The Liability of Auditors beyond Their
Clients: A Comparative Study
Lara Khoury’
the
functions during
The constant evolution of the importance of
auditors’
twentieth century
brought with it considerable scholarship on their re-
sponsibility. Indeed, confronted with the insolvency of
a company in which they have invested, shareholders,
investors, and offerors increasingly seek to recover
their economic loss from auditors who, solvent and in-
sured, were negligent in auditing the financial state-
ments of the company in question. Accordingly, the
study of the liability of an auditor towards third parties
has a growing importance. In this article the author
analyzes comparatively auditors’
liability under the
common law of England and Canada and under the
civil law of France and Quebec. Specifically, she at-
tempts to show how courts use the duty of care in the
common law and causality in the civil law to limit this
liability. Furthermore, she pays particular attention to
the influence of Canadian, English, and French law on
the law of Quebec. The author not only delineates this
influence, but also comments on the extent to which the
law of Quebec may legitimately take inspiration from
the English and Canadian common law and the civil
law of France in the area of auditors’ liability to third
parties.
situation
rend
l’nud
do
L’dvolution
coastante de
l’impcrtance des
fonctions du vdrificateur comptable a entralna durant le
XX sikcle une recherche accme de sa responsabilitd.
En effet, face A l’insolvabilitd de la compagnie dans
laquelle is ont investi, les aectionnairs les irvestisseurs
et les pollicitants cherchent d plus en plus h recouvrer
leur dommage 6conomique aupr~s du vrificateur
comptable, solvable et assurd, ayant did ngligent dans
la vrification des dtats financiers de la comp3gnie cn
question. Cette
a
responsabiitd des vificateurs comptables envers les
tiers d’un int at grandissant. Dans le prdsent tet,
l’auteure analyse de fa;on comparative les ragles
rdgissant cette demisre en common law anglaise et
frantais et
canadienne, ainsi qu’en droit civil
quab6cois. Plus prcisAment. cie entreprend do
d~montrer comment les concepts de duiy of care en
common law, et de causalitd en droit civil, ont dti
utisds par
limiter cette
responsabilit& De plus, une attention particuli e est
porte a
juridictions
canadienne, anglaise et franaise sur le droit qui.bois
dans ce domaine. L’auteure tente non seulement d
dcrire cette influence, mais dgalement de se prononcer
quant 4 l’inspiration que Ie droit qudb&ois pout
lgitimement tirer de la common law canatdienne et
anglaise et du droit civil frangais dans Ie dmaino d. Ia
responsabilitd des v&ificateurs envers les tiers.
l’influence du droit des
tribunaux arm de
les
. LTB. (Sherbrooke); B.CJL. (Oxon.); candidate to the D.Phil. degree at the University of Oxford;
Boulton Junior Research Fellow, Faculty of Law, McGill University; Lecturer, Faculty of Law, Uni-
versity of Sherbrooke. This article is based on the text of a thesis submitted in partial fulfillment of the
requirement for the B.CL. at Oxford. The author wishes to thank Dt Simon Whittaker, Professor
Suzanne Philips-Nootens, and M Colin West for their helpful comments on an earlier version of this
text.
McGill Law Journal 2001
Revue de droit de McGill 2001
To be cited as: (2001) 46 McGill LJ. 413
Mode de rf6rence: (2001) 46 RD. McGill 413
414
MCGILL LAw JOURNAL / REVUE DE DROIT DE MCGILL
[Vol. 46
Introduction
1. Auditing: A Profession in Context
A. The General Role of Auditors
B. Professional Organization of the Auditing Profession
1. The English and Canadian Professional Organization
2. The French Commissariat aux Comptes
C. Statutory Context
1. The Conduct of an Audit in England and Canada
2. The Certification of Accounts by the Commissaire aux Comptes
II. The Common Law
A. Duty of Care and Pure Economic Loss in the Law of Negligence
B. Auditors’Liability towards Third Parties in England and Canada
1. The Search for a Test
a. England
i. The Existence of a Duty of Care
ii. The Restriction on the Scope of the Duty of Care
b. Canada
i. Haig v. Bamford The Incorporation of Hedley Byrne
ii. Hercules* The Reign of Anns
2. Knowledge of the Plaintiff and the Contemplated Transaction
a. The Scope of the Limited Class
b. The Scope of the Transaction
3. The Reliance/Reasonable Reliance Requirement
4. Policy Considerations
C. Conclusion
I1l. The Civil Law
A. France and Quebec: The Juridical Context
1. Quebec: Tensions and Influences in a Mixed System
2. Responsabilit6 Civile: General Features
a. General Principle of Liability
b. The Causation Requirement
i. The Efforts of the Theorists and the Subjectivity of the
Courts
ii. The Problem of the Victime par Ricochet
c. Pure Economic Loss
B. The Liability of the Comissaire aux Comptes towards Third Parties
1. Assessment of Causation
2. Causation as a Restrictive Tool
3. Similarities with the Common Law
2001]
L. KHOURY- AUDITORS’LIABILITY
415
C. The Quebec Auditor and Third Parties
1. The Existence of the Causal Link
2. Causation as a Restrictive Tool
3. The Influence of the Common Law
D. Conclusion
IV. Quebec: At the Border of Civil Law and Common Law
A. The Restrictive Approach
B. The Use of Common Law Concepts
1. Reasonable Reliance
2. Foreseeability of Reliance and Knowledge of the Plaintiff and the
Purpose of the Financial Statements
3. Policy Considerations
C. Causation as a Sufficient Limiting Device
Conclusion
416
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Introduction
Over the last hundred years, the accounting profession has evolved greatly. Mod-
em accountants, once only bookkeepers, have gradually been attributed a large range
of responsibilities. They now not only prepare, investigate, and audit accounts, but
also perform important advisory, reporting, investigatory, regulatory, and administra-
tive functions.’ This new diversity in their functions exposes them to a greater risk of
liability towards a larger range of people:
The increasing growth and changing role of corporations in modem society has
been attended by a new perception of the societal role of the profession of ac-
counting. The day when the accountant served only the owner-manager of a
company and was answerable to him alone has passed. The complexities of
modem industry combined with the effects of specialization, the impact of
taxation, urbanisation, the separation of ownership from management, the rise
of professional corporate managers, and a host of other factors, have led to
marked changes in the role and responsibilities of the accountant, and in the re-
liance which the public must place upon his work. The financial statements of
the corporations upon which he reports can affect the economic interests of the
general public as well as of the shareholders and potential shareholders.!
Hence, the question of auditors’ liability towards persons other than their clients’
has assumed great practical importance. Following the collapse of a company, third
parties frequently attempt to recover their losses from a solvent and insured auditor.
Faced with such claims, the common and civil law courts had to struggle between two
conflicting interests: the public’s interest in the independent and competent review of
financial statements and the interest of the auditing profession in carrying out its
function without the burden of a potentially overwhelming liability. The following
comparative analysis examines the nature of the different conceptual devices by
which the common law courts of England and Canada and the civil law courts of
France have attempted to balance these interests and to keep auditors’ third party li-
ability within proper boundaries. Attention is also given to the Canadian province of
Quebec, which is of particular interest by reason of the influence of the common law
on its civil law system. Ultimately, this comparative analysis will attempt to provide
proper guidelines for dealing with the question of auditors’ liability towards third par-
ties in the legal system of Quebec.
‘ R.M. Jackson & J.L. Powell, Professional Negligence, 4th ed. (London: Sweet & Maxwell, 1997)
‘Haig v. Bamford (1976), [1977] 1 S.C.R. 466 at 475-76, 72 D.L.R. (3d) 68 [hereinafter Haig cited
at 804.
to S.C.R.].
‘ The word “client” is not meant to have a contractual connotation, but rather refers to an audited
person or company.
2001]
L. KHOURY – AUDIToRs’ LIABILTY
I. Auditing: A Profession in Context
At first sight it may appear futile to undertake a comparative analysis of legal
systems that evolve in different social, cultural, and economic contexts. Such an exer-
cise can nevertheless be useful, not only in providing a better understanding of one’s
own legal system, but also as a “theatre of observation” permitting one, through ex-
amination of how other legal systems at a comparable stage of social and economic
development have dealt with similar problems, to find one’s “own paths through ‘the
forest’:7 One must, however, avoid engaging in such a comparative venture without a
clearer understanding of the context in which each system has evolved. It would, con-
sequently, be ill-advised to undertake the present study without painting a broader
picture of the professional and regulatory context in which auditing is carried out in
the four jurisdictions studied. The following section therefore considers the organiza-
tion of the auditing profession, as well as the different aspects of the conduct of audits
in these four legal systems.
A. The General Role of Auditors
The content of auditors’ duties varies from one jurisdiction studied to another.
There is, however, one substantial role that is central to all auditors: the controlr of a
company’s financial statements and reporting to its shareholders, directors, and offi-
6
cers.
Auditors’ control over a company’s financial statements is traditionally viewed as
having a dual aim. First, it enables the company’s directors and officers to ensure that
they can safely rely on the financial statements in taking managerial decisions. In ad-
dition, the financial statements’ accuracy and reliability are key to the shareholders’
ability to evaluate the strengths and weaknesses of the enterprise, to assess whether
the corporation is managed with competence and honesty, and to make informed in-
” J.P Dawson, cited in MA. Glendon, M.W. Gordon & C. Osakwe, Comparative Legal Traditions
(St. Paul, Mlnn: West Publishing Company, 1994) at 10.
‘ This broad word is used here since the nature of auditors’ control varies in each jurisdiction.
6 See Jackson & Powell, supra note 1 at 809; Caparo Industries v. Dicdanan, [1990] 2 A.C 605 at
660, [1990] 1 All E.R. 568 (ILL.) [hereinafter Caparo cited to A.C.]; . lacobucc1 M.- Pill-ington &
J.S. Prichard, Canadian Business Corporations (Agincourt- Canada Law Book, 1977) at 403; JAI.
Morin, ‘Aspects de la responsabilit du commissaire aux comptes” (1996) Affiches Parisiennes 18 at
18; 1. Mon~ger & T. Granier, Le conunissariat attr comptes (Paris: Dalloz, 1995) at 17; Y. Guyon,
Droit des affaires, 8th ed. (Paris: Economica, 1994) at 369; Y. Guyon & G. Coquereau, Le commis-
sariat aux comptes: aspectsjuridiques et techniques (Paris: Litec, 1971) at 277; Compagnie Nationale
des Commissaires aux Comptes, La responsabilild civile du conunissaire artr coamptes (Paris: Ency-
clop&lie d’&udes juridiques, 1995) at 8; Guardian Insurance Company of Canada v. Sharp, [1941]
S.CYR 164 at 169, [1941] 2 D.L.1R. 417 [hereinafter Guardian cited to S.C.R].
418
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vestment decisions.! Second, full and accurate disclosure is essential to third parties
who might have access to, and rely on, the company’s reports in making financial de-
cisions. Prospective purchasers of shares, potential investors, banks, suppliers, sure-
ties, lenders, and public authorities have a substantial interest in the auditors’ work,
since it is very often the only objective and independent source of information avail-
able to them.
B. Professional Organization of the Auditing Profession
At the outset, it must be observed that the similarities between the English and
Canadian professional and statutory contexts justify a joint treatment of these two ju-
risdictions. Moreover, in Canada, these contexts have been harmonized to such an
extent that dissimilarities between the provinces are usually minor.’ The different
background in which French auditors perform their duties, however, necessitates a
distinct analysis.
1. The English and Canadian Professional Organization9
In England and Canada, the conduct of audits is generally reserved to members of
specific professional accounting bodies. These bodies are created by law to ensure the
protection of the public and the integrity of the profession and to regulate some as-
pects of the exercise of the profession. The English Companies Act 1989″ provides
that a company’s auditor must be a member of a Recognised Supervisory Body” and
‘On this dual aim, see Caparo, ibid. at 630, Lord Oliver.
‘ Abbyad et al., La vdrification. Une approche intdgrde (Gatan Morin, 1994) at 98. The Consttnt-
tion Act, 1867 (U.K.), 30 & 31 Vict., c. 3, s. 92(13), reprinted in R.S.C. 1985, App. II, No. 5, grants to
the provinces the competence for the regulation of professions. See PW. Hogg, Constitutional Law of
Canada, looseleaf, vol. 1 (Scarborough: Carswell, 1997) at 21-6. Each province has enacted its own
statutes governing the accounting and auditing professions and created its own professional bodies,
but the existence of a national professional body, the Canadian Institute of Chartered Accountants
[hereinafter CICA], has greatly contributed to the harmonization of the profession across the country.
9 The statutes of seven Canadian provinces are studied, namely those of Alberta, British Columbia,
Manitoba, New Brunswick, Nova Scotia, Ontario, and Quebec.
(‘ (U.K.), 1989, c. 40 [hereinafter CA 1989]. The CA 1989 implemented a new system to conform
with the EU’s Eighth Company Law Directive on the regulation of auditors. See S.W, Mason, D.
French & C. Ryan, French & Ryan on Company Law, 14th ed. (London: Blackstone Press, 1997-98)
at 521; J. Birds et al., Boyle & Birds’Company Law, 3d ed. (Bristol: Jordans, 1995) at 402.
” This category includes the Institute of Chartered Accountants in England and Wales [hereinafter
ICAEW], the Institute of Chartered Accountants of Scotland, the Chartered Association of Certified
Accountants, the Institute of Chartered Accountants in Ireland, and the Association of Authorised
Public Accountants.
2001]
L. KHOURY- AUDITORS’LIABILITY
419
be eligible for appointment under the rules of that body.” Auditors must also hold ap-
propriate qualifications,” usually granted by Recognised Qualifying Bodies.” In Can-
ada, the auditing practice is also reserved to specific professionals, who are usually
Chartered Accountants.’ In some provinces, however, other accountants'” as well as
non-accountants”‘ can also perform audits.
Auditors must have professional insurance” and can exercise their functions indi-
vidually or in partnership.’9 Additionally, since the adoption of the CA 1989, English
2 CA 1989, supra note 10, ss. 25, 30, Sch. 11, para. 4. On eligibility, see Mason, French & Ryan.
supra note 10 at 521-22; G. Morse, Charlesworth & Morse Company Lm, 15thed. (London: Sweet
& Maxwell, 1995) at 555-63; Birds etaL, supra note 10 at 402.
‘3 CA 1989, ibid, ss. 31-34, Sch. 11-2.
“Supra note 11, with the exception of the Association of Authorised Public Accountants.
See e-g. Chartered Accountants Act, R.S.Q. c. C-48, ss. 2, 19, 24 [herednafter QCAA]; Profes-
sional Code, R.S.Q. c. C-26, s. 32; Code of Ethics of Chartered Accountants, R.R.Q. 1981, c. C-48,
r. 2, s. 1.01(d) [hereinafter QCE]. In Quebec other accountants are allowed to undertake audits in lim-
ited cases (QCAA, ibid., ss. 24,27-28).
16 See Company Act, R.S.B.C. 1996, c. 62, s. 180 [hereinafter BCCA]; Public Accountancy Act,
1RS.O. 1990, c. P.37, ss. 7, 14(1), 24(1) [hereinafter OPAA].
‘” In Alberta it is not required to be an accountant unless the audit is intended to be relied on by a
third party (Certified Management Accountants Act, S.A 1987, c. C-3.8, s. 2(1) [hereinafterACMAA];
Chartered Accountants Act, S.A. 1987, c. C-5.1, s. 2(l) [hereinafter ACAA]; Certified General Ac-
countants Act, S.A. 1987, c. C-3.6, s. 2(1) [hereinafter ACGAA]). See also B. Welling, Corporate Law
in Canada.- The Governing Principles, 2d ed. (Toronto: Buttervorths, 1991) at 595.
” See England: ICAEWs Professional Indemnity Insurance Regulations, The ICAEW Members
Handbook 1995, vol. 1, 1309,341; Canada: Bylvs, s. 251, online: Institute of Chartered Accountants
online: Institute of Chartered Accountants of Ontario
Regulation, online: The Institute of Chartered Accountants of Ontario
duct, online: The Institute of Chartered Accountants of Ontario
Chartered Accountants Act, 1956, S.O. 1956, c. 7, s. 8 [hereinafter OCAA]; Bylau’s and Regulations, s.
701, online: The Institute of Chartered Accountants of Manitoba
ability Insurance) Regulation, R.R.Q. e. C-48, r. 1.1.
” See England: CA 1989, supra note 10, s. 26; Canada: Canada Business Corporations Act, &S.C.
1985, c. C-44, s. 2(1) [hereinafter CBCA]; Business Corporations Act, S.A. 1981, c. B-15, s. 1(I)(c.l)
[hereinafter ABCA]; BCCA, supra note 16, ss. 1(1); Corporations Act, R.S.M. 1987, c. C-225, s. 1(1)
[hereinafter MCA]; Business Corporations Act, N.BA 1981, c. B-9.1, s. 1(1) [hereinafterNBBCA];
Companies Act, R.S.N.S. 1989, c. 81, s. 2(1)(aa), as am. by Business Eficiency (1998) Act, S.N.S.
1998, c. 8, ss. 16-21 [hereinafter NSCA]; Business Corporations Act, R.S.O. 1990, c. B.16, s. 1(1)
[hereinafter OBCA]; QCE, supra note 15, s. 1.01(b).
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auditors can also carry out their business by forming a body corporate.”0 The same ap-
plies to auditors in Alberta,’ British Columbia,’ New Brunswick, ‘ and Nova Scotia. ‘
Moreover, recent developments now allow accountants of England, Ontario, and Al-
berta to carry on their practice through a “limited liability partnership”.”
2. The French Commissariat aux Comptes
In France, the organization of the auditing profession, as well as the carrying out
of the certification of financial documents, is strictly regulated by an important legal
body constituted by the Loi n’ 66-537 du 24 juillet 1966 sur les socidts commercia-
les? and other statutes,’ ddcrets,’ and ordonnances.’
Only one type of independent professional is entitled to carry out certification, the
conmissaire aux compte? registered with the Commission of Inscription.” Any per-
o See CA 1989, ibid., s. 53(1).
21 See ACMAA, supra note 17, s. 2(1); ACAA, supra note 17; ACGAA, supra note 17.
” See BCCA, supra note 16, s. 180. Only in British Columbia does this incorporation carry with it
limited liability in respect of professional liability claims. In other provinces this is either forbidden
directly (Public Accountants Act, R.S.N.S. 1989, c. 369, as am. by S.N.S. 1994, c. 30, s. 22A [herein-
after NSPAA]), or indirectly by provisions precluding accountants from attempting to elude their per-
sonal liability (ACAA, ibid., s. 28(1); ACMAA, ibid., s. 28(1); NBBCA, supra note 19, s. 22(1); QCE,
supra note 15, s. 3.01.06). In Ontario the exercise of public accountancy by a body corporate is ex-
plicitly prohibited. See OPAA, supra note 16, s. 24(1); ICAO Rules of Professional Conduct, supra
note 18, s. 408.
23 Certified General Accountants Act, N.B.A. 1986, c. 86, s. 2(1); Chartered Accountants’Act 1986,
N.B.A. 1986, c. 87, ss. 20(1)ff.
24 NSPAA, supra note 22, s. 22.
2 A partner in a limited liability partnership or LLP is not individually liable for the negligence of
another partner. The negligent partner’s assets and the partnership’s assets are the only ones submitted
to a claim in damages. See Limited Liability Partnerships Act 2000 (U.K.), 2000, c. 12; Partnership
Act, R.S.A. 1980, c. P-2, ss. 11.1, 79.1-79.996; Partnerships Act, R.S.O. 1990, c. P.5, ss. 10, 44.1-
44.4. See OCAA, supra note 18, s. 13.1, added by Partnerships Statute Law Amendment Act, 1998,
S.O. 1998, c. 2, s. 10. Demands for the introduction of LLPs are currently being made by profession-
als in other provinces. See also Partnership Act, R.S.B.C. 1996, c. 348, Part 3.
26J.O., 26 July 1966, as am. by 19 October 1986, 609 [hereinafter Loi de 1966].
27 See Loi n 70-1300 du 31 dicembre 1970, J.O., 1 January 1971 [hereinafter Loi de 1970]; Loi n’
84-148 du I mars 1984, J.O., 2 March 1984, 1705 [hereinafter Loi de 1984].
See Dicret nd 69-810 du 12 aotit 1969, J.O., 29 August 1969, as am. by 12 September 1969, 832
[hereinafter Dicret de 1969]; Decret n’ 85-295 du 1 mars 1985, J.O., 5 March 1985, 593 [hereinafter
Dicret de 1985].
Ordonnance n 67-821 du 23 septembre 1967, J.O., 28 September 1967, 589 [hereinafter Ordon-
nance de 1967]; Ordonnance n’45-2138 du 19 septembre 1945, J.O., 21 September 1945 as am. by
30 September 1945 [hereinafter Ordonnance de 1945].
‘ See Dicret de 1969, supra note 28, s. 2.
2001]
L. KHOURY – AUDITORS’ LIABlTY
son who satisfies the requirements set out in sections 3 to 7 of the Ddcret de 1969 can
be inscribed, but in practice the great majority of commissaires au: comptes are also
experts-comptables (accountants). In fact, the same individual can hold simultane-
ously the status of expert-comptable and commissaire atx comptes, and exercise both
functions, albeit not within the same socidtJ6n
Every commissaire aux comptes is a member of a national association called the
Compagnie Nationale des Commissaires aux Comptes, as well as of a regional com-
pany that comes under the authority of the latter.” These are private bodies to which
certain public functions are granted, such as the control of the exercise of the profes-
sion.’
A commissaire aux comptes, who has an obligation to hold professional insur-
ance,-
3 can be either a physical person or a socidtJ de commissaires aux comptes7′ No
specific form of socihtd is imposed by the Loi de 1966″ The socidtd undertakes legal
liability in solidum with any commissaire held to be at fault.’
C. Statutory Context
1. The Conduct of an Audit in England and Canada”
In England the conduct of an audit is regulated by two main statutes, the Compa-
nies Act 1985 ‘ and the CA 1989. In Canada, it is regulated either by the CBCA, a fed-
eral statute, or by provincial legislation,”‘ which sometimes follows the federal scheme
closely.
3 See Loi de 1966, supra note 26, ss. 218-29; Ordonnance de 1945, supra note 29, s. 22; Dicret de
1969, ibid.
-There would otherwise be a breach of the requirement of independence. See text accompanying
note 72. See Mondger & Granier, supra note 6 at 23.
_See Dicret de 1969, supra note 28, s. 26.
Monger & Granier, supra note 6 at 23,24.
“See Ddcret de 1969, supra note 28, s. 84; Loi de 1984, supra note 27, s. 234.
