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Duty of Care (III) [post-Livent]

. McDonald v. Toronto-Dominion Bank

In McDonald v. Toronto-Dominion Bank (Ont CA, 2022) the Court of Appeal reviews some doctrine of negligence duty of care:
[32] Under the Anns/Cooper framework, establishing a duty of care requires a two-step analysis: Anns v. London Borough of Merton, [1977] 2 All E.R. 492 (H.L); Cooper v. Hobart, 2001 SCC 79, [2001] 3 S.C.R. 537, at para. 28. At the first stage, the court asks whether the defendant owes the plaintiff a prima facie duty of care by considering proximity and foreseeability: Cooper, at para. 30; Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63, [2017] 2 S.C.R. 855, at para. 20; 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35, 450 D.L.R. (4th) 181, at para. 20. If a prima facie duty is established, the analysis moves to the second stage where the question is whether there are residual policy considerations that may negate the imposition of a duty of care: Livent, at para. 37.

[33] According to the Supreme Court’s decision in Livent, in cases like this one, where it is alleged that there was negligent performance of a service, it is more useful to consider proximity before foreseeability, because whether an injury is reasonably foreseeable will depend upon the scope of the relationship of proximity: at para. 24.

[34] At the proximity stage of the analysis, the overarching question is whether the parties are in “‘such a close and direct’ relationship that it would be ‘just and fair having regard to that relationship to impose a duty of care in law’”: Livent, at para. 25, citing Cooper, at paras. 32, 34; Maple Leaf, at para. 63.

[35] A full proximity analysis is not required in every case. If a relationship falls within a previously established category, or within an analogous one, proximity will be shown. In these circumstances, so long as the injury is reasonably foreseeable, the first stage of the duty of care analysis will be complete: Livent, at para. 26; Maple Leaf, at para. 23.

[36] Conversely, if a relationship does not fall within an established or analogous category, a full proximity analysis is required: Livent, at para. 29; Maple Leaf, at para. 31. As will be discussed more below, in cases of pure economic loss arising from negligent performance of services, two factors are determinative in the proximity analysis: the defendant’s undertaking and the plaintiff’s reliance: Livent, at para. 30; Maple Leaf, at para. 32.
. Breen v. Lake of Bays (Township)

In Breen v. Lake of Bays (Township) (Ont CA, 2022) the Court of Appeal considered a municipality's negligence regarding building permits and related inspections:
[26] The leading case with respect to a municipality’s duty of care in enforcing building codes is Ingles v. Tutkaluk Construction, 2000 SCC 12, [2000] 1 S.C.R. 29. There, dealing with inspection of construction after it had commenced without a permit, and prior to the 2001 amendments that clarified the legislation to explicitly mandate inspections, the duty is laid out clearly at para. 67:
The purpose of the building inspection scheme is clear from these provisions: to protect the health and safety of the public by enforcing safety standards for all construction projects. The province has made the policy decision that the municipalities appoint inspectors who will inspect construction projects and enforce the provisions of the Act. Therefore, municipalities owe a duty of care to all who it is reasonable to conclude might be injured by the negligent exercise of their inspection powers.
[27] The parties agree that Ingles remains good law and the appeal was argued on that basis. For the purposes of the present appeal, I would agree with that approach, with the caution that in the future, a duty of care analysis should take account of the SCC developments in recent years: Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63, [2017] 2 SCR 855; 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35, 450 DLR (4th) 181; and Charlesfort Developments Limited v. Ottawa (City), 2021 ONCA 410, 156 O.R. (3d) 10 (leave to appeal refused, 39818 (17 February 2022)).

....

[37] The trial judge rejected the municipality’s argument on this issue, finding that there was no policy reason for limiting or negating the duty of care. After reviewing Ingles and Rothfield v. Manolakos, 1989 CanLII 17 (SCC), [1989] 2 S.C.R. 1259, he specifically found that the municipality owed a duty of care to the Breens to “not negligently exercise its power to grant a building permit and in the inspection of the construction of the building which is the subject matter of the building permit pursuant to the Act and requisite regulations.” As he explained, at paras. 71, 72:
The purpose of the construction scheme - the granting of the building permit and subsequent inspection of construction is the same: to protect the health and safety of the public. The legislative scheme grants powers to the [appellant] to not only inspect the construction but also to grant or reject an application for a building permit or later revoke said building permit, if the circumstances warrant.

