Deloitte & Touche v Livent Inc (Receiver of), 2017 SCC 63 is a leading case of the Supreme Court of Canada concerning the duty of care that auditors have toward their clients during the course of a professional engagement.

In 1998, Livent's financial statements for the 1996 and 1997 fiscal years were restated, resulting in a significant downward adjustment of reported income, and its share value fell from USD $6.75 to $0.28 per share.^[2] This resulted in numerous criminal, civil, regulatory and disciplinary proceedings in both Canada and the US.^{[2][lower-alpha 1]}

After Livent sought bankruptcy protection under the Companies' Creditors Arrangement Act in November 1998, it was subsequently placed into receivership in September 1999, with Ernst & Young being appointed as receiver and manager.^[4] In November 2001, a special receiver was appointed by the court with respect to any potential legal action against Deloitte, Livent's former auditor, and such action was commenced in February 2002, alleging that "Deloitte owed a duty to ensure that Livent’s financial statements were reported in accordance with its own accounting policies and generally accepted accounting principles,"^[5] which, if followed, would have revealed the extent of fraudulent activity that had been occurring within the company.^[6] It was further alleged that "[i]ts alleged negligent issuance of unqualified opinions, in turn, deprived the honest directors and shareholders of the opportunity to put a stop to the fraud, and the losses eventually caused to the company by the fraud, at an earlier date."^[7]

In a 4-3 ruling, the appeal was allowed in part, and Livent was awarded for costs throughout. For the majority, Gascon and Brown JJ held that the framework established in Anns v Merton LBC^{[na 4]} and Cooper v Hobart^{[na 5]} served to identify whether a duty of care existed, and that the Court's previous decision in Hercules Managements Ltd^{[lower-alpha 6]} had already established where liability may exist in the context of a statutory audit. Accordingly, Deloitte was liable for negligence only with respect to Livent's 1997 audit, and damages were reduced from $84,750,000 to $40,425,000. A several-stage analysis is required in order to properly determine whether liability arises:

• While Hercules stands for the general proposition that an auditor may owe its client a duty of care in relation to a particular undertaking, it is the Anns/Cooper framework that identifies a principled basis for imposing liability.^[25]
• In Stage 1, foreseeability alone is not enough to establish a prima facie duty of care - it is also necessary to establish proximity;^[26] therefore, in the prima facie duty of care analysis:

• proximity entails asking whether the parties are in such a "close and direct" relationship that it would be "just and fair having regard to that relationship to impose a duty of care in law"^[27]
• reasonable foreseeability entails asking whether an injury to the plaintiff was a reasonably foreseeable consequence of the defendant’s negligence^[28]

• In Stage 2, where a prima facie duty of care is recognized on the basis of proximity and reasonable foreseeability, the question then becomes whether there are "residual policy considerations" outside the relationship of the parties that may negate the imposition of a duty of care^[29]

• In that regard, indeterminate liability is liability of a specific character, not of a specific amount, and it is only a residual policy consideration^[30]

Applied to the case at hand, Deloitte’s undertakings in relation to soliciting investment, and the 1997 Audit, gave rise to proximate relationships,^[31] but the increase in Livent’s liquidation deficit which arose from its reliance on the Press Release and Comfort Letter connected with the first undertaking was not a reasonably foreseeable injury.^[32] However, the injury that arose to Livent from the negligent handling of the 1997 audit was reasonably foreseeable, and there was no basis in distinguishing this case from the facts that arose in Hercules.^[33]

In response to McLachlin CJ's assertion that, while the above framework for analysis was conceptually correct, residual policy considerations would have also defeated Livent's claim in this case,^[34] the majority declared:

• The character of indeterminacy has temporal, claimant and value aspects, none of which arise here.^[35]
• A remoteness analysis^[36] does not apply, as the duty analysis is concerned with the type of injury that is reasonably foreseeable as flowing from the defendant’s conduct, whereas the remoteness analysis is concerned with the reasonable foreseeability of the actual injury suffered by the plaintiff.^[37] However, Livent's loss was reasonably foreseeable.^[38]
• The "SAAMCO principle"^{[na 6]} does not apply in the present case, as "the shareholders’ capacity to oversee the conduct of Livent’s business was entirely dependent upon the statutory audit preceding that oversight."^[39]

While Canadian Dredge remains authoritative as to the application of the doctrine of corporate identification, its principles provide a sufficient basis to find that the actions of a directing mind be attributed to a corporation, not a necessary one, and, where its application would render meaningless the very purpose for which a duty of care was recognized, such application will rarely be in the public interest.^[40]

As to the question of contributory negligence, the Negligence Act in Ontario^[41] requires that a plaintiff’s fault be factored into the apportionment of damages. However, corporate identification is a prerequisite to the plaintiff, Livent, being at fault. Therefore, the Act only makes contribution by a negligent plaintiff mandatory; it does not make attribution of negligence to a plaintiff mandatory.^[42]

As the SCC held in Hercules, "if an action is to be brought [against an auditor] in respect of such losses, it must be brought either by the corporation itself (through management) or by way of a derivative action."^[43] The case was notable in that it was initiated by Livent's bondholders, who were not in a position to sue directly but did finance the special receiver (acting on behalf of the corporation), whose litigation will enable them to receive a large part of the award.^[44] The win proves that this indirect route can succeed, but it will most likely benefit creditors more than shareholders.^[44] While Hercules expressed concern about the effect of indeterminate liability upon an auditor's duty of care, Livent found that it was not of sufficient concern, as well as declaring that auditors are no longer insulated from liability on the basis of policy concerns.^[45]

The SCC also observed that "the liability that could attach to one year’s negligent audit could not extend beyond the following year’s audit,"^[46] which has been observed to be a significant finding in limiting potential liability.^[47]

The SCC's holding that a proximate relationship will preclude indeterminate liability in any event, in the context of a statutory audit, has been observed to be a key development in Canadian jurisprudence.^[48] Such jurisprudence was already developing, and at least one other ruling, in similar circumstances and with similar effect, was already made in a summary judgment in Ontario, even before the SCC handed down its judgment.^[49]

There are still uncertainties as to the extent to which the decision will affect the dynamics and details of the audit process.^[50] The Capital Markets Institute of the Rotman School of Management at the University of Toronto hosted a panel in January 2018 to assess the implications of the decision for auditor responsibility, governance and Canadian public corporations.^[51][52] It is quite likely that audit firms will face greater insurance premiums as a result of their now-higher risk exposure, which will thus result in debate as to how that risk should be allocated (with likely cascading down into higher audit fees to be charged to all clients).^[53]

Jurisprudence in this matter is mixed within the various members of the British Commonwealth. The Commercial Court of England and Wales stated in January 2019 that it did "not consider the Livent decision to be of any real assistance in identifying the scope of the duty of an auditor under English law, or as to the circumstances in which legal causation will be established. It appears from a consideration of the majority judgment that the approach to scope of duty in Canadian law is not identical to that in English law as it stands today,^{[lower-alpha 7]} nor does there appear to have been any detailed analysis of the correlation or otherwise between the auditors' negligence and the particular losses claimed, which also involves a consideration of what reliance there was (on which the majority and the Chief Justice differed as to the existence of any such reliance)."^{[na 7]}

• Ellis, Colin (December 20, 2017). "Supreme Court decision sets legal framework for establishing audit liability, virtual guarantor". Canadian Accountant.
• MacKinnon, Leslie (December 20, 2017). "Deloitte financially liable for negligent Livent audit, top court finds". iPolitics.