Bloor Italian Gifts Limited et al. v. Dixon et al. [Indexed as: Bloor Italian Gifts Ltd. v. Dixon]

48 O.R. (3d) 760

[2000] O.J. No. 1771

Docket No. C32874

Court of Appeal for Ontario

Abella, Goudge and MacPherson JJ.A.

May 25, 2000

Professions -- Accountants -- Negligence -- Accountant preparing plaintiff's financial statements pursuant to review engagement -- Accountant failing to notice dramatic underpayment of provincial sales tax over six-year period -- Plaintiff required to pay unremitted tax plus interest and penalty -- Accountant owing plaintiff duty of care to exercise reasonable skill and care in management of his professional duties -- Defendant breaching that duty by not meeting standard of care of reasonable professional person in failing to make inquiries of management about glaring discrepancies between sales and remitted sales tax -- Exclusion clause in contract between parties only coming into effect if accountant had conformed to applicable standards in conducting review engagement -- Exclusion clause not excusing accountant's negligence -- Plaintiff contributorily negligent in not detecting sales tax problem -- Equal responsibility should be attributed to each party.

The defendant accountant prepared the plaintiff's financial statements pursuant to a review engagement, which is an intermediate form of financial reporting, less onerous than an audit and more onerous than a compilation engagement, requiring the accountant to make inquiries of management and perform certain analytical procedures to determine if the financial information contained in the client's records is plausible. The plaintiff failed to remit over $1 million in provincial retail sales tax during the period December 1985 to December 1991. Notices of assessment were issued by the Ministry of Revenue demanding payment of the unremitted tax plus interest and a 25 per cent penalty. The unremitted sales tax was treated by the defendant as revenue of the plaintiff, which resulted in an overpayment of income tax in the amount of approximately $220,000. Eighty per cent of that amount was eventually recovered. The plaintiff brought an action against the defendant for damages. The trial judge found that an accountant even with a minimum of curiosity, could have realized that retail sales tax was being underpaid as the tax remitted bore no relationship whatever to sales as revealed in the financial statements. However, the trial judge held that the plaintiff's claim grounded in negligence could not succeed because the relationship between the parties did not create a duty of care on the defendant's part to detect the underpayment of sales tax. The action was dismissed. That decision was affirmed by the Divisional Court. The plaintiff appealed.

Held, the appeal should be allowed.

It was undisputed that the relationship between the defendant and the plaintiff was such that the defendant owed the plaintiff a duty of care to exercise reasonable skill and care in the performance of his professional duties. The defendant breached that duty by not meeting the standard of care of the reasonable professional person in the circumstances of his relationship with the plaintiff. The Canadian Institute of Chartered Accountants ("CICA") Handbook requires that the accountant has sufficient knowledge of the business to make intelligent inquiries and that the accountant possess an appreciation of matters that could have a significant effect on the information being reported on. A checklist prepared by the CICA includes the possible existence of any sales tax liability as an item into which the accountant ought to inquire. The CICA Handbook supported the conclusion that, at the least, the applicable standard of care required the defendant to make inquiries of management regarding the plausibility of the plaintiff's stated retail sales tax liability. The defendant was negligent in so far as he did not make intelligent inquiries of management about the implausibility of the indicated retail sales tax figures despite the glaring discrepancies between sales and remittance levels and also despite the fact that the amounts of collected retail sales tax decreased from year to year at the same time that sales were increasing. This was particularly the case because the defendant knew that the plaintiff had had significant remittance problems in the past.

The contract between the parties contained an exclusion clause which stated that "control over and responsibility for the prevention and detection of defalcations and other irregularities, errors and omissions" rested with the plaintiff. However, a limitation clause such as this only comes into effect if the accountant has conformed to the standards that are required in conducting a review engagement. The clause did not excuse the defendant's negligence. A limitation clause does not negate the accountant's duty to see and report errors that would be evident to an accountant acting reasonably in the circumstances and, having detected them, to make the necessary inquiries of management.