-See Loi de 1966, supra note 26, s. 218.
They cannot, however, form a socigte en nom collectif, since all associ&s of this type of societd are
conzerants, which is not allowed by the Loi de 1966, ibid., s. 219-3.
-See Decret de 1969, supra note 28, s. 69; J.F. Barbi&i, Conmissariat auxr comptes (Paris: Joly,
1996) at 18 [hereinafter Conunissariat aux comptes]; Mon~ger & Granier, supra note 6 at 161. The in
solidum obligation compels every debtor to perform the whole obligation. The debtor who does so,
however, has a remedy against the other for the part to which that other is obliged.
” Only statutory audits are the concern of this section and no mention is made of contractual audits.
4 (U.K.), 1985, c. 6 [hereinafter CA 1985].
” The regulation of businesses is, according to the Constitution of Canada, a shared competence. It
ordinarily falls under the provincial competence over “Property and Civil Rights in the Province”
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Despite the fact that auditors’ mission and duties are set out by the law, auditors
are generally viewed as having a contract with the audited company.’2 Yet they hold a
special status and stand aside from the management of the company.” They perform
their function on behalf of the shareholders and are accountable to them,” without
being their agents.” Moreover, in order to ensure their objectivity, they have an obli-
gation to act in a state of total independence vis-A-vis the company.’6
The appointment of auditors is usually made by the shareholders,” or by the di-
rectors in the case of the first auditors.’ In principle, every company must appoint an
auditor. Exceptions are, however, provided for in the statutes, depending on the nature
of the company.’9
The main obligation of an auditor is to report to the shareholders on the prepara-
tion and accuracy of the annual accounts of the company.” In England the report must
(Constitution Act, 1867, supra note 8, s. 92(13)). A few exceptions, though, make some businesses
fall within federal jurisdiction (ibid., ss. 91 (introduction), 91(29), 92(10)(c)). See Hogg, supra note 8
at 21-8 to 21-10. For provincial legislation, see e.g. ABCA, supra note 19; MCA, supra note 19;
NBBCA, supra note 19; OBCA, supra note 19.
,2 See lacobucci, Pilkington & Prichard, supra note 6 at 414; Abbyad et aL, supra note 8 at 130.
‘3 Iacobucci, Pilkington & Prichard, ibid at 390.
“Ibid.
“See Morse, supra note 12 at 571; Roman Corp. v. Peat Marwick Thorne (1992), 11 O.R. (3d) 248
at 254, 8 B.L.R. (2d) 43 (Gen. Div.) [hereinafter Roman I cited to O.R.].
‘6 See England: CA 1989, supra note 10, s. 27; Canada: CBCA, supra note 19, ss. 161(1), 161(2);
ABCA, supra note 19, ss. 155(1), 155(2); BCCA, supra note 16, ss. 183(1)-183(3); MCA, supra note
19, ss. 155(1), 155(2); NBBCA, supra note 19, ss. 104(1), 104(2); NSCA, supra note 19, ss. 119A(l),
119A(2); OBCA, supra note 19, ss. 152(1), 152(2); Companies Act, R.S.Q. c. C-48, s. 113(3) [herein-
after QCA]; QCE, supra note 15, ss. 3.02.01, 3.02.05.
‘7 England: CA 1985, supra note 40, ss. 384-85; Canada: CBCA, ibid., s. 162(1); ABCA, ibid., s.
156(1); BCCA, ibid., s. 178(3); MCA, ibid., s. 156(1); NBBCA, ibid., s. 105(1); NSCA, ibid., s. 117(2);
OBCA, ibid., s. 149(1); QCA, ibid., s. 123.97.
” England: CA 1985, ibid., s. 385, except in the case of private companies that have elected to dis-
pense with the laying of accounts (ibid., s. 385A) or with the annual appointment of auditors (ibid., s.
386); Canada: CBCA, ibid., s. 104(1); ABCA, ibid., s. 99(1)(e); BCCA, ibid., s. 178(1); MCA, ibid., s.
99(1); NBBCA, ibid., s. 62(1)(e); NSCA, ibid., s. 117(3); OBCA, ibid., s. 117(1)(e). No such provision
exists in the QCA, ibid.
49 England: CA 1985, ibid., ss. 249A, 250(3), 384(1), 388A; Canada: CBCA, ibid., ss. 160(1),
163(1); ABCA, ibid., s. 157; BCCA, ibid., s. 179; MCA, ibid., ss. 154(1), 157(1); NSCA, ibid., s.
118(a); OBCA, ibid., s. 148(1)(a); QCA, ibid, ss. 123.98-123.100.
.0 England: CA 1985, ibid., ss. 235(1), 235(2); Canada: BCCA, ibid., s. 188(2); NSCA, ibid., s. 119;
QCAA, supra note 15, s. 114(2). In Canada auditors have the duty, even after the termination of their
functions or the deposit of their reports, to inform the directors of any material error discovered in the
financial statements on which they have reported. See CBCA, ibid., ss. 171(7), 171(8); ABCA, ibid.,
ss. 165(8), 165(9); BCCA, ibid., s. 195; MCA, ibid., ss. 165(7), 165(8); NSCA, ibid., s. 119B; OBCA,
2001]
L. KHOURY- AuDlToRs’LIABILTY
state whether, in the auditor’s opinion, the financial statements have been prepared in
accordance with the CA 1985, and whether they give a “true and fair view” of the fi-
nancial situation of the company.-” In Canada some statutes mention a similar re-
quirement, but usually they do not articulate the specific standards
ith which the
auditor must comply.” Unlike their French colleagues, Canadian and English auditors
do not “certify” the correctness of the accounts, but merely give an “opinion” that is
not meant to provide absolute certainty.”
For each financial year, the company’s annual accounts, accompanied by the
auditor’s report, must be presented before the company at a general meeting.”5 Audi-
tors have the right to receive notice of every shareholders’ meeting,” to attend it, and
ibid, ss. 153(3), 153(4). The NBBCA, supra note 19, and QCA, ibid, contain no similar provision.
But see Abbyad et aL, supra note 8 at 8-9, 14.
-” CA 1985, ibid., s. 235(2). See also Auditing Practices Board, Auditors’ Reports on Financial
Statements (1993), which establishes standards of auditing and provides a framework of practice with
which auditors must comply.
‘ See NSCA, supra note 19, s. 119; QCAA, supra note 15, s. 114(2) (“true and correct view”);
BCCA, supra note 16, s. 188(2)(a) (whether “the financial statements presents fairly the financial po-
sition of the company”).
53The CICA has, however, issued a document fundamental to the conduct of audits in Canada, The
CICA Members Handbook, looseleaf (Toronto: CICA), which sets out the auditing standards for all
accountants in Canada [hereinafter CICA Handbook]. See especially s. 5400.14 (the financial state-
ments must “present fairly” the financial position of the company). The handbook is referred to by
many provisions. See e.g. Canada Business Corporations Regulations, S.O.Rf9-316, ss. 44, 45;
OBCA, supra note 19, s. 153(1); ICAO Rules of Professional Conduct, supra note 18, s. 206; NSCA,
ibid., s. 119B(2). In Quebec the courts have stated that the handbook should be complied with when
carrying out an audit. See e.g. Malo v. Michaud, [1993] RR.A. 760 (Sup. Ct.) [hereinafter Malo];
Irwin (Management Consultants) v. Thonze Riddell, [1991] RLIRA. 187 at 190 (Sup. Ct.) [hereinafter
Irwin (Sup. CL)], aff’d, [1995] R.R.A. 589 (C.A.) [hereinafter Irwin (CA)]; Caisse populaire de
Charlesbourg v. Michaud, [1990] R.R.A. 531 (C.A.) [hereinafter Charlesbourg]. See also Welling,
supra note 17 at 96; lacobucci, Pilkington & Prichard, supra note 6 at 390; J. Ziegel et al., Cases and
Materials on Partnerships amd Canadian Business Corporations, 2d ed. (Toronto: Carswell, 1989) at
967; Abbyad et aL, supra note 8 at 26.
“,Birds et aL, supra note 10 at 404.
“CICA Handbook, supra note 53, s. 5025.11; SSA’sAuditors’Report, supra note 51 at para. 6.
” England. CA 1985, supra note 40, s. 241; Canada: CBCA, supra note 19, s. 155(1); ABCA, supra
note 19, s. 149(1); BCCA, supra note 16, s. 145(1); MCA, supra note 19, s. 149(l); NBBCA, supra
note 19, s. 100(1); NSCA, supra note 19, ss. 121(l), 121(2); OBCA, supra note 19, s. 154; QCA, su-
pra note 46, ss. 98(1), 98(2).
England. CA 1985, ibid, s. 390(1); Canada. CBCA, ibid, s. 135(1)(c); ABCA, ibid., ss. 129(l(c),
162(1); BCCA, ibiL, ss. 198; MCA, ibid., s. 129(l); NBBCA, ibid., s. 109; NSCA, ibid., s. 119(1);
OBCA, ibid., s. 96(1)(c). The QCA, ibid, contains no similar provision.
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
[Vol. 46
to be heard on matters relating to their duties as auditors.” Moreover, in Canada audi-
tors have an obligation to attend shareholders’ meetings and to answer any questions
relating to their duties when a director or shareholder of the corporation gives them
prior written notice to this effect.”
An auditor’s report is prepared in the primary interest of the shareholders. ‘ In
England, before an annual shareholders’ meeting, every member of the company,
every holder of the company’s debentures, and every person entitled to receive notice
of a general meeting has the right to receive a copy of the company’s annual accounts,
accompanied by a copy of the auditor’s report on these accounts.” In Canada share-
holders have the same right.62 Moreover, most statutes grant shareholders a general
right to examine financial statements and to take extracts from them.6′
Outsiders can also, in certain cases, have access to the auditor’s report. Thus, if
the company publishes, or otherwise makes available, its accounts in a manner calcu-
lated to invite the general public, or any class of the public, to read them, they must be
accompanied by the auditor’s report.” In addition, the BCCA gives a direct right of ac-
cess to third parties and provides that, in the case of a “reporting company”, ‘ any per-
son may examine and take extracts from every audited financial statement of the
company and its subsidiaries, including the auditor’s report.” In practice the auditor’s
report is also often communicated to third parties by the company’s directors and offi-
cers in the hope of attracting investments, contracts, or financing.
8 See England: CA 1985, ibid, s. 390(1); Canada: CBCA, ibid., s. 168(1); ABCA, ibid., s. 162(1);
BCCA, ibid., s. 198; MCA, ibid, s. 162(1); NBBCA, ibid., s. 109(1); NSCA, ibid., s. 119B(9); OBCA,
ibid., s. 151(1). The QCA, ibid., contains no similar provision.
‘9 See CBCA, ibid, s. 168(2); ABCA, ibid., s. 162(2); BCCA, ibid., ss. 193-94; MCA, ibid., s. 162(2);
NBBCA, ibid., s. 109(2); NSCA, ibid., s. 119(2); OBCA, ibid., s. 151(2). The QCA, ibid., contains no
similar provision.
6 0See CA 1985, supra note 40, s. 235: “the company’s auditors shall make a report to the company’s
members” See also QCA, ibid., s. 114(2).
61 See CA 1985, ibid., ss. 238(1), 238(2), 239(1).
62 See CBCA, supra note 19, s. 159(1); ABCA, supra note 19, s. 153(1); NBBCA, supra note 19, s.
103(1); OBCA, supra note 19, s. 154(3); QCA, supra note 46, s. 114(4). In some provinces this is so
only in specific circumstances (BCCA, supra note 16, s. 172; MCA, supra note 19, s. 153(1); NSCA,
supra note 19, ss. 121(3), 121(6)).
6′ See CBCA, ibid., s. 157(2); ABCA, ibid., ss. 21(1), 21(2); BCCA, ibid., s. 164(2) (right also pro-
vided to debenture holders); MCA, ibid., s. 151(2); NBBCA, ibid., s. 101(2); QCA, ibid., ss. 114(3),
122.
6′ See England: CA 1985, supra note 40, ss. 240(1), (4); Canada: CBCA, ibid., s. 158(2); ABCA,
ibid., s. 152(2); BCCA, ibid., s. 174(1); MCA, ibid., s. 152(2); NBBCA, ibid., s. 102(2)(b); NSCA, su-
pra note 19, s. 122(3); OBCA, supra note 19, s. 159(2). The QCA, ibid., contains no similar provision.
65BCCA, ibid., s. 1(1).
6 Ibid.,s. 164.
2001]
L. KHOURY – AUDITORS’LIABILITY
2. The Certification of Accounts by the Commissaire aux Comptes
Traditionally comrmissaires aux comptes were viewed as the agents of the socidtd
(mandataires), as well as the protectors of shareholders’ private interests!’ Since the
adoption of the Loi de 1966, which institutionalized their functions,” however, their
status is no longer contractual, but rather statutory. Hence, they do not act in the in-
dividual interest of the shareholders, but rather in the general interest of the public,*’
and their duties clearly extend to third parties!’ In view of this new role, the Loi de
1966 imposes a strict requirement of independence with severe sanctions for its viola-
tione
Most bodies pursuing economic activities, whatever their form, are subjected to
the control of the connissaire aux comptes Depending on the type of socidte,” the
commissaire aux comptes must be appointed by the associds, 1 shareholders, ‘ mem-
CREDA, Le conmdssariat aux comptes (Paris: 1989) at 414.
, Compagnie Nationale des Commissaires aux Comptes, supra note 6 at 1.
69 The conmdssaire aux comptes is now seen as the controller of the legality of the socited. See
Mon6ger & Granier, supra note 6 at 136-37; P. Feuillet, Pratique du conunissariat aier comptes, 2d
ed. (Paris: Sirey, 1978) at 88; D. Kurkdjian, “Responsabilit6 civile du commissaire aux comptes”
(1995) 50 Cahier LF.E.C. 11-12; CREDA, supra note 67 at 418,420; Sarrut, Dictionnaire pennanent
de droitdes affaires (Feuillets 143, 1996) at 2299.
70 Corn., 15 June 1993, Bull. C.N.C.C.1994.93; Commissariat aux comptes, supra note 38 at 3, 14;
Mon6ger & Granier, ibid. at 20, 135; Guyon, supra note 6 at 372; Compagnie Nationale des
Commissaires aux Comptes, supra note 6 at 1. This change vas introduced to give conrnissaires aux
comptes the credibility that they had been lacking compared to their English, American, and German
counterparts.
7’ See Loi de 1966, supra note 26, s. 234. See also Com., 15 June 1993, ibid.; Com., 17 October
1984, Bull. C.N.C.C.1985.57.107 Rev Soc.1985.845 (Annot. E. du Pontavice). The third parties can
be creditors or investors (Trib. gr. inst. Le Havre, 15 November 1979, aff’d, Rouen, 27 April 1982,
Bull. C.N.C.C.47.288), and shareholders or associds if they suffer personal harm distinct from the
harm caused to the socitd. See Guyon, ibid. at 383; CREDA, supra note 67 at 433, 438; Kur Wdjian,
supra note 69 at 15; Compagnie Nationale des Commissaires aux Comptes, ibid. at 29; E. du Ponta-
vice, Le conzndssaire aux comptes. Manuelpratique, voL 1 (Ormesson-sur-Mame: 1981) at A.15, 209
[hereinafter Manuelpratique].
“‘ Loi de 1966, ibid., ss. 17-1, 65,219-3,220 to 221-1.
Every sociltd anonye, socisti en conuandite par actions, and socidt par actions simplifiles
must have its accounts reviewed (ibid., ss. 218, 254, 262-1). The same rule applies to the soci6t6s
civilesfaisantpubliquenent appel a l’dpargne (Loi de 1970, supra note 27, s. 18).
74See Loi de 1966, ibid, s. 218.
7S !bd, s. 64.
76 Ibid, s. 79, if the socidtd par actions is public. If it is private, they are appointed in the articles of
the company (ibid, s. 88). The subsequent auditors, in both cases, will be appointed by the sharahold-
ers (ibid, ss. 233, 254).
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
[Vol. 46
bers,” or societaires.” The law has, however, taken into account the size and impor-
tance of some sociits in order to create exceptions to this general rule.”
Despite the many responsibilities of the commissaires aux comptes, their main
task is to certify the lawfulness (rigularite’ and sincerity” of the annual statements,
and to certify that they give a faithful picture (imagefidle)f of the financial situation
of the socit6Y. The impact of certification in France is paramount since the commis-
saire gives strong authority to the control and verification undertaken, and attests per-
sonally to the likelihood of the regularity and sincerity of the accountsY Yet this certi-
fication is not meant to give absolute guarantees.’ In fact, the commissaire must com-
ply only with an obligation of diligence (obligation de moyens) towards the societd
and third parties. Consequently, as long as the commissaires meet the standard of a
prudent, competent, and diligent professional placed in the same circumstances, they
are deemed to have discharged their duties.”
‘ See Ordonnance de 1967, supra note 29, s. 10.
7’ See Dgcret de 1985, supra note 28, s. 23.
7 Ddcret n0 67-236 du 23 mars 1967, J.O., 24 March 1967, 2843, ss. 12, 43 [hereinafter Decret de
1967]; Loi de 1966, supra note 26, ss. 17-1, 64; Loi de 1984, supra note 27, s. 27; Ddcret de 1985,
ibid, ss. 19, 22; Ordonnance de 1967, supra note 29, ss. 5, 10.
See e.g. Loi de 1966, ibid, ss. 228, 233(1), 233(2); Loi de 1984, ibid., s. 29.
,See Commissariat aux comptes, supra note 38 at 52. This means that the accounts must comply
with the relevant substantive rules and procedures.
82 See Sarrut, supra note 69 at 2301. This refers to the quality of the description of the situation of
the company. See also Commissariat aux comptes, ibid at 52.
“3 See Commissariat aux comptes, ibid. This concept refers to the common law “true and fair view”
concept and means that the accounts must present the situation and results of the company completely
and objectively.
‘4See Loi de 1966, supra note 26, s. 228.
” Commissariat aux comptes, supra note 38 at 52; Com., 9 February 1988, Joly.1988.275, Rev.
Soc.1988.555 (Annot. J. Mon6ger).
“Commissariat aux comptes, ibid.; Guyon, supra note 6 at 389; D. Lang6, “Commissaire aux
comptes” in Jurisclasseur, Responsabilitd civile (Fasc. 340, 1999) at 3; Com., 9 February 1988, ibid.;
Com., 27 October 1992, JCP14.G.22026, Bull. C.N.C.C. Id 91.376, Rev. Soc.1993.86 (Annot. M.
Jeantin).
Com., 21 January 1997, Bull. C.N.C.C.1997.406 (Annot. P Merle); Com., 2 July 1973, DS
1973.674; Paris, 23 February 1978, Rev. Soc.79.92; Bordeaux, 4 November 1997, Bull. C.N.C.C.
1998.203; Rennes, 22 February 1999, Bull. C.N.C.C. 1999.463 (Annot. P. Merle); Commissariat aux
comptes, ibid. at 74, 78; Manuelpratique, supra note 71 at A.15, 192; Morin, supra note 6 at 18-19;
Guyon, supra note 6 at 396; Feuillet, supra note 69 at 89; Mon6ger & Granier, supra note 6 at 143,
145; Lang6, ibid. at 4; Kurkdjian, supra note 69 at 11; Compagnie Nationale des Commissaires aux
Comptes, supra note 6 at 3, 5-6; CREDA, supra note 67 at 420-21; annot., Com., 17 October 1984,
supra note 71; Corn., 6 October 1992, RJC.1993.166 (Annot. D. Vidal); annot., Com., 27 October
1992, ibid. See also generally G. Vmney, Traiti de droit civil. Les obligations. La responsabilit: con-
ditions (Paris: L.G.D.J., 1982) at 292 [hereinafter La responsabilit,: conditions]. The same test ap-
2001]
L. KHOURY- AUDITORS’IABILIY427
427
The financial documents, as well as the conmissaire’s report on them, are pre-
sented to the assembly of associds or shareholders, who are their primary recipients
and have the right to obtain a copy of these documents.t’ Moreover, any third party
can have access to the cornnissaire’s report of the sociits h responsabilitd Iimitde
and the socitfspar actions, since both socidtds have the obligation to file a copy with
the commercial court.’ Finally, as in England and Canada, certified accounts are often
disclosed voluntarily to third parties by the management of the socidtd.
Therefore, the fundamental difference between a French auditor, on the one hand,
and an English or Canadian auditor, on the other, lies in the scope of people for whose
interest the auditor’s report is prepared. It is difficult to exaggerate the importance of
the broader statutory and institutional role of the commissaire aux comptes, who must
act in the public interest, while the Canadian and English auditors’ duty is directed
primarily towards the shareholders. The practical importance of auditors’ work for
third parties is not, however, denied in these jurisdictions. In light of these different
statutory roles towards non-clients, it is interesting to see how the courts have treated
liability of auditors for harm suffered by third parties in the common law and civil law
jurisdictions.
II. The Common LaWf
Because auditors’ liability for negligent misstatements is not, in itself, an autono-
mous category within the law of negligence, it must first be analyzed in the wider
context of liability for pure economic loss’
plies in the Province of Quebec. See Roberge v. Bolduc, [1991] 1 S.C.R, 374 at 395-96, 398, (sub
nom. Dorion v. Roberge et aL) 78 D.L.R. (4th) 666; RM.A. Restaurant Management v. Gallay,
[1996] R.R.A. 485 (Sup. Ct.); Guardian, supra note 6 at 169, 173; J.C. Rend, “La responsabilitd pro-
fessionnelle des comptables: dtveloppements r¢s” (1991) 51 Can. Bar Rev. 395 at 398; Charles-
bourg, supra note 53 at 536.
“See Loi de 1966, supra note 26, ss. 56, 157, 168; Decret de 1967, supra note 79, ss. 36,139.
Dicret de 1967, ibid, ss. 44-1,293.
In the development of the law of auditors’ liability towards third parties, the landmark cases in
England have had a great impact on the way the Canadian common law has evolved. These tvo juris-
dictions are thus treated together
9′ Claims brought by third parties against negligent auditors usually seek recovery for pure eco-
nomic loss. Pure economic loss is harm not associated with any physical damage to the plaintiff’s
person or property. See e.g. J.G. Fleming, The Law of Torts, 9thed. (North Ryde, N.S.W: LBC Infor-
mation Services, 1998) at 195; R.A. Buckley, The Modern Lav of Negligence, 3dd. (London: But-
terworths, 1999) at 131; R.A. Percy, Clzarlesvorth & Percy on Negligence, 9th ed. (London: Sweet &
Maxwell, 1997) at 87; J.F Clerk, Clerk & .”ndsell on Torts, 17th ed. (London: Sweet & Maxwell,
1995) at 271.