The [respondents] are subsequent owners of a building that the [appellant] granted a building permit for construction and inspected the construction as the construction was ongoing. It is reasonable to conclude that the [appellant] would owe a duty of care to the [respondents] who might be injured by the [appellant’s] negligent exercise of their authority not only to inspect the progress of the construction but also in the process of granting a building permit, not to subsequently revoke said building permit which is the subject matter of the construction, pursuant to the provisions of the Act and requisite regulations.
[38] I do not agree with the municipality that the trial judge erred in this analysis.

....

[41] Specifically, I would not accept the municipality’s argument that the absence of an explicit requirement to inspect effectively rendered all inspections optional. Taken to its logical conclusion this risks undermining the purpose of the legislative scheme. As stated by the trial judge, at para. 115, “I am of the view that once a building permit is granted, the municipality has an obligation to inspect the building to comply with the Act and the requisite Building Code. Anything less would make the whole building permit and inspection process meaningless” (emphasis added). If a municipality were to decide to conduct limited or no inspections of known and permitted construction, it would be incapable of ensuring that the construction underway conformed with the permit granted, and that it met the uniform standards of the Ontario Building Code.

[42] Consequently, having made the policy decision to inspect, the municipality was bound to implement this decision with the care that would be expected of an ordinary, reasonable and prudent municipality in the same circumstances: Ingles, at para. 20. In my view, the municipality fell short of this standard when it declared the construction of the cottage closed without conducting further inspections.

[43] Second, and regardless, the municipality must make the policy decision to inspect in a manner that accords with the Act’s purpose: Ingles, at para. 19. In this case, there is no dispute that the regulatory scheme reflected in the Act was intended to ensure the health and safety of the public. It did so by providing a province-wide framework for the required enforcement of building regulations, while also providing for municipalities to operationalize this framework through its own by-laws, of which the municipality’s By-Law No. 80-19 was an example.

[44] The municipality is a creature of statute, with “clear responsibilities for health and safety in the area.” It therefore could not “immunize itself from liability by simply making a policy decision never to inspect”: Ingles, at para. 19. Rather, the decision to not inspect would leave the implementation of the universal standards in the Act to the builders, not the municipality who is charged with its enforcement.

[45] However, this obligation does not go nearly as far as to make an insurer of the municipality. In implementing the inspection regime, as in negligence generally, the municipality’s obligation and, accordingly, its liability is limited by what is reasonable: Allen M. Linden et al, Canadian Tort Law, 12th ed. (Markham, Ont.: LexisNexis, 2022) at pp. 176-77.

[46] The trial judge did not impose tortious liability for failing “to attend every building site daily to determine if it is an opportune time to carry out an inspection,” as the municipality argues. Rather, he found fault where the municipality carried out its statutory mandate unreasonably. Choosing not to inspect everyday was reasonable, but failing to conduct any inspection after June 1991 was not.
. Tokarz v. Selwyn (Township)

In Tokarz v. Selwyn (Township) (Ont CA, 2022) the Court of Appeal considered breach of statute (here the Building Code) as evidence of negligence breach of duty:
The First Issue: Scope of Duty and The Standard of Care

[22] The trial judge found that the Township breached its duty of care by failing to inspect the work done, signed off on the work, and abrogated its role under the Building Code. The Township submits that its duty is narrow when inspecting a building: it has a duty to ensure that there are no deviations from the Building Code that could affect public health and safety.

[23] The Township relies on Ingles v. Tutkaluk Construction Ltd., 2000 SCC 12, [2000] 1 S.C.R. 298, at para. 23, wherein Bastarache J. for the court discussed the purpose of the Building Code:
The legislative scheme is designed to ensure that uniform standards of construction safety are imposed and enforced by the municipalities. …The purpose of the building inspection scheme is clear from these provisions: to protect the health and safety of the public by enforcing safety standards for all construction projects. The province has made the policy decision that the municipalities appoint inspectors who will inspect construction projects and enforce the provisions of the Act. Therefore, municipalities owe a duty of care to all who it is reasonable to conclude might be injured by the negligent exercise of their inspection powers. [Emphasis added]
[24] In White v. The Corporation of the Town of Bracebridge, 2020 ONSC 3060, 4 M.P.L.R. (6th) 271, at para. 48, DiTomaso J. explained
The Ontario Building Code provides minimum standards for construction so that owners of houses will be safe from poor construction. The standard of care is, at a minimum, the Ontario Building Code’s requirements. At trial, Mr. Koerth testified that the minimum standards in Part IX of the OBC could not be ignored without risking the safety of the building’s occupants. [Emphasis added]
[25] Contrary to the Township’s assertion, the trial judge did not suggest that the mere existence of defects was sufficient to hold the Township liable. Rather, the Township was held liable for failing to perform the inspection it was required to conduct under the Building Code, resulting in the failure to identify and order the deficiencies to be remedied.

