2010 CarswellOnt 5320, [2010] O.J. No. 3126, 99 C.P.C. (6th) 254 (Ont. S.C.J.) — followed Evans v. Bank of Nova Scotia (2014), 2014 ONSC 2135, 2014 CarswellOnt 7666, 55 C.P.C. (7th) 141, [2014] O.J. No. 2708 (Ont. S.C.J.) — followed Fischer v. IG Investment Management Ltd. (2015), 2015 ONSC 3525, 2015 CarswellOnt 7992, [2015] O.J. No. 2780 (Ont. S.C.J.) — followed Jones v. Tsige (2012), 2012 ONCA 32, 2012 CarswellOnt 274, 108 O.R. (3d) 241, 89 C.C.L.T. (3d) 221, 6 R.F.L. (7th) 247, 2012 C.L.L.C. 210-012, 287 O.A.C. 56, 346 D.L.R. (4th) 34, 96 B.L.R. (4th) 1, 251 C.R.R. (2d) 124, [2012] O.J. No. 148 (Ont. C.A.) — considered Hemeon v. SW Nova District Health Authority Pickup J. 319

L. (T.) v. Alberta (Director of Child Welfare) (2010), 2010 ABQB 203, 2010 CarswellAlta 543, [2010] A.J. No. 329, 492 A.R. 394 (Alta. Q.B.) — considered Murray v. Capital District Health Authority (2015), 2015 NSSC 61, 2015 Car- swellNS 132, 71 C.P.C. (7th) 114, [2015] N.S.J. No. 77 (N.S. S.C.) — considered Pennyfeather v. Timminco Ltd. (2011), 2011 ONSC 4257, 2011 CarswellOnt 6829, 107 O.R. (3d) 201, [2011] O.J. No. 3286 (Ont. S.C.J.) — considered Stanway v. Wyeth Canada Inc. (2013), 2013 BCSC 369, 2013 CarswellBC 563, 32 C.P.C. (7th) 301, 44 B.C.L.R. (5th) 389, [2013] B.C.J. No. 411 (B.C. S.C.) — considered Stanway v. Wyeth Canada Inc. (2013), 2013 BCCA 256, 2013 CarswellBC 1561, 339 B.C.A.C. 23, 578 W.A.C. 23, [2013] B.C.J. No. 1093 (B.C. C.A.) — referred to Trout Point Lodge Ltd. v. Handshoe (2012), 2012 NSSC 245, 2012 CarswellNS 585, 1014 A.P.R. 22, 320 N.S.R. (2d) 22, [2012] N.S.J. No. 427 (N.S. S.C.) — considered 1176560 Ontario Ltd. v. Great Atlantic & Pacific Co. of Canada Ltd. (2003), 2003 CarswellOnt 5808, [2003] O.J. No. 5703 (Ont. Master) — considered Statutes considered: Class Proceedings Act, S.N.S. 2007, c. 28 Generally — referred to s. 7(1) — considered Rules considered: Civil Procedure Rules, 2009, N.S. Civ. Pro. Rules Generally — referred to R. 1.01 — considered R. 14.12 — considered

MOTION by defendant for order for production of representative plaintiff’s medical records.

Michael Dull, Madeleine Carter, for Plaintiffs Nancy G. Rubin, Q.C., Scott Campbell, Gavin Johnston (Articled Clerk), for Defendant

Arthur W.D. Pickup J.:

1 This is a production motion brought by the defendant, a result of their request of one of the representative plaintiffs, Alicia Hemeon, for production of records during a discovery held on August 14, 2014. 320 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

2 The main action involves an alleged breach of privacy. The plaintiffs commenced this action in June 2012 as a proposed class action proceeding, pursuant to the Class Proceedings Act, S.N.S. 2007, c. 28. The plaintiffs allege that a former employee of the defendant committed the tort of “intrusion upon seclusion” by accessing their medical records in an unauthorized manner at the Roseway Hospital in Shelburne. They claim that the defendant is vicariously liable, and also that the defendant is independently negligent for the way in which it administered its medical records system. 3 By certification order issued on August 26, 2013, this action was certified as a class proceeding. The following six issues were certified as common issues which will be adjudicated at a common issues trial in April 2016: i. Is the tort of intrusion upon seclusion recognized as an independent tort in Nova Scotia? If so, what are its parameters and constituent elements? ii. Did an employee of the defendant, over the course of his or her employment, intentionally access the medical records of the class members without a valid purpose? iii. If the tort of intrusion upon seclusion is ultimately available in Nova Scotia and established by any of the class members, would the defendant be vicariously liable for the commission of this tort by the employee? iv. Did the defendant owe a duty of care to the class members to protect the privacy of their personal health information? v. If so, did the defendant breach the corresponding standard of care as pleaded by the plaintiffs in the statement of claim? vi. If the tort of intrusion upon seclusion is recognized in Nova Sco- tia, can damages of class members be determined on an aggregate basis in the circumstances of this action? 4 Ms. Hemeon was discovered on August 14, 2014. She was asked a series of questions about how she felt when she learned about the alleged privacy breach. She described how she felt and how it affected her. One question posed to Ms. Hemeon was whether she had changed her hospital attending behaviour as a result of the alleged breach of her privacy. She responded that she did attend other hospitals (that is, other than Roseway Hospital where the breach allegedly happened) if at all possible. The defendant’s counsel asked for production of medical records to Hemeon v. SW Nova District Health Authority Pickup J. 321

confirm this answer. Plaintiff’s counsel refused to produce the requested medical records. Accordingly the defendant has initiated this motion to compel production. Civil Procedure Rule 14.12 allows the court to order production.

Discovery and Disclosure in Class Action Proceedings 5 Parties to litigation are subject to broad obligations of discovery and disclosure under our Civil Procedure Rules. However, in my view, the determination of the production motion before me also requires consideration of elements that are specific to the context of a class action proceeding. This raises the question of the scope of discovery in a class proceeding. In particular, the issue is whether discovery is limited to the common issues. 6 The plaintiffs argue that relevance at this stage is defined by the common issues and the information sought is not relevant to these issues. 7 The defendant’s position appears to be while the common issues are one consideration, the litigation plan and issue of credibility must also be taken into account. The defendant also appears to rely on the general principles of relevance pertaining to production and discovery in regular non-class proceedings litigation. 8 The scope of discovery and disclosure in a class proceeding was discussed in 1176560 Ontario Ltd. v. Great Atlantic & Pacific Co. of Canada Ltd., [2003] O.J. No. 5703 (Ont. Master), where Master Mac- Leod said at paras. 6 and 9: In any proceeding the starting point to determine relevance is the pleadings. Relevance of course is the touchstone in determining whether or not a question is proper. A class proceeding, however, takes place in two stages. Firstly there is a trial on the common issues. Thereafter a mechanism is established for resolution of the issues that have not been defined as common issues. Discovery of the representative plaintiffs at the present stage in the case before me is limited by the definition of common issues. In other words, the pleadings inform interpretation of the common issues and set out the facts to be relied upon but a question is only a proper question in this phase of the action if it relates to the common issues and not the individual claims. It is therefore the certification order as informed by the pleadings and not the pleadings at large that define relevance for the first phase of the trial...... 322 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