428
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[Vol. 46
A. Duty of Care and Pure Economic Loss in the Law of Negligence
To succeed in a claim for negligence, plaintiffs must show that they suffered harm
as a consequence of the breach of a duty of care owed to them by the defendant. The
absence of a duty of care has the effect of nullifying any possibility of liability, even if
the negligence or carelessness of the defendant has caused harm to the plaintiff.’ It is
principally through the use of this requirement that the courts have responded to one
of the basic problems of the tort of negligence, namely, keeping recovery for pure
economic loss within proper limits.”
The recognition of a duty of care in cases of pure economic loss is one of the
most controversial issues in the law of negligence, and the courts have traditionally
been reluctant to allow recovery for this type of loss. This restrictive approach origi-
nates mainly from the belief that, if accepted in principle, liability for negligently
caused pure economic loss could be indeterminate. ‘ It has incited the English and Ca-
nadian courts to interpret the Donoghue “neighbour principle” based on foreseeability
of harm as applying only to instances of physical damage to persons or property.”
Thus, to avoid indeterminate recovery in the area of pure economic loss, courts had to
formulate safeguards more efficient than the foreseeability of harm. The exact nature
of such safeguards, however, is much debated and not yet totally settledY
92SeeLeLivre and Dennis v. Gould, [1893] 1 Q.B. 491 at 497.
9’It should be noted that the rule of privity of contract, as it existed in England until recently, did not
prevent a person not party to a contract from claiming damages suffered in consequence of the negli-
gent execution of that contract. See Donoghue v. Stevenson, [1932] A.C. 562 at 611, [1932] All E.R.
Rep. 1 (H.L.) [hereinafter Donoghue cited to A.C.]; G.H. Treitel, The Law of Contract, 9th ed. (Lon-
don: Butterworths, 1995) at 551.
See e.g. Ultramares Corp. v. Touche, 174 N.E. 441 at 444, 255 N.Y 170, 74 A.L.R. 1139 (1931).
See also Canadian National Railway v. Norsk Pacific Steamship, [ 1992] 1 S.C.R. 1021 at 1137, 1139,
91 D.L.R. (4th) 289, McLachlin J. [hereinafterNorsk cited to S.C.R.]; B.S. Markesinis & S.F. Deakin,
Tort Law, 3d ed. (Oxford: Clarendon Press, 1994) at 79, 85; D. Howarth, Textbook on Tort (London:
Butterworths, 1995) at 300ff, 319ff; Buckley, supra note 91 at 143-44; L.N. Klar et al., Tort Law, 2d
ed. (Scarborough: Carswell, 1996) at 172; D. Marshall, “Liability for Pure Economic Loss Negli-
gently Caused-French and English Law Compared” (1975) Int’l & Comp. L.Q. 748 at 750.
9’ See Donoghue, supra note 93 at 580. This broad test was said to come close to establishing a
general clause in the French style. See Howarth, ibid. at 163.
“, See e.g. Markesinis & Deakin, supra note 94 at 77, 79; Klar et al., supra note 94 at 139; I.F.
Ivankovich, ‘Accountants and Third-Party Liability-Back to the Future” (1991) 23 Ottawa L. Rev.
505 at 509; P. Cane, ed., Atiyah’s Accidents’ Compensation and the Law, 6th ed. (London: Butter-
worths, 1999) at 58.
‘7 Percy, supra note 91 at 77; G.H.L. Fridman, The Law of Torts in Canada, vol. 1 (Toronto: Car-
swell, 1989) at 264; Norsk, supra note 94 at 1137.
2001]
L. KHOURY – AuDIToRs’LIABILI4y
429
The exact meaning and practical application of the duty of care are difficult to
grasp, and no clear test has been articulated for the duty’s assessment. It is agreed,
though, that it is based upon the existence of a certain kind of relationship between the
parties, sometimes called a relationship of “proximity”. Yet this last notion, criticized
as ambiguous and not susceptible of any precise definition,. has failed to render the
evaluation of the duty of care easier. In fact, the concept of proximity is mainly a con-
trol device that allows the courts to restrict recovery in negligence to limited cases. As
for its exact content, it seems to depend on the case at hand and on the type of harm
suffered.”‘
Recovery in tort for pure economic loss was first accepted in Hedley Byrne & Co.
v. Heller & Partners’ in the context of negligent misstatements. In this case, the
House of Lords attempted to draw boundaries around the possibility of recovery, but
did not articulate precise, uniform criteria, and even today the limits of this decision
remain uncertain.'” These boundaries, however, revolved around the following ideas:
the concept of a “special relationship”; ‘ the exercise of special skills by the defen-
B. Feldthusen, Economic Negligence: The Recorery of Pure Economic Loss, 2d ed. (Toronto:
Carswell, 1989) at 22,31; Fleming, supra note 91 at 150-51; Klar et al., supra note 94 at 133.
‘ See N. Rafferty, Torts–Negligent Misstatement-Recovery for Purely Economic Loss” (1991)
70 Can. Bar Rev. 381 at 383; ICM. Stanton, The Modern Lmv of Tort (London: Sweet & Maxwell,
1994) at 33; Fleming, ibiL at 138-39. See also the comments of A . Dugdale & K.M. Stanton,
ProfessionalNegligence, 3d ed. (London: Butterworths, 1998) at 112-13.
“‘ See Caparo, supra note 6 at 633; Snith v. Eric S Bush (afirm) (1989), [1990] 1 A.C. 831 at 871,
[1989] 2 All E.R. 514 (EL.) [hereinafter Smith cited to A.C.]; Federal Business Development Bank v
Morris, Burk Luborsk); David & Kale (1988), 38 B.LR. 1 at 4 (Ont. H.CJ.) [hereinafter Morris];
Boyd v. Ackley (1962), 32 D.L.R. (2d) 77 at 80 (B.C. S.C.); Hercules Managements v. Ernst & Young,
[1997] 2 S.C.R. 165 at 187, 146 D.L.R. (4th) 577 [hereinafter Hercules cited to S.C.R.]. See also
Junior Books v. Veitchi Co. (1982), [1983] 1 A.C. 520 at 533, 539, [1982] 3 All F.R. 201 (H.L)
[hereinafter Junior Books cited to A.C.]; Norsk, supra note 94 at 1152; Queen v. Cognos Inc., [1993]
1 S.C.R. 87 at 110, 99 D.L.R. (4th) 626 [hereinafter Cognos cited to S.C.R.]; Fletder v. Manitoba
Public Insurance, [1990] 3 S.C.RI
191 at 206, 74 D.L.R. (4th) 636 [hereinafter Fletcher cited to
S.C.R.j; RivtowMarine v. Mushington Iron lilbrk (1973), [1974] S.C.R. 1189 at 1196, 40 D.L.R. (3d)
530 [hereinafter Rivtow Marine cited to S.C.R]; B.D.C. v. Hofstrand Fais, [1986] 1 S.C.R. 228 at
236, 26 DJR. (4th) 1 [hereinafter B.D.C. cited to S.C.R.]; JA Campion & D.. Dimmer Profes-
sionalLiability in Canada, looseleaf (Scarborough: Carswell, 1994) at 8-6.
’10 (1963), [1964] A.C. 465, [1963] 2 All E.R 575 (LL.) [hereinafter Hedley Byrne cited to A.C.].
” See Caparo, supra note 6 at 628, 632; Dugdale & Stanton, supra note 99, where the authors note
at 106 that it took thirty years for the full implications of the decision to become clear; Percy, supra
note 91 at 96; Jackson & Powell, supra note 1 at 833; Howvarth, supra note 94 at 328.
” See edley Byrne, supra note 101 at 486-87, Lord Reid, at 502, Lord Morris, at 509, Lord Hod-
son, at 515, 529, Lord Devlin, at 539, Lord Pearce. See the criticism of Feldthusen, supra note 98 at
22,31,38,40-43.
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dant;'”‘ the existence of a relationship “equivalent to contract”;'” and the notion that
the maker of the statement has undertaken some responsibility towards the plaintiff.”
Even though they were interpreted by some as an extension of the Donoghue princi-
ple”‘ and applicable to other areas, the principles established in Hedley Byrne were
long confined to cases of negligent misstatement.'”
In 1977 the House of Lords initiated another attempt to create a general test ap-
plicable to all types of harm. In Anns v. Merton London Borough Council,’ Lord
Wilberforce formulated a two-stage test: first, a prima facie duty of care could arise
from a relationship of proximity based on foreseeability of harm; second, once found,
this prima facie duty of care could nevertheless be restricted by the application of
policy considerations.”‘
This test was subsequently criticized as too broad, and in fact, it provoked an ex-
pansion of liability in tort in the late 1970s and early 1980s.”‘ It was consequently re-
jected in England,”2 where the courts returned to the narrower categorization of cases,
‘0’ See Hedley Byrne, ibid at 502-503, Lord Morris, at 514, Lord Hodson. See also Mutual Life v.
Evatt (1970), [1971] A.C. 793 at 804, 806-807, [1971] 7 All E.R. 150 (P.C.) [hereinafter Evatt cited to
A.C.]. Contra ibid at 811, Lord Reid, Lord Morris; Esso Petroleum Co. v. Mardon, [1976] 2 All E.R.
5 at 22, [1976] 2 W.L.R. 583 (C.A.); Spring v. Guardian Assurance (1994), [1995] 2 A.C. 296 at 318-
19, [1994] 3 All E.R. 129 (H.L.) [hereinafter Spring cited to A.C.]; Howarth, supra note 94 at 277;
Cognos, supra note 100 at 117; Royal Bank of Canada v. Aleman (1988), 86 A.R. 64 at 71, [1988] 3
W.W.R. 461 (Q.B.) [hereinafterAleman cited to A.R.]. See also Percy, supra note 91 at 95; Klar et al.,
supra note 94 at 183; Fridman, vol. 1, supra note 97 at 267; Dugdale & Stanton, supra note 99 at 128.
‘o’ See Hedley Byrne, ibid. at 529, Lord Devlin. See also Smith, supra note 100 at 846; White v.
Jones, [1995] 2 A.C. 207 at 281, [1995] 1 All E.R. 691 (H.L.) [hereinafter cited to A.C.].
‘o See Hedley Byrne, ibid. at 483, 486, 493, Lord Reid, at 494, Lord Morris, at 529, Lord Devlin.
See also Percy, supra note 91 at 96, 98; Feldthusen, supra note 98 at 46.
07 See Howarth, supra note 94 at 294; Stanton, supra note 99 at 333-39; Rafferty, supra note 99 at
393; G.H.L. Fridman, The Law of Torts in Canada, vol. 2 (Toronto: Carswell, 1989) at 133.
‘0, Markesinis & Deakin, supra note 94 at 77. But see text accompanying notes 126-31 for an out-
line of the recent developments concerning “assumption of responsibility”.
‘0 (1977), [1978] A.C. 728, [1977] 2 All E.R. 492 (H.L.) [hereinafter Anns cited to A.C.].
“0 Ibid. at 751-52.
… Markesinis & Deakin, supra note 94 at 20; Stanton, supra note 99 at 33, 68-69; Rafferty, supra
note 99 at 381; Dugdale & Stanton, supra note 99 at 72; Percy, supra note 91 at 28; Jackson & Pow-
ell, supra note 1 at 16. In the area of nervous shock see e.g. McLoughlin v. O’Brian (1982), [1983]
A.C. 410, [1982] 2 All E.R. 298 (H.L.); for pure economic loss caused by a negligent deed, see Jun-
ior Books, supra note 100.
. See Murphy v. Brentwood District Council (1990), [1991] 1 A.C. 398, [1990] 2 All E.R. 908
(H.L.) [hereinafter Murphy cited to A.C.]. See Dugdale & Stanton, ibid. at 72; Percy, ibid. at 34-36;
Rafferty, ibid at 382.
2001]
L. KHOURY- AUDIToRs’LABILIY
making analogies with established categories of liability.”‘ In Canada, however, the
Supreme Court of Canada continued to apply the Arms test.’ This had the impact of
rendering the Canadian courts more receptive to claims for pure economic loss. De-
spite this conceptual divergence, the possibility of recovering pure economic loss in
cases other than those of negligent misstatements has been accepted in Canada,”‘ as
well as in England,”‘ though only in a few specific and limited situations.”‘
B. Auditors’Liability towards Third Parties in England and Canada
In line with this tendency, the English courts have traditionally refused claims al-
leging negligent misrepresentation causing pure economic loss in the absence of a
contract, fraud, or fiduciary relationship.”‘ The door was opened, however, by the fa-
mous dissenting judgment of Lord Denning in Candler,”‘ which was later approved
by the House of Lords in Hedley Byrne.”=
Despite this new expansion of grounds for liability, pure economic loss caused by
words was still viewed with particular suspicion. There was fear of unlimited liability
arising from the possibility of such words being transmitted without the consent or
foresight of their author.” Therefore, one of the preoccupations of the courts dealing
3 Fleming, supra note 91 at 153. See eg. Caparo, supra note 6 at 633, 635-36, Lord Oliver, at 618,
Lord Bridge, at 628, Lord Roskill; Murphy, ibid at 461; White v. Jones, supra note 105 at 270, 275.
“4 Kamloops (City oJ) v. Nielsen, [1984] 2 S.C.R. 2, 10 D.LR. (4th) 641 [hereinafter Kamloops
cited to S.C.R.]; Norsk, supra note 94; B.D.CA, supra note 100; London Dngs v. relne & Nagel In-
ternational, [1992] 3 S.C.R. 299,97 D.L.R. (4th) 261; lnmipeg Condominium Corporation No. 36 v.
Bird Construction, [1995] 1 S.C.R. 85, 121 D.L.R. (4th) 193; Hercules, supra note 100; A.M. Linden,
Canadian Tort Lav, 6th ed. (Toronto: Butterworth, 1997) at 274; Kar et aL, supra note 94 at 143;
Dugdale & Stanton, supra note 99 at 72.
“t See e-g. Norsk, ibid; Rivtow Marine, supra note 100.
“6 See eg. Ross v. Counters (1979), [1980] 1 CL. 297, [1979] 3 All E.R. 580 [hereinafter Ross cited
to Ch.]; Junior Books, supra note 100; Wite v. Jones, supra note 105.
“7 Percy, supra note 91 at 65; Marshall, supra note 94 at 778.
” See Deny v. Peek (1889), 14 A.C. 337 (ILL.) [hereinafter Deny]; Candler v. Crane, Christmas
& Co., [1951] 2 K.B. 164, [1951] 1 All E.R. 426 [hereinafter Candler cited to K.B.]. See Jackson &
Powell, supra note 1 at 831; Linden, supra note 114 at 423; Fridman, vol. 1, supra note 97 at 263-64;
Fridman, vol. 2, supra note 107 at 132-33. Contra Nocton v. Ashburton (Lord), [1914] A.C. 932
(H.L.).
119Ibid
‘2″ See supra notes 101-108 and accompanying text. Even though it did not involve auditors’ liabil-
ity, Hedley B ,rne became the reference judgment in this field. Its importance was not affected by the
fact that the relevant remarks were obiter. In Hedley Byrne itself the claim vas rejected because of the
presence of a disclaimer.
‘2’Hedley B ,rne, supra note 101 at 482-83. Lord Pearce said at 534 that “[w]ords are more volatile
than deeds. They travel fast and far afield.” See also Caparo, supra note 6 at 633; Fleming, supra note
91 at 189,705.
432
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with cases of negligent misstatement in the post-Hedley Byrne era was finding an
adequate test for the assessment of the duty of care. They attempted to do so by
building an intellectual framework capable of keeping the right to recovery within ac-
ceptable boundaries.
1. The Search for a Test
a. England
i. The Existence of a Duty of Care
In England attempts to identify the existence of a duty of care in cases of audi-
tors’ liability towards third parties have been dealt with mainly through three ap-
proaches: (1) the adoption of a general test of liability; (2) the development of a
threefold test; and (3) the use of the traditional incremental approach. No definitive
choice has been made between them, and it was even suggested recently that more
than one approach can be adopted.”=
The first attempt to introduce a general principle of liability in this area was no-
ticed particularly in the 1980s.” On the basis of Donoghue and Anns, a duty of care
was found in cases where it was reasonably foreseeable that a person might rely on
the statements and could suffer an economic loss if the accounts were inaccurate. It is
now clear, however, that foreseeability, while being a necessary requirement, is not
sufficient to ground liability in cases of negligent misstatement, since it is too easily
met and fails to provide adequate safeguards against the risk of indeterminate liabil-
12 4
ity.
‘2See
Bank of Credit & Commerce International (Overseas) v. Price Waterhouse (No. 2), [1998]
B.C.C. 617 at 631-34, [1998] E.C.C. 410, 142 SJ.L.B. 86 (C.A.) [hereinafter BCCI cited to B.C.C.].
See also Electra Private Equity Partners v. KPMG Peat Manvick, [1999] Lloyd’s Rep. PN. 670
(C.A.) [hereinafter Electra Private].
‘2 JEB Fasteners v. Marks Bloom & Co. (1980), [1981] 3 All E.R. 289 at 296, [1982] Com. L.R.
226 (Q.B.D.) [hereinafter JEB Fasteners (Q.B.) cited to All E.R.], aff’d, [1983] 1 All E.R. 583 (C.A.)
[hereinafter JEB Fasteners (C.A.)]; Scott Group v. McFarlane, [1978] 1 N.Z.L.R. 553 (C.A.) [herein-
after Scott Group]; Evatt, supra note 104 at 807. See also White v. Jones, supra note 105 at 273; Berg
Sons & Co. v. Adams (1992), [1993] B.C.L.C. 1045 at 1054-55, [1992] B.C.C. 661 [hereinafter Berg
Sons cited to B.C.L.C.].
“2 Caparo, supra note 6 at 635, 643, 649-50, Lord Oliver, at 655, 661, Lord Jauncey, at 633, Lord
Roskill, at 623, 625, Lord Bridge; Al Saudi Banque v. Clarke Pixley (1989), [1990] Ch. 313 at 330,
[1989] 3 All E.R. 361 [hereinafter Al Saudi cited to Ch.]; Morgan Crucible & Co. v. Hill Samuel &
Co., [1991] Ch. 295 at 317, [1991] 1 All E.R. 148 [hereinafter Morgan Crucible cited to Ch.]; Mur-
phy, supra note 112 at 487; Berg Sons, ibid. at 1054, 1067, where the claim was rejected even though
2001]
L. KHOURY – AUDITORS’LIABILITY
433
In addition, on the basis of Hedley Byrne, the House of Lords introduced the no-
tion of “assumption of responsibility” as a theoretical basis for a general right to re-
covery of pure economic loss in tort. In Spring, Henderson v. Merrett Syndicates,'”
and White v. Jones,'” the House of Lords stressed that there is a general principle that
when defendants have “assumed responsibility” for the plaintiff’s economic welfare,
they may be liable for economic loss in cases other than those of negligent misstate-
ment. Whether this concept should become the “unifying principle”‘ grounding a
general right to recovery is arguable, however, and it has therefore been strongly criti-
cized. Moreover, the use of a broad test of liability is controversial, especially in
light of the judgment of the House of Lords in Caparo, which continues to be the
leading case in the area of auditors’ liability towards third parties.”
the evidence showed actual foresight of reliance. See also Stanton, supra note 99 at 339, 342; Feld-
thusen, supra note 98 at 43, 92; Dugdale & Stanton, supra note 99 at 119. See the criticism of Atiyah
in Cane, supra note 96 at 38-39.
‘2Supra note 104 at 316,318.
‘2(1994), [1995] 2 A.C. 145 at 180-81, [1994] 3 All E.R. 506 (HL.) [hereinafter Henderson cited
to A.C.].
‘ Supra note 105 at 270, 257, 262. See Canada: Edgeworth Construction v. N.D. Lea & Associates,
[1993] 3 S.C.R. 206 at 212, 107 D.L.R (4th) 169 [hereinafter Edgevorth cited to S.C.R.]; Fletcher,
supra note 100 at 212. But in Keith Plunbing & Heating Co. v. Newport City Club (sub nom. Micron
Construction v. Hongkong Bank of Canada) (2000), 184 D.L.R. (4th) 75, [20001 6 WAV.R. 65 (B.C.
CA), leave to appeal to S.C.C. refused, [2000] S.C.C.A. No. 192, online: QL (SCCA) [hereinafter
Keith Phnbing], Esson JA said that since Hercules, it is the “Anns test” and not the “assumption of
responsibility” test which should apply in Canada. This latter concept has received the support of
some commentators. See e-g. Rafferty, supra note 99 at 396; Fridman, vol. 1, supra note 97 at 281;
Feldthusen, supra note 98 at 22, 39,46-52. See also Dugdale & Stanton, supra note 99 at 113-16.
“Jackson & Powell, supra note 1 at 830.
‘2 Caparo, supra note 6 at 582-83, 628, 637; Smith, supra note 100 at 862-64; Min. of Housing v.
Sharp, [1970] 1 All E.R. 1009 at 1018-19, [1970] 2 Q.B. 223 (CA); Haig, supra note 2 at 479; SJ.
Whittaker, “Privity of Contract and the Tort of Negligence: Future Directions” (1996) 16 Oxford .
Legal Stud. 191 at 204; Howarth, supra note 94 at 292; Stanton, supra note 99 at 341.
‘ Clerk, supra note 91, states at 281, however, that there may be little difference in the outcome of
these two approaches. Moreover, several recent English cases have applied the “assumption of re-
sponsibility” test to misstatement claims, alongside some of the requirements developed in Caparo.
They have underlined that the relevant question for this test is whether the defendants assumed re-
sponsibility for the task that they undertook, not whether they assumed legal responsibility for the
statement. See BCCI, supra note 122; A.D.T v. B.D.O. Binder Hanilyn, [1996] B.C.C. 803 at 824,
828-29 (Q.B.D.) [hereinafter Binder Handyn]; Peach Publishing v. Slater & Co., [1999] B.C.C. 139
(CA); Yorkshire Enterprise v. Robson Rhodes (17 June 1998) (U.K. Q.B.); HIT Finance v. Cohen
Arnold & Co. (14 October 1999) (U.K. CA); Electra Private, supra note 122, where Auld LJ. held
that both the Caparo “threefold” test and the “assumption of responsibility” test must be applied, but
that the latter is the predominant one for the purpose of a case involving auditors’ liability. The con-
cept is also mentioned in Andrew v. Kounis Freeman, [1999] 2 B.C.L.C. 641 (CA) [hereinafter An-
drew]. See ibid at 654, Beldam LJ., at 654-55, Buxton LJ. Buxton LJ. stressed that two types of
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[Vol. 46
In Caparo a claim was brought by the takeover bidder for a company listed on a
stock exchange. The plaintiff argued that the accounts of the company were inaccu-
rate and misleading, and that he purchased 29.9 percent of the shares of the company
and made a bid for the remaining shares in reliance on them. He also contended that
the defendant ought to have foreseen that the company was vulnerable to a takeover
bid, and that the bidders might rely on the accounts and consequently suffer a loss be-
cause of their inaccuracy. The question was whether the auditors owed a duty of care
to the plaintiff in his capacity as (1) a potential investor and (2) a shareholder. Both
claims were rejected.
