COURT FILE NO.: 286/07

DATE: 20070917

SUPERIOR COURT OF JUSTICE - ONTARIO

(DIVISIONAL COURT)

RE: Canadian Imperial Bank of Commerce, High River Limited Partnership and Philip Services Corp., by its Receiver and Manager, Robert Cumming Plaintiffs

• and -

Deloitte & Touche LLP, et al. Defendants/Respondents

• and -

Howard Beck, Marvin Boughton, Connie Caisse, Allen Fracassi, Philip Fracassi, Peter McQuillan, Felix Pardo, Derrick Rolfe, Colin Soule, Robert Waxman and John Woodcroft Third Parties/Moving Parties

BEFORE: Madam Justice Chapnik

COUNSEL: For Deloitte & Touche, Defendants/Respondents: Robb Heintzman. Michael Schafler and Mark Evans

For the Third Parties: Patricia D. S. Jackson and Andrew Gray, for Connie Caisse Sandra Forbes and Sean Campbell, for Howard Beck, Felix Pardo and Derrick Rolfe Chris Dockrill, for Peter McQuillan Robert Brush, for Marvin Boughton, Allen Fracassi, Philip Fracassi, and John Woodcroft

HEARD: August 22, 2007

ENDORSEMENT ON LEAVE MOTION

[1] Some of the third parties (the Applicants) seek leave to appeal the decision of the motions judge, E. Macdonald J. dated May 28, 2007, in which she refused to strike out the claims brought by the defendants against them personally. The Applicants allege that this case raises a matter of significant importance, that being the proper scope of a third party claim brought by a defendant against an officer or director of the plaintiff company, personally. Four motions for leave to appeal all raised similar issues and were heard together.

BACKGROUND

[2] The plaintiff Philip Services Corp. (Philip) was a public company carrying on business in the integrated resource recovery and industrial sectors. The defendant, Deloitte & Touche (Deloitte) audited Philip’s financial statements for the years ending December 31, 1995 and December 31, 1996.

[3] Philip failed in 1999, due to what was described as a sophisticated accounting fraud committed by one of its former directors and officers, Robert Waxman. Following the failure, Philip and its lenders brought actions claiming negligence by Deloitte in the performance of the audits and seeking damages of approximately $1 billion.

[4] In response, Deloitte delivered a statement of defence and issued a third party claim against a number of Philip’s directors and officers for contribution and indemnity under the Negligence Act. Some, but not all, of the third parties then brought motions under Rule 21.01(1)(b) to strike out the third party claims against them, which E. Macdonald J. dismissed. Those parties now seek leave pursuant to Rule 62.02(4) to appeal the order of the motions judge.

THE TEST FOR GRANTING LEAVE

[5] Leave to appeal from an interlocutory order of a judge shall not be granted unless the applicant has satisfied one of the following two tests under Rule 62.02(4) of the Rules of Civil Procedure:

(a) there is a conflicting decision by another judge or court in Ontario or elsewhere on the matter involved in the proposed appeal and it is, in the opinion of the judge hearing the motion, desirable that leave to appeal be granted; or

(b) there appears to the judge hearing the motion good reason to doubt the correctness of the order in question and the proposed appeal involves matters of such importance that, in his or her opinion, leave to appeal should be granted.

[6] In this case, the Applicants’ claim is founded on both branches in the test. Specifically, they contend that the decision of the motions judge conflicts with the decision of Spence J. in Morneau Sobeco Limited Partnership v. AON Consulting Inc., [2007] O.J. No. 1455, and with well-settled legal principles; that the third party claim fails to disclose a cause of action against the third parties; and that there is good reason to doubt the correctness of the motions judge’s decision.

[7] The two tests set out in R. 62.02 have been judicially considered on a number of occasions. With respect to the first element in R. 62.02(4)(a), the cases have held that a different result achieved due to varying circumstances does not meet the requirement of a “conflicting decision.” Rather, it is necessary to demonstrate a difference in the principles chosen as a guide to the exercise of judge’s discretion. See, for example, Consolidated Enfield Corp. v. Blair, 1995 Carswell Ont. 3809 at para. 1 (Gen. Div.), citing Comtrade Petroleum Inc. v. 490300 Ontario Ltd. (1992), 1992 7405 (ON SC), 7 O.R. (3d) 542 (Div. Ct.).

