Stephen Cole

Livent Inc., through its special receiver, sued its former auditor, Deloitte & Touche, for negligence and breach of contract in failing to detect a massive fraud perpetrated by Livent's senior management.

The trial judge found Deloitte negligent in its conduct of the 1997 audit and awarded Livent $118 million in damages.

Deloitte appealed, arguing that the ex turpi causa and corporate identification doctrines barred the claim, and that its negligence did not cause the losses.

Livent cross-appealed the trial judge's refusal to award damages for the 1996 audit and the 25% reduction for contingencies.

The Court of Appeal dismissed both the appeal and cross-appeal, holding that the ex turpi causa doctrine could not shield an auditor from liability for failing to detect the very fraud it was engaged to uncover, and that Deloitte's negligence was the proximate cause of Livent's increased liabilities.

Livent Inc., through its Special Receiver, sued its former auditors, Deloitte & Touche, for negligence and breach of contract in failing to detect massive corporate fraud perpetrated by Livent's directing minds, Garth Drabinsky and Myron Gottlieb.

The court found that Deloitte failed to conduct its 1996 and 1997 audits in accordance with generally accepted auditing standards (GAAS), particularly regarding preproduction costs and complex revenue transactions.

The court rejected Deloitte's defences based on the corporate identification doctrine and ex turpi causa, holding that the fraud of the directing minds could not be attributed to the company to shield the negligent auditors.

Damages were assessed at $84,750,000, representing the increase in Livent's liquidation deficit caused by the delayed discovery of the fraud, discounted by 25% for business contingencies.

The appellant, Welch Foods Inc., appealed a trial judgment that found it had unreasonably withheld consent for the respondent, Cadbury Beverages Canada Inc., to enter into a co-packing arrangement with a third party under their 1972 licensing agreement.

The trial judge awarded damages to the respondent for the unreasonable refusal and imposed conditions on the appellant's future discretion to withhold consent.

The trial judge also found the respondent breached the agreement by selling competing products but refused to allow the appellant to terminate the agreement, instead ordering a royalty payment.

The Court of Appeal dismissed most of the appeal, upholding the trial judge's interpretation of the agreement, the finding of unreasonable refusal, the damages award, and the refusal to terminate the agreement.

However, the Court allowed the appeal in part by removing certain conditions imposed on the appellant's future discretion to withhold consent.