Summary

36875

Deloitte & Touche v. Livent Inc., Through its Special Receiver and Manager Roman Doroniuk

(Ontario) (Civil) (By Leave)

Keywords

Law of professions - Professional liability.

Summary

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Law of Professions – Professional liability – Auditors – Duty of care owed by auditor to corporate client – Publicly traded company discovers accounting irregularities in financial records — Company’s principals convicted for fraud and company placed into receivership – Company’s receiver commences action against auditor – Whether misconduct of company’s directing minds disentitles company from damages – Whether auditor’s duty of care extends beyond limits set out in Hercules Managements Ltd. v Ernst & Young, [1997] 2 SCR 165 – Whether auditor’s duty of care includes duty to resign –Application of principles of corporate identification and defence of ex turpi causa – Whether damages should be awarded based on theory of prolonged corporate life or deepening insolvency?

Livent Inc. was a publicly traded company. In 1998, new management discovered serious accounting irregularities in its financial records and restated its revenues and expenses. Trading in Livent shares was suspended. Livent’s founders were convicted for fraud. Class actions were commenced against Livent. Livent was placed into receivership. Deloitte & Touche, now Deloitte LLP., was Livent’s auditor between 1989 and 1998. Deloitte prepared year-end financial statements and financial statements for seven share offerings and private placements. In 2001, Livent, through its receiver, commenced an action against Deloitte alleging that its audits between 1992 and 1998 did not meet generally accepted auditing standards. Livent alleged Deloitte was negligent in failing to detect the fraud and Deloitte’s negligence caused it to realize a value on its assets upon liquidation less than it would have realised had Deloitte discovered and disclosed the fraud. The trial judge found Deloitte negligent in respect to some of its audits and awarded Livent $84,750,000 in damages. The Court of Appeal dismissed an appeal and a cross-appeal.