There was a causal nexus between the defendant's failure to detect the remittance problem and the imposition of the penalty imposed by the Ministry and the interest that was levied by the Ministry in the notices of assessment. It was also foreseeable that overstating the plaintiff's income by treating unremitted sales tax as income would lead to an overpayment of income tax that might not be recoverable. The plaintiff was entitled to recover damages under those heads. However, the defendant was not the cause of the interest charges incurred by the plaintiff following the due date for complying with the notices of assessment.

The plaintiff was contributorily negligent in not detecting the retail sales tax problem. Equal responsibility should be attributed to each party. Accordingly, the defendant was liable for only 50 per cent of the recoverable damages.

APPEAL by the plaintiff from a judgment of Divisional Court ((1999), 125 O.A.C. 384) dismissing an appeal from a judgment of Pitt J. ([1997] O.J. No. 3088 (Gen. Div.)) dismissing an action for damages for negligence.

Cases referred to BG Checo International Ltd. v. British Columbia Hydro & Power Authority, 1993 145 (SCC), [1993] 1 S.C.R. 12, 75 B.C.L.R. (2d) 145, 99 D.L.R. (4th) 577, 147 N.R. 81, [1993] 2 W.W.R. 321, 14 C.C.L.T. (2d) 233; Central Trust Co. v. Rafuse, 1988 46 (SCC), [1988] 1 S.C.R. 1206, varg 1986 29 (SCC), [1986] 2 S.C.R. 147, 75 N.S.R. (2d) 109, 31 D.L.R. (4th) 481, 69 N.R. 321, 86 A.P.R. 109, 34 B.L.R. 187, 37 C.C.L.T. 117, 42 R.P.R. 161 (sub nom. Central & Eastern Trust Co. v. Rafuse); Haig v. Bamford, 1976 6 (SCC), [1977] 1 S.C.R. 466, 72 D.L.R. (3d) 68, 9 N.R. 43, [1976] 3 W.W.R. 331; Hercules Managements Ltd. v. Ernst & Young, 1997 345 (SCC), [1997] 2 S.C.R. 165, 115 Man. R. (2d) 241, 146 D.L.R. (4th) 577, 211 N.R. 352, 139 W.A.C. 241, [1997] 8 W.W.R. 80, 31 B.L.R. (2d) 147, 35 C.C.L.T. (2d) 115; ter Neuzen v. Korn, 1995 72 (SCC), [1995] 3 S.C.R. 674, 11 B.C.L.R. (3d) 201, 127 D.L.R. (4th) 577, 188 N.R. 161, [1995] 10 W.W.R. 1 (sub nom. Neuzen v. Korn) Statutes referred to Negligence Act, R.S.O. 1990, c. N.1, s. 3 Retail Sales Tax Act, R.S.O. 1990, c. R.31, s. 20(4) Authorities referred to Canadian Institute of Chartered Accountants Handbook Jackson and Powell on Professional Negligence, 4th ed. (London: Sweet and Maxwell, 1997), p. 827 Linden, Canadian Tort Law, 6th ed. (Toronto: Butterworths, 1997), p. 99

Jeffrey S. Leon and David A. Hausman, for appellant. Michael E. Girard, for respondents.

The judgment of the court was delivered by

MACPHERSON J.A.: --

Introduction

[[1]] This appeal arises from the failure of the appellant, Bloor Italian Gifts Limited ("Bloor Italian"), to remit over $1 million in provincial retail sales tax during the period December 1985 to December 1991. Bloor Italian was issued notices of assessment by the provincial Ministry of Revenue ("Ministry") demanding payment of the unremitted tax plus interest and a 25 per cent penalty. At issue is whether Bloor Italian can recover damages from its accountant, the respondent Douglas Dixon ("Dixon"), and his accounting firm, Arkay and Dixon. Dixon failed to notice his client's liability for unremitted retail sales tax in the course of preparing Bloor Italian's yearly financial statements.