The certification motion is procedural but, like any order defining the issues for trial, it limits the scope of relevant inquiry. What a definition of issues for trial does is to remove other items from consideration at that trial. In that sense the certification order defining the common issues is similar to an order for trial of an issue on an application or to an order under Rule 20.05(1) defining the issues to be tried. The issues that are not to be tried do not exist for purposes of discovery at this time. Defining and narrowing the issues, does not guarantee success on the issues and it narrows the issues for both parties. In this case, the plaintiff is restricted to proving aggregate liability to the class and can not advance a different theory of liability that would take the trial outside of the common issues. 9 The same issue was addressed in L. (T.) v. Alberta (Director of Child Welfare), 2010 ABQB 203, [2010] A.J. No. 329 (Alta. Q.B.), where Thomas J. said, at para. 16: While the traditional starting point for determining relevance and materiality is the pleadings, I am satisfied that the bifurcated nature of class proceedings requires a modified approach. In this case, the class proceeding is still at its first stage and as such, the relevance and materiality of a record ought to be determined by reference to the common issues. This position is consistent with the C.P.A., which clearly sets out a bifurcated process that distinguishes between the common issues that are shared collectively by all class members, and the individual issues particular to each separate class member. In order to preserve the goals of access to justice and judicial economy, it is imperative to respect the bifurcated process and to not confuse the common issues at the first stage with matters that are best left to the determination of any outstanding individual issues at the second stage. 10 The general rule, as stated by Strathy J. in Abdulrahim v. Air France, 2010 ONSC 3953, [2010] O.J. No. 3126 (Ont. S.C.J.), is that “in a class proceeding, where the common issues are bifurcated and tried before the individual issues, examination for discovery is limited to the common issues.” The defendant had taken the position that “all matters that touch upon the common issues” — including the damages alleged by the representative plaintiffs — were subject to discovery. Strathy J. adopted the plaintiffs’ position that “the scope of the examination of the representative plaintiffs should be restricted to the common issues...” He said at paras. 12 - 13: No authority is necessary for the proposition that the purpose of discovery is to enable a party to learn about and test the opponent’s Hemeon v. SW Nova District Health Authority Pickup J. 323

case, to narrow the scope of the issues, to obtain admissions favourable to the party’s case and to promote settlement. In the usual case, the scope of the action, and therefore the scope of discovery, is defined by the pleadings. A class proceeding is not, however, a usual action. It is a special form of action and the C.P.A. contemplates that the proceeding will be bifurcated and that issues that are common will be tried before individual issues in order to achieve efficiency. The scope of the common issues trial is, therefore, defined by and limited to the common issues. For the same reason, discovery prior to the common issues trial should be limited to the issues that are common. Once those issues have been resolved, discovery may be ordered of individual class members (including the representative plaintiffs) on individual issues. It would not serve efficiency or economy to conduct discovery of the representative plaintiffs on matters that are not relevant to the common issues. 11 Justice Strathy went on to state at para. 21 of his decision stated: In my view, these cases are exceptions that support the general rule that in a class proceeding, where the common issues are bifurcated and tried before the individual issues, examination for discovery is limited to the common issues. This approach is consistent with the objective of judicial economy as well as the principle expressed in rule 1.04: “These rules shall be liberally construed to secure the just, most expeditious and least expensive determination of every proceeding on its merits... 12 This principle of judicial economy is recognized under our Civil Pro- cedure Rule 1.01: These rules are for the just, speedy and inexpensive determination of every proceeding. 13 In the more recent case of Fischer v. IG Investment Management Ltd., 2015 ONSC 3525, [2015] O.J. No. 2780 (Ont. S.C.J.), Perell J. summarized the general rule at para. 64: In class proceedings, the general rule is that the examinations for discovery are restricted to just the issues that have been certified: 1176560 Ontario Ltd. v. Great Atlantic & Pacific Co. of Canada, [2003] O.J. No. 5703 (Master) at paras. 6 and 9; Andersen v. St. Jude Medical Inc., [2006] O.J. No. 3659 (Master), aff’d [2006] O.J. No. 5769 (S.C.J.); T.L. v. Alberta (Child, Youth and Family Enhancement Act, Director), 2010 ABQB 203at para. 18; Abdulrahim v. Air France, 2010 ONSC 3953. However, the approach of restricting the scope of the common issues trial and the associated discovery pro- 324 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

cess to the certified questions is not an absolute rule: Pennyfeather v. Timminco Limited, 2011 ONSC 4257; Canadian Imperial Bank of Commerce v. Deloitte & Touche, [2008] O.J. No. 3304 (S.C.J.). 14 The authors of The Law of Class Actions in Canada (Toronto: Canada Law Book, 2014) state at 192: The general rule in Ontario is that discovery for the common issues trial should be limited to the issues that are common and once those issues have been resolved, discovery may be ordered of individual class members. There are few exceptions to this rule; depending on the exigencies of the particular class action, the scope of the discovery may extend to all of the pleaded issues. The British Columbia courts have interpreted the Ontario line of cases as not restricting discovery strictly to the common issues... 15 The British Columbia approach is set out in Stanway v. Wyeth Canada Inc., 2013 BCSC 369, [2013] B.C.J. No. 411 (B.C. S.C.). In de- nying leave to appeal to the British Columbia Court of Appeal (2013 BCCA 256, [2013] B.C.J. No. 1093 (B.C. C.A.)), Prowse J.A. described the Chambers judge’s reasoning as follows: Madam Justice Gropper clearly identified the issue before her as “the proper scope of examination for discovery in the context of class proceedings.” She then set out the common issues which had been certified. She noted that the scope of examination for discovery under the Supreme Court Civil Rules, B.C. Reg. 168/2009 [“Rules”], is broad, and that s. 17(1) of the Class Proceedings Act, R.S.B.C. 1996, c. 50 [“CPA”] provides that parties to a class proceeding have the same rights of discovery as under the Rules. She then referred to three On- tario decisions on the scope of discovery in the context of class proceedings. In her view, those decisions did not stand for any absolute proposition that discovery was strictly limited to the common issues. In that regard, she referred to Andersen v. St. Jude Medical, Inc., 2010 ONSC 4708, and quoted para. 38 of that decision, which states: In a civil proceeding, the relevance of the facts to the issues in the proceeding is usually determined with reference to the claims and defences raised in the pleadings. In the context of a class proceeding, relevance is also governed by the common issues that have been certified for trial, and not by any individual issues that remain. It is therefore the certification order as informed by the pleadings that define relevance for this phase of the trial: [Cita- tions omitted.] Hemeon v. SW Nova District Health Authority Pickup J. 325

I am not persuaded that there is an arguable case that Madam Justice Gropper erred in her interpretation of the Ontario authorities, or that they restrict discovery strictly to the common issues as an absolute principle, as the applicants appear to suggest. In the result, she concluded that the scope of discovery in class proceedings should be governed by the usual rules for discovery regarding materiality and relevance, but with the key determinant of materiality and relevance being the certified common issues. At para. 26 of her decision, she states: I find the scope of examination for discovery in the context of class proceedings shall also be defined broadly. It will not be limited by the common issues. Questions led in examination shall be subject to the evidentiary principles of materiality and relevance, the key determinant of relevance and materiality being the certified common issues. 16 The British Columbia approach to this issue as set out in Stanway, supra, reflects the essence of the defendant’s argument that production in a class proceeding should be handled the same way as production in a conventional proceeding. With respect, I am persuaded that the Ontario authorities provide a more convincing method of applying general production and relevance to class proceedings. 17 I am satisfied that the appropriate approach in this type of proceeding is to follow the general rule — though obviously not an absolute one — that discovery will generally be tied to the common issues and to depart from this approach is the exception, not the rule. 18 The defendant’s stated reason for requesting disclosure of the representative plaintiff’s medical records is in order to “corroborate or refute the plaintiff’s assertion that the breach caused her to change her behav- ior”. The defendant claims the requested records are relevant to the common issues of (1) whether the tort should be recognized in Nova Scotia and, if so, what its elements are; (2) whether damages can be assessed in the aggregate in this case; (3) vicarious liability; and (4) credibility of the representative plaintiff.