As a reaction to the extensive liability that followed Anns, the House of Lords re-
fused to adopt a general principle on the basis of which tortious liability would be
determined in all circumstances.”‘ At most, a broad categorization of the decided
cases according to the type of situation in which liability has been established could
be attempted.”‘
In addition to this return to the traditional case by case approach, Caparo also ap-
proved the tripartite analysis of Smith.”‘ This case introduced, as elements demon-
strating the existence of a duty of care, foreseeability of damage, proximity, and the
fact that the situation is one in which the court considers it fair, just, and reasonable to
impose a duty.” These three criteria were adopted in other cases.'” In Caparo, how-
ever, the House of Lords stressed that these criteria were not to be regarded as ele-
ments of a general test, because they could not be defined precisely enough to give
them such utility.”
cases exist in which liability might accrue for negligently caused economic loss, the Hedley Byrne
type and those in which the defendant’s conduct can be objectively analyzed as involving an assump-
tion of responsibility for the performance of a task, as in White v. Jones, supra note 105.
“‘ Caparo, supra note 6 at 633, 635-36, Lord Oliver, adopting the incremental approach advocated
by Brennan J. in Sutherland Shire Council v. Heyman (1985), 60 A.L.R. I at 43-44, 157 CLR. 424,
59 A.LJ.R. 564 (H.C.). See also Caparo, ibid. at 618, Lord Bridge, at 628, Lord Roskill. This ap-
proach was approved in Murphy, supra note 112 at 461,472; Evatt, supra note 104 at 809; Norsk, su-
pra note 94 at 1139, 1149-50; BCCI, ibid.
3 Caparo, ibid at 635.
” Supra note 100 at 864-65.
m Caparo, supra note 6 at 617-18. See e.g. ibid. at 633, Lord Oliver.
‘ Morgan Crucible, supra note 124 at 317; Al Saudi, supra note 124 at 329; McNaughton Ltd v.
Hicks Anderson & Co., [1991] 2 Q.B. 113 at 123, [1991] 7 All E.R. 134 [hereinafter McNaughton
cited to Q.B.]; Possfund v. Diamond, [1996] 2 All E.R. 774 at 782, 787, [1996] 1 WL.R. 1351
(Ch.D.) [hereinafter Possfund cited to All E.R.]; Al-Nakib Investments v. Longcrofl, [1990] 3 All E.R.
321 at 328, [1990] 1 W.L.R. 1390 (Ch.D.) [hereinafterAl-Nakib cited to All E.R.]; Spring, supra note
104 at 342; BCCI, supra note 122.
‘3 6 See Caparo, supra note 6, e.g. at 618, Lord Bridge, describing the criteria as “convenient labels”,
at 628, Lord Roskill. See also Jackson & Powell, supra note I at 21; Morgan Crucible, ibid. at 317.
2001]
L. KHOURY- AUDITORS’LIABILIY4
435
ii. The Restriction on the Scope of the Duty of Care
In addition to finding an adequate approach to evaluate the existence of a duty of
care, the courts also had to ensure that, once this duty was found, its scope would be
limited adequately. The first judge to express this concern was Lord Denning in Can-
dler. In his dissent, he outlined the necessity of limiting the ambit of the duty of care
owed by accountants both in terms of persons to whom they show their accounts, or
to whom they know the accounts will be shown, and with respect to the transactions
for which the auditors know the accounts will be required.”
In Caparo the House of Lords followed the path taken by Lord Denning:
What can be deduced from the Hedley Brne case, therefore, is that the neces-
sary relationship between the maker of the statement or giver of advice (the ad-
viser) and the recipient who acts in reliance upon it (the advisee) may typically
be held to exist where (1) the advice is required for a purpose, whether par-
ticularly specified or generally described, which is made know,, either actually
or inferentially, to the adviser at the time when the advice is given, (2) the ad-
viser knows, either actually or inferentially, that his advice will be communi-
cated to the advisee, either specifically or as a member of an ascertainable
class, in order that it should be used by the advisee for that purpose, (3) it is
known, either actually or inferentially, that the advice so communicated is
likely to be acted upon by the advisee for that purpose without independent in-
quiry and (4) it is so acted on by the advisee to his detrimentL””
These factors were adopted in several cases.” In addition, some judges juggled with
the idea that the defendant’s intent that the plaintiff rely on the financial statement
must also be found as an indicator of proximity. ‘ This restrictive tendency was re-
cently rejected, however, by the Court of Appeal in BCCL”
Candler, supra note 118 at 180, 182.
13 Caparo, supra note 6 at 638, Lord Oliven See also ibid. at 620-21, Lord Bridge, at 658, Lord
Jauncey.
Al Saudi, supra note 124 at 330; Morgan Crucible, supra note 124 at 319-20; AJ-Nakib, supra
note 135 at 326; Spring, supra note 104 at 332; McNaughton, supra note 135 at 125-26. See also
Hianni v. Edwin Evans and Sons, [1981] 3 W.L.I. 843 at 857, [1981] 3 All E.R. 592 (Q.B.D.); Smith,
supra note 100 at 847-48; Andrew, supra note 130 at 654.
” See Possfund, supra note 135 at 787; Anthony v. Wright, [1995] 1 B.C.L.C. 237 at 239, [1995]
B.C.C. 768 (Ch.), relying on Galoo Ltd. v. Bright Grahame Murray, [1995] 1 All E.R. 16 at 36-37,
43, [1995] B.C.C. 768 (C.A.); Al Saudi, ibid. at 330; Morgan Crucible, ibid. at 319-20; MeNaughton,
ibid. at 125; Clerk, supra note 91 at 281.
’41 Supra note 122. However, in Andrew, supra note 130, Beldam LJ. mentions at 654 that the de-
fendants, in certifying the accounts of their client, were doing so with the intention that the plaintiff
should act upon them. See also Dugdale & Stanton, supra note 99 at 120.
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
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These limiting devices developed by the English courts found their way across the
Atlantic, just as did the efforts to establish factors facilitating the search for the duty
of care. They have, however, come into play within a different legal framework.
b. Canada
i. Haig v. Bamford. The Incorporation of Hedley Byrne
In Canada the landmark case in the area of auditors’ liability towards third parties
was, for many years, the 1976 case of Haig,’2 in which the Supreme Court of Canada
incorporated Hedley Byrne into Canadian law. A firm of accountants had issued an
unqualified opinion on the financial statements of a private company. No audit had
been carried out, but the report led the reader to believe the contrary. When the com-
pany ceased trading, the plaintiff, who had purchased shares of the company and
guaranteed a bank loan in its favour, sued the accountants for his loss. The evidence
showed that the accountants knew that the financial statements were prepared for the
purpose of influencing a limited number of potential investors, but that the plaintiff
was completely unknown to them. Dickson J. (as he then was) outlined three possible
tests to determine the existence of a duty of care:
(i) foreseeability of the use of the financial statements and the auditor’s report
thereon by the plaintiff and reliance thereon; (ii) actual knowledge of the lim-
ited class that will use and rely on the statements; (iii) actual knowledge of the
specific plaintiff who will use and rely on the statement.”3
The third test was rejected because it was considered too narrow, and the larger
“limited class test” was adopted by the Court.'” It was not important that the account-
ants did not know the exact identity of the plaintiff as long as he was within the lim-
ited class of persons to whom they knew the company intended to supply the state-
ments for a specific class of transaction. Hence, the applicability of the “foreseeability
test” was not evaluated. Subsequent case law did not determine whether or not this
broad test could be acceptable on its own,”‘ but rather expressed suspicion towards it. ‘
1
’42 Supra note 2.
43Ibi. at 476.
‘” See also Aleman, supra note 104 at 71, 73; Twiggco Financial v. Peat Marwick Thorne (1994),
12 B.L.R. (2d) 1 at 6 (Ont. Gen. Div.) [hereinafter Twiggco]. For cases of misrepresentation, see
Edgeworth, supra note 127 at 214.
’14 J.E. Sexton & J.W. Stevens, “Accountants’ Legal Responsibilities and Liabilities” in Meredith
Memorial Lectures 1983-84: Professional Responsibility in Civil Law and Common Law (Don Mills:
Richard De Boo Publishers, 1985) 88 at 90; G.B. Maughan & M. Paskell-Mede, ‘Auditors’ Liability
since Haig v. Bamford ‘ in ibid., 57 at 61.
2001]
L. KHOURY- AuDIToRs’LIABIL4TY
437
In the following years, under the influence of Candler, Haig, and Caparo, the
courts introduced the notion of knowledge of the plaintiff and of the transaction as in-
dicators of proximity, and as a means of restricting the scope of the duty of care.”
Some courts also adopted the threefold test of Smith and Caparo.'” The reception of
Caparo into Canadian law was, however, only partial, since the Supreme Court did
not follow Caparo’s rejection of the Anns approach to the duty of care.
ii. Hercules The Reign of Anns
While the Anns test changed the way Canadian courts deal with the issue of duty
of care, it was not clearly applied in negligent misstatement cases until 1997.”0
Both Anns and Caparo had an important impact on the path taken by the Supreme
Court of Canada in Hercules,” in which the Court decided that the test used in other
“” See Rangen Inc. v. Deloitte & Toude, [1994] 10 W.W.R- 55, 95 B.C.L.R. (2d) 182 (CA.) [here-
inafterRangen]; BCCA, supra note 16, s. 100; Dixon v. Deacon Morgan McEwan Easson (1989), 64
D.LR. (4th) 441 at 445,41 B.C.LIL (2d) 82 (S.C.) [hereinafter Dixon cited to D.L.R.]; Aleman, su-
pra note 104 at 471; Kripps v. Toudze Ross & Co., motion to strike claim (1990), 52 B.C.L.R. (2d)
291 (S.C.) [hereinafter Kripps (motion to strike (S.C.))], aff’d (1992), 94 D.LR. (4th) 284, 69
B.C.L.R. (2d) 62 (C.A.), leave to appeal to S.C.C. refused, [1993] 2 S.C.R. viii, 101 D.L.R. (4th) vii,
trial of action, [1995] 6 W.W.R. 180, 5 B.C.L.R (3d) 22 (S.C.) [hereinafter Kripps (trial of action
(S.C.))], rev’d, [1997] 6 W.W.R. 421, 33 B.C.L.R. (3d) 254 (CA.) [hereinafter Kripps (trial of action
(C.A.)) cited to W.W.R.], leave to appeal to S.C.C. refused (1997), 225 N.R. 236 (note), 102 B.C.A.C.
238 (note) (S.C.C.), remitted for resolution of contributory negligence and quantum (1998), [1999] 3
W.W.. 629,41 B.LR. (2d) 124 (B.C. S.C.) [hereinafter Kripps (contributory negligence and quan-
tum) cited to W..R.]; Toronto-Doninion Bank v. Deloitte Haskins & Sells (1991),5 O.R. (3d) 417 at
422, 8 C.C.L.T. (2d) 322 (Gen. Div.) [hereinafter TD Bank cited to O.R.]; Fridman, vol. 1, supra note
97 at 281; Feldthusen, supra note 98 at 22, 33; Dugdale & Stanton, supra note 99 at 122. Contra
Sexton & Stevens, ibid. at 99-102, whose views were rejected in Hercules, supra note 100 at 196-97;
see also Linden, supra note 114 at 407.
“7 See Twiggco, supra note 144 at 6, 9; Hercules, ibid at 197; Canadian Conunercial Bank v.
Crawford, Smith & Swallow (1993), 9 B.L.R. (2d) 311 at 320,322, 15 C.C.LT. (2d) 273 (Ont. Gen.
Div.), Rosenberg J. [hereinafter Crawtford cited to B.L.R.]; Torornont Industrial Holdings v. Thome,
(2d) 65 at 87,62 D.LR (3d) 225 (H.CJ.) [hereinaf-
Gunn, Helliwell & Christenson (1975), 10 O.R1
ter Toromont Industrial cited to O.R.], rev’d on other grounds (1976), 14 O.R. (2d) 87,73 D.LR. (3d)
122 (CA.), leave to appeal to S.C.C. refused (1976), 13 N.R. 539 (note), 30 C.P.IL (2d) 93 (note)
(S.C.C.); Dixon, ibid. at 445; TD Bank, ibid See also Rivtow Marine, supra note 100 at 1196, 1200;
Campion & Dimmer, supra note 100 at 8-7; Fleming, supra note 91 at 710-11.
‘4 See Akhtar v. MacGillivray & Co. (1990), 112 A.R. 242 at 268, 77 Alta. LR. (2d) 337 (Q.B.)
(obiter) [hereinafterAkhtar cited to A.R.]; Dixon, ibid
“9 Its influence was nevertheless sometimes noticed. See eg. Edgeworth, supra note 127 at 214ff.
See also, in cases of pure economic loss, Kandoops, supra note 114 at 10; B.D.C, supra note 100 at
242; VIK Mason Construction v. Bank of Nova Scotia, [1985] 1 S.C.I 271 at 284, 16 D.L..
(4th)
598, Wilson J. [hereinafter VK Mason cited to S.C.R.]. Contra Kripps (trial of action (S.C.)), sqpra
note 146.
438
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instances of negligence, namely the Anns test, should be applied in negligent mis-
statement cases. In doing so, the Court moved away from Caparo, but only to come
back to it by incorporating, within the framework of the Anns test, most of the princi-
ples developed by Caparo to limit the ambit of the duty of care.
In Hercules the auditors provided audit reports to the shareholders of two compa-
nies. When the companies became insolvent, the shareholders brought an action
against the auditors alleging that the audit reports were negligently prepared. They
pleaded that, in reliance on these reports, they had suffered financial losses. In a
unanimous judgment, the Court refused this argument and applied the two-stage test
of Anns. Hence, the prima facie duty of care depended on the existence of a suffi-
ciently close relationship of “neighbourhood” or “proximity”. Believing, however,
that foreseeability of harm was not a sufficient criterion for the assessment of proxim-
ity, La Forest J. adopted instead the “foreseeability/reasonable reliance test”. This test
considers whether the defendant ought reasonably to have foreseen that the plaintiff
would rely on his or her misrepresentation, and whether reliance by the plaintiff
would be reasonable in the particular circumstances of the case.
The Court recognized the breadth of this test as compared with the English
courts’ reasoning, which requires that the defendant know the identity of the plaintiff
or the class of plaintiffs who will rely on the financial statement, and that the reliance
losses stem from the particular transaction in respect of which the statement was
made.”‘ The Court was thus concerned with establishing limits, since its test was oth-
erwise susceptible of being satisfied in every case.”2 La Forest J. believed, though, that
these limiting concepts were nothing other than ways of circumscribing, for reasons
of policy, the scope of the potential liability of the author of the statement, and ways
to avoid the danger of indeterminate liability.’ Therefore, the limiting concepts had to
be dealt with within the second step of the Anns test. It is this requirement that the
plaintiffs failed to meet. While there was no apparent concern for indeterminate li-
ability, since the identities of the plaintiffs were known to the auditors, the plaintiffs
did not show that the statement was used by them “for precisely the purpose or trans-
action for which it was prepared”‘
“0 Supra note 100.
“‘ Ibid. at 190, referring specifically to Candler, supra note 118; Hedley Byrne, supra note 101;
Caparo, supra note 6; Haig, supra note 2.
Hercules, ibid at 193-94.
,’See also Crawford, supra note 147 at 322, which seemed to announce this distinction.
‘ Hercules, supra note 100 at 203.
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L. KHOURY – AuDIToRs’LIABILy
439
2. Knowledge of the Plaintiff and the Contemplated Transaction
Hence, in Canada and in England, the courts have applied these two requirements
in several cases to avoid imposing liability on an indeterminate class of defendants.’
In most cases, actual knowledge was not essential, and the knowledge attributed to a
reasonable person in the same circumstances was sufficient. ‘:’
These factors are easy to assess where the report has been requested, directly or
indirectly, for a specific purpose. The cases are not always so clear, however, indeed,
the auditor’s report is frequently used by persons, and for purposes, other than those
for which it was prepared. To what extent, in such a case, will the courts extend these
flexible notions to allow recovery?
a. The Scope of the Limited Class
The specific identification of the plaintiff is not a necessary requirement, and
knowledge that the plaintiff is a member of a limited class, which the auditor knows is
targeted by the financial information, is sufficient’ 7 The ‘limited group or class” con-
cept has, however, been described as ambiguous,”‘ and is susceptible of being fash-
ioned according to the needs of each specific case. The limits of its scope therefore
attracted the attention of judges.
This question is particularly relevant in the case of public companies, whose fi-
nancial statements are included in prospectuses available to the general public. Even
in this context, though, the courts are generally reluctant to extend the right of recov-
ery to members of the general public.'”‘ Caparo expressed this reluctance to permit too
large a class to claim damages from auditors, even in the case of a public company:
See text accompanying notes 137-39, 144, 147.
‘”See McNaughton, supra note 135 at 126; Caparo, supra note 6 at 638, 641; Al-Nakib, supra note
135 at 326; BCCI, supra note 122 (“presumed kmowledge”); Morris, supra note 100 at 13; Twiggco,
supra note 144 at 9; Toroinont Industrial, supra note 147 at 87; Alernan, supra note 104 at 71; An-
drew, supra note 130 at 653-54, 656, in which the kmowledge vs in fact actual. Contra Rangen, su-
pra note 146 at paras. 28-33; Haig, supra note 2 at 476.
‘”See Hedley Byrne, supra note 101 at 482,499; Haig, ibiL at 483. See also B.D.C., supra note
100 at 241; Stanton, supra note 99 at 344. Contra Candler, supra note 118 at 183; however, Lord
Denning, in obiter, mentioned that liability could also arise if the accountant prepared his accounts for
the guidance of a specific class of persons; Smnifl, supra note 100 at 865; see Caparo, supra note 6 at
658, Lord Jauncey.
‘ See B.M. Knoppers, Professional Liability in Canada (Cowansville, Qe.: Yvon Blais, 198S) at
187; Ivankovich, supra note 96 at 524-26.
See e-g. Candler, supra note 118 at 180; Hedle Byrme, supra note 101 at 483; Possfimd, supra
note 135 at 782; Dixon, supra note 146 at 449-50; Aldtar, supra note 148 at 26869. See also B.D.C.,
supra note 100 at 241. Contra Kripps (motion to strike (S.C.)), supra note 146 at 302.
440
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The situation is entirely different where a statement is put into more or less
general circulation and may foreseeably be relied on by strangers to the maker
of the statement for any one of a variety of purposes which the maker of the
statement has no specific reason to anticipate. To hold the maker of the state-
ment to be under a duty of care in respect of the accuracy of the statement to all
and sundry for any purpose for which they may choose to rely on it is not only
to subject him in the classic words of Cardozo CJ to “liability in an indetermi-
nate amount for an indeterminate time to an indeterminate class” … it is also to
confer on the world at large a quite unwarranted entitlement to appropriate for
their own purposes the benefit of the expert knowledge or professional exper-
tise attributed to the maker of the statement.’
b. The Scope of the Transaction
As for the second limiting element, the courts generally require that the specific
transaction in sight be known to the defendant.'” Since most cases have involved ei-
ther a situation where the transaction was specifically known to the defendant, or not
known at all, it is open to discussion whether the courts would agree to enlarge the
test so as to include transactions of a “type” known to the auditors.
The courts have faced the interesting question of whether shareholders should be
treated differently, since the audited financial statements are legally prepared for the
primary purpose of protecting their interest. 2 Auditors should normally foresee that
shareholders will have access to the audited statements and might rely on them.
Nonetheless, the company’s shareholders have not benefited from any special treat-
ment. In Caparo the House of Lords rejected the contention that shareholders should
be treated specially by stating that the purpose of a statutory audit is not to assist the
shareholders in making individual speculations with a view to profit. ‘ The interest of
the shareholders is, rather, a collective interest in the company’s proper manage-
ment.’ When this interest is infringed, the claim must be made in the name of the
company.” This distinction was subsequently approved in England ‘ and in Canada.’1
6′ Caparo, supra note 6 at 621.
… See Berg Sons, supra note 123 at 1069; Al-Nakib, supra note 135 at 329; Smith, supra note 100
at 847; see also Caparo, ibid. at 658, Lord Jauncey.
1 See Part L above.
63 Supra note 6 at 653, Lord Oliver.
1
’64 Ibid. at 654, Lord Oliver, at 662, Lord Jauncey.
16 See ibid. at 626, Lord Bridge.
6 Berg Sons, supra note 123 at 1064. See also West Wiltshire District Council v. Garland, [1995] 2
W.L.R. 439 at 445-46, [1995] 2 All E.R. 17 (C.A.).
,67 Hercules, supra note 100 at 205-207; Roman I, supra note 45 at 256, 260-61; Roman Corp. v.
Peat Marwick Thorne (1993), 12 B.L.R. (2d) 10 at 18, 21 (Ont. Gen. Div.).
2001]
L. KHOURY – AuDIToRs’LABIuTY
Nevertheless, this rule does not preclude every action brought by a shareholder. In
fact, if a shareholder can show that a duty of care was owed to him or her independ-
ently from any duty owed to the company or to the body of shareholders, as where the
auditors know that an individual shareholder is likely to rely on the accounts for a
particular purpose, the claim will succeed.’
3. The Reliance/Reasonable Reliance Requirement
To establish the existence of a relationship of proximity, plaintiffs must demon-
strate not only that the defendant knew actually or inferentially that his or her advice
would be relied on,” or in Canada, that the reliance was foreseeable,'” but also that
the plaintiff did in fact rely on the statements.”‘ This last criterion is not only releN-ant
when assessing the existence of a duty of care, but also essential to the evaluation of
causation.”
3 Caparo, supra note 6 at 662. See also Possfund, supra note 135 at 788; 7i’iggco, supra note 144
at 8.