[26] In any event, the trial judge was clearly alive to the purpose of the Building Code, and held that, “Water and panels that are not installed properly are anathema to safety in this paradigm”. He found as a fact that, “This barn is not a safe haven with these defects.” In addition, the respondents’ expert, Mr. Koerth, testified that he had concerns about the risk of fire.

[27] For these reasons, I do not agree that the trial judge misapprehended the scope of the appellant’s duty of care.
. Florence v. Benzaquen

In Florence v. Benzaquen (Ont CA, 2021) the Court of Appeal considered the basics of negligence duty of care:
[63] To decide whether to recognize a novel duty of care, the court must conduct the two-stage Anns analysis. In the first stage, the court determines whether a prima facie duty of care should be recognized based on the reasonable foreseeability of harm and whether the proposed relationship is sufficiently close and direct. Policy considerations that affect the relationship are also considered in the stage one analysis. If the stage one analysis leads to the prima facie conclusion that a duty of care should be recognized, the court moves to the second stage. In the second stage, the court determines whether, despite having found a prima facie duty of care, there are residual policy reasons to reject such a duty.[6]
. Charlesfort Development Limited v. Ottawa (City)

In Charlesfort Development Limited v. Ottawa (City) (Ont CA, 2021) the Court of Appeal considered the foreseeability issue in negligence law after Livent:
(ii) Reasonable foreseeability

[39] The second part of the prima facie duty of care analysis requires considering reasonable foreseeability. The question is whether an injury to the plaintiff was a reasonably foreseeable consequence of the defendant’s negligence: Livent, at para. 32.

[40] An injury to the plaintiff will be reasonably foreseeable if the defendant should have reasonably foreseen that the plaintiff would rely on their representation and such reliance would be reasonable. The reasonable foreseeability and the reasonableness of the plaintiff’s reliance is determined by the proximate relationship between the parties. A plaintiff only has a right to rely on a defendant to act with reasonable care for the particular purpose of the defendant’s undertaking, and in such situations, the plaintiff’s reliance is both reasonable and reasonably foreseeable. Reliance by the plaintiff for any other purpose would fall outside the scope of the defendant’s undertaking, and any consequential injury would not be reasonably foreseeable: Livent, at para. 35.
. Whitehouse v. BDO Canada LLP

In Whitehouse v. BDO Canada LLP (Div Ct, 2021) the Divisional Court considered negligence law as it applied to auditors:
[34] In Hercules, the Supreme Court applied the two-part test in Anns v. London Borough of Merton, [1978] A.C. 728. Hercules involved a small group of shareholder investors, all of whom were, as is the case here, known to the auditor at the time it completed the audits in issue. As here, the audited periodic financial statements had been presented to the plaintiff shareholders. And, as here, the claim was for losses arising from the plaintiffs’ investments in the audit client. In Hercules, the Supreme Court rejected the existence of a duty to the investors, finding that the only actionable duty owed by the defendant auditor was to its client, the company.

[35] In reaching this determination, the Supreme Court held that any prima facie duty owed to the plaintiffs based on reasonable foreseeability was negated by public policy concerns, specifically, the concern over indeterminate liability. In light of these policy considerations, the Supreme Court expressly found that the auditor’s knowledge of the investors was insufficient to ground a duty of care, as the audits – again, being periodic statutory audits – had not been prepared for the express purpose of attracting specific investments from those specific investors.