Elements of the tort of intrusion upon seclusion 19 The Ontario Court of Appeal confirmed the existence and elements of the tort of intrusion upon seclusion in Jones v. Tsige, 2012 ONCA 32, [2012] O.J. No. 148 (Ont. C.A.), where the intrusion consisted of unauthorized accessing of the plaintiff’s bank records by a bank employee. 326 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

After confirming the tort existed in Ontario, Sharpe J.A. (for the court) described the elements at para. 70 - 71: I would essentially adopt as the elements of the action for intrusion upon seclusion the Restatement (Second) of Torts (2010) formulation which, for the sake of convenience, I repeat here: One who intentionally intrudes, physically or otherwise, upon the seclusion of another or his private affairs or concerns, is subject to liability to the other for invasion of his privacy, if the invasion would be highly offensive to a reasonable person. The key features of this cause of action are, first, that the defendant’s conduct must be intentional, within which I would include reckless; second, that the defendant must have invaded, without lawful justification, the plaintiff’s private affairs or concerns; and third, that a reasonable person would regard the invasion as highly offensive causing distress, humiliation or anguish. However, proof of harm to a recognized economic interest is not an element of the cause of action. I return below to the question of damages, but state here that I believe it important to emphasize that given the intangible nature of the interest protected, damages for intrusion upon seclusion will ordinarily be measured by a modest conventional sum. 20 More recently, in Evans v. Bank of Nova Scotia, 2014 ONSC 2135, [2014] O.J. No. 2708 (Ont. S.C.J.), on a certification motion in a class proceeding, Smith J. cited Jones, supra, and set out the elements as follows at para. 18: a) The defendant’s conduct must be intentional (which could include recklessness); b) The defendant must have invaded the plaintiff’s private affairs or concerns without lawful justification; and c) A reasonable person would regard the invasion as highly offensive causing distress, humiliation or anguish. 21 The defendant says that the tort has not been recognized in Nova Sco- tia and its elements have, therefore, not been defined. While the defendant is correct that there has been formal recognition of the tort in Nova Scotia, it has been referred to in Nova Scotia jurisprudence. 22 While not explicitly recognizing the tort in Trout Point Lodge Ltd. v. Handshoe, 2012 NSSC 245, [2012] N.S.J. No. 427 (N.S. S.C.), Hood J. cited Jones, supra, and held that “in an appropriate case in Nova Scotia there can be an award for invasion of privacy or as the Ontario Court of Appeal called it, the “intrusion upon seclusion”. In Murray v. Capital Hemeon v. SW Nova District Health Authority Pickup J. 327

District Health Authority, 2015 NSSC 61, [2015] N.S.J. No. 77 (N.S. S.C.), Justice Denise Boudreau cited this comment in a certification decision, holding that while “the tort of intrusion upon seclusion is novel ... s. 7(1) of the CPA does not exclude novel claims; it means to exclude claims that have absolutely no chance of success, or frivolous claims.” 23 In any event, the defendant’s position is that (1) the tort has not been recognized in Nova Scotia, and (2) if it is to be recognized, it should include as an element that the breach caused “anguish and suffering”. The defendant says this is supported by Jones, supra. In fact, the court in Jones was referring to an American textbook, Prosser’s Law of Torts, 4th edn. published in 1971. Prosser set out a list of four elements somewhat different from those ultimately adopted by the court. In any event, Sharpe J.A. noted, “anguish and suffering are generally presumed once the first three elements have been established”. 24 The defendant argues that disclosure of the representative plaintiff’s medical records is necessary to determine the elements of the tort. In particular, it is the defendant’s position that these records are required in order to determine whether the court should apply the elements that have already been endorsed implicitly by this court and explicitly by the On- tario Court of Appeal, or whether Prosser’s “anguish and suffering” — or the Australian “mental, psychological or emotional harm or distress or which prevents or hinders the plaintiff from doing an act which she is lawfully entitled to do”, also referred to in Jones, supra, — should be incorporated into the tort in Nova Scotia. Counsel has provided no clear argument to explain how the information sought is relevant. 25 In summary, as I understand the defendant’s position, the representative plaintiff’s medical records are allegedly necessary because the court needs a factual record before it, in case it decides to interpret the tort of intrusion upon seclusion as requiring the element of “anguish and suffering”. This element has not been required by Canadian courts that have recognized the tort, including, implicitly, this one. 26 I am not persuaded that determining the elements of the tort would require such disclosure at this stage. In my view, determining the elements of the tort will be essentially a policy decision. How the subjective experience of a single representative plaintiff influences this decision is not clear. 328 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

Damages in the aggregate 27 Counsel for the defendant submitted in oral argument that the representative plaintiff’s medical records would be relevant to the common issue of whether damages could be assessed in the aggregate. Counsel submitted that it would be necessary to determine whether the damages would be too disparate for aggregate damages to be available. 28 The defendant cites Fischer, supra, where the issue of aggregate damages had not been certified, and the court observed that if the issue had been certified, the documents respecting trading data that the plaintiffs sought from the defendant “would have become relevant to the common issues trial and producible for the discovery purpose”. I am not satisfied that this is persuasive authority for requiring the plaintiffs to produce documents related to their individual alleged damages. The documents sought in Fischer, supra, went directly to the conduct of the defendant that had caused the damage, not to the individual damages of the plaintiffs. Moreover, the court in Fischer, supra, emphasized the novelty of the damages issue. 29 The defendant offers no clear explanation or basis for the claim that the representative plaintiff’s individual distress is relevant to the issue of whether aggregate damages are available. Rather, as the plaintiff argues, if aggregate damages are held not to be available, this will result in the individual damages of the plaintiffs becoming relevant at a later stage of the proceeding.

Evidence of individual distress in the litigation plan 30 The defendant further argues that a reference to distress arising from the breaches appears in the litigation plan. In Pennyfeather v. Timminco Ltd., 2011 ONSC 4257 (Ont. S.C.J.), Perell J. remarked that “the litigation plan and the certification order will define the nature of the common issues trial...”. Accordingly, the defendant argues that the record of the representative plaintiff’s hospital attendances is “relevant in relation to these common issues and to establish the elements of the tort in a prece- dent setting case for a novel tort, and it believes these documents are relevant for credibility of the plaintiff”. Thus, following the general law of relevance and production, the defendant says the court should “err on the side of requiring production...”. 31 Plaintiff’s counsel replies that the litigation plan “is not set in stone” and was developed long before the common issues trial. Hemeon v. SW Nova District Health Authority Pickup J. 329

32 I am not satisfied this reference in the litigation plan displaces the basic principle that the representative plaintiff’s individual distress is of no apparent relevance to the common issues. 33 In summary, for the reasons set out above, I am of the view that in the context of class proceedings the distress of a class member is irrelevant to the common issues. 34 The defendant’s motion for production is dismissed. Motion dismissed. 330 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