See Caparo, ibid. at 638, Lord Oliver The following cases also consider actual andlor deemed
knowledge of the reliance necessary to find a duty of care on the part of the defendant: Hedley Byrne,
supra note 101 at 486, 502-503, 514; Candler, supra note 118 at 185; McNaughton, supra note 135 at
126; Snith, supra note 100 at 863; Yorkshire Enterprise v. Robson Rhodes, supra note 130; Electra
Private, supra note 122; Grand Restaurants of Canada v. Toronto (CiV o) (1981), 32 O.R. (2d) 757
at 772, 123 D.L.R. (3d) 349, Trainor J. (I.CJ.) [hereinafter Grand Restaurants cited to O.1L, affd
(1982), 39 O.R_ (2d) 752, 140 D.L.R. (3d) 191 (C.A); Edgeworth, supra note 127 at 214; Fletcher,
supra note 100 at 212; Kingu v. Walnzar entures (1986), 10 B.C.L.R. (2d) 15 at 23, 38 C.C.L.T. 51
(C.A.) [hereinafter Kingu cited to B.C.L.R.]. See Dugdale & Stanton, supra note 99 at 116-17, 125-
26,139; Linden, supra note 114 at435; Fridman, vol. 1, supra note 97 at 267. But see the criticism of
M.A Jones, Textbook on Torts, 6th ed. (London: Blackstone, 1998) at 104, who believes that a re-
quirement of actual knowledge would be unworkable.
170 SeeKingu, ibid. at 28.
7 See generally Caparo, supra note 6 at 638; Candler, supra note 118 at 182-83; Ross, supra note
116 at 313; Junior Books, supra note 100 at 546; JEB Fasteners (CA), supra note 123 at 5S9;
McNaughton, supra note 135 at 126-27; Edgeworth, supra note 127 at 214; Fletcher, supra note 100
at 209; B.D.C., supra note 100 at 242; Toronwnt Industrial, supra note 147 at 87; Surrey Credit Union
v. W lison (1990), 49 B.C.LL (2d) 102 at 105, 107, 73 D.L.IL (4th) 207 (S.C.) [hereinafter Sunre
Credit Union cited to B.C.L.R.]; Fridman, voL 1, supra note 97 at 267; Fridman, vol. 2, supra note
107 at 138.
‘”2JEB Fasteners (C.A), ibiL at 585, 589; JEB Fasteners (Q.B.), supra note 123 at 304. See also
Henderson, supra note 126 at 180; Evatt, supra note 104 at 811; Ross, ibid. at 313-14; AMktar, supra
note 148 at 269; Kripps (trial of action (CA)), supra note 146, citing Cognos, supra note 100, in
which the criterion of reasonable reliance is listed separately from the duty of care requirement and
thus may be referred to as establishing causation; Kingu, supra note 169 at 23; Morris, supra note 100
at 5. JA Campion & S.A. Brown, ‘Professional Liability of Auditors” (1994) Advocates’ Q. 314 at
331, also list reasonable reliance separately. Finally, actual reliance was similarly part of the assess-
442
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To meet the requirement of actual reliance, it is not sufficient for the plaintiffs to
show that they were aware of the statements. They must demonstrate, on a preponder-
ance of evidence, that the financial statements were a real inducement for entering the
transaction. In the words of Stephenson L.J. in JEB Fasteners (C.A.), the financial
statements must have played a “real and substantial part” in inducing the plaintiff to
act, without being necessarily a decisive part.'” Furthermore, the misstatement does
not have to be the only or the main element in the plaintiff’s decision-making process,
nor does it have to have been fundamental to the latter. Hence, plaintiffs are entitled to
succeed if they prove that the statements were one of the factors in the decision.”
Once reliance on the statements is proven, the defendant may, however, rebut the
prima facie causation deduced from them.'” Liability will not be found if the plaintiff
would have acted in the same way even if the statement had disclosed the real situa-
tion,’76 or if the plaintiff decided to invest before reviewing the financial statements'”
or in the full knowledge of the true state of affairs.’73 In short, there is no compensation
if the same loss would have been suffered in any event.'”
ment of the causal link in Hercules, supra note 100 at 184, since La Forest J. believed it was not nec-
essary to inquire into the matter of actual reliance given that the absence of a duty of care made this
question inconsequential. See Sexton & Stevens, supra note 145 at 103; Campion & Dimmer, supra
note 100 at 8-1; Fleming, supra note 91 at 714; Jackson & Powell, supra note 1 at 295; Howarth, su-
pra note 94 at 278; Dugdale & Stanton, supra note 99 at 117; Linden, supra note 114 at 445; H.
Rowan, “Just How Far Does Third-Party Liability Extend?” (1982) 2:115 C.A. Mag. 68 at 69.
,’ JEB Fasteners (C.A.), ibid. at 588-89, Stephenson LJ., at 588, Donaldson L.J,; Surrey Credit
Union, supra note 171 at 108 (the statements must be a “real inducement into entering upon the trans-
action”); Akhtar, ibid. at 252, 269; Campion & Brown, ibid. at 333; Feldthusen, supra note 98 at 34.
In Kripps (trial of action (C.A.)), ibid at 450, Finch J.A. held that reliance may be inferred where the
representation is calculated to induce the plaintiff to act.
‘”, See JEB Fasteners (C.A.), ibid. at 588; Surrey Credit Union, ibid. at 122; Kripps (trial of action
(C.A.)), ibid. at 450. See also Fleming, supra note 91 at 714; Jackson & Powell, supra note I at 899.
.Kripps (trial of action (C.A.)), ibid.
76 JEB Fasteners (C.A.), supra note 123 at 588, Donaldson LJ., at 589, Stephenson LJ.; JEB Fas-
‘
teners (Q.B.), supra note 123 at 305; Surrey Credit Union, supra note 171 at 125.
‘n Toronont Industrial, supra note 147 at 94.
‘7 Haig, supra note 2 at 484.
‘”But in Downs v. Chappell (1996), [1996] 3 All E.R. 344 at 351, [1997] 1 W.L.R. 426 (C.A.), the
English Court of Appeal stressed that once it is shown that the plaintiff was in fact induced by a mate-
rial misrepresentation to act to his detriment, the question of whether he would have gone ahead had
the correct information been supplied becomes irrelevant. See also Bristol and West Building Society
v. Mothew (1996), [1996] 4 All E.R. 698 at 705-706, [1997] 2 W.L.R. 436 (C.A.), where Millett L.J.
limited this reasoning to cases in which a negligent misstatement is communicated, by opposition to
an omission to give appropriate information or advice. In both cases, which did not involve auditors’
liability, JEB Fasteners was not referred to. See the criticism of Jones, supra note 169 at 109-10;
comments in Swindle v. Harrison, [1997] 4 All E.R. 705 at 728, [1997] P.N.L.R. 641 (C.A.). In light
of JEB Fasteners, causation can indeed be inferred without the need for the plaintiff to comply with a
2001]
L. KHOURY- AuDIToRs’LIABILiTY
The second aspect of the reliance requirement used in the evaluation of the defen-
dant’s duty of care is that the reliance be reasonable.” Feldthusen outlines different
factors that can be used to distinguish the situations where the reliance is reasonable
from those where it is not:
1) the defendant had a direct or indirect financial interest in the transaction in
respect of which the representation was made;
2) the defendant was a professional or someone who possessed special skill
judgement or knowledge;
3) the advice or information was provided in the course of the defendant’s
business;
4) the information or advice was given deliberately, and not on a social occa-
sion;
5) the information or advice was given in response to a specific enquiry or re-
!8′
quest
Reasonableness has been questioned where the plaintiff was an expert, or was
knowledgeable in the subject matter of the inquiry and did not verify the accuracy of
the statement or representation made by the defendant; u where the relative positions
of the parties were such that the plaintiff ought to have verified the accuracy of the in-
burden of proof as stringent as the one imposed by the %but for” test of causation. This is tre despite
the existence of cases in which causation was assessed on the basis of such a reasoning. See e.g. Gran
Gelato v. Richci~ffLtd. (1991), [1992] Ch. 560 at 569, [1992] 1 All .R. 865 [hereinafter Gran Gelato
cited to CIL] (in the context of a claim under the Misrepresentation Act 1967, s. 2(1)); Hongkong
Bank of Canada v. Touche Ross & Co. (1989),36 B.C.L.R. (2d) 381 at 385 (CA.) [hereinafter Hong-
kong v. Touche]; Lloyd Cheyham & Co. v. Littlejolm & Co. (1986), [1987] B.C.LC. 303 at 305, 319,
[1986] P.C.C. 389 (Q.B.) [hereinafter Lloyd Cheylan cited to B.C.LC.]; 1874000 Nova Scotia v. Ad-
ams (1997), 146 D.LR (4th) 466 at 472,475, 159 N.S.R (2d) 260 (CA.) [hereinafterAdams]. Nev-
ertheless, this does not prevent defendants from negating causation by showing that even if they had
not been negligent, the loss would have been suffered in any event.
‘” See e-g. McNaughton, supra note 135 at 126-27; Grand Restaurants, supra note 169 at 772;
Fletcher, supra note 100 at 209; Edgeworth, supra note 127 at 212; Kripps (contributory negligence
and quantum), ibUL at 633; Keith Plumbing, supra note 127; W.V.H. Rogers, I5nfield & Jolowic on
Torts, 15th ed. (London: Sweet & Mlaxwell, 1998) at 384; Fridman, vol. 1, supra note 97 at 267.
Some cases specify that reasonableness has to be w~arranted by the particular situation of the parties.
See e-g. Hedley Byrne, supra note 101 at 486, 503, 514; Sndth, supra note 100 at 847-48; McNaugh-
ton, supra note 135 at 126-27; JEB Fasteners (Q.B.), supra note 123 at 296-97; Hercules, supra note
100 at 188; Clerk, supra note 91 at 294; McGauley v. British Columbia (1990), 44 B.C.L.R. (2d) 217
at 232 (S.C.), rev’d on other grounds (1991), 56 B.C.L1R (2d) I (CA.).
’81Feldthusen, supra note 98 at 62-63. These factors were adopted in Hercules, ibid. at 202, where
the Court held, however, that these elements should not be seen as strict tests of reasonableness.
” Fridman, vol. 1, supra note 97 at 267; Fridman, vol. 2, supra note 107 at 139, citing Banque
Bruxelles Lambert SA v. Eagle Star Insurance, [1995] 2 All E.R. 769, [1995] 2 W.L.R. 607 (Q.B.D.)
[hereinafter Eagle Star cited to All E.R]. See also McNaughton, supra note 135 at 128.
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
[Vol. 46
formation;
and where the information was outdated.'” Conversely, reliance was
found to be reasonable where the statements were prepared by two respected auditing
firms in accordance with relevant legislative and regulatory schemes.’
Reasonableness of the reliance can also be relevant to the assessment of causa-
tion.'” Thus, it is possible for the defendant to defeat a claim on the ground that it was
the plaintiff’s negligence or recklessness, and not the defendant’s representation, that
caused the loss.”‘ It can also be contended that the plaintiff’s negligence evidences
that the plaintiff would have acted in the same way even with knowledge of the true
situation.”
Finally, the reasonableness of the reliance is important to establish the defence of
contributory negligence.”‘ It is generally accepted that the English Law Reform (Con-
tributory Negligence) Act 1945 is applicable to instances involving negligent mis-
statements.’9 This statute allows a court to reduce the amount of damages recoverable
by the plaintiff if the latter is also found negligent,”‘ and if this negligence has con-
tributed to the loss suffered.'” In Canada the defence of contributory negligence has
been similarly accepted in the context of negligent misstatements.”
’93McNaughton, ibid at 127-28. In this case, however, the accounts were only draft accounts.
‘I/bid at 106. In JEB Fasteners (Q.B.), supra note 123 at 297, and Berg Sons, supra note 123, this
element affected the foresight of reliance.
” Surrey Credit Union, supra note 171 at 123.
‘8Linden, supra note 114 at 445.
‘8 Evatt, supra note 104 at 811, Lord Reid, Lord Morris, dissenting; Berg Sons, supra note 123 at
1070; Strover v. Harrington, [1988] 1 All E.R. 769, 780-81, [1988] 2 W.L.R. 572 (Ch.D.); Mackenzie
Financial Corp. v. McRae (1998), 81 O.T.C. 321 (Gen. Div.). Clerk, supra note 91, notes at 295 that
this could be the case if the plaintiff actually knows that the statement is inaccurate.
,s Howarth, supra note 94 at 279.
‘8 Linden, supra note 114 at 448; Sexton & Stevens, supra note 145 at 104; Howarth, ibid. at 279;
Jackson & Powell, supra note 1 at 295; Fridman, vol. 2, supra note 107 at 138; Fleming, supra note
91 at 714. Contra Feldthusen, supra note 98 at 22, 128.
,0 (U.K.), 8 & 9 Geo. VI, c. 28. See Rogers, supra note 180 at 383; Buckley, supra note 91 at 129-
30; Jackson & Powell, ibid. at 910. See also JEB Fasteners (Q.B.), supra note 123 at 297; Lloyd
Cheyham, supra note 179 at 320; Gran Gelato, supra note 179.
… See Law Reform (Contributory Negligence) Act 1945, ibid., s. 1 (1).
” It is not necessary for the plaintiff’s negligence to contribute to the accident or other event from
which the damage flows. See Rogers, supra note 180 at 235-37; Dugdale & Stanton, supra note 99 at
519-24; Percy, supra note 91 at 202-204; Clerk, supra note 91 at 68-72. For Canada, see Fridman,
vol. 1, supra note 97 at 375-80; Linden, supra note 114 at 438-39.
‘” See Fridman, vol. 2, supra note 107 at 138-39; Linden, ibid. at 448; L.N. Klar, “Recent Devel-
opments in Canadian Law: Tort Law” (1991) 23 Ottawa L. Rev. 177 at 200. The following cases have
considered the defence: Hongkong v. Touche, supra note 179; Adams, supra note 179. See also the
following cases not involving auditor’s liability: Grove Service v. Lenhart Agencies (1979), 10
C.C.L.T. 101 (B.C. S.C.); J.D. Irving Ltd. v. Western Plumbing & Heating (1979), 34 N.S.R. (2d) 285
2001]
L. KHOURY – AUDITORS’ LIABILITY
445
The fact that reasonable reliance is factored into the recognition of a duty of care
and the defence of contributory negligence creates a conceptual difficulty, which con-
tinues to be unresolved. It is well explained by Trainor J. in Grand Restaurants:
At first blush, there is perhaps some difficulty in finding that a plaintiff ought to
recover damages for negligent misrepresentation, which presupposes a reason-
able reliance on the advice of the defendant, and then to have his damage re-
duced on account of his reliance … being to some degree “unreasonable” or
excessive.”
Similarly, if the plaintiff’s reliance on the accounts is so unreasonable as to
amount to contributory negligence, it may be argued that he or she cannot be held to
have reasonably placed reliance on the statements for the purpose of establishing
prima facie liability.” Different attempts to resolve this “apparent!” contradiction are
not all convincing.”‘ Despite this difficulty, the courts have nevertheless found con-
tributory negligence along with liability based on reasonable reliance.”‘ Some cases,
however, have stressed that only in “very special cases” are the courts justified in re-
ducing damages of plaintiffs who have done what the defendant intended them to do
by way of reliance on the misrepresentation.”
(S.C. (T.D.)); H.B. Nickerson & Sons v. boldridge (1980), 40 N.S.R. (2d) 388, 115 D.LR. (3d) 97
(S.C. (A.D.)); Reardon v. Kings Mutual Insurance Co. (1981), 44 N.S.1R (2d) 691, 120 DJ..R. (3d)
196 (S.C. (T.D.)); Dorsch v. Weyburn (City of) (1985), 43 Sask. R. 46,23 D.LR. (4th) 379 (CA).
” Grand Restaurants, supra note 169 at 775. See also JEB Fasteners (Q.B.), supra note 123 at 297;
Markesinis & Deakin, supra note 94 at 650. This has prompted Lowry L to say in Kripps (contribu-
tory negligence and quantum), supra note 146 at 633, that it is not very often that a successful plea of
contributory negligence in the context of an allegation of negligent misstatement can be made.
‘9 Evatt, supra note 104 at 811, Lord Reid, Lord Morris, dissenting; Fridman, vol. 2, supra note 107
at 138-39; Klar, supra note 193 at 200, who believes that apportionment on the basis of contributory
negligence is unwise since reasonable reliance is required to establish the duty of care.
, Klar uses this adjective (ibid).
“‘See e.g. the distinctions made in Grand Restaurants, supra note 169 at 775-76, analyzed by
Fridman, vol. 2, supra note 107 at 139; Eagle Star, supra note 182, Phillips J., studied by Clerk, supra
note 91 at 295, and by Howarth, supra note 94 at 279. This interesting question falls beyond the scope
of this article.
.Eagle Star, ibid at 773-76; Platform House Loans v. Oyston Shipways, [1998] 4 All ER. 252,
[1998] 3 W.L.R. 94 (Ch.D.); Eavards v. Lee (1991), 141 N.LJ. 1517, The Independent (1 November
1991) (Q.B.); Grand Restaurants, ibid at 773-76; Hongkong v. Touche, supra note 179; Lewis v. Co-
les (1992), 47 C.CEL. 302 (B.C. S.C.); O.E.X Electromagnetic v. Coopers & Lybrand (1992), 75
B.C.L.R. (2d) 384 (S.C.); Surrey Credit Union, supra note 171 at 121; Kipps (contributory negli-
gence and quantum), supra note 146.
‘ See Gran Gelato, supra note 179 at 574; Eagle Star, ibid at 824.
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4. Policy Considerations
Finally, the importance of policy factors in the analysis of the courts must be dis-
cussed. In the words of Lord Pearce, “How wide the sphere of the duty of care in
negligence is to be laid depends ultimately upon the courts’ assessment of the de-
mands of society for protection from the carelessness of others:”
The application of policy considerations is usually done at two levels. First, it can
be reserved to cases where proximity is satisfied and a prima facie duty of care is
found, but where there is nevertheless an interest in refusing recovery, as was the case
in Anns. Second, it can come into play within the assessment of the requirement of
proximity itself, and therefore is a factor in the decision regarding the existence of a
duty of care.”‘
The main policy factor, which has preoccupied the English and Canadian com-
mon law courts, is the fear of opening the floodgates of litigation.’ On the one hand,
such factors as the fear that an open-ended liability might seriously injure the profes-
sion or burden social and commercial life have also been assessed.”3 On the other,
these arguments have been balanced against, inter alia, the need to deter negligent
conduct and to furnish incentives to caution,’ as well as the fact that auditors are in a
better position to protect themselves by getting insurance and passing on its costs to
their clients.’
C. Conclusion
The most interesting features of this comparative study of the English and Cana-
dian common law are the following. First, a very different approach has guided the
courts of these two jurisdictions in the determination of the duty of care, especially in
2Hedley
Byrne, supra note 101 at 536.
” Kar et al., supra note 94 at 139-45.
. See supra notes 93-97, 121 and accompanying text. Contra Binder Hamlyn, supra note 130,
where it is noted that the extent of potential liability and commercial problems over insurance can be
guarded against by a disclaimer as in Hedley Byrne, supra note 101.
‘0’ Linden, supra note 114 at 423; Knoppers, supra note 158 at 184; B.R. Cheffins, “Auditors’ Li-
ability in the House of Lords: A Signal Canadian Courts Should Follow” (1991) 18 Can. Bus. LI.
118 at 127. See also B.D.C., supra note 100 at 243.
‘ Linden, ibid. at 276; Sexton & Stevens, supra note 145 at 100-101; Dugdale & Stanton, supra
note 99 at 87-88. But see Hercules, supra note 100, where this argument was said at 194 to be out-
weighed by the “socially undesirable consequences to which the imposition of indeterminate liability
of auditors might lead:’ See also Cheffins, ibid at 124.
m Scott Group, supra note 123 at 572; Norsk, supra note 94 at 1123-1125, 1157. For a more exten-
sive discussion of these policy issues, see Cheffins, ibid at 121-28; Ivankovich, supra note 96 at 520-
21; Howarth, supra note 94 at 320; Sexton & Stevens, ibid. at 101; Knoppers, supra note 158 at 184-
85.
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L. KHOURY- AuDfTORS’LIABILITY
447
recent years. English law has, with the exception of the tendency to use assumption of
responsibility as a general test, adopted an incremental approach and refused to state a
broad test that would allow a uniform assessment of the right to recovery. In contrast,
Canadian courts have proceeded on a more global theoretical basis and endorsed the
Arms test as applicable to every case of negligence. As has been observed, however,
the difference between the Canadian and the English approaches is probably only a
question of semantics. ‘ In fact, both jurisdictions are concerned with the possibility
of indeterminate liability, and concede that foreseeability alone is not sufficient to
prevent it. Both systems believe that policy concerns should play an important role,
and express the need to impose limitations on recovery to avoid the dangers of inde-
terminate liability. In addition, both use knowledge about the plaintiff and the con-
templated transaction as limiting devices, albeit at different conceptual levels. Finally,
both jurisdictions have stressed the necessity of demonstrating reasonable reliance in
order to find liability. Thus, on a practical level, these different theoretical approaches
have resulted in little divergence in the courts’ conclusions. It is now interesting to ex-
amine whether one can make a similar observation in the context of a different legal
system, the French and Quebec systems of responsabilitd civile.
Ill. The Civil Law
A. France and Quebec: The Juridical Context
In order to draw useful conclusions from the present comparative study, it is im-
portant to understand from the outset the specific situation of the legal system of Que-
bec. Moreover, since the question of auditors’ liability towards third parties in France
and Quebec is not dealt with through the application of a specific system of liability,
this section also gives a broad overview of the relevant rules of responsabilitd civile in
these two jurisdictions.
1. Quebec: Tensions and Influences in a Mixed System
The origin and development of Quebec private law is based on French law, and to
some extent, it is still very similar to it. In more than three hundred years of autono-
mous existence, however, Quebec private law has cultivated its own specificity, influ-
enced by its different societal and cultural context and the considerable influence of
its common law neighbours.
The Province of Quebec and the state of Louisiana are the two areas in North
America where the French legal tradition has survived, despite the fact that they are
2″Kar et aL, supra note 94 at 145.
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members of federal countries ruled entirely by the common law tradition. This is par-
ticularly true of Quebec, where the French tradition is kept alive outside the legal
system, and dominates its language, culture, and social and economic activities.
Moreover, while the French tradition has subsisted in the area of private law, the pub-
lic law of the Province of Quebec is governed by the English common law tradition.’
The mixed nature of the Quebec legal system, and the sometimes difficult relationship
between its French roots and the direct influence of the common law tradition, makes
it a fascinating jurisdiction to study.