[[2]] A majority of the Divisional Court upheld the trial judge's decision that the accountant was not liable for any damages suffered by Bloor Italian in connection with the inadequate retail sales tax remittances. For the reasons that follow, I would allow the appeal and find the respondents liable for 50 per cent of the appellant's recoverable losses.

A. Facts

[[3]] Bloor Italian is a retail business owned by Matteo and Claudia Lauriola [See Note 1 at end of document] which specializes in the sale of bomboniere to the Italian community. Bomboniere are small gifts of appreciation that are given to guests at weddings and other festive occasions.

[[4]] Dixon is a chartered accountant who provided bookkeeping and accounting services for Bloor Italian from 1974 until 1991 pursuant to a letter of engagement between the parties that was signed on a yearly basis. Dixon prepared Bloor Italian's annual financial statements and corporate tax returns.

[[5]] In terms of bookkeeping services provided to Bloor Italian, Dixon's staff prepared monthly summaries of financial data contained in daily cash reports drawn up by Matteo Lauriola ("Matteo"). Dixon's staff then posted this information to Bloor Italian's sales journal and general ledger.

[[6]] Dixon prepared Bloor Italian's financial statements pursuant to what is known as a review engagement. A review engagement is an intermediate form of financial reporting that requires the accountant to make inquiries of management and perform certain analytical procedures to determine if the financial information contained in the client's records is plausible. A review engagement is less onerous than an audit, which requires the accountant to make inquiries of third parties and to test internal control systems so as to ensure the accuracy of the financial information provided by management. A review engagement is more onerous than a compilation engagement, which requires the accountant to assemble information provided by management without making any assessment of the plausibility of that information.

[[7]] A brief discussion of Bloor Italian's practices in relation to sales of bomboniere is necessary to understand the origins of the retail sales tax problem that is behind this appeal. When a customer placed an order for bomboniere, Bloor Italian normally accepted a deposit towards the purchase price. The balance was paid when the customer returned to pick up the order. Before 1981, Bloor Italian collected sales tax on the entire purchase price. However, it only recorded and remitted sales tax on the balance and not on the deposit. In 1981, the Ministry conducted an audit of the company which revealed that it had not been recording and remitting the proper levels of retail sales tax. Matteo referred the auditor to Dixon. Several meetings were held between Dixon and the auditor to discuss the problem. Bloor Italian was assessed $49,300.73 by the Ministry as a result of the inadequate remittances. Following the audit, Bloor Italian purchased a new electronic cash register and developed new daily cash reports . In the fall of 1983, an auditor from the Ministry conducted a spot follow-up audit and concluded that Bloor Italian was collecting and remitting sales tax correctly.

[[8]] At some time after the purchase of the new cash register, the staff at Bloor Italian began to use the machine in such a way that sales tax was not consistently recorded, despite the fact that it was being collected on the entire purchase price from customers at the time that the balance was paid. The printout tapes from the cash register, which did not disclose the proper amounts of collected retail sales tax, were used by Matteo to create the daily cash reports. These reports, as well as the register printout tapes, were provided to Dixon's office for entry into Bloor Italian's sales journal. Matteo also provided to Dixon's office copies of Bloor Italian's monthly sales tax remittance forms, which showed the remittance levels submitted to the Ministry. These forms were filed as required by regulations under the Retail Sales Tax Act, R.S.O. 1990, c. R.31, as amended, and were signed every month by Matteo. Dixon's bookkeeper entered this information on Bloor Italian's sales journal and general ledger and also summarized it on a monthly basis.

[[9]] These monthly summary statements revealed grossly inadequate levels of retail sales tax. For example, the monthly cash sheet for March 1988 disclosed sales of $99,951 at one of Bloor Italian's stores while the total sales tax collected was indicated as $51.33. In December 1988, the total sales at the same store were $19,651.41, while only $1.68 in retail sales tax was recorded as having been collected.