[Indexed as: Chandra v. Canadian Broadcasting Corp.] Ranjit Kumar Chandra, Plaintiff and Canadian Broadcasting Corporation, Chris O’Neill-Yates, Catherine McIsaacs, Lynn Burgress, Jack Strawbridge and Memorial University of Newfoundland, Defendants Ontario Superior Court of Justice Docket: 06-CV-310261PD2 2015 ONSC 5303 Graeme Mew J. Heard: July 16, 2015 Judgment: August 31, 2015 Privacy and freedom of information –––– Federal privacy legislation — General principles –––– In 2006, defendant broadcaster aired documentary as- serting plaintiff, world reknown expert in fields of nutrition and immunology, had fabricated research results used as basis for published studies and reports — Documentary claimed to have uncovered trail of scientific fraud and deception dating back to 1980s — Plaintiff brought action for damages for defamation — In 2012, he amended Statement of Claim to include claim for damages for invasion of privacy — Plaintiff alleged broadcast defendants had secretly tracked and monitored private email communications and had disclosed very personal and embarrassing private information — Broadcast defendants moved for ruling that claim for invasion of privacy should not be put to jury — Motion dismissed — Broadcast defendants had not erred by failing to seek ruling on tenability of claim at earlier point in proceeding — At time documentary was broadcast, broadcaster was subject to Personal Information Protection and Electronic Documents Act which provided process by which individual could complain to Privacy Commissioner that personal information had been illegally obtained — While s. 4(2)(c) provided that Act did not apply to information collected for journalistic, artistic or artistic purposes, that could not be interpreted as insulat- ing broadcast defendants from tort claims — Since Act left complainant option of bringing civil proceeding, it was not complete code that precluded within claim as suggested by broadcast defendants — While tort of invasion of privacy should not be extended to public disclosure of embarrassing facts, matter at heart of law of defamation, separate claim for intrusion upon seclusion could be maintained where defendants had intentionally or recklessly breached plaintiff’s private affairs or concerns without lawful justification and reasonable person would regard invasion as highly offensive causing distress, humiliation or anguish — Focus was on intrusion rather than publication or dissemination — Chandra v. Canadian Broadcasting Corp. 331

While scope for successful claim of tort would be limited, it could not be said that plaintiff’s claim was untenable in law or that there were no facts upon which properly instructed jury could find broadcast defendants had unlawfully invaded his privacy. Cases considered by Graeme Mew J.: Chandra v. Canadian Broadcasting Corp. (2015), 2015 ONSC 3945, 2015 Cars- wellOnt 10174 (Ont. S.C.J.) — referred to FL Receivables Trust 2002-A (Administrator of) v. Cobrand Foods Ltd. (2007), 2007 ONCA 425, 2007 CarswellOnt 3697, 85 O.R. (3d) 561, 46 C.P.C. (6th) 23, [2007] O.J. No. 2297 (Ont. C.A.) — referred to Globe & Mail c. Canada (Procureur général) (2010), 2010 SCC 41, 2010 Car- swellQue 10258, 2010 CarswellQue 10259, 94 C.P.C. (6th) 1, 78 C.R. (6th) 205, (sub nom. Globe & Mail v. Canada (Procureur général)) 325 D.L.R. (4th) 193, (sub nom. CTVglobemedia Publishing Inc. v. Canada (Attorney General)) 407 N.R. 202, [2010] 2 S.C.R. 592, (sub nom. Globe & Mail v. Canada (Attorney General)) 220 C.R.R. (2d) 339, [2010] S.C.J. No. 41, [2010] A.C.S. No. 41 (S.C.C.) — referred to Grant v. Torstar Corp. (2009), 2009 SCC 61, 2009 CarswellOnt 7956, 2009 CarswellOnt 7957, 79 C.P.R. (4th) 407, 397 N.R. 1, [2009] 3 S.C.R. 640, 258 O.A.C. 285, 314 D.L.R. (4th) 1, EYB 2009-167615, 72 C.C.L.T. (3d) 1, 204 C.R.R. (2d) 1, [2009] S.C.J. No. 61, 102 O.R. (3d) 607 (note) (S.C.C.) — referred to Hill v. Church of Scientology of Toronto (1995), 30 C.R.R. (2d) 189, 25 C.C.L.T. (2d) 89, 184 N.R. 1, (sub nom. Manning v. Hill) 126 D.L.R. (4th) 129, 24 O.R. (3d) 865 (note), 84 O.A.C. 1, [1995] 2 S.C.R. 1130, 1995 Cars- wellOnt 396, 1995 CarswellOnt 534, [1995] S.C.J. No. 64, EYB 1995- 68609, 24 O.R. (3d) 865 (S.C.C.) — referred to Jones v. Tsige (2012), 2012 ONCA 32, 2012 CarswellOnt 274, 108 O.R. (3d) 241, 89 C.C.L.T. (3d) 221, 6 R.F.L. (7th) 247, 2012 C.L.L.C. 210-012, 287 O.A.C. 56, 346 D.L.R. (4th) 34, 96 B.L.R. (4th) 1, 251 C.R.R. (2d) 124, [2012] O.J. No. 148 (Ont. C.A.) — considered Metropolitan Railway v. Jackson (1877), (1877-78) L.R. 3 App. Cas. 193, 3 A.C. 193, 4 L.J.Q.B. 303 (U.K. H.L.) — followed Ontario v. O.P.S.E.U. (1990), 37 O.A.C. 218, 1990 CarswellOnt 711, [1990] O.J. No. 635 (Ont. Div. Ct.) — referred to Roe v. Cheyenne Mountain Conference Resort Inc. (1997), 124 F.3d 1221 (U.S. C.A. 10th Cir.) — referred to Simpson v. Mair (2008), 2008 SCC 40, 2008 CarswellBC 1311, 2008 Car- swellBC 1347, 56 C.C.L.T. (3d) 1, 66 C.P.R. (4th) 121, [2008] 8 W.W.R. 195, 80 B.C.L.R. (4th) 1, 293 D.L.R. (4th) 513, 376 N.R. 80, 256 B.C.A.C. 1, 431 W.A.C. 1, [2008] R.R.A. 515, (sub nom. WIC Radio Ltd. v. Simpson) [2008] 2 S.C.R. 420, (sub nom. WIC Radio Ltd. v. Simpson) 175 C.R.R. (2d) 145, [2008] S.C.J. No. 41 (S.C.C.) — referred to 332 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

Statutes considered: Canadian Charter of Rights and Freedoms, Part I of the Constitution Act, 1982, being Schedule B to the Canada Act 1982 (U.K.), 1982, c. 11 Generally — referred to s. 2(b) — referred to Courts of Justice Act, R.S.O. 1990, c. C.43 Generally — referred to Personal Information Protection and Electronic Documents Act, S.C. 2000, c. 5 Generally — referred to s. 3 — considered s. 4(2) — considered s. 4(2)(c) — considered Privacy Act, R.S.C. 1985, c. P-21 Generally — referred to Rules considered: Rules of Civil Procedure, R.R.O. 1990, Reg. 194 Generally — referred to R. 1.04 — considered R. 21 — considered

MOTION by broadcast defendants for ruling that claim for invasion of privacy should not be put to jury.