In 1866 the distinctiveness of the Quebec private law was settled by the drafting
of the Civil Code of Lower Canada,’ which aimed to protect the French legal tradi-
tion from foreign influences.”0′ The C.C.L.C. was in fact seen as the immune system
of the French-Canadian nation,”‘ and as a means of protecting not only Quebec’s legal
roots, but also its religious and linguistic heritage. Since then, the distinctiveness of
the private law of Quebec has not disappeared, but the need to protect it against for-
eign imports has been frequently articulated by courts and commentators alike. One
of its greatest advocates was Pierre-Basile Mignault.2′” Through the voices of
Mignault J., and subsequently of Beetz J., the Supreme Court of Canada insisted on
the necessity of refraining from importing common law concepts into Quebec law,
while recognizing that the common law could have an influence over the civil law:
I me semble respectueusement qu’il est temps de rragir contre I’habitude de
recourir, dans les causes de la province de Quebec, aux pr~c&lents du droit
commun anglais, pour le motif que le code civil contiendrait une rfgle qui
serait d’accord avec un principe du droit anglais. Sur bien des points, […] le
code civil et le connon law contiennent des rfgles semblables. Cependant le
droit civil constitue un syst~me complet par lui-meme et doit s’interpr~ter
d’apr~s ses propres r~gles. Si pour cause d’identit6 de principes juridiques on
peut recourir au droit anglais pour interpreter le droit civil frangais, on pourrait
SThis is the result of historical factors flowing from the conquest of Nouvelle France by England
during the eighteenth century. For a detailed historical overview, see F.P. Walton, Le domaine et
l’interpritation du Code Civil du Bas-Canada, trans. M. Tancelin (Toronto: Butterworths, 1980) at
35ff. See also the following constitutional documents: Royal Proclamation, 1763 (U.K.), 3 Geo. Il;
Quebec Act, 1774 (U.K.), 14 Gee. TI, c. 83; Constitutional Act, 1791 (U.K.), 31 Geo. 111, c. 31; Un-
ion Act 1840 (U.K.), 3-4 Vict., c. 35, all reprinted in R.S.C. 1985, App. HI.
‘ The private law was reformed in 1991 by the adoption of the Civil Code of Quebec, which came
into force on 1 January 1994.
‘ See R-A. Crdpeau, “Preface” in Office de Revision du Code civil, Rapport sur le Code civil du
Quebec, vol. 1 (Quebec: 12diteur Officiel, 1978) xxv at xxvi-xxvii, cited in M. Guy, “Le Code Civil du
Quebec: Un peu d’histoire, beaucoup d’espoir” (1993) 23 R.D.U.S. 453 at 461.
20 See S. Normand, “Un th6me dominant de la pensre juridique traditionelle au Quebec: La sa-
vegarde de l’intdgrit6 du droit civil” (1987) 32 McGill LJ. 559 at 574.
… See e.g. R-B. Mignault, “L’avenir de notre droit civil” (1923) 1 R. du D. 104,
2001]
L. KHOURY- AuDIToRs’LIABILfTY
449
avec autant de raison citer les monuments de la jurisprudence franaise pour
mettre en lumi~re les regles du droit anglaisP2
The Court of Appeal of Quebec also endorsed this protectionist position, preferring in
some cases to rely on French law for inspiration!” In practice, however, the influence
of the common law on the civil law of Quebec can be witnessed in many Supreme
Court of Canada decisions, “” as well as in judgments of the Quebec courts, which
have sometimes applied common law principles without scruple.!”5 One of the fields
where this influence is most remarkable is that of auditors’ liability towards third par-
ties for negligent misstatements, despite the fact that, in principle, these cases are gov-
erned by the general rules of responsabilit6 civile.
212 Desrosiers v. Canada (1920), 60 S.C.R. 105 at 126, Mvignault
., approved in Rubis v. Gray
Rocks Inn, [1982] 1 S.C.R. 452 at 469, 41 N.R. 108, Beetz J. See also National Bank v. Soucisse,
[1981] 2 S.C.R. 339,43 N.R 283, Beetz J.; Driver v. Coca Cola, [1961] S.C.R. 201, 27 D.LR. (2d)
20, Cartwright J.; C.N.R. v. Vancent (1978), [1979] 1 S.C.R. 364, 93 D.L.R. (3d) 663, Pratte J.;
(4th) 617, L’Heureux-Dub. J.; Raleigh Co. v.
Augustus v. Gosset, [1996] 3 S.C.R. 268, 138 D.L.
Dumoulin, [1926] S.C.R. 551, Mignault J.
2 3 Dodds v. Schierz, [1986] R.J.Q. 2623 at 2627,40 C.C.L.T. 167, Monet . (CA). But see ibid.,
., added at 2638 that when legal provisions are similar, the
where Rothman J., echoing Mignault
common law might be helpful. See also Chouinard v. Landr,, [19871 RJ.Q. 1954 at 1362-69, [1987]
R.RA. 856 (CA); TS.C.O. of Canada v. Chdteauneif, [1995] RJ.Q. 637 at 679, 124 D.LR. (4th)
308 (C.A.); Elliott v. Entreprises C~te-Nord, [1976] CA 584 [hereinafter Elliott]; J.E. Construction
v. General Motors du Canada, [1985] CA 275 at 280 [hereinafterJ.E. Construction].
114 See e.g. Magann v. Auger (1901), 31 S.C.R. 186; Drysdale v. Dugas (1897), 26 S.C.L 20; Can-
ada v. LaperriLre, [1946] S.C.R. 415, [1946] 3 D.L.R 1; Taillon v. Donaldson, [1953] 2 S.C.R. 257;
Ouellett v. Cloutier, [1947] S.C.R. 521; Tremblay v. Daigle, [1989] 2 S.C.R. 530, 62 D.LR. (4th)
634. It must be noted that three judges of the Supreme Court of Canada are appointed from among
the judges or advocates of Quebec. See Supreme CourtAct, R.S.C. 1985, c. S-26, s. 6.
” See e.g. Imasa Ltd v. Artitex Knitting Mills, [1977] C.S. 531, rev’d (12 March 1979), Montreal
500-09-000245-779 (C.A.); Serice alinentaire exciusif v. Trust gsneral du Canada, [1979] C.S. 838,
rev’d, [1984] CA 145; Lange Company of Canada v. Platt, [1973] CA. 1068, 18 C.P.R. (2d) 144;
O’Hearn v. Estrada (17 April 1984), Montreal 500-09-000999-813, J.E. 84-449 (CA); Dunant v.
Chong (13 December 1985), Montreal 500-09-000035-816, J.E. 86-73 (CA). The influence of the
common law can also be witnessed in the C.C.Q. itself, which incorporates rules of common law ori-
gin. Moreover, some areas of private law are of federal competence and thereby ruled by federal stat-
utes. Such is the case for bankruptcy and divorce. See Constitution Act, 1867, supra note 8, ss. 91(21),
91(26).
450
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2. Responsabilit6 Civile: General Features
a. General Principle of Liability
In French and Quebec civil law, a plaintiff to any claim in damages benefits from
a general right of action,” ‘ which comes into play whenever three prerequisites are
met: the defendant has committed a fault, the plaintiff has suffered harm, and there is
a sufficient causal relation between these two events. These three conditions restrict
the extent of the general principle of liability. Thus, not every act of the defendant will
constitute a fault, and not every harm claimed will be worth compensating. The main
controlling device in cases of auditors’ negligence causing a loss to third parties, how-
ever, is the causation requirement.
b. The Causation Requirement
In France, this condition is expressed in articles 1382 and 1383 of the Code civil:
1382. Any human deed whatsoever which causes harm to another creates an
obligation in the person by whose fault it was caused to compensate it.
1383. Everyone is liable for the harm which he has caused not only by his
deed, but also by his failure to act or his lack of care.”7
In Quebec, article 1457 of the C.C.Q. lays down this fundamental principle:
1457. Every person has a duty to abide by the rules of conduct which lie upon
him, according to the circumstances, usage or law, so as not to cause injury to
another.
Where he is endowed with reason and fails in his duty, he is responsible for any
injury caused to another by the act or fault of another person or by the act of
things in his custody.”‘
The codes do not indicate how the causal link between the fault and the damage
should be evaluated, and stress only that the damage must have been the direct2’ and
1 See arts. 1382-83 C.N.; art. 1457 C.C.Q.
27 Articles translated in J. Bell, S. Boyron & S. Whittaker, Principles of French Law (Oxford: Ox-
ford University Press, 1998) at 355.
“‘ The generality of these provisions can be contrasted with the specificity of the provisions of other
civil law countries, such as art. 823 of the German Blirgerliches Gesetzbuch, which enumerates an
exhaustive list of protected rights.
,9 Directness of the damage amounts to causation. See J.L. Baudouin & P. Deslauriers, La respon-
sabilit6 civile, 5th ed. (Cowansville, Qc.: Yvon Blais, 1998) at 158; M. Tancelin, Des obligations:
L’acte illdgitinze et les modes d’exicution (Montreal: Wilson & Lafleur, 1993) at 111 [hereinafter
L’acte illigitime]; P Conte & P. Maistre du Chambon, La responsabilitd civile ddlictuelle (Grenoble:
Presses Universitaires de Grenoble, 1994) at 41.
2001]
L. KHOURY- AUDITORS’LIABILITY
immediate consequence of the fault.tm While in many cases straightforward, this de-
termination can become a difficult exercise when dealing with several factors suscep-
tible of having caused the damage.2′ To provide guidance in such circumstances, dif-
ferent theories of causation were developed. They do not always respond properly,
however, to the specific problems encountered in the practical application of the cau-
sation requirement.t
i. The Efforts of the Theorists and the Subjectivity of the
Courts —
Despite the fact that there is no judicial consensus in France and Quebec as to
which theory should be favoured,’
the theory of causalitd adiquate (adequate causa-
tion) is the one that has received the most support from, and application by, the
courts.’ This theory seeks to eliminate the mere circumstance of the damage to iso-
late only its immediate cause, namely, the event, which in the normal state of affairs
(dans le cours habituel des choses), is of a nature to cause the damage. It may be seen,
however, as having the disadvantage of isolating only one cause even in cases where
the damage flows from many factors.’ In addition, some Quebec cases tend to adopt
the theory of privision raisonnable des consdquences (“reasonable foreseeability).’
This approach finds the existence of a causal relation when the kind of damage caused
could be reasonably foreseen by the author of the fault. It has been criticized as con-
fusing the fault and the causation requirements, and is usually imposed only in cases
220 See art 1607 C.C.Q. Compare art. 1151 C.N., extended by the doctrine from contract to cases of
responsabilitd civile.
, A. Nadeau & R. Nadeau, Traitdpratique de la responsabilitd civile delictuelle (Montreal: Wilson
22J Flour & J.L. Aubert, Les obligations: 2) Lefaitjuridique, 6th ed. (Paris: A. Colin, 1997) at
& Lafleur, 1971) at 607-608.
paras. 161, 182.
For analysis and criticism of these theories, see La responsabilit: conditions, supra note 87 at
410-16; Flour & Aubert, ibid. at paras. 155-62; P Malaurie & L. Ayn s, Cours de droit civil. Les obli-
gations, 3ded. (Paris: Cujas, 1992) at 50; B. Starck, H. Roland & L Boyer, Obligations. 1) La re-
sponsabilitddelictuelle, 5thed. (Paris: Litec, 1996) at 444-49; L’acte iidgitine, supra note 219 at 132-
35; Baudouin & Deslauriers, supra note 219 at 34447.
‘ See Nadeau & Nadeau, supra note 221 at 608; La responsabilite: conditions, ibid. at 406; Bau-
douin & Deslauriers, ibid. at 347.
2″See Baudouin & Deslauriers, ibid. at 353; J. Pineau & M. Ouellete, Th orie de la responsabilitd
civile, 2ded. (Montreal Th~mis, 1980) at 178; L’acte illdgitinte, supra note 219 at 123-34; La respon-
sabilitd conditions, ibid. at 413; Flour & Aubert, supra note 222 at para. 150.
see Baudouin & Deslauriers, ibid., rightly observing at 351 that, in accordance with this the-
ory, more than one event can be identified as the cause of the harm, as long as each event is its true
cause.
6But
2
2!lbid at 350,353.
= Ibid at 342.
452
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of contractual liability.’ Finally, the dquivalence des conditions (“equivalence the-
ory”), which retains as causal all the facts contributing to the damage, plays a role in
the specific area of auditors’ liability.
Ultimately, however, the judges’ intellectual process is usually not based on any
theoretical ground, logical explanation, or search for a scientifically exact solution,
but is rather empirical and depends on their sovereign and subjective appreciation, as
well as the application of their bon sens (common sense).’ While having the advan-
tage of being flexible =’ and susceptible of adaptation depending on the facts of the
case and the results that the court thinks just, this subjective evaluation can have the
effect of creating uncertainty. 2
ii. The Problem of the Victime par Ricochet
Linked to the issue of causation is the question of whether the courts should grant
recovery for harm sustained by a “ricochet victim”, that is, a victim whose harm arises
from someone else’s damage. The courts generally do so, with some exceptions, as
long as it can be proven that there was a causal link, and that the damage suffered was
distinct from damage to the immediate victim.”‘
See art. 1613 C.C.Q.; art. 1150 C.N. See Companie Miron v. Brott (1978), [1979] C.A. 255, 11
C.C.L.T. 114 [hereinafter Miron], where the court held, in a case of a claim for financial loss, that the
question is whether the damage is a direct consequence of the fault, not whether the loss was foresee-
able.
230 Starck, Roland & Boyer, supra note 223 at 438, 441, 443; Flour & Aubert, supra note 222 at
paras. 154, 165; J. Pineau, D. Burman & S. Gaudet, Thdorie des obligations, 3d ed. (Montreal:
Th~mis, 1996) at 666; Demogue: “[]I s’agit d’une question de bon sens plus que de science… qu a
parfois laiss6 les patiences les plus dprouv~es” cited in La responsabilit: conditions, supra note 87 at
407.
23 See B.S. Markesinis, “La politique jurisprudentielle et la reparation du pr6judice 6conomique en
Angleterre: une approche comparative” (1983) R.I.D.C. 31 at 45-46.
22 See Marshall, supra note 94 at 766.
233 See La responsabilit: conditions, supra note 87 at 425; Pineau & Ouellette, supra note 225 at
24; Baudouin & Deslauriers, supra note 219 at 158-59; Malaurie & Ayn~s, supra note 223 at 52, 54;
Congrdgation des Petits Frres de Marie v. Regent Taxi (1928), 46 B.R. 96; Trib. gr. inst. Nanterre, 22
October 1975, Gaz. Pal.1976.1″ sem. Jur.392 (Annot. A. Plancqueel). It must be noted that the princi-
ple of the relative effects of contracts (art. 1440 C.C.Q.; art. 1165 C.N.), which precludes third parties
from benefiting from a contract to which they are not a party, does not prevent recovery in favour of a
person suffering a loss flowing from the defective performance of a contractual obligation. The third
party in fact benefits from an extra-contractual action in damages under certain conditions in Quebec,
or automatically in France. See France: La responsabiliti: conditions, ibid. at 256,258; G. Viney,
TraitJ de droit civil. Introduction a la responsabilitd, 2ded. (Paris: Librairie g~nrale du droit et juris-
prudence, 1995) at 286, 367, 386-403; J. Ghestin, Trait6 de droit civil. Les obligations. Les effets du
contrat (Paris: Librairie g6nrale de droit et de jurisprudence, 1992) at 549; C. Larroumet, Droit civil.
2001]
L. KHOURY – AUDITORS’ LIABILIY4
453
In this area, however, French law shares a concern of indeterminate liability with
the common 1aw.” The concept of causation is, therefore, used to eliminate damages
that are considered too indirect.’ Hence, the real question is not whether the plaintiff
is the “immediate victim”, but rather if a causal link exists.
c. Pure Economic Loss
The same observation applies to the question of pure economic loss, which has
not unduly preoccupied the judiciaries of France and Quebec. This type of harm has
never been categorically excluded or treated separately.’
It is compensated under the
general principle of liability,” as long as it meets the conditions of directness, legiti-
macy, and certainty set out in the codes.’ The central question is usually whether
there is a causal link between the act of the defendant and the harm suffered by the
plaintiff.” Through the use of this concept, recovery is restricted to cases the courts
find appropriate.
Les obligations, vol. 3, 3d ed. (Paris: Economica, 1996) at 731-36, 742-44. In Quebec see Bank of
Montreal v. Bail Lte, [1992] 2 S.C.R. 554 at 581, 583, 93 D.L.R. (4th) 490; National Bank of Can-
ada v. Houle, [1990] 3 S.C.R. 122 at 165, 167, 181, 182,74 D.L.R. (4th) 577 [hereinafter Houle cited
to S.C.R]; Boucher v. Drouin, [1959] B.tR 814 at 822; Services inunobiliers Royal Lepage v. Des-
chambault, [1993] R.D.I. 291 at 294 (Sup. Ct.); Inzneubles Ldger v. Lafleur, [1993] R.D.I. 220 at
221-22 (C.Q.); M. Tancelin, Sources des obligations: L’actejuridique legitime (Montrl: Wilson &
Lafleur, 1993) at 195; D. Jutras, “Le tiers tromp” (1993) 72 Can. Bar Rev. 28 at 36,39 [hereinafter
“Le tiers trompe’]; J.L. Baudouin & P-G. Jobin, Les obligations, 5th ed. (Coiansville, Qe.: Yvon
Blais, 1998) at 383.
‘ See Ripert, D.1921.2.17: “Tout acte dommageable peut avoir des rdpercussions lointaines, et cc
serait exag~rer la responsabilit6 que de suivre ind~finiment dans le labyrinthe des actions humaines le
fil tnu de causalit6 qui relie les actes les uns aux autres”. The courts have been particularly reluctant
to allow recovery for claims of creditors, employers, or partners of a deceased victim. See La respon-
sabiliti: conditions, supra note 87; Norsk, supra note 94 at 1080; Markesinis, supra note 231 at 44.
Moreover, the courts are more willing to accept a third party claim when the defective peformance of
the contractual obligation results in physical damage to a person or property than when the damage is
purely financial. See D. Jutras, “Civil Law and Pure Economic Loss: What Are We MissingT’ (1986-
87) 12 Can. Bus. LJ. 295 at 304 [hereinafter’Pure Economic Loss”]; “Le tiers trompS’, ibid. at 42.
2″ See Baudouin & Deslauriers, supra note 219 at 159.
‘ See Linden, supra note 114 at 380; ‘Ture economic loss”, supra note 234 at 295; L’acte illdgi-
time, supra note 219 at 126-27. Art. 1607 C.C.Q. states only that the damage may either be “bodily,
moral or material:’
‘ See L’acte illgitine, ibidL at 108. See also Markesinis, supra note 231, who wonders at 32 if the
English law is now coming closer on this issue to the liberal attitude of the C.N. because of the ex-
ceptions it has recognized in the last decades.
See art. 1607 C.C.Q.; art. 1151 C.N.
z See France: Trib. gr. inst. Nanterre, 22 October 1975, supra note 233; Cass. Civ., I 1 July 1963,
Gaz. Pal. 1963.2′ sern. Jtu389; Cass. civ. 2′, 19 March 1980, J.C.P 1980.IV.216, D. 1980.IR.414;
Cass. civ. 2% 19 March 1980, D. 1980.LR.414 (Annot. Laroumet); Colmar, 20 April 1955, D. 1956.
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[Vol. 46
It is mainly with the help of this requirement that the courts have limited, to a
great extent, third party recovery of financial losses from auditors. McLachlin J. (as
she then was) of the Supreme Court of Canada has stressed that causation and the
common law notion of proximity play similar roles:
[P]roximity may be seen as paralleling the requirement in civil law that dam-
ages be direct and certain. Proximity, like the requirement of directness, poses
the requirement of a close link between the negligent act and the resultant loss.
Distant losses which arise from collateral relationships do not qualify for re-
covery.
4
0
The next section is concerned with the use of causation as a controlling device in the
area of auditors’ liability towards third parties in the legal systems of France and Que-
bec.
B. The Liability of the Commissaire aux Comptes towards Third
Parties
The distinctness of the French system rests on the fact that the commissaire aux
comptes has an unequivocal mission of general interest and an institutional role. In
addition, it is the only legal system in which the law provides explicitly for auditors’
liability towards third parties, through article 234, paragraph 1 of the Loi de 1966:1
Les commissaires aux comptes sont responsables, tant A l’6gard de la socidt6
que des tiers, des consequences dommageables des fautes et n~gligences par
eux commises dans l’exercice de leurs fonctions.
This provision does not replace or derogate from the general principle of liability pro-
vided for by articles 1382 and 1383 of the Code civil, but rather serves as a specific
application of it.”‘ Fault, harm, and causation must therefore always be proven before
such a claim is accepted.” 3 Hence, article 234 of the Loi de 1966 appears to be de-
Jur.723 (Annot. Savatier); Quebec: Trans-Quebec Helicopters v. Lee, [1980] C.A. 596; Elliott, supra
note 213. See also the following cable cases: J.E. Construction, supra note 213; Joly v. Ferme R-ni,
[ 1974] C.A. 523; Syndicat des Employds de Mitier d’Hydro-Quebec, section locale 1500 v. Eastern
Coated Papers, [1986] R.J.Q. 1895,2 Q.A.C. 209 (C.A.); Miron, supra note 229.
‘ 4 0Norsk, supra note 94 at 1154.
2,’ Supra note 26. See generally Part I, above.
242 Com., 27 October 1992, supra note 86; Lang6, supra note 86 at 3.
2, Lyon, 27 January 1994, Bull. C.N.C.C. 1994.271 (Annot. P. Merle); Paris, 23 February 1978, su-
pra note 87; Com., 27 October 1992, ibi; R. Castell & F Pasqualini, Le commissaire aur coniptes
(Paris: Economica, 1995) at 87; Guyon, supra note 6 at 274; Compagnie Nationale des Commissaires
aux Comptes, supra note 6 at 2; annot., Rennes, 22 Febuary 1999, supra note 87. On the requirement
of causation, see Corn., 12 November 1992, Bull. C.N.C.C. 1993.89.110 (Annot. M. Jeantin, E. du
Pontavice); Com., 15 June 1993, supra note 70; Amiens, 20 June 1988, Bull. C.N.C.C. 71.316 (An-
not. E. du Pontavice); Trib. gr. inst. Cherbourg, 6 April 1976, B.C.C. 1976.23.318.
L. KHOURY- AUDITORS’ LIABILITY
2001]
claratory of the principles already existing in the Code civil. It is interesting to note,
however, that the French legislator did not find it sufficient to rely on the general prin-
ciple provided for in the code. By reaffirming this general principle in the area of
auditors’ liability towards third parties, the legislator made it clear that the third party
is not an “indirect victim” whose prima facie right to recovery is uncertain.
455
The existence of this provision does not necessarily make the third party’s right of
action easier, since once the fault of the conzmissaire aux comptes and the loss are es-
tablished, the difficult burden of proving the direct link between the two must be
overcome.