[[10]] In preparing Bloor Italian's financial statements, Dixon determined whether the sales tax shown on the company's financial records was the same amount that was remitted to the Ministry. After the follow-up audit in 1983, Dixon did not check the accuracy of the sales tax remittance levels. A simple analytical procedure of multiplying the total amount of sales by seven per cent to determine if the correct amount of tax was being remitted was performed by Dixon in 1981 and 1982, but, on the findings of the trial judge, not thereafter.

[[11]] In 1991, the Ministry assessed Bloor Italian for unremitted retail sales tax during the period December 1985 to December 1991 in the amount of $1,126,830 plus interest and a 25 per cent penalty. The unremitted sales tax had been treated by Dixon as revenue of Bloor Italian, which resulted in an overpayment of income tax to Revenue Canada in the amount of approximately $220,000 during the years between 1985 and 1991. Eighty per cent of this amount was eventually recovered.

[[12]] Bloor Italian as well as Matteo and Claudia Lauriola commenced an action against Dixon and his partnership for negligence and breach of contract. They alleged that Dixon was negligent in not detecting Bloor Italian's failure to remit appropriate amounts of retail sales tax and in overstating the company's income by including the collected tax in income. The plaintiffs also claimed against the defendants for damages arising from Dixon's failure to submit Bloor Italian's federal sales tax inventory rebate application on a timely basis.

B. Judgments Below

(1) The Trial Decision: [1997] O.J. No. 3088.

[[13]] The trial judge, the Honourable Justice Pitt, found that the underpayment of retail sales tax was obvious:

On the view that I take of the evidence, an accountant, even with a minimum of curiosity, could have realized, at least at the time of the preparation of each annual financial statement, that RST was being underpaid. I say this, for among other reasons, because for the entire period under review, the tax remitted bore no relationship whatever to sales as revealed in the financial statements.

[[14]] The trial judge held, however, that the plaintiffs' claim grounded in negligence could not succeed because the relationship between the parties did not create a duty of care on Dixon's part to detect the underpayment of sales tax:

The plaintiffs are not in the category of persons who could reasonably be said to be relying on Dixon for the reliability of their RST remittances. Dixon was not negligent, as he owed no duty to the plaintiffs in the circumstances.

[[15]] The trial judge found another basis for rejecting the plaintiffs' claim. He held that the scope of Dixon's duty to the plaintiffs ought to be determined on the basis of the contract between the parties:

In any event, the better view is that Dixon's liability has to be determined not on the basis of a tortious breach of duty, but rather on the basis of the contractual duty arising from his Letter of Engagement, as qualified by the rules of the governing body.

[[16]] After citing the Supreme Court of Canada's decisions in Central Trust Co. v. Rafuse, 1986 29 (SCC), [1986] 2 S.C.R. 147, 31 D.L.R. (4th) 481 and Haig v. Bamford, 1976 6 (SCC), [1977] 1 S.C.R. 466, 72 D.L.R. (3d) 68, the trial judge concluded that the plaintiffs had not met the onus of demonstrating that the defendant had breached a duty owed to them either in tort or in contract. He thus dismissed the plaintiffs' claim arising out of the provincial retail sales tax remittances.

[[17]] The trial judge granted the plaintiffs' claim for damages arising from Dixon's late filing for a federal sales tax rebate, which he assessed in the amount of $8,123.

(2) The Divisional Court Decision: (1999), 125 O.A.C. 384

[[18]] The Divisional Court dismissed both the plaintiffs' appeal from the trial judge's holding on the provincial retail sales tax issue and the defendants' cross-appeal from the determination of liability for the late filing of the federal sales tax rebate application. The majority of the court (Coo and Cusinato JJ.) held as follows:

After careful review of the reasons and the points raised on behalf of both the appellant and the cross-appellant, we find no error in principle or disregard or misinterpretation of evidence by the trial judge. We are not prepared to decide he was clearly wrong in his disposition of the case.