John W. Lavers, Sarah Learmonth, H. Richard Bennett, Joseph Figliomeni, for Plaintiff Christine Lonsdale, Elder Marques, Gillian Kerr, for Defendants, CBC, O’Neill- Yates and Burgess

Graeme Mew J.:

1 Can a plaintiff who has sued a broadcaster for defamation in connection with a television programme also maintain a claim for general damages for invasion of privacy? 2 The Canadian Broadcasting Corporation (“CBC”) and two of its employees who are defendants in this action (“CBC defendants”) say that a common law claim for breach of privacy is, in the circumstances of this case, precluded by operation of the Personal Information Protection and Electronic Documents Act, S.C. 2000, c.5 (“PIPEDA”). Alternatively, they argue, to the extent that a common law tort of intrusion upon seclusion has been recognised in Ontario, its application does not extend to the publication or dissemination of information by a broadcaster. Chandra v. Canadian Broadcasting Corp. Graeme Mew J. 333

3 The evidentiary portion of the trial between these parties before me and a jury lasted for approximately ten weeks. After the parties had closed their respective cases, the CBC defendants moved for a ruling that the plaintiff’s claim for general damages for invasion of privacy should not be put to the jury. I heard argument on 16 July 2015, and, on 17 July, ruled that while the scope for a successful claim by the plaintiff for intrusion upon seclusion would be limited, I could not say that such a claim was untenable in law, or that there were no facts upon which a reasonable, properly instructed jury could base a finding that the CBC defendants had unlawfully invaded the plaintiff’s privacy. 4 My reasons for coming to that conclusion are set out below.

Background 5 Between 1974 and 2002, the plaintiff was employed as a professor and researcher in the Faculty of Medicine at Memorial University of Newfoundland (“MUN”). He became a world renowned expert in the fields of nutrition and immunology. 6 On 30 and 31 January and 1 February 2006, a news segment entitled “The Secret Life of Dr. Chandra” was broadcast on CBC television (the “Documentary”). 7 The Documentary asserted that the plaintiff had fabricated research results which were then used as the basis for published scientific studies and reports. In the broadcast, the CBC claimed to have “uncovered a pat- ent of scientific fraud and financial deception dating back to the [1980s]”. 8 In January 2012, the decision of Ontario Court of Appeal in Jones v. Tsige, 2012 ONCA 32, 108 O.R. (3d) 241 (Ont. C.A.) was handed down. The decision recognised the existence of a common law right of action for intrusion upon seclusion in Ontario. 9 On 16 November 2012, the plaintiff amended his statement of claim to include a claim for general damages for invasion of privacy in the amount of $1,000,000. 10 Particulars of the claim for invasion of privacy pleaded by the plaintiff can be summarised as follows: (a) The CBC engaged in a campaign of harassing conduct including the disclosure of embarrassing private facts alleged to be true about the plaintiff; 334 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

(b) The plaintiff’s private email communications were “secretly and surreptitiously tracked and monitored” without the plaintiff’s knowledge or consent (this was allegedly done by sending emails to the plaintiff and using software to monitor the plaintiff’s email communications and his physical whereabouts); (c) The broadcasts described very personal and private information about the plaintiff’s money matters, grants, Human Investigation Committee (“HIC”) approvals, employment, email and his divorce from his wife, all matters not in the public domain or otherwise generally known by the public. 11 The CBC defendants did not oppose the amendments to the statement of claim that introduced the plaintiff’s claim for breach of privacy. Nor did the CBC defendants bring a motion for determination before trial of the issue grounded on its submission that “the Federal Government has enacted a full and complete legislative scheme which excludes common law claims of this sort against the CBC”. 12 Setting aside the plaintiff’s procedural objections to the CBC defendants seeking to move against the invasion of privacy issue being determined at trial at such a late stage, the plaintiff points to evidence adduced at trial concerning the investigative techniques employed by the CBC as supportive of its claim for breach of privacy. The plaintiff also alleges that the CBC defendants breached the implied undertaking rule in order to be able to inform and report upon embarrassing facts about Dr. Chan- dra that were disclosed in the Documentary (as to which see: Chandra v. Canadian Broadcasting Corp., 2015 ONSC 3945, 255 A.C.W.S. (3d) 301 (Ont. S.C.J.)). 13 In short, the plaintiff asserts that there is ample evidence upon which a properly instructed jury could find that his right to privacy was violated.

Issues 14 The following issues emerge from the parties’ submissions: (a) Is the motion by the CBC defendants appropriate at this juncture, given that the CBC defendants: i. did not move for a determination before trial of the issue of whether the plaintiff could maintain a claim for breach of privacy; and Chandra v. Canadian Broadcasting Corp. Graeme Mew J. 335

ii. did not apply to nonsuit the plaintiff on this issue at the close of the plaintiff’s case at trial. (b) Has the Federal Government established a complete legislative scheme that ousts a common law breach of privacy claim against the CBC defendants? (c) Could any properly instructed jury acting judicially find for the plaintiff with respect to his claim for violation of his common law privacy rights or invasion of privacy?

Facts 15 Reference has already been made to the allegations in the amended statement of claim concerning the plaintiff’s claim for breach of privacy. 16 In the course of argument, the plaintiff also referred to evidence adduced at trial, including the following: (a) In the Documentary, the CBC disclosed the existence and contents of a preliminary report made by a four person committee (the “Kiefte Committee”) that was appointed by MUN to investigate allegations of scientific misconduct alleged to have been committed by the plaintiff. Pursuant to the framework under which the Kiefte Committee conducted its investigation, its report was to remain sealed and confidential. The CBC knew this. Indeed, the CBC tried, and failed, to obtain a copy of the Kiefte report by way of a Freedom of Information request in 1997. In the late spring of 2005, a copy of the Kiefte report was delivered to the CBC in an unmarked envelope. At no time prior to the broadcast did the CBC alert the plaintiff to the fact that it had obtained a copy of the Kiefte report. Instead, the CBC used the contents of the Kiefte report to further their investigation into the “secret” life of Dr. Chandra. (b) During its investigation, the CBC used confidential sources to track the plaintiff to Switzerland where it performed an on camera “jump” interview of him as he was on his way to have lunch with a friend. Footage from the “jump” interview formed part of the CBC’s nationwide broadcast of the Documentary. (c) The CBC used a computer software program called “Did They Read It” to monitor email communications from the CBC to Dr. Chandra and, in particular, to determine where, when, and how many times the plaintiff opened the CBC’s emails. 336 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

(d) During the course of its investigations, the CBC contacted a lawyer who represented the plaintiff’s ex-wife during their divorce proceedings and obtained from that lawyer information and documents, possibly in breach of the implied undertaking rule, which were then used by the CBC to further their investigation and which formed part of the Documentary. (e) The CBC contacted another lawyer who had represented Marilyn Harvey. Ms. Harvey previously worked with the plaintiff and there was at one time a lawsuit between her and Dr. Chandra. She was interviewed during the course of the Documentary and was also a key witness at trial. Information and documents obtained from Ms. Harvey’s lawyer, possibly in breach of the implied undertaking rule, were used by the CBC to further their investigation and formed part of the Documentary. (f) The CBC defendants made enquiries of a number of individuals in their attempt to scrutinize the plaintiff’s private financial affairs.