1. Assessment of Causation
In addition to the particular difficulties related to the application of the notion of
causation,”
the specific context of auditors’ liability towards third parties makes this
problematic requirement even more difficult to meeL First, the fault of the commis-
saire aux comptes is usually one of omission rather than of positive action, and this
creates evidentiary difficulties.2″ Second, comnmissaires do not prepare the accounts
themselves and have the obligation not to participate in the management of the soci-
jtj.-” Consequently, their fault is never the only cause of the damage suffered by the
socidtd or the third party, which usually flows primarily from the lack of care or the
fraud of the administrators. -” Finally, since the work of the comnmissaire amx comptes
is not meant to provide any certainty, it should normally be only one of the factors in-
volved in the appreciation of the financial situation of a business. These elements may
explain why the courts have shown a reluctance to allow recovery in favour of third
parties on grounds of causation even when the commissaire aux comptes was at
fault.'”
When assessing the existence of the causal link, courts generally ask whether the
normal diligence of a competent conrnissaire aux comptes would have permitted the
24 See supra notes 223-35 and accompanying text.
2, See Guyon, supra note 6 at 281; Morin, supra note 6 at 19; Lang6, supra note 86 at 8.
4 See Loi de 1966, supra note 26, s. 228.
“Another alternative is the fault of the expert-comptable in the establishment of the accounts.
2, The commentators recognize unanimously that this requirement is difficult to meet. See Manuel
pratique, supra note 71 at A.15, 208; annot., Lyon, 27 January 1994, supra note 243 at 275; Guyon,
supra note 6 at 399; Corn, 27 October 1992, supra note 86; Compagnie Nationale des Commissaires
aux Comptes, supra note 6 at 24. See also Corn., 2 July 1973, supra note 87; Conwnissariat atur
comptes, supra note 38 at 82; CREDA, supra note 67 at 430; Mondger & Granier, supra note 6 at
153. The importance of carefully assessing the existence of a causal link vas reiterated in Com., 17
October 1984, supra note 71.
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plaintiff to avoid the loss.”9 If the loss would have occurred even in the absence of a
fault, the claim will be rejected. According to Vidal, the requirement is twofold: first,
granted that diligence on the part of the commissaire aux comptes would have allowed
the real situation to be discovered, the fault must have provoked an error in the mind
of the plaintiff in relation to the evaluation of the financial wealth of the company;
second, this error must have brought about the prejudicial action of the plaintiff.’
Moreover, in some cases, that the error has prevented the plaintiff, or the administra-
tors, from taking an action to remedy the situation and to avoid the collapse of the
business also demonstrated causation.’
It is noticeable that the courts do not require the fault of the commissaire aux
comptes to be the only or even the main cause of the plaintiff’s loss.’ Such an ap-
proach would have the consequence of making almost every case inadmissible, since
the cause of the loss is usually multiple and lies, at the outset, in the fault or fraud of
the administrators. 3
According to the rule found in section 234, paragraph 2 of the Loi de 1966, corn-
missaires aux comptes are only liable for their personal faults, and their fault cannot
be substituted for the fault of the administrators.’ This principle has prompted some
commentators to affirm that, when harm has been caused by the fault of both the ad-
ministrators and the commissaire aux comptes, the latter should not be condemned in
solidum with the former. Thus, it is argued that commissaires should be held liable for
only the part of the loss directly linked to their fault since they are not the co-author of
the faults committed by the administrators or their accomplice and do not participate
in the creation of the same loss.’ Refusing in solidum condemnation, some judges
have therefore attempted to apportion the damage according to the exact part played
2,9 Com., 27 October 1992, ibid.; Aix-en-Provence, 29 May 1981, D. 1982.I.R.66; Rouen, 27 April
1982, supra note 71; Rennes, 22 February 1999, supra note 87; Bordeaux, 4 November 1997, supra
note 87; Manuelpratique, ibid. at A.15, 208; Feuillet, supra note 69 at 90; Morin, supra note 6 at 19;
Mon6ger & Granier, ibid. at 153.
2′ See e.g. Com., 27 October 1992, ibid. See also Com., 6 October 1992, supra note 87 at 229;
Com., 9 February 1988, supra note 85; Paris, 20 June 1990, aff’d, Com., 12 November 1992, supra
note 243.
2′ See Com., 9 February 1988, ibid.; Rouen, 27 April 1982, supra note 71; Conmissariat aux
comptes, supra note 38 at 83.
.2 See Com., 18 October 1994, Joly. 1994.1302 (Annot. J.F Barbi~ri).
… See Trib. gr. inst. Paris, 22 January 1997, Joly 1997A32 (Annot. J.F. Barbi6ri); Lang6, supra note
86 at 8.
‘ Com., 14 October 1959, J.C.P. 59.11308 (Annot. J. Nectoux); CREDA, supra note 67 at 428;
Morin, supra note 6 at 20. See also annot., Com., 9 February 1988, supra note 85.
2” See Conunissariat aux comptes, supra note 38 at 79. See also Mon~ger & Granier, supra note 6
at 156; Morin, ibid at 20. But see the exceptional cases provided for in Loi de 1966, supra note 26, ss.
7,228, 234.
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L. KHOURY- AUDITORS’LIABILITY
457
by the fault of the conunissaire aux comptes in the realization of the harmn- ‘ Never-
theless, in other cases, there is a discemable tendency to apply the theory of dquiva-
lence des conditions, and to condemn conunissaires in solidum with the administra-
tors.! 7
Finally, the courts have sometimes linked the plaintiff’s damage solely to the fault
of the administrators’ or to the collapse of the socidtd, which was said not to be pri-
marily caused by the connissaire aux comptes.’ This fact, however, present in every
case, does not usually in itself prevent the courts from finding a causal link; rather,
such a fact demonstrates the prima facie indirectness of the actions of the commissaire
aux comptes as a cause of the failure of the business and the necessity of applying
strictly the requirement of causation.
2. Causation as a Restrictive Tool
The French courts have frequently rejected claims where the damage would have
been suffered even in the absence of a fault on the part of the commissaire attx comp-
tes.-‘ Thus, third party claims have failed where the evidence showed that the irregu-
larities would not have been discovered even if the commissaires aux comptes had ex-
‘ See Bordeaux, 17 October 1990, Bull. C.N.C.C. 1990.499; Poitier, 20 October 1998, Bull.
C.N.C.C. 1999.125 (Annot. P. Merle); Paris, 23 February 1978, supra note 87, where the CA. refused
to condemn the conunissaires aux comptes in solidum with the administrators. See also Guyon, supra
note 6 at 400. The concept of loss of a chance is also used to allow partial recovery by linking the
fault of the conmmssaire aux comptes to the loss of a chance to reduce or avoid the damages suffered,
rather than the total harm. See Pads, 7 February 1997, Bull. C.N.C.C. 1997.257 (Anno. P. Merle);
Paris, 26 January 1996, J.C.P. 1996.268; Aix-en-Provence, 29 May 1981, supra note 249; Trib. gr.
inst. Nantene, 12 May 1999, Bull. C.N.C.C. 1999.489; Trib. gr. inst. Le Hare, 15 November 1979,
supra note 71, aff’d, Rouen, 27 April 1982, supra note 71, where the court took into account the im-
portance of the fault of the conunissaire aux comptes and held him liable for only 5 percent of the to-
tal damage.
… See Paris, 24 January 1986, Bull. C.N.C.C. 1986.62.187 (Annot. E. du Pontavice), aft’d, Com., 9
February 1988, supra note 85; Trib. gr inst. Marseilles, 10 September 1986, Bull. C.N.C.C. 1986.419;
Com., 17 October 1984, supra note 71, where the conunissaire aur comples and the erpert.comptable
were condemned in solidun. See also M.-J. Coffy de Boisdeffre, “La responsabilitd du commissaire
aux comptes: trois ans de d6cisions judiciaires” (1988) Eco. et Compt. 13 at 19; Guyon, supra note 6
at 400; CREDA, supra note 67 at 428.
, See generally Guyon, ibiL at 400; Com., 14 October 1959, supra note 254.
29 See however Com., 17 October 1984, supra note 71, where the conmnssaire aLr comptes had re-
cently been appointed and consequently had not been able to carry out all the investigations necessary
to control the accounts and did not certify the accounts in question.
See Mon6ger & Granier, supra note 6 at 153; Compagnie Nationale des Commissaires aux
Comptes, supra note 6 at 24; Guyon, supra note 6 at 281; Lang6, supra note 86 at 8.
458
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ercised their control with diligence and prudence;”‘ when the errors did not modify
substantially the results of the statements;2. when the court considered that the plain-
tiff would have acted the same way even with knowledge of the errors,” ‘ or that the
sequence of events would have been the same in the absence of the fault; ‘ where the
detrimental act of the plaintiff occurred before the fault of the commissaire atux
comptes was committed;” and finally, where the cause of the loss laid solely in an
event independent of the defendant, such as the unavoidable failure of the socidt6f.”
In most cases, however, the plaintiff fails because the evidence shows that he or
she knew, or should have known, about the real situation.” The plaintiff’s knowledge
need not be linked to the actual deficiencies of the report. It is sufficient that he or she
knew, or should have known, about the difficulties experienced by the socite,” if, for
example, despite the irregularities, the mere reading of the statements or of the report
would have revealed them.”
A judgment rendered by the Cour de cassation on 21 November 1989 exemplifies
this situation. The plaintiff had invested in a soci&J. According to a provision in the
agreement, a second investment occurred after the accounts of the socidtd were ap-
proved on the basis of the report of the commissaire aux comptes. This was followed
26’ See Aix-en-Provence, 7 June 1985, Bull. C.N.C.C. 1985.487; Coffy de Boisdeffre, supra note
257 at 19; CREDA, supra note 67 at 431; Com., 27 October 1992, supra note 86.
262 See e.g. Paris, 20 June 1990, aff’d, Com., 12 November 1992, supra note 243; Rennes, 24 June
1987, Bull. C.N.C.C. 1987.67.336. In this case, however, the court also judged that the plaintiff knew
or should have known the exact nature of the financial situation of the socidt. See also Coffy de
Boisdeffre, ibid. at 19.
26 See Paris, 3 November 1987, aff’d, Com., 21 November 1989, Bull. C.N.C.C. 1990.78,240 (An-
not. E. du Pontavice); CREDA, supra note 67 at 432; Rennes, 22 February 1999, supra note 87; Paris,
14 November 1997, Bull. C.N.C.C. 1998.209 (Annot. P. Merle); Paris, 8 September 1999, Joly.
1999.1162 (Annot. J.F Barbi~ri).
See e.g. Lyon, 27 January 1994, supra note 243.
20 See Trib. gr. inst. Paris, 14 April 1986, B.C.C. 1986.299; Com., 15 June 1993, supra note 70;
Com., 21 November 1989, supra note 263; Lyon, 27 January 1994, ibid.; Trib. gr inst. Montauban,
21 March 1985, B.C.C. 1985.234; Paris, 14 November 1997, supra note 263; Coffy de Boisdeffre,
supra note 257 at 19.
See e.g. Trib. gr. inst. Cherbourg, 6 April 1976, supra note 243; Morin, supra note 6 at 19.
267 See Trib. gr. inst. Paris, 26 May 1981, unreported (transcripts used); Coffy de Boisdeffre, supra
note 257 at 19; annot. (du Pontavice), Com., 12 November 1992, supra note 243. Contra Com., 9
February 1988, supra note 85, which exemplifies the tendency of the courts to find a causal link more
readily in presence of gross fault.
26 See e.g. Com., 15 June 1993, supra note 70; Com., 12 November 1992, ibid.; Rennes, 24 June
1987, supra note 262; Morin, supra note 6 at 19; Trib. com. Marseilles, 27 October 1986, Bull.
C.N.C.C. 1986.66.211.
269 See Com., 17 October 1984, supra note 71; Amiens, 20 June 1988, supra note 243, hearing a
case referred by Com., 17 October 1984, ibid.; Coffy de Boisdeffre, supra note 257 at 19.
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L. KHOURY – AUDIToRs’LIABILTY
459
by other investments. Subsequently, a verification requested by the board of directors
showed an important loss, which did not appear in the certified statements. On the
facts, the claim was refused. The plaintiff had been present at the meeting of the board
of directors where the accounts had been approved. At this meeting it had been de-
cided that accounting investigations were necessary and that some order had to be
brought into the management of the sociftd. The plaintiff, therefore, had been suffi-
ciently alerted by the apparent irregularity of the accounts, and could have decided to
postpone subsequent investments until after the investigations requested by the board
had been conducted.”
The expertise of the plaintiffs is an element that can convince the court that they
could, or should, have discovered the irregularities themselves.” ‘ Moreover, both the
plaintiffs’ knowledge, or presumed knowledge, of the actual situation, and their ex-
pertise can prompt the court to find fault of their own.’ The courts can also come to
this conclusion if it is shown that the plaintiffs failed to exercise reasonable care in
relying on the accounts73 or in their decision to get involved with the controlled soci-
eti, independent of any reliance on the accounts. The fault of the plaintiffs either leads
‘ or if it considers that the plaintiffs’ and defendant’s
the court to reject the claimr,
faults have contributed to the damage, to apportion the damages between them.”‘
On the basis of the plaintiffs’ fault, the Tribunal de Grande Instance de Paris re-
fused compensation on 6 April 1990 for their lost investment after the collapse of a
societif6 Since the plaintiffs were experts in risk investment, and the fragility of the
financial situation of the business was apparent on the face of the statements, the court
_’o See also Amiens, 20 June 1988, ibid; Paris, 1 February 1984, Rev. Soc. 1984.779 (Annot. D.
Schmidt).
” See Trib. gr. inst. Lorient, 22 February 1983, Bull. C.N.C.C. 1983.92, aft’d, Rennes, 24 June
1987, supra note 262; Coffy de Boisdeffre, supra note 257 at 19; Trib. gr. inst. Paris, 25 February
1992, cited in Kurkdjian, supra note 69 at 25; Trib. gr inst. Nantermre, 12 May 1999, supra note 256
(the plaintiff was both an expert-comptable and coninissaire aux comptes). Contra Trib. gr. inst. Paris,
22 January 1997, supra note 253.
See Amiens, 20 June 1988, supra note 243; Trib. gr. inst. Lorient, 22 February 1983, ibid
See Paris, 1 February 1984, supra note 270; Trib. gr inst. Paris, 6 April 1990, unreported; Trib.
gr. inst. Nanterre, 12 May 1999, supra note 256; Guyon, supra note 6 at 281; annot., Com., 9 Febru-
ary 1988, supra note 85. Contra Com., 21 January 1997, supra note 87, where it was said that an in-
vestor commits no fault if he does not undertake an accounting audit before a takeover bid. See the
strong criticism of Merle in annot., ibid; annot., Paris, 14 November 1997, supra note 263. See also
to the same effect Paris, 8 September 1999, supra note 263, in a case of emergency; Trib. g. inst.
Paris, 22 January 1997, supra note 253.
‘ See Com, 2 July 1973, supra note 87, for the ease of the preparation of a special report; Rennes,
24 June 1987, supra note 262; annot., Com., 18 October 1994, supra note 252.
See Paris, 1 February 1984, supra note 270.
Supra note 273.
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judged that it was for the plaintiffs to calculate the risk that they were about to take. It
was significant for the court that the plaintiffs never met with the expert-comptable
and the commissaire aux comptes, and that they made their decision on the sole basis
of the accounting documents without obtaining further verifications.’m
On 1 February 1984 the Court of Appeal of Paris”‘ had gone even further. A soci-
jt6 seeking financing to overcome its difficulties signed an agreement with the plain-
tiff rescuer. After the general assembly approved the certified accounts, the plaintiff
invested in the company. Three months later, the plaintiff, by then the principal share-
holder and officer of the company, discovered grave irregularities in the accounts of
the socitd. The court held the expert-comptable and the commissaire aux comptes li-
able for only half the damage suffered by the plaintiff. After stating that he had the
right to rely on the certified accounts, the court criticized the plaintiff’s attitude as
being careless and imprudent, since he did not, before getting involved, verify the val-
ues indicated on the accounts, carry out a thorough accounting verification, or seek in-
formation from the expert-comptable and the commissaire aux comptes.’ Moreover,
the court believed that he should have requested a more recent statement, since the fi-
nancial statements were already six months old at the moment of his investment.
These judgments imply that it is generally imprudent for the plaintiff not to un-
dertake a verification of the financial information contained in the statements.” While
these decisions are striking, considering the weight given by the law to the certifica-
tion of the French commissaires aux comptes, this type of argument is widely found in
the cases and has been approved by some commentators, who emphasize that certifi-
cation is not insurance.’
3. Similarities with the Common Law
At first sight, the French courts do not take into account the considerations that
have preoccupied the English and Canadian common law courts. Thus, the French
courts do not ask openly for actual reliance on the financial statements, and in some
cases, the mere disclosure of the documents was held to be sufficient to find causa-
tion.”2 Moreover, the examination of the certified accounts does not even appear to be
a necessary requirement for establishing causation. In fact, the Tribunal de Grande In-
also Trib. gr. inst. Toulouse, 5 January 1987, Bull. C.N.C.C.66.224 (Annot. E. du Pontavice).
“”See
.. Supra note 270.
“‘ But see Corn., 27 October 1992, supra note 86, where this “widely spread idea” [translation] was
not raised despite the fact that the plaintiff was a regular contractual partner of the socidtd and that the
irregularity was easily identifiable. See annot., ibid.
2
0 See annot., Paris, 1 February 1984, supra note 270.
‘
“‘ See annot., Corn., 27 October 1992, supra note 86.
2See Corn., 21 January 1997, supra note 87.
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L. KHOURY- AUDITORS’LIABILITY
stance de Le Havre stated on 15 November 1979 that specific reliance on the state-
ments or on the certification, as well as mere kmowledge of them, was not necessary
to allow the claim of the creditors of a socitJ. In this case, the liability of the com-
missaire aux comptes resulted from the fact that his faulty omission had allowed the
to continue its existence and to benefit from a clean reputation, thereby creat-
socift
ing a false sense of security in the minds of the creditors.’
There are, however, other cases where the court placed some importance on the
absence of knowledge or reliance on the statements.’ Moreover, some judgments
have incorporated considerations similar to the notion of “reasonable reliance’, in the
sense that they have refused to allow total, or even partial, recovery when the third
party did not exercise reasonable care in relying on the certification, or in a decision to
get involved with the controlled sociYtd.?
Knowledge of the specific plaintiff or class of plaintiffs to whom the accounts
will be communicated, and of the transaction in contemplation, are never mentioned
as influential considerations. ‘ Finally, the study of the case law reveals no real con-
cern for limiting recovery because of the fear of indeterminate liability, and more sig-
nificantly, this concern is never mentioned by the doctrine.’
C. The Quebec Auditor and Third Parties
The Quebec law of auditors’ liability towards third parties is distinguished by the
lack of guidance provided by the statutes, courts, and commentators. It does not benefit
BCC.1980.44, aff’d, Rouen, 27 April 1982, supra note 71.
The court held that the creditors, contrary to the shareholders, do not get involved on the basis of
the statements of the soci&d, but by reason of the simple existence and reputation of the socitd.
Contra Com., 5 March 1980, Gaz. Pal. 1981.4 (Annot. APS), Bull. C.N.C.C. 1980A0.435 (Annot. E.
du Pontavice) in a case of liability of a conunissaire atux apports.
See Trib. gr. inst. Bordeaux, 31 December 1974, Bull. C.N.C.C. 1975.180, aft’d, Bordeaux, 9
February 1976, Bull. C.N.C.C. 1976.169; Trib. gr. inst. Montauban, 21 March 1985, supra note 265;
Trib. gr inst. Rouen, 9 March 1998, Bull. C.N.C.C. 1998.401 (Annot. P. Merle); Paris, 14 November
1997, supra note 263; Com., 21 January 1997, supra note 87; Paris, 8 September 1999, supra note
263.
See supra notes 271-81 and accompanying text.
=’Except perhaps in Trib. gr. inst. Rouen, 9 March 1998, supra note 285, where it is held that the
reports were meant to inform existing shareholders of the suppression of one of their rights (droit
prferentiel de souscription). It was held that most of the plaintiffs were not part of this group. In this
case, however, the court found no fault on the part of the conunissaire autr comptes and no causal link,
which may show that the above element was not of tremendous importance. It seems instead to have
been taken into account in the context of the evaluation of the fault.
‘ This does not necessarily mean that this is not a preoccupation in French law. See Markesinis,
supra note 231 at 44. See also supra note 234 and accompanying text.
462
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from any provision similar to section 234 of the Loi de 1966,”‘ and the few cases that
have examined this issue have created confusion as to the applicable legal principles.
Given the absence of any specific rule governing this area of the law, reliance
must be placed on the general principle of responsabilitj civile provided in article
1457 of the C.C.Q. As in France, the requirements of fault, harm, and more particu-
larly, causation, serve as controlling devices restricting the scope of this principle. In
addition to the particular difficulties inherent in the application of the causation re-
quirement,’ Quebec law has to deal with a further problematic factor, the over-
whelming influence of the common law.
1. The Existence of the Causal Link
In Quebec, as in France, the application of the causation requirement as a restric-
tive tool has resulted in few successful claims against auditors by third parties. One
such case is Irwin (C.A.),”‘ in which the plaintiffs became involved with the audited
company as shareholders, officers, and guarantors. After the company became insol-
vent, it was discovered that other shareholders had illegally appropriated large sums
of money. The plaintiffs pleaded that the auditors were at fault for not discovering the
irregularities, and that had the irregularities been disclosed, the plaintiffs would have
closed the business and not suffered any loss. In response, the defendants contended
that there was no direct damage, and that if there were any, it was caused to the com-
pany and not to the shareholders.
Michaud J. rejected this argument and found a direct causal link between the de-
fendants’ fault and the plaintiffs’ loss, since the latter were lulled into a false sense of
security by the erroneous financial statements.’ As is the case in France, the error
created in the plaintiffs’ minds as to the nature of the risk involved, as well as the fact
that this error prompted the plaintiffs to act to their detriment, were both fundamental
to the existence of a causal link.
Finally, the courts’ position with respect to the test of causation is not clear. One
case found it sufficient that the audited statements be only one of the factors which
m The only similar provision is QCE, supra note 15, s. 3.02.12. This statute provides for profes-
sional rules that do not bind the civil courts, although they are usually strongly influenced by them.
See Charlesbourg, supra note 53 at 536.
m See supra notes 223-35 and accompanying text.
‘Supra note 53.