[36] In Livent, the Supreme Court revisited the application of the two-part Anns test for claims based on auditor liability. The Court revised the Anns test by distinguishing more clearly between foreseeability and proximity, and by placing greater emphasis on a more demanding first stage of the two-stage analysis. This was grounded in the Court’s view, at paras. 42-45, that the issue of “indeterminacy” was more appropriately dealt with by a robust analysis of the duty of care based on considerations of sufficient proximity and reasonable foreseeability, with the rare case of true indeterminacy being dealt with in the second stage.

[37] The Court confirmed the result in Hercules but, in effect, added a gloss to the analysis by which that result was arrived at.

[38] In cases of negligent misrepresentation or performance of a service, the Court found, at para. 24, that proximity will be more usefully considered before foreseeability. This is because what the defendant reasonably foresees as flowing from his or her negligence depends upon the characteristics of his or her relationship with the plaintiff, and specifically, in such cases, the nature and purpose of the defendant’s undertaking.

[39] At para. 28, the Court held that where a party seeks to base a finding of proximity upon a previously established or analogous category of claim, the court must be attentive to the particular factors which justified recognizing that prior category in order to determine whether the relationship at issue is, in fact, truly the same as or analogous to that which was previously recognized. And, by corollary, the court should avoid identifying established categories in an overly broad manner because residual policy considerations will not be considered where proximity is found on the basis of an established category. A finding of proximity based upon a previously established or analogous category, therefore, must be grounded not merely upon the identity of the parties, but upon examination of the particular relationship at issue in each case.

[40] In cases of pure economic loss arising from negligent misrepresentation or performance of a service, the Court found, at para. 30, that two factors are determinative in the proximity analysis: the defendant’s undertaking and the plaintiff’s reliance. Where the defendant undertakes to provide a service in circumstances that invite the plaintiff’s reasonable reliance, the defendant becomes obligated to take reasonable care. And, the plaintiff has a right to rely on the defendant’s undertaking to do so. However, the Court noted, at para. 31, that any reliance on the part of the plaintiff which falls outside of the scope of the defendant’s undertaking of responsibility – that is, outside of the purpose for which the service was undertaken – necessarily falls outside the scope of the proximate relationship and, therefore, of the defendant’s duty of care. At para. 52, the Court concluded that an overly broad characterization of an established category of proximity which fails to consider the scope of activity in respect of which proximity was previously recognized, risks a premature imposition of a prima facie duty of care.

[41] In Lavender, the Court of Appeal, after a detailed analysis of the Livent decision, concluded that the key theme from the Supreme Court’s decision is the necessity of ascertaining the scope of an auditor’s undertaking when conducting a duty of care analysis: at para. 50. In Lavender, the Court observed, at para. 65, that the primary reason proximity has not been established in auditor liability cases turned on the nature of the auditor’s undertaking and the connection between that undertaking and the loss claimed.

[42] In Lavender, the company retained the auditor to audit Form 9 Reports, which the company then filed confidentially with the OSC. Although the Form 9 Reports were used by the OSC to police securities dealers and their purpose was to protect investor assets, the Court held it did not necessarily follow that the audit of the Form 9 Reports created proximity between the auditor and the investors. The auditor made no representations to members of the class. The auditor did not undertake to assist the class in making investment decisions. The limited scope of the auditor’s undertaking and lack of direct connection between the auditor and the class drove a conclusion against a finding of proximity in that case. As Epstein J.A. wrote, at para. 66:
In my view, the interposition of the OSC and Buckingham between the Auditors and the Class rendered the relationship between the parties too remote to ground a duty of care. The Auditor may well have owed a duty of care to Buckingham to properly conduct the audit. Perhaps an argument could be made that a duty was also owed to the OSC (which provided regulatory oversight and received the audit reports). This, however, is an issue I need not determine. In this case, the Auditor’s undertaking did not extend to assisting the Class members – who, as mentioned earlier and as the motion judge noted, never saw the Form 9 Reports and did not even know of their existence – with supervising Buckingham and making investment decisions. As a result, I am of the view that the Auditor’s undertaking in this case strongly militates against a finding of proximity.
[43] It is of course true that, in Lavender, the investors were not given, and most were not aware of, the audit reports in question. In this case, the Plaintiffs have pleaded that: BDO’s audits were sent to the unitholders; BDO intended that the reports be relied on by the unitholders; and the reports were relied on.