Procedural Concerns 17 The plaintiff observes that at no time prior to the conclusion of the evidence at trial did the CBC defendants raise the issue that the plaintiff’s claim for breach of privacy was not tenable at law. The CBC should have moved prior to trial, pursuant to Rule 21 of the Rules of Civil Pro- cedure, R.R.O. 1990, Reg. 194. Alternatively, the plaintiff asserts that the CBC defendants’ submission that “the evidence brought by the Plain- tiff, even if unquestionably accepted, cannot ground a claim for intrusion upon seclusion in the law of Ontario”, is tantamount to a motion for nonsuit. A nonsuit motion should have been brought prior to the CBC defendants adducing any evidence at trial. 18 Against this, the CBC defendants point to the gatekeeper role of the trial judge to assess the sufficiency of evidence adduced by a party and to determine whether “a reasonable trier of fact could find in the plaintiff’s favour if he or she believed the evidence given in the trial up to that point”: Sidney N. Lederman, Alan W. Bryant & Michelle K. Fuerst, Sopinka, Lederman & Bryant: The Law of Evidence in Canada, th ed. (Markham: LexisNexis Canada Inc., 2014), at para. 5.4. Chandra v. Canadian Broadcasting Corp. Graeme Mew J. 337

19 The seminal statement on this issue comes from Lord Cairns in Metropolitan Railway v. Jackson (1877), 4 L.J.Q.B. 303, 3 App. Cas. 193 (U.K. H.L.) at 197: The Judge has a certain duty to discharge, and the jurors have another and a different duty. The judge has to say whether any facts have been established by evidence from which negligence may be reasonably inferred; the jurors have to say whether, from those facts, when submitted to them, negligence ought to be inferred. It is, in my opinion, of the greatest importance in the administration of justice that the separate functions should be maintained, and should be maintained distinct. 20 The learned authors of The Law of Evidence in Canada discuss the principles established by Metropolitan Railway v. Jackson in the context of the plaintiff’s evidential burden and motions for a nonsuit in civil proceedings. They note that whereas in most provinces a motion for a nonsuit is provided for in the relevant rules of procedure, in Ontario, neither the Courts of Justice Act, R.S.O. 1990, c.C.43, nor the Rules of Civil Procedure, specifically provide for nonsuit motions. Notwithstanding this, judges have jurisdiction to entertain such motions (Lederman et al., para. 5.8). 21 In civil cases, with or without a jury, the established practice is that the defendant must elect whether or not to call evidence: Ontario v. O.P.S.E.U. (1990), 37 O.A.C. 218 (Ont. Div. Ct.), at p. 226. If the defendant elects to call evidence, the judge reserves on the nonsuit motion until the end of the case. 22 The test for nonsuit is whether there is any evidence upon which a jury, acting judicially, could find in favour of the plaintiff: Michelle Fuerst & Mary Anne Sanderson, Ontario Courtroom Procedures, 3rd ed. (Markham: LexisNexis Canada Inc., 2012) at p. 490. In jury cases, whether a defendant elects to call evidence or not, the trial judge should receive the jury’s verdict before ruling on the motion: Lederman et al., at para. 5.18. 23 The plaintiff argues that it is simply too late for the CBC defendants to wait until the defence has closed its own case before raising the issue that the breach of privacy claim is untenable in law and fact. 24 I do not accept the plaintiff’s argument that the CBC defendants’ motion should fail because it is an untimely nonsuit motion in disguise. In- deed, even if it is, the Court of Appeal has questioned whether, in this day and age, a nonsuit motion in a civil trial has much value: FL 338 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

Receivables Trust 2002-A (Administrator of) v. Cobrand Foods Ltd., 2007 ONCA 425, 85 O.R. (3d) 561 (Ont. C.A.), at para. 13. Whilst the Court of Appeal’s comment was made in connection with a non-jury case, in civil jury cases the nonsuit procedure would also seem to be largely redundant. 25 Although the CBC defendants rely on the leading authority used in nonsuit motions, their motion is of a different character. They ask the court to consider whether, as a matter of law, given the allegations pleaded and the evidence adduced at trial, the plaintiff’s claim for damages based on the tort of invasion of privacy should be put to the jury. The issue is less about whether the plaintiff has made out a prima facie case (the focus of a nonsuit motion) and more about the tenability in law of advancing such a claim given the pleaded allegations and the evidence adduced. The evidence, while perhaps not essential to the task of considering whether the plaintiff’s breach of privacy claim is tenable in law, is nevertheless helpful because it provides context that is all-important to a trial court considering the application of what is a nascent tort under On- tario law. 26 The CBC defendants could have brought a Rule 21 motion dealing with the PIPEDA issue. However, a Rule 21 motion in respect of the intrusion upon seclusion issue would have had little chance of success. The availability of a civil remedy for invasion of privacy as a distinct claim is a new one in Ontario. The law is bound to evolve and, as it does, courts will be reluctant to determine before trial, and in the absence of evidence, that such claims cannot succeed. 27 I would therefore not fault the CBC defendants for waiting. 28 Furthermore, as a practical matter, the plaintiff’s claim for invasion of privacy is very much secondary to his defamation claim, which has been the focus of the vast majority of the evidence adduced at trial. Having regard to the principles of interpretation provided for in rule 1.04 of the Rules of Civil Procedure, including that of proportionality, it made more sense in this case to defer consideration of whether the invasion of privacy claim should go to the jury until the full context of the case was known to the court, as a result of having heard all of the evidence at trial. Not only has this assisted me in exercising my gatekeeper function, it also informed the instructions which I gave to the jury on the invasion of privacy claim. Chandra v. Canadian Broadcasting Corp. Graeme Mew J. 339

Does PIPEDA establish a complete legislative scheme that ousts the common law breach of privacy claim? 29 Prior to 1 September 2007 (and therefore at the time the Documentary was broadcast) the CBC was subject to PIPEDA (since 1 September 2007 the CBC ceased to be subject PIPEDA and has instead been governed by the Privacy Act, R.S.C. 1985, c. P-21). 30 The purpose and scope of PIPEDA is laid out in s. 3 of the Act: 3. The purpose of this Part is to establish, in an era in which technol- ogy increasingly facilitates the circulation and exchange of information, rules to govern the collection, use and disclosure of personal information in an manner that recognizes the right of privacy of individuals with respect to their personal information and the need of organizations to collect, use or disclose personal information for purposes that a reasonable person would consider appropriate in the circumstances. 31 It is not contested that PIPEDA applies to all institutions subject to federal jurisdiction except those described in s. 4(2). The Act provides a process for an individual who believes there has been a violation of the Act to file a complaint with the Privacy Commissioner. Unlike the re- gime under the Privacy Act, a complainant who believes that his or her personal information has been illegally obtained remains entitled to bring the matter before the courts for further resolution (s. 14). It is open to a court to award monetary damages, including damages for any humiliation that the complainant has suffered (s. 14(c)). 32 Significantly, under s. 4(2)(c), PIPEDA does not apply to information collected or used for journalistic, artistic or literary purposes. The CBC defendants initially argued that the Privacy Act and PIPEDA were applicable to the plaintiff’s claim against the CBC defendants. However, in argument, it was tacitly conceded by counsel that it was PIPEDA which governed. 33 Under PIPEDA, upon completion of the Privacy Commissioner’s investigation, he or she issues a report containing recommendations on how to resolve the complaint. But, as already noted, the legislation specifically leaves open to a complainant the option of bringing a civil proceeding. Because of that feature, PIPEDA does not, in my view, constitute the “complete code” which the CBC defendants advocate it does. 34 The CBC defendants argue that the effect of s. 4(2)(c) of PIPEDA, which expressly provides that the Act does not apply to any information collected or used for journalistic, artistic or literary purposes, represents a 340 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

