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On December 20, 2017, the Supreme Court of Canada (SCC) released its long-awaited decision in Deloitte & Touche v. Livent Inc. (Receiver of) (Livent),1 which addressed the issue of the auditor's liability for failing to detect a fraud perpetrated by the directing minds of Livent Inc. (Livent). The seven-member panel was unanimous that the defendant auditor was not liable to the company for work performed in connection with a public offering - a result that drastically reduced the damages awarded. However, the panel split four to three on the question of whether the auditor was liable to the company for damages in connection with a negligent audit. The SCC reviewed the leading precedents relating to recovery for pure economic loss in the context of professional negligence. Arguably, the Court merely reaffirmed and did not alter the basic analytic framework for determining the liability of auditors or other professional service providers. The majority and minority of the SCC disagreed over the sufficiency of evidence of detrimental reliance to support the existence of a duty of care and causation. The SCC did not accept an argument advanced by the defendant auditor that the receiver could not stand in the shoes of the company for the purpose of advancing the claims. It also found that the defence of contributory negligence was unavailable in the circumstances. The extent to which the Livent decision will affect corporate Canada's relationship with its auditors remains to be seen; however, it could result in a reassessment of retainer terms and increased audit fees.
1.BACKGROUND
Livent was a theatre production company that filed for insolvency protection in 1998 after the discovery of an accounting fraud that resulted in the restatement of the company's financial statements. The defendant auditor became aware of certain red flags, but did not uncover the fraud. Livent went into receivership and the receiver sued the auditor for the liquidity deficit that arose during the seven months that elapsed between the point in time when it argued the auditor should have resigned and the insolvency. The receiver argued that, but for the auditor's negligence, the company's life would not have been "artificially extended" and it would have suffered fewer losses during this period. Two mandates were at issue: work the...