ANALYSIS

[8] The main thrust of the Applicants’ argument rests on the import of the Morneau decision and the Applicants’ submission that the ratio in that case conflicts with the decision of the motions judge.

[9] Morneau dealt with a situation in which the plaintiff who acted as the administrator of pension plans sued the defendant for giving bad advice respecting the plans and the plaintiff suffered damages by relying on that advice. The defendant moved for leave to add as third parties certain individuals who managed the plans on the plaintiff’s behalf. The court in that case characterized the proposed third parties as “agents” of the plaintiff and their conduct as falling “within the scope of the agency.” The court held that in those circumstances, a finding against the defendant that the plaintiff reasonably relied on its advice would preclude a contrasting decision that the individual third parties had acted improperly; and therefore, the third party claim could not proceed.

[10] In the instant case, however, Deloitte has asserted tort claims against the third parties in their personal capacities and not as agents of Philip. Indeed, in Morneau at para. 32, Spence J. contemplated such a situation, citing Adams v. Thomson, Berwick, Pratt & Partners (1987), 1987 2590 (BC CA), 15 B.C.L.R. (2d) 51 at 55 (C.A.):

… where the pleadings and the alleged facts raise the possibility of a claim against the third party for which the plaintiff may not be responsible, the third party claim should be allowed to stand.

[11] Furthermore, in this case, no relationship or “unity of person” is alleged between two of the plaintiffs, Canadian Imperial Bank of Commerce and High River Limited Partnership, and the third parties.

[12] In addition, the legal issue relating to the propriety of third party claims in such circumstances has been determined by a higher court in the case of Burgoyne Holdings Inc. et al v. KPMG, [2003] O.J. No. 513 (C.A.).

[13] The circumstances in Burgoyne parallel those in the instant case. The defendant in Burgoyne was alleged to be negligent in conducting the plaintiff’s audits; more specifically, it failed to uncover the fraudulent conduct of one of the plaintiff’s employees. The Court of Appeal, overturning the judge at first instance, allowed the defendant’s third party claim for contribution and indemnity against a number of officers and directors of the plaintiff company, to proceed. At para. 3, the Court set out the basis underlying its decision and the pleading requirements necessary for such an action to proceed further:

“… what is required is that the alleged breach of duty be owed (in the context of this case) by the third parties to the defendants. Their conduct must be tortious in itself.”

[14] In the present case, the defendants closely followed the pleadings in Burgoyne. They restricted their third party claim to those individuals with whom they allege a “special relationship,” and whose alleged tortious personal conduct caused or contributed to the plaintiff’s damage. Thus, the legal basis founding the third party claim differs in nature from that pleaded in the main action.

[15] I appreciate the Applicants’ concerns surrounding the importance of limiting directors and officers liability. Nevertheless, I agree with the conclusion of the motions judge that the threshold for sustaining a pleading is very low and these are complex issues that invoke different considerations in the context of Rule 21 motions as opposed to the context of a trial.

[16] Deloitte may or may not be successful in its claim for contributory negligence against the plaintiffs. The plaintiffs have not yet filed a reply nor have discoveries been completed. It is currently unknown whether, for example, Philip will deny that it is vicariously liable for any misrepresentations found to have been made by the third parties, or whether Philip will argue it is not bound by them. To strike out the third party claim at this stage would be most inappropriate.

CONCLUSION

[17] In my view, with respect to this rather complex but narrow issue, there is no substantive conflict in the principles underscored in the relevant jurisprudence. Moreover, the Court of Appeal in Burgoyne, whose decision is binding upon me, allowed almost identical claims to stand.

[18] The other arguments brought by the applicants have, in my opinion, little merit. I agree with the motions judge that “it is not feasible, particularly in the context of a pleadings motion, to separate the plaintiff’s alleged losses into identifiable parts.” I see no lack of particularity in the pleadings. In my view, the materials as pleaded contain sufficient factors to properly found a reasonable cause of action against the third parties.

[19] I agree with the motions judge that it is not plain and obvious that the third party claim lacks merit and would not succeed at trial. There is, in my view, no good reason to doubt the correctness of the motions judge’s decision. Accordingly, the Applicants’ motions for leave are denied.

[20] Costs are awarded to the defendants as against the moving parties jointly, in the all inclusive sum of $15,000.00.

CHAPNIK J.

DATE: September 17, 2007