[[19]] The majority considered Bloor Italian's argument that the trial judge ought to have considered the issue of liability for the negligence of Dixon's bookkeeper. This argument was rejected on the basis that, "[t]he trial judge obviously concluded that the bookkeeper's obligation did not extend to analyzing the adequacy of the sales tax remitted on the basis of information received from the client; certainly not in the context of the overriding limit placed on responsibility by the hiring agreement between the parties."

[[20]] The majority also dismissed the defendants' cross- appeal, noting that there was some evidence to support the trial judge's conclusions on the issue.

[[21]] Finally, the majority stated in obiter that:

Had our view on liability been different, we would have been driven to return this matter for another trial. There was not sufficient clarity and certainty of evidence on the issue of damages to enable us to revisit that issue afresh on appeal.

[[22]] Ferguson J. dissented. He was of the view that a new trial was warranted to determine the issue whether Dixon's negligence caused the plaintiffs' damages in the form of the penalty imposed by the Ministry. He pointed out that the trial judge failed to make a determination as to whether any conduct of the plaintiffs was a cause of the imposition of the penalty and thus failed to provide a basis for apportioning fault. This failure was significant, according to Ferguson J., in light of two omissions from the trial judge's reasons on the issue of the defendants' liability: first, the trial judge erred in not considering whether there was negligence on the part of the bookkeeper, for which Dixon would be vicariously liable; and, second, the trial judge failed to make a finding on whether the limitation of liability in the engagement letter applied to the bookkeeping services, in addition to the accounting services. Ferguson J. would have allowed the appeal and cross-appeal and ordered a new trial.

[[23]] Bloor Italian appeals the Divisional Court's decision upholding the trial judge's determination that the respondents were not liable to the plaintiffs for failing to detect the retail sales tax problem. The respondents do not cross-appeal on the issue of liability for damages arising from the failure to submit Bloor Italian's federal sales tax inventory rebate application on a timely basis. However, the respondents do make a contingent cross-appeal on the question of damages. They submit that if Bloor Italian's appeal is allowed, the damages it receives should be reduced substantially because of its own contributory negligence in failing to detect the retail sales tax problem. The respondents further submit that if the appeal is allowed, the absence of findings by the trial judge with respect to damages and contributory negligence necessitates that a new trial be ordered.

C. Issues

[[24]] This appeal raises the following issues:

1. Were the respondents negligent in their provision of accounting and bookkeeping services to the appellant?

2. If the answer to (1) is "yes", can the respondents rely on an exclusion clause in their contract with the appellant to overcome their prima facie liability in negligence?

3. If the answer to (2) is "no", what damages should the appellant recover from the respondents?

D. Analysis

(1) The liability issue

[[25]] It is undisputed that the relationship between Dixon and Bloor Italian was such that the accountant Dixon owed the appellant a duty of care to exercise reasonable skill and care in the performance of his professional duties: see Haig v. Bamford, supra, and Hercules Managements Ltd. v. Ernst & Young, 1997 345 (SCC), [1997] 2 S.C.R. 165, 146 D.L.R. (4th) 577. This duty arises quite apart from any contractual obligations between the parties: see Central Trust Co. v. Rafuse, supra, and Jackson and Powell on Professional Negligence, 4th ed. (London: Sweet and Maxwell, 1997), at p. 827.

[[26]] The real question is whether Dixon breached the duty he owed by not meeting the standard of care of the reasonable professional person in the circumstances of his relationship with Bloor Italian. This question needs to be addressed in the context of both the accounting and the bookkeeping services provided by Dixon to Bloor Italian.

(a) Accounting services

[[27]] To establish whether Dixon's conduct fell below the standard of care required of a public accountant on a review engagement, it is necessary to assess whether the applicable standard of care would have resulted in the discovery of the retail sales tax problem at issue. In determining the standard of care required of Dixon in these circumstances, the Canadian Institute of Chartered Accountants Handbook ("CICA Handbook") is of great assistance.