deliberate policy decision not to subject broadcasts to privacy torts in the common law. I disagree. 35 As the Court of Appeal noted in Jones v. Tsige (at para. 15), aspects of privacy have long been protected by causes of action such as breach of confidence, defamation, breach of copyright, nuisance and various property rights. 36 The CBC defendants did not, and could not, credibly, argue that the effect of PIPEDA is to insulate them from a claim in defamation based upon the use or disclosure of personal information, whether for journalistic, artistic or literary purposes, or otherwise. 37 I see no reason in logic or in principle that would justify the type of exemption the CBC defendants argue for. 38 I am reinforced in this view by the observations of the Court of Ap- peal in Jones v. Tsige concerning the effect of PIPEDA. In Jones v. Tsige, the defendant Bank of Montreal was, like the CBC, subject to PIPEDA. At para. 49, Sharpe J.A., for the Court of Appeal said: I am not persuaded that the existing legislation provides a sound basis for this court to refuse to recognize the emerging tort of intrusion upon seclusion and deny Jones a remedy. In my view, it would take a strained interpretation to infer from these statutes a legislative intent to supplant or halt the development of the common law in this area.... 39 However, as will be seen, when regard is given to the constitution- ally-protected fundamental freedom of expression, including freedom of the press and other media of communication (Canadian Charter of Rights and Freedoms, s. 2(b)) and to analogous defences available to the media defendants in defamation cases, there are necessarily limitations on the liability of media defendants to plaintiffs who claim their privacy has been violated.

Can a claim for breach of privacy lie against the CBC defendants in the circumstances of the case? 40 In Jones v. Tsige, the Court of Appeal confirmed (at para. 65) the existence of a right of action for intrusion upon seclusion. The Court described such a cause of action as “an incremental step that is consistent with the role of this court to develop common law in a manner consistent with the changing needs of society.” 41 In arriving at this conclusion, the Court of Appeal considered the right of privacy under United States law, as developed through hundreds of cases and classified by Professor Prosser (William L. Prosser, “Pri- Chandra v. Canadian Broadcasting Corp. Graeme Mew J. 341

vacy” (1960), 48 Cal. L. Rev. 383) as “not one tort, but four tied together by a common theme and name, but comprising different elements and protecting different interests” (Jones v. Tsige, at para. 18). Professor Prosser’s four-tort catalogue is summarised at page 389 of his article (as quoted at para. 18 in Jones v. Tsige): 1. Intrusion upon the plaintiff’s seclusion or solitude, or into his private affairs. 2. Public disclosure of embarrassing private facts about the plaintiff. 3. Publicity which places the plaintiff in a false light in the public eye. 4. Appropriation, for the defendant’s advantage, of the plaintiff’s name or likeness. 42 The tort that was most relevant to the facts raised in Jones v. Tsige was that of “intrusion upon seclusion”. While the Court of Appeal referred to the other three categories identified by Professor Prosser, it was not necessary on the facts of the case to decide whether those categories should also be recognised by Ontario law. 43 The plaintiff argues that it is nevertheless open to this court to further evolve the common law in Ontario to recognise as actionable the public disclosure of embarrassing private facts about the plaintiff and publicity which places the plaintiff in a false light in the public eye. 44 There may well come a time when this court is presented with a case, the circumstances of which make it appropriate to consider further expansion of the law on invasion of privacy to incorporate more of the torts catalogued by Professor Prosser. This is not, however, such a case. 45 In confining its expansion of a remedy from invasion of privacy to situations of intrusion upon seclusion, Sharpe J.A. in Jones v. Tsige noted that (at para. 21): ...As a court of law we should restrict ourselves to the particular issues posed by the facts of the case before us and not attempt to decide more than is strictly necessary to decide that case. A cause of action of any wider breadth would not only over-reach what is necessary to resolve this case, but could also amount to an unmanageable legal proposition that would, as Prosser warned, breed confusion and uncertainty. 46 As noted by the CBC defendants, in Jones v. Tsige, the Court of Ap- peal expanded the common law to respond to “the problem posed by the routine collection and aggregation of highly personal information that is 342 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

readily accessible in electronic form” and to deal with “facts that cry out for a remedy” (Jones v. Tsige, at para. 69). 47 Jones v. Tsige did not involve consideration of freedom of the press. Nor were there allegations of defamation. However, possibly anticipating a case such as the present one, Sharpe J.A. observed, at para. 73: ...claims for the protection of privacy may give rise to competing claims. Foremost are claims for the protection of freedom of expression and freedom of the press. As we are not confronted with such a competing claim here, I need not consider the issue in detail. Suffice it to say, no right to privacy can be absolute and many claims for the protection of privacy will have to be reconciled with, and even yield to, such competing claims. A useful analogy may be found in the Supreme Court of Canada’s elaboration of the common law of defamation in Grant v. Torstar, [2009] S.C.C. 61, [2009] 3 S.C.R. 640where the court held, at para. 65, that “[w]hen proper weight is given to the constitutional value of free expression on matters of public interest, the balance tips in favour of broadening the defences available to those who communicate facts it is in the public’s interest to know.” 48 The essence of the plaintiff’s claim for breach of privacy is that the CBC went beyond what the law should tolerate, even in cases of investigative journalism on matters of public interest. The result was a Docu- mentary broadcasted to a nationwide audience, containing information that might otherwise have remained private. 49 While the plaintiff’s claim as pleaded tracks the language of the second and third torts catalogued by Professor Prosser, the alleged dissemination or publication of private information already lies at the heart of the tort of defamation. On a number of recent occasions, the Supreme Court of Canada has considered, in the context of Charter values, the balancing of free expression on the one hand and the protection of reputation on the other: Hill v. Church of Scientology of Toronto, [1995] 2 S.C.R. 1130 (S.C.C.); Grant v. Torstar Corp., 2009 SCC 61, [2009] 3 S.C.R. 640 (S.C.C.); Simpson v. Mair, 2008 SCC 40, [2008] 2 S.C.R. 420 (S.C.C.). The CBC defendants submit, and I agree, that to expand the tort of invasion of privacy to include circumstances of public disclosure of embarrassing private facts about a plaintiff, would risk undermining the law of defamation as it has evolved and been pronounced by the Supreme Court. To do so would also be inconsistent with the common law’s incremental approach to change. Chandra v. Canadian Broadcasting Corp. Graeme Mew J. 343

50 The next consideration is whether the plaintiff’s allegations are, effectively, subsumed by his claim for defamation or whether he can maintain a separate claim for intrusion upon seclusion. 51 The key features of intrusion upon seclusion are set out at para. 71 of Jones v. Tsige: (a) The defendant’s conduct must be intentional or reckless; (b) The defendant must have invaded, without lawful justification, the plaintiff’s private affairs or concerns; and (c) A reasonable person would regard the invasion as highly offensive causing distress, humiliation or anguish. 52 In adopting the formulation of “intrusion upon seclusion” articulated in American Law Society, Restatement (Second) of Torts (2010) at 652B, Jones v. Tsige referred to U.S. case law indicating that the tort focuses on the act of intrusion, as opposed to dissemination or publication of information: Roe v. Cheyenne Mountain Conference Resort Inc., 124 F.3d 1221 (U.S. C.A. 10th Cir. 1997), at p. 1236. 53 The fact that the allegations made by the plaintiff against the CBC defendants arise in the context of those defendants’ purported journalistic activities and purposes does not, in my view, necessarily preclude an action against them for invasion of privacy. However, as already noted, journalistic activities and practices lie at the heart of claims for the protection of freedom of expression and freedom of the press and, as a result, claims for the protection of privacy have to be reconciled with, and even yield to, competing claims for protection of freedom of expression and freedom of the press. 54 The plaintiff’s claims arise in connection with a broadcast that all parties have conceded deals with matters of public interest. Specifically, the plaintiff’s claim for breach of privacy focuses on what are described as the CBC defendants’ “investigative techniques”. The plaintiff attempts to distinguish between the words used in the broadcast, which are the subject of the plaintiff’s concurrent claim for defamation, and the actions of the CBC defendants which preceded and, to some extent, succeeded the broadcast. 55 In relation to the defamation claim, the CBC defendants have pleaded, inter alia, the defences of fair comment and responsible communication. 56 A defence of fair comment will fail if the plaintiff can establish that the comment was primarily motivated by malice. 344 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