Irwin (Sup. Ct.), supra note 53 at 195. This reasoning is mentioned by Carriare I. in a judgment
rejecting a motion for dismissal. It is applied, however, to the claim made by the auditor’s client. See
Richter & Associates v. Wightman, [1998] R.RA. 538 at 542 (Sup. Ct.).
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L. KHOURY – AuDIToRs’LIABIInY
463
prompted the plaintiff’s decision.’ In another case, however, it was required that the
statements be the principal factor.-
2. Causation as a Restrictive Tool
In most cases, courts have refused recovery on grounds of absence of causation.
This was so where the loss would have occurred even in the absence of fault, or
where the decision to become involved in the company materialized before the audi-
tors performed their duties.’
In addition, the fact that the plaintiff invested in the
company with the knowledge of the actual situation also showed that the auditors’
fault did not have any impact on the plaintiff’s decision-making process.’ The exper-
tise of the plaintiff is a factor taken into account to demonstrate actual or deemed
knowledge!” Finally, both the plaintiff’s knowledge and expertise can amount to evi-
dence of the plaintiff’s fault, thereby exonerating the defendant or leading to an ap-
portionment of liability.4
In Chevrier v. Guimond the court refused the claim of purchasers of shares in a
company which subsequently became insolvent. The plaintiffs argued that the audited
financial statements, which had been prepared by the auditors with the knowledge that
they were being relied on by the purchasers of the shares, were erroneous and mis-
leading, since they did not mention the existence of two chattel mortgages. The trial
judge believed that the auditors’ fault did not cause the loss, since the plaintiffs knew
of the existence of the mortgages from the start. Consequently, they were responsible
for the events that resulted from their own carelessness. On appeal Tyndale J. added
that, in any event, the error did not modify substantially the situation exposed in the
statements, since they mentioned two non-existent mortgages, the value of which ex-
ceeded that of the undisclosed mortgages. Moreover, even if the plaintiffs were not
-‘ Garnet Retallack & Sons v. Hall & Henshaiv, [1985] C.S. 409 at 413-14 [hereinafter Garnet
(Sup. Ct)], rev’d, [1990] R.R.A. 303 at 306-307 (C.A.) [hereinafter Garnet (CA)].
-” Irwin (CA), supra note 53 at 306. See also Caisse populaire desfonctionnaires v. Plante, [ 1990]
R.R.A. 250 (C.A.), a case of valuers’ liability. The valuer’s report was held to be only an opinion,
however, and it specifically stated that it should not be used without consent by persons other than the
client.
“” See Irwin (Sup. Ct.), supra note 53 at 195. But see Verrier v. Malka, [19981 RRA. 715 (CA), in
which the claim was allowed and the argument to the effect that the plaintiff investor would have in-
vested in the company even if its true position had been disclosed was rejected (ibid. at 719).
-. See Sarraf v. Awad, J.E. 95-1881 (Sup. CL); Fengtres St-Jean v. Banque Natianale du Canada,
(4th) 384 (CA) [hereinafter Fenttres St-Jean cited to RJ.Q.]; Irwin
[1990] RJ.Q. 632, 69 D.L.R1
(Sup. CL), ibid at 195.
-9 See also Irwin (C.A.), supra note 53 at 306.
“” See Charlesbourg, supra note 53 at 538.
-9 See arts. 1470,1478 C.C.Q.
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actually aware of the existence of the mortgages, they could have discovered them by
checking the registry had they exercised due care.’
3. The Influence of the Common Law
Over the years, in the absence of clear guidelines, it has been tempting for the
parties to litigation involving auditors’ liability to plead the landmark common law
cases of Canada and England.’ While the Quebec cases on this issue make no refer-
ence to the French law, except insofar as the general principles of liability are con-
cerned, some have not hesitated, in view of the lack of precedent, to incorporate
common law principles.’ Today, the direct importation of the common law would be
more difficult in light of the scepticism shown recently by the Quebec Court of Ap-
peal. ‘ This court has nevertheless been persuaded, at least in some cases, to examine
the common law approach to this problem and to take inspiration from it.
The most rigid attitude was expressed by Baudouin J. in Charlesbourg?2 In this
case, the parties had pleaded English and Canadian decisions such as Hedley Byrne
and Haig. Baudouin J. stated that these cases, despite their comparative interest, were
not useful, because the relevant principles of law are only those of responsabilitd ci-
vile.’ Nonetheless, in Fenetres St-Jean, Baudouin J. recognized the unarguable
moral authority of the common law principles developed by the Supreme Court of
Canada in VK. Mason,’ a case involving negligent misrepresentations by a bank. Yet
this admission was based on the fact that VK. Mason drew upon rules similar, though
not identical, to those applying in Quebec. Baudouin J. refused, however, to substitute
“0 [1990] R.R.A. 603 (C.A.), aff’g (6 June 1985), Montreal 500-05-012838-817 (Sup. Ct.), leave to
appeal to S.C.C. refused (1991), 39 Q.A.C. 80 (note), 129 N.R. 237 (note) (S.C.C.) [hereinafter
Chevrier]. See also Garnet (Sup. Ct), supra note 293, where the principal cause of the damage was
not the financial statements, but the plaintiff’s actions in the knowledge of the situation. But in Garnet
(C.A.), supra note 293, the Court of Appeal agreed to order the plaintiff indemnified for the differ-
ence between the real value of the assets and the value indicated on the statements, since the latter had
been one of the factors relied on by the plaintiffs in assessing the value of the company.
301 The influence of the common law in this field has been so great that some commentators have
even maintained that the common law jurisprudence has been accepted in the Quebec civil law. See
e.g. Maughan & Paskell-Mede, supra note 145 at 57.
m See Guardian, supra note 6. The court’s position may be explained, however, by the fact that the
audit had been conducted under the federal CBCA, supra note 19, and that the Court was concerned
with the standard of care to be applied in evaluating the contractual fault of the auditor.
30’M. Paskell-Mede, “Made in Quebec” (1990) 8:123 C.A. Mag. 48 at 48.
Supra note 53.
Haig, supra note 2 at 535.
Supra note 296.
w Supra note 149.
3
2001]
L. KHOURY- AuDffoRs’LIABILIY4
465
the common law conceptual framework used to establish negligence in misrepresen-
tation cases for the traditional civilian analysis.-”
One of the most important attempts to incorporate a common lawv type of reason-
ing is found in Ganzet (Sup. Ct.).– In this case, the plaintiff had requested that the de-
fendants prepare audited financial statements for the express purpose of merger dis-
cussions. The statements showed some problems, but did not mention their extent.
The plaintiff later discovered serious errors, but proceeded nevertheless with the
merger, believing he could turn things around. Martin J. stated that the common law
decisions establish a series of “yard-sticks” by which the accountant’s error is to be
measured. He applied the principle of “substantial reliance” and stressed that, in the
context of the civil law, “substantial reliance relates … strictly to causality and, de-
pending on the circumstances, upon mitigation of damages.”‘
In his opinion, the
plaintiff had to demonstrate that he relied substantially upon the flawed statements,
and that this reliance was reasonable in the circumstances.'” On appeal Jacques J.
stressed that the main issue in this case was one of causation, and that the criterion of
“substantial reliance” was not part of the law of the Province of Quebec, unless it re-
ferred merely to the need to prove a causal link between the fault and the loss.”‘
Moreover, he expressed the same reservation about reasonableness of reliance unless
it is used to show the absence of a causal link. Nonetheless, he accepted the conclu-
sion of the Superior Court that the causal link was absent because the plaintiff did not
take the “elementary precautions required of the reasonably informed business man in
parallel circumstances” and that his reliance on the statements was, therefore, not rea-
sonable?”
The notion of reasonable reliance is not the only common law concept which was
used by the courts of Quebec. On the basis of Haig, foreseeability and knowledge of
the object and purpose of the statement were taken into account in Placements Mira-
cle v. Larose,”‘ a case involving a surveyor’s certificate,”‘ and in Malo,” involving a
“‘ Fenetres St-Jean, supra note 296 at 635.
3 9Supra note 293.
31O Ibid at 413.
311 bid at 413-14.
312 Garnet (CA), supra note 293 at 305.
3131!bid at 306.
314 [1980] CA. 287.
3 5 Ibid at 289. The court took into account that the certificate is not an official or authentic docu-
ment. See also 158661 Canada v. Manolakos, [1993] RJ.Q. 1543 at 1555 (Sup. CL); Maughan &
Paskell-Mede, supra note 145 at 61.
3 16 Supra note 53. In this case, however, the court took into account these factors in the assessment
of the defendant’s “duty of advice”. See also Dupuis v. Pan American Mines, [1979] C.S. 421; aver
Real Estates v. Young, [1977] CA 237 at 239, concerning a representation made in a valuation re-
466
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review engagement” prepared for the purpose of a share purchase transaction.”” Con-
versely, in Charlesbourg,'” Baudouin J. held that the fact that the statements are pre-
pared for a specific purpose does not prevent a finding of liability despite their use by
the client for another purpose. In Baudoin J.’s opinion, auditors must accept the con-
sequences of their representations irrespective of the initial destination of the docu-
ment because of the public trust in the quality of the professional’s acts. 2″ This tends
to attribute to the Quebec auditor a public interest role similar to that of the French
commissaire aux comptes. An assimilation of these two professionals is not, however,
justified, because of their different status. Nevertheless, Baudouin’s statement is more
in harmony with the general principles of liability, which in the assessment of the
causal link do not usually consider as relevant the plaintiffs’ knowledge or foresight of
the consequences of their actions.
D. Conclusion
This analysis shows that the civil law systems of France and of the Province of
Quebec have used the flexible concept of causation to limit recovery, while the com-
mon law has done so through the concept of duty of care. Yet one qualification to this
affirmation must be made with respect to Quebec, where attempts to use common law
notions are noticeable in some cases. This leads to the discussion of the hybrid situa-
tion in the Province of Quebec.
IV. Quebec: At the Border of Civil Law and Common Law
Despite the general reluctance of Quebec courts to use common law principles in
private law matters, they have drawn upon common law precedents frequently in the
area of auditors’ liability towards third parties. Meanwhile, surprisingly, the French
law on this subject takes no part in the reasoning of the Quebec courts. While this is
probably due to the fact that the French law was not pleaded, it can also be explained
by the differences existing between the professional role and status of French and
port. The court used these concepts in assessing the question of whether the plaintiff was “another”
within the meaning of art. 1053 C.C.L.C. (ancestor of art. 1457 C.C.Q.).
,’A review engagement provides a level of assurance lower than that of the audit engagement.
318 See also Houle, supra note 233 at 185, a case of abuse of rights. The close relationship existing
between a company’s bank and the company’s shareholders, as well as the knowledge of the transac-
tion in which the latter were involved, prompted the Supreme Court of Canada to conclude that the
bank had a legal obligation not to prejudice the plaintiff in the conduct of this transaction, and that the
damage caused was foreseeable by the defendant.
“9 Charlesbourg, supra note 53. See also Chevrier, supra note 300, where the court refused to grant
recovery because of the absence of causation, despite the fact that the auditors were aware of the spe-
cific purpose of the statements.
0 Charlesbourg, ibid. at 536.
L. KHOURY- AUDITORS’LIABIL4TY
2001]
Quebec auditors. These differences render problematic attempts to transpose French
solutions into Quebec law. Moreover, the similarity of the status and role of the Que-
bec, common law Canadian, and English auditors probably encourage courts to look
more willingly at the common law treatment of this question.
467
These observations pose an important question: can, and if so, should, Quebec
courts draw inspiration from the common law when dealing with this issue? This
question cannot be answered categorically, because it involves two conflicting ideas.
First is the conviction that Quebec law should adopt a protectionist attitude towards its
civil law tradition, as well as the opinion that the civil law system is complete and
does not need to import principles from foreign jurisdictions. Second, and opposed to
this point of view, is the belief that use of comparative law should be welcomed, at
least as a source of inspiration, in areas where the domestic law is underdeveloped or
in need of guidance.
To reconcile these two opposing positions, one can argue that some notions,
which are useful and relevant in the context of the civil law analysis, and are in har-
mony with its conceptual framework, can be taken into account, even though they are
also elements of the common law analysis. While it must be recognized that the Que-
bec system of responsabilitd civile is complete, and that courts are justified in pro-
tecting its integrity, the Quebec courts should not adopt an overly purist attitude,
closing their eyes to helpful elements which respect the particular civilian methods.
As for the principles developed by French law, no such debate arises, and they
can be studied without having to face any reluctance on the part of courts. In the pres-
ent context, and despite the basic differences outlined above, these principles are
valuable, since they provide examples of how the requirement of causation has been
applied in this area. In addition, French cases show how restrictive French courts have
been with this question, and how ultimately they arrive at a solution similar to that of
the common law courts with regard to the scope of auditors’ liability towards third
parties.
A. The Restrictive Approach
One of the most striking features of this comparative study is that the French and
Quebec courts, without expressing the need to develop conceptual devices specifically
meant to circumscribe third party recovery from auditors, have nevertheless adopted a
strict attitude towards it. Both the civil and common law systems have shown a desire
to restrict the boundaries of liability in this context, but have achieved this goal
through a different theoretical framework.
On the one hand, the common law courts have been overwhelmingly preoccupied
with the risk of opening the floodgates of litigation if a general right to recover pure
economic loss were granted. They have dealt with this issue through a “restricted ex-
tension” of the concept of duty of care. Accordingly, they have accepted that a duty to
avoid causing pure economic loss could be owed to third parties in circumstances
limited by the use of concepts such as proximity, foreseeability, and the application of
policy considerations.
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The civil law jurisdictions, on the other hand, never had to deal with problems
such as the traditional reluctance of the judiciary to compensate for negligently in-
flicted pure economic loss and the strict approach to the extension of the duty of care
in this area. Indeed, the law of France and of Quebec has proceeded on the basis of a
broad principle of liability, limited through the requirements of fault, harm, and prin-
cipally, causation.
The application of this last concept has brought about practical results similar to
those arising from the application of the common law duty of care analysis. It is as-
tonishing that, even in France, where the commissaires aux comptes act in the public
interest, and where their liability towards third parties has been specifically provided
for by statute, the requirement of causation has been applied strictly by the courts, and
compensation is rarely granted.
Yet because the notion of causation is flexible and can be assessed subjectively,
the actual outcome of a specific case is more difficult to predict in the civil law sys-
tem. This assertion can be contradicted by saying that “proximity”, which serves a
similar controlling function in the common law, is no more explicit than the notion of
causation. Nevertheless, on the whole, concepts such as reasonable reliance, knowledge
of the transaction in contemplation, and knowledge of the specific plaintiff or class of
plaintiffs, despite the ambiguity of this last notion, yield more precise guidelines.
B. The Use of Common Law Concepts
This discussion leads to the question whether some of the conceptual tools devel-
oped by the common law should take a place in the reasoning of the Quebec courts.
1. Reasonable Reliance
The application of the concept of reasonable reliance in the common law can, and
should, inspire the Quebec courts, since it is directly relevant to the issue of causation,
and has even been accepted as such by the Court of Appeal. When present, reasonable
reliance is a strong indication of the existence of a causal link; when lacking, it gives
evidence of missing causation, since it shows that the financial documents were not,
and could not have been, a factor in the decision that led to the loss. In fact, without
actual reliance on the audited financial statements, one cannot say that the statements
played a causal role in the plaintiff’s detrimental decision.
Moreover, some elements taken into account by the common law courts in order
to find reasonable reliance are already at the root of the causal analysis of the French
and Quebec courts, even though they do not necessarily frame them in terms of “rea-
sonable reliance”. Factors such as the plaintiffs’ knowledge, deemed or actual, of the
financial situation of the company, their expertise, the fact that they would have acted
in the same way even with knowledge of the errors, or that they had taken the detri-
mental decision before reviewing the financial statements are used, in both systems, to
assess the existence of reasonable reliance or causation.
This argument can be contradicted by accepting, as was done in some of the
French decisions, that actual reliance on the financial statements is not necessary. This
2001]
L. KHOURY – AuDIToRs’LIABILInY
469
argument holds that reliance on the apparent soundness of the financial situation of
the company, or on its mere existence, is sufficient. It is possible to see the merits of
this argument in the French system where the conintissaire aux comptes assumes an
institutional role towards the public. It is more difficult, though, to accept this argu-
ment in Quebec, where the auditor’s status is similar to that of the English and com-
mon law Canadian counterparts. One can wonder, therefore, why the Quebec auditor
should be treated more severely, unless such treatment is justified by some element
flowing from the particular nature of the Quebec system of responsabilitd civile. But
this is not the case. Accepting causation as proven when the reliance has not been
placed specifically on the company’s financial statements, but rather on the company’s
positive image, is problematic. Depending on the facts of each case, the existence of
such an image can flow from several factors independent from the fault of the auditor.
Moreover, it is difficult enough to argue that a negligent misstatement played a causal
role in cases where the third party actually relied on the financial statements. It should
be even more complex a fortiori where the reliance has been placed on the overall im-
age projected by the company or on its mere existence. Consequently, such reliance
cannot adequately, by itself, prove causation.
The reasonableness of the reliance should also be taken into account in the analy-
sis of the Quebec courts. It is, in fact, material to the assessment of the causal link, as
it may demonstrate the existence of the plaintiff’s fault, and depending on the gravity
of the latter, may lead to an apportionment of responsibility or a total exoneration of
the defendant. The courts should apply this factor rigorously in light of the fact that
the auditor’s work is not meant to provide any certainty, so it is prima facie unreason-
able to rely unconditionally on it.
2. Foreseeability of Reliance and Knowledge of the Plaintiff and the
Purpose of the Financial Statements
The study of the case law on auditors’ liability towards third parties shows that, in
France as in Quebec, these notions are rarely part of the courts’ reasoning. In fact, in
most cases, the defendant knew about the plaintiff’s reliance and the purpose for
which the financial statements were used, so this issue was not discussed.
The fact that the French cases show no use of these concepts is not necessarily
significant, and can again be explained by the unequivocal role of general interest of
the commissaire aux comptes. Hence, it could be contended that the French commis-
saire aux comptes should, in every case, expect a third party to rely for any purpose
on the certification. A similar type of analysis cannot, however, apply in Quebec,
given the auditor’s different status in this province.
Unless the privision raisonmable des consequences test of causation is explicitly
adopted, these factors are difficult to include within the particular framework of the
Quebec law of responsabilit civile. The general endorsement of this test, however, is
doubtful. In fact, it is used, in principle, only to assess the extent of the loss in claims
for contractual damages. Moreover, it tends to confuse the requirements of fault and
causation. The notions of foresight of reliance/harm and of knowledge of the plaintiff
and of the contemplated transaction appear to be more significant at the level of the
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
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determination of the fault than at the level of the evaluation of the adequacy of the
causal link. Hence, to be used in harmony with the civil law framework, they should
only be accepted as subjective factors in the assessment of what a reasonable auditor
would have done in similar circumstances.
3. Policy Considerations
Finally, the French and Quebec systems have not demonstrated any overt concern
for policy decision making. The differences in the respective frameworks of the civil
and common law systems can partly explain this situation.
In the common law, the justification for limiting liability in the area of pure eco-
nomic loss caused by misstatements is policy-based and lies in the desire to prevent
indeterminate liability. In contrast, the French and Quebec systems of responsabilit6
civile are governed by a general principle of liability that imposes limits through the
requirements of fault, harm, and causation. Their justification for limiting liability is,
therefore, conceptual, and has not rendered necessary any policy-oriented discussion.
This does not mean, however, that the judiciaries of Quebec and France have not
been preoccupied with policy concerns when assessing the liability of auditors to-
wards third parties. Policy considerations may explain, first, the courts’ rigid applica-
tion of the causation requirement, and second, their reluctance to allow recovery, even
in the presence of fault on the part of the auditor. These concerns do not need to be
expressed openly, since the notion of causation can serve limitative purposes without
the use of this rationale. The flexibility of this requirement, and the fact that it is ap-
plied by the courts to arrive at the result they think just, allows the judges to take pol-
icy decisions under the cover of their formal analysis.
C. Causation as a Sufficient Limiting Device
More generally, one can argue that the civil law does not, ultimately, need to rely
on the common law framework to restrict recovery in this area. As the French experi-
ence demonstrates, causation is a flexible enough concept to serve as a restrictive de-
vice, and in practice it has led to a marked limitation of the acceptance of such claims.
This situation has arisen from the fact that causation is difficult to prove, especially in
the presence of a multiplicity of faults. Moreover, the particular difficulties that the
field of auditors’ liability entails have rendered its demonstration more complex. Fi-
nally, the ease with which the civil law courts find an absence of causation in this area
has allowed them, where a fault on the part of the auditor was found, to refuse com-
pensation in cases where it was thought just to do so.
To reduce the subjective element involved in the courts’ evaluation of the causal
link, while ensuring the adoption of a restrictive approach, the concept of reasonable
reliance should play a role in the assessment of causality. In accordance with the
“adequate causation” theory, taking this element into account can permit the courts
sufficiently to isolate the cases where the fault of the auditor has played a real role in
the detrimental decision of the plaintiff, and thus in the realization of the loss.
2001]
L. KHOURY- AUDITORS’LIABIUTY
Conclusion
La Forest I. once said that the legal system of every society faces essentially the
same problems and solves them by quite different means, though often with similar
results.- ‘ This observation describes remarkably well the conclusion flowing from the
present study. In the area of auditors’ liability towards third parties, the courts of the
common law and civil law jurisdictions have been faced with the same struggle: the
need to balance two fundamentally important, but conflicting, interests, the public’s
interest in relying on sound and fair financial reporting and the interest of the auditing
profession not to be burdened with potentially overwhelming liability. Despite the fact
that this balancing exercise has been carried out in the context of very different legal
systems, the application of the legal principles developed in each jurisdiction studied
has led to the same results: recovery against a negligent or faulty auditor in favour of a
third party is allowed only in limited circumstances.
In this picture, the civil law of the Province of Quebec, at the crossroads of the
civil and common law systems, stands aside. The boundaries Quebec has set to pro-
tect its system of responsabilitJ civile from the constant courtship of the Canadian and
English common law have become blurred in the area of auditors’ liability towards
third parties. This has prompted a move towards a reaffimation of the self-sufficiency
of the Quebec civil law system. Nevertheless, Quebec law can and should draw from
both the French civil law and the English and Canadian common law in this area.
From the former it can adopt the restrictive approach to the application of the causa-
tion requirement; from the latter, it can borrow clear limiting devices, such as the con-
cept of reasonable reliance, which could reduce the amount of subjectivity and ambi-
guity in the assessment of causation by the courts. By taking inspiration from the ex-
amples provided by these two different systems, the Quebec law can achieve, with its
own tools and within its specific legal system, an adequate balance of these two con-
flicting interests.
‘ Norsk, supra note 94 at 1079.