[[28]] The CICA Handbook sets out the professional standards that apply to accountants in conducting a review engagement. The CICA Handbook explains that a review engagement consists "primarily of enquiry, analytical procedures and discussion related to information supplied to the public accountant by the enterprise with the limited objective of assessing whether the information being reported on is plausible within the framework of appropriate criteria". "Plausible" is defined as "appearing to be worthy of belief based on the information obtained by the public accountant in connection with the review". The CICA Handbook also stipulates that an accountant must apply "analytical procedures such as comparing the current and prior period information and considering the reasonableness of financial and other inter-relationships . . . Explanations for relationships and individual items that appear to be unusual would be obtained by directing inquiries to appropriate personnel of the enterprise, the responses to whi ch the public accountant is entitled to accept without examination of supporting evidence as long as such responses appear plausible."

[[29]] In addition, the CICA Handbook requires that the accountant has sufficient knowledge of the business to make intelligent inquiries and further that the accountant possess an appreciation of matters that could have a significant effect on the information being reported on. The accountant must also ensure proper supervision over any assistants he employs.

[[30]] A checklist prepared by the CICA includes the possible existence of any sales tax liability, assessed or not, as an item into which the accountant ought to inquire. Another checklist item requires the accountant and his staff to inquire about how sales tax and other taxes are determined and recorded.

[[31]] Professional standards of conduct such as those prescribed in the CICA Handbook provide a persuasive guide as to what constitutes the standard of reasonable care for a professional: see ter Neuzen v. Korn, 1995 72 (SCC), [1995] 3 S.C.R. 674 at pp. 696-98, 127 D.L.R. (4th) 577. The standards of conduct prescribed by the CICA Handbook throw considerable doubt on the respondents' assertion that retail sales tax is too trivial an item in the financial statements to prompt inquiries of management by an accountant. This assertion is not sensitive to the nature of the business for which the accountant is conducting the review engagement. In the case of a retail business with a high volume of sales, unremitted retail sales tax could become a significant liability for the client.

[[32]] The CICA Handbook supports the conclusion that, at the least, the applicable standard of care required Dixon to make inquiries of management regarding the plausibility of Bloor Italian's stated retail sales tax liability. The findings of the trial judge also support this conclusion. Paraphrasing the trial judge, an accountant with even a minimum of curiosity could have discovered the retail sales tax problem in issue. Furthermore, the trial judge noted that "it would not have required much effort on the part of the accountant at year-end to multiply the sales shown on the financial statement by seven or eight per cent, depending upon the year, and compare it with the sum of the twelve RST payments made during the year and thereby test the 'plausibility' or 'reasonableness' of the amount of taxes actually paid."

[[33]] Unfortunately, the trial judge fell into error in treating the tort at issue as one that included a reliance component. He concluded that the plaintiffs' claim could not be made out because it had not been established that the plaintiffs were "in the category of persons who could reasonably be said to be relying on Dixon for the reliability of their RST remittances." However, reliance is not an element of a cause of action for negligence: see Allen M. Linden, Canadian Tort Law, 6th ed. (Toronto: Butterworths, 1997), at p. 99.

[[34]] In summary, Dixon was negligent in so far as he did not make intelligent inquiries of management about the implausibility of the indicated retail sales tax figures despite the glaring discrepancies between sales and remittance levels and also despite the fact that the amounts of collected retail sales tax decreased from year-to-year at the same time that sales were increasing. Moreover, Dixon ought to have been sensitive to the retail sales tax issue in light of the 1981 and 1983 audits conducted by the Ministry. Indeed, the auditor conducting the 1981 audit brought the problem of incorrect recording of sales to Dixon's personal attention.

[[35]] I am thus of the view that in failing to conduct an inquiry into the plausibility of the indicated retail sales tax liability, where the levels shown on the financial statements were grossly incorrect and where the accountant knew that his client had had significant remittance problems in the past, Dixon fell below the standard of care required of an accountant performing a review engagement.

(b) Bookkeeping services

[[36]] The appellant's proposed alternative basis for liability, namely, that Dixon breached the standard of care in respect of the bookkeeping services his staff provided, cannot succeed. None of the parties called any evidence to establish the standard of care for the provision of bookkeeping services. Without such evidence having been led at trial, I would not give effect to this ground of appeal.

(2) The exclusion clause issue

[[37]] The respondents assert that the terms of the contract between the parties as spelled out in the yearly engagement letters between them exclude tort liability. The engagement letters included the following limitation on liability:

Although we will prepare or assist in preparing your financial statements, the statements will be your representations and you must accept responsibility for the fairness of such representations.

We wish to emphasize that control over and responsibility for the prevention and detection of defalcations and other irregularities, errors and omissions must rest with you.

[[38]] In so far as this limitation applied to the accounting services conducted by Dixon, it is consistent with the CICA Handbook, which stipulates that a review engagement cannot be relied upon by the client to prevent or detect error and fraud.

[[39]] Counsel for Dixon submitted, relying on Central Trust, supra, that the effect of this contractual exclusion clause is to negate any tort law duty of care otherwise owed by Dixon to his client. I do not accept this submission. In my view, the limitation clause comes into effect only if the accountant has conformed to the standards that are required in conducting a review engagement. The clause, on its face, does not excuse the accountant's negligence. It is instructive in this regard to read the exclusion clause together with the following passage from the accountants' comments, which also appear in the engagement letter between Dixon and Bloor Italian:

ACCOUNTANTS' COMMENTS

We have prepared the accompanying balance sheet as at (date) and the statement of income for the (period) then ended from the records of Bloor Italian Gifts Limited and from other information supplied to us by the company. In order to prepare these financial statements we made a review consisting primarily of enquiry, comparison and discussion of such information. However, in accordance with the terms of our engagement we have not performed an audit and consequently do not express an opinion on these financial statements.

(Emphasis added)

[[40]] An accountant cannot escape his responsibility to make reasonable inquiries and comparisons and engage in a discussion of information provided by management by relying on the limitation that he is not responsible to prevent or detect error or fraud. The limitation clause is to the effect that it is not the accountant's responsibility to uncover errors or fraud. The clause does not negate the duty to see and report errors that would be evident to an accountant acting reasonably in the circumstances, and having detected them, to make the necessary inquiries of management. Accordingly, the Supreme Court of Canada's holding in Central Trust, that an alternative liability in tort will not be admitted if its effect would be to permit the plaintiff to escape a limitation of liability, is not dispositive of the instant case: see also BG Checo International Ltd. v. British Columbia Hydro & Power Authority, 1993 145 (SCC), [1993] 1 S.C.R. 12 at pp. 26-30, 99 D.L.R. (4th) 577. As Dixon failed to conform to th e standards required in performing a review engagement, he cannot avail himself of the exclusion clause.

(3) The damages issue

(a) Causation

[[41]] It is next necessary to consider whether Dixon's negligence caused any or all of the damages complained of by Bloor Italian. The Divisional Court upheld the trial judge's findings on liability but did not review his findings on damages on the basis that there was not sufficient clarity and certainty of evidence on the issue to do so.

[[42]] The trial judge determined that the plaintiffs had not met the onus of proving the required causal nexus between Dixon's alleged negligence and the imposition of the penalty by the Ministry. He also concluded that the interest payments and professional fees incurred by Bloor Italian were not recoverable because of the plaintiffs' failure to show that impecuniosity on their part was what caused them to incur ongoing interest and professional fees. Accordingly, he held that the plaintiffs had failed to discharge their duty to mitigate.

[[43]] The plaintiffs led evidence at trial to establish the losses that Bloor Italian experienced as a result of the failure to remit adequate retail sales tax to the provincial government. These losses, which relate to the period between December 1, 1985 and December 31, 1991, included the penalty imposed by the Ministry, the interest on the penalty assessed by the Ministry, the cost