Negligent Misstatement in Canada—
Hercules Management Ltd v Ernst & Young
Despite extensive consideration of negligent misrepresentation in the Supreme Court of Canada over the years, today one need refer to one case only—Hercules Management Ltd v Ernst & Young.26 Much of what went before Hercules was superÂficial.
The Court deliberately abandoned most of it in Hercules. It also abandoned Hedley Byrne. Since then, there has been only one other Supreme Court deciÂsion of substance dealing with negligent misrepresentation, the Imperial Tobacco case. There, the Court adopted and applied Hercules unreflectively, except for some special consideration of public authority immunity at Step Two of the Anns framework.27The defendant in Hercules was a national accounting firm hired by corporate management to prepare audited financial statements required by statute. The plaintiffs were shareholders who claimed that the statements had been negligently prepared. They claimed that, in reliance on the statements, they had suffered losses on additional investments in the corporation that they were induced to make and losses from devaluation of their pre-existing holdings. The facts are similar to those in the leading UK decision, Caparo Industries Plc v Dickman2s and the leading Australian decision, Esanda Finance Corporation Ltd v Peat Marwick Hungerfords.29 In all three of those cases, the plaintiffs' action failed. In all three cases, the action failed because the loss was not incurred within the ambit of the purpose for which the statements were prepared; a violation of what may be called the ‘end and aim' rule.30 In Hercules the Court held that the statements were preÂpared to assist the shareholders in guiding the corporation, not to assist them in making private investments. Notwithstanding these similarities, the reasoning in Hercules is deliberately and fundamentally different from that in Caparo and Esanda.31
The judgment of the Hercules Court was given by LaForest J.
The recovery of economic loss in negligence seems to have been of particular interest to him. He left his mark on three leading economic loss decisions during the 1990s, each of which remains the law today. The first was his dissenting judgment in CNR v Norsk Steamship, which dealt with relational economic loss.32 In Norsk he argued unsuccessfully for a firm exclusionary rule for relational economic loss, subject to a few specific exceptions. The Supreme Court effectively reversed itself and adopted LaForest J's dissenting judgment in its 1997 decision in Bow Valley Huskey (Bermuda) Ltd v St John Shipbuilding Ltd.33 Second, speaking for the Court in 1995 in Winnipeg Condominium Corporation No 36 v Bird Construction Co, he held that a building owner could sue a non-privity builder in negligence to recover the cost of removing dangerous structural defects.34 This decision is at odds with the law26 Hercules (n 4).
27 Anns (n 3).
28 Caparo Industries Plc v Dickman [1990] 2 AC 605 (HL) (‘Caparo’).
29 Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 142 ALR 750 (HCA) (‘Esanda’).
30 This phrase was used by Cardozo J in Glanzer v Shepard, 135 NE 275 (NYCA 1922) and cited with approval in Hercules (n 4) [38].
31 See Hercules (n4) [27]-[28].
32 CNR v Norsk (n 7), discussed in Section VI below.
33 Bow Valley (n 7).
34 Winnipeg Condominium (n 4) discussed in Section VI below. in the United Kingdom[1339] and the United States,[1340] and quite controversial. Finally, there was the 1977 misrepresentation decision in Hercules. Of the three, Hercules is the most obviously wrongly decided and the least frequently criticised.
One of the most significant aspects of the Hercules decision is the critical role played by the House of Lords' decision in Anns v London Merton Borough Council.[1341] [1342] Although abandoned in the United Kingdom, Anns continues to be enthusiastiÂcally followed by the Canadian Supreme Court.
It was, for example, relied upon as a direct precedent for recovery in Winnipeg Condominium.33 Anns was also influential in introducing the concept of public authority immunity to Canada.[1343] Of particular significance for negligence law generally and Hercules in particular, Canada has adhered religiously to the Anns two-step template for evaluating the case for novel duties of care:[1344]First one has to ask whether, as between the alleged wrongdoer and the person who has suffered damage there is a sufficient relationship of proximity or neighbourhood such that, in the reasonable contemplation of the former, carelessness on his part may be likely to cause damage to the latter—in which case a prima facie duty of care arises. Secondly, if the first question is answered affirmatively, it is necessary to consider whether there are any considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed or the damages to which a breach of it may give rise.
The Court's commitment to the Anns approach to duty of care turned out to be determinative in Hercules.[1345] Consistently with Anns itself, LaForest J regarded it as crucial that the same general framework be applied to all negligence claims.[1346] Following Professor Stapleton, he did not want to create a pocket of negligence claims for misrepresentation where the duty is justified differently.[1347]
The Anns generalist approach to negligence law is different from the attempt in Donoghue v Stevenson to justify all negligence law with a single principle. The paradigmatic negligence action generally associated with Donoghue v Stevenson involves physical harm to person or property. The degree of proximity necessary to found a duty of care in such a case is derived from foreseeable harm to a foreseeÂable plaintiff—the neighbour principle. Professor Beever would say that the relÂevant harm (or injury) must be the foreseeable violation of a primary right, either the right to personal security, or a property right.[1348] He would see the law's search for a foreseeable, unreasonable risk to a plaintiff's primary rights as the unifying principle of negligence law.
Anns dictates a common, two-step approach with which to approach any negÂligence claim. This includes claims for economic loss, and actions for negligent misrepresentation. Lord Wilberforce credited the decision in Hedley Byrne for the development of his unified approach.
Anns requires, at Step One, a sufficient degree of proximity to justify imposÂing a prima facie duty of care. It is unclear whether Lord Wilberforce intended to adopt double foreseeability from Donoghue v Stevenson as the sole test for proximÂity. If so, the majority of negligence cases outside the paradigm would have to be decided with reference to Step Two. Step Two is an open invitation to introduce ‘policy' arguments to refute the prima facie duty. According to Professor Beever, Professor Stapleton has identified 50 different judicial policy arguments, 29 of which she regarded as legitimate.[1349] So much for a unified approach! If LaForest J had wanted to avoid little pockets of negligence law where the duty is created difÂferently he would have had to reject Anns, not follow it.