57 Similarly, a defendant who acted with malice in publishing defama- tory allegations will not have acted responsibly and, hence, will not be able to avail itself of the responsible communication defence. 58 The development of the law of defamation, and in particular, the effi- cacy of the defences of fair comment or responsible communication, would be significantly undermined if a plaintiff was able to avoid its ef- fects by establishing in the alternative, on the basis of the same or related facts, a breach by the defendants of the plaintiff’s right to be free from intrusion upon seclusion. 59 The effect of the comments at para. 73 of Jones v. Tsige (no right to privacy can be absolute), and para. 98 of Grant v. Torstar Corp. (which summarises the responsible communication defence), is that the collection of otherwise private information for journalistic purposes, absent malice on the part of the defendant, is lawful. Because a successful claim for intrusion upon seclusion must be pinned on conduct that is unlawful, the plaintiff cannot advance a claim for intrusion upon seclusion in circumstances analogous to those in which a media defendant can establish fair comment or responsible communication. 60 Conversely, if the plaintiff can establish that the CBC defendants have invaded the plaintiff’s private affairs or concerns without lawful justification, it follows that even media defendants would remain potentially liable to a claim of intrusion upon seclusion. 61 Assuming the plaintiff can overcome the hurdle of showing that the invasion of his private affairs or concerns was without lawful justification, he must still establish that the defendant’s conduct was intentional or reckless and that a reasonable person would regard the invasion as highly offensive causing distress, humiliation or anguish. 62 In my view it cannot be said, based on what the plaintiff has pleaded and upon the evidence that has been given during the course of nine weeks of testimony, that it would not be open to the jury to make findings of fact upon which a reasonable, properly instructed jury could base a conclusion that the CBC defendants unlawfully invaded the plaintiff’s privacy. But the scope for a successful claim by the plaintiff will necessarily be limited. 63 Accordingly, the issue of whether the CBC defendants intruded upon the seclusion of the plaintiff will be put to the jury but with instructions that reflect the foregoing analysis. Chandra v. Canadian Broadcasting Corp. Graeme Mew J. 345

Jury Instruction 64 Because the tort of invasion for privacy has only recently been recognised in Ontario law, there is relatively little guidance on how a jury called upon to consider such a claim should be instructed. It may, therefore, be of assistance to other litigants and trial judges to consider the instructions which I provided to the jury concerning the invasion of privacy claim (see the Appendix to these reasons - footnote reference added). Motion dismissed.

Appendix Invasion of Privacy Question 8. Did the CBC defendants (either individually or collectively) intentionally intrude, physically or otherwise, upon the seclusion of Dr. Chandra, his private affairs or concerns in a way that would be highly offensive to a reasonable person? Yes ______No ______For the purposes of this lawsuit, what is meant by invasion of privacy is “intrusion upon seclusion”. One who intentionally intrudes, physically or otherwise, upon the seclusion of another or his or her private affairs or concerns, is subject to liability to the other for invasion of his or her privacy, if the invasion would be highly offensive to a reasonable person. The key features of intrusion upon seclusion are: a. the defendant’s conduct must be intentional or reckless; b. the defendant must have invaded, without lawful justification, the plaintiff’s private affairs or concerns; and c. a reasonable person would regard the invasion as highly offensive causing distress, humiliation or anguish. The allegations made by Dr. Chandra against the CBC defendants arise in the context of those defendants’ purported journalistic activities and purposes. Responsible journalistic activities and practices lie at the heart of claims for the protection of freedom of expression and freedom of the press. There is inevitably a balancing exercise when claims for the protection of privacy are considered alongside freedom of expression and freedom of the press. 346 CANADIAN CASES ON THE LAW OF TORTS 24 C.C.L.T. (4th)

In this case, Dr. Chandra’s claims arise in connection with a broadcast which all parties have conceded deals with matters of public interest. However, Dr. Chandra’s invasion of privacy claim extends beyond the words used in the broadcast (which are properly the subject of his defamation claim) and address, too, what are described as the CBC defendants’ “investigative techniques”. Mr. Lavers may have left you with the impression that the CBC’s use of a confidential report or of other confidential sources is an actionable intrusion upon seclusion. It is not. Absent evidence of any illegal acts on the part of the CBC, the law recognises that journalists are not automati- cally subject to the same legal constraints and obligations imposed on their sources.1 History is replete with examples of sources willing to act as whistleblowers who breach legal obligations they owe in the course of providing information to the media. But unless it would breach a higher order public interest for a journalist or broadcaster to disseminate such information, which is not the case here, there is no impropriety and, it follows, any intrusion into another’s seclusion which results is not unlawful. To the extent that you may have taken from Mr. Lavers’ submissions the notion that the use of email software by the CBC played a part in locat- ing Dr. Chandra in Switzerland, there was no such evidence. The evidence is that the software concerned was deployed after Dr. Chandra was interviewed in Switzerland. You heard evidence and submissions about what was done, and why, in that regard. Similarly you were asked how you would feel if you were on the receiving end of the email tracking software or had your personal financial information flashed on a TV screen. That is not the test you are to apply. You are required to put yourself in the position of the reasonable person — which is not to suggest that any of you are not reasonable — and to ask yourself whether the intrusion upon Dr. Chandra’s seclusion was highly offensive causing him distress, humiliation or anguish. If you conclude that the actions of the CBC did not breach any laws, were not actuated by malice, or did not fall outside the scope of responsible communication, there would be no basis upon which you can find the CBC defendants liable for invasion of privacy. As to what constitutes

1 Globe & Mail c. Canada (Procureur g´en´eral), 2010 SCC 41, [2010] 2 S.C.R. 592 (S.C.C.) at 639, at para. 84. Chandra v. Canadian Broadcasting Corp. Graeme Mew J. 347 malice and responsible communication, you should apply the same considerations that pertain to the defences of fair comment and responsible communication described by me earlier in relation to the defamation claim. If you have considered those questions (4 and 5) and have concluded that the defence of responsible communication should succeed, then you should answer “No” to question 8, since it would be inconsistent with the recognition of the place of responsible communication in the balancing exercise that I mentioned just now if a journalist whose actions benefit from the protection of that defence in a defamation claim were to remain exposed to a claim for invasion of privacy arising from her journalistic activities. Put another way, the prerequisite that there must be no lawful justification for the invasion of a person’s private affairs or concerns will be hard, if not impossible, to satisfy if there has been a finding that such an invasion occurred during the course of responsible journalistic activities. If, however, you conclude that the CBC defendants’ intentionally or recklessly invaded Dr. Chandra’s private affairs or concerns without lawful justification and that a reasonable person would regard the invasion as highly offensive causing distress, humiliation or anguish, then you should find in Dr. Chandra’s favour.