[44] The motion judge recognized this. He turned his mind to the fact that, in the immediate case, it was pleaded that the class members were provided with BDO’s reports to the OSC and that they relied on the reports to make investment decisions.[2] However, the motion judge found that material facts had not been pleaded that, if true, would rise to the level of an undertaking by BDO to assist the class members with their individual investment decisions or to safeguard them from Crystal Wealth’s non-compliance with the Securities Act.

[45] In arriving at this conclusion, the motion judge made no legal error. I come to this conclusion for two reasons: (1) the Plaintiffs’ argument fails to appreciate that sufficient proximity turns on both the nature and content of the defendant’s undertaking and the plaintiff’s reliance – reliance alone is insufficient; and (2) the Plaintiffs’ argument is undermined by, and inconsistent with, the manner in which the Plaintiffs have sought to define the plaintiff class.

Sufficient Proximity

[46] In my view, the motion judge was correct in his conclusion that the alleged undertaking of the auditor to the unitholders arises out of the requirement for annual audit reports under the Securities Act, as pleaded in paras. 60-61 of the Claim. This is clear from the use of the word “[a]ccordingly” at the beginning of para. 62, which goes on to plead two alleged “purposes” for the audit. The pleading in para. 62 is conclusory in nature. There are no material facts pleaded to connect the allegation in para. 61, that Crystal Wealth was required by the Securities Act to provide audit reports, to the alleged purposes for these reports in para. 62. Paragraphs 63-64 (indeed, paras. 65-66 and 68-69 as well) are indelibly focused on allegations of reliance by the unitholders, not on the nature of the undertaking by the auditors to existing or putative investors.

[47] The law since Hercules is well settled on this point. The fact that annual audit reports were required to be provided under the provisions of the Securities Act is insufficient to establish a duty of care to investors. Similarly, the fact that the auditor may have known that its reports would come to the attention of investors and be relied upon by them is also insufficient to establish a duty of care, whether those investors relied on the reports or not. The reason, in both cases, these facts (or pleaded facts) are insufficient to give rise to a duty of care is lack of proximity: as per Livent and Lavender.

[48] The cases where a claim for pure economic loss based on alleged negligent provision of an audit service have succeeded (or met the test for a viable cause of action under r. 21) involve circumstances where a particular audit report was prepared for the particular purpose of soliciting investment from particular investors: Haig v. Bamford et al., 1976 CanLII 6 (SCC), [1977] 1 S.C.R. 466; Excalibur. This requires some basis (i.e., pleaded material facts) for establishing a proximate relationship. Here there is none. There is merely a conclusory allegation, logically unconnected to the premise: Crystal Wealth was required by the Securities Act to prepare audit reports; accordingly, the purpose was to enable unitholders to make investment decisions. There is no pleading of any material facts which might establish an undertaking by the auditor to the unitholders that the reports should be used for the investor’s individual investment decisions.

[49] The Appellants argue, however, that para. 67 of the Claim also pleads the basis for an undertaking on the part of BDO to the unitholders. Specifically, that BDO “knew and intended” that the unitholders would rely on the audit reports.

[50] This pleading suffers from the same logical gap as the pleading of an alleged “purpose” arising out of the provisions of the Securities Act. Even though pleaded and accepted as true under r. 21, BDO’s knowledge that unitholders would receive and might rely on the audit reports is, under the Hercules/Livent analysis, insufficient to establish an undertaking giving rise to sufficient proximity.

[51] Intention, on the other hand, could theoretically found a basis from which an undertaking might be inferred. However, intention is not like other facts; it cannot be seen, felt, or heard – it is a state of mind. Intention may unambiguously be manifest in written or oral statements but, most often, it must be inferred from other circumstances. This is why r. 25.06(8) requires that when intent is alleged, the pleading must contain full particulars of the circumstances from which intent is to be inferred. The only pleaded circumstance from which BDO’s “intention” can be inferred is the alleged purpose of the audit in para. 62 of the Claim. But, as I have already found, the pleading of that purpose is deficient, being merely an unsubstantiated conclusion of law. Similarly, the pleading of “intention” in para. 67 of the Claim is conclusory in nature. There are no circumstances pleaded from which the alleged intention could be inferred.

[52] Without a pleaded basis for BDO having undertaken to the unitholders to provide audit reports for their personal investment decisions, there can be no basis for the necessary proximate relationship set out in Hercules, Livent, and Lavender.




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