That is only part of the story. The generalist or unifying aspirations of Anns unravel even at Step One. Foreseeable harm is not a sufficient justification for even prima facie liability in every case. It does provide a justification when interferences with primary rights associated with physical harm are involved. However, it will be argued that the foreseeability of economic loss alone does not justify a prima facie duty of care for economic loss in cases of misrepresentation, relational loss or product/structure defect loss.[1350] Nothing in moral philosophy supports such a principle, and nothing in generally accepted positive law suggests it either.
This leaves two choices in a misrepresentation case. The court can conclude that there is no liability for misrepresentation in negligence. This is Beever's conclusion, at least so far as economic loss is concerned.[1351] As explained below, he recognises liability for misrepresentation based on the basic principles of Hedley Byrne, but concludes that the cause of action is not negligence.
The more traditional choice is to enrich the negligence definition of proximity to include foreseeability, but to add other requirements in particular types of cases. This is the clear Canadian choice,[1352] and it is reflected in Hercules. Again, this generates a series of distinct pockets of negligence law.LaForest J's problem in Hercules was that the case for a duty of care in misrepÂresentation is fundamentally different from the basic Donoghue v Stevenson duty. He recognised at least one key antecedent difference of principle—a misstatement does not harm anyone directly. Harm only occurs if the plaintiff[1353] relies on the statement to his or her detriment. Therefore, for the purposes of Step One of the Anns approach, LaForest J had to recognise a unique definition of proximity in negligent misrepresentation. So far, so good. The error was that he chose ‘foreseeaÂble reasonable reliance', which will be revealed below as demonstrably incomplete.
The next dilemma for LaForest J was that foreseeable reasonable reliance looks exactly like the special pocket of negligence duty that he wanted to avoid. LaForest J tried to have his cake and eat it too. He explained that the existence of the paraÂdigmatic duty to avoid foreseeable harm to a foreseeable plaintiff in physical damÂage claims was also grounded on reasonable reliance.[1354] For present purposes it suffices to describe the attempt to justify all basic physical damage negligence law on the basis of reasonable reliance as strained and unconvincing.[1355]
LaForest J based proximity on foreseeable reasonable reliance. This is a departure from Hedley Byrne, where all the Law Lords spoke of known reasonable reliance.[1356] The choice of foreseeability over knowledge is appropriate and consistent with his desire to promote a single conception of negligence law. In combination with some consideration of the defendant's role in inducing the reliance, foreseeable reliance works well.
However, relying on foreseeable reliance a lone created an unnecesÂsary practical problem. The defendants were a reputable national accounting firm, hired by a reputable company. It was therefore foreseeable that anyone who would foreseeably see the accounts could reasonably rely on their having been prepared with due care.[1357] By this I mean rely in fact.[1358] The Court in Hercules created the classic, practical problem of potentially indeterminate liability.Again, LaForest J was well aware of this. He deliberately chose to deal with indeÂterminate liability at Step Two of the Anns test. For LaForest J, foreseeable reasonaÂble reliance raised only a practical problem, not a problem of principle. Implicitly, he adopted Professor Stapleton's view that the only difference between claims for physical damage and claims for economic loss was that the latter tended to pose the problem of potentially indeterminate liability.[1359] The criticism of the Hercules decision that follows entails a rejection of that claim. Liability for negligent misÂrepresentation is fundamentally different from liability for physical damage under the Donoghue v Stevenson principle.[1360]
LaForest J chose to limit the ambit of liability to losses suffered when the plainÂtiff relied on the information ‘for precisely the purpose or transaction for which it was prepared'.[1361] This may be conveniently described as the ‘ end and aim' rule. In doing so, he relied on the decisions in Glanzer v Shepard5 Hedley Byrne v Heller,[1362] [1363] Haig v Bamford[1364] and Caparo v Dickman.[1365] However, in each of these decisions the ‘end and aim' rule was not invoked to address a practical problem of indeterminate liability. It was invoked to define the circumstances under which, as a matter of principle, it was just to recognise the duty of care.[1366] It was invoked as part of the proximity analysis. And it was invoked in the context of judicial recognition that unilateral reliance by the plaintiff was insufficient to justify imposing a duty on the defendant. These cases and others illustrate that if one defines proximity properly as a matter of principle, it is unnecessary to deal with potentially indeterminate liability as a matter of policy.[1367] In fairness to LaForest J, he did not consider proxÂimity to be a particularly useful concept.[1368]
A proximity definition that depends on the plaintiff's reliance alone poses more than a practical problem. It is simply wrong as a matter of principle. It would be equally objectionable to define proximity in terms of k nown reasonable reliÂance instead of foreseeable reasonable reliance. It would be equally wrong to define proximity in terms of known reasonable reliance by members of a known limited class.[1369] These reformulations might make the exposure more determinate, but not more just.
It is incorrect in principle to hold the defendant legally responsible for losses suffered by relying on the defendant in a case like Hercules, for two reasons. First, neither the positive law nor philosophers recognise purely economic primary rights. The rights that do exist in relation to purely economic interests are those derived from the generally accepted primary rights.[1370] This does not, in my opinÂion, determine conclusively whether economic loss should ever be recoverable in negligence. I would accept a weaker proposition that it should not be recoverable under the paradigmatic D onoghue v Stevenson neighbour principle. Second, the plaintiff has no right to rely on the defendant without the defendant objectively manifesting an intention that he or she do so. This is more important to the duty question than whether the loss is purely economic. These points are elaborated upon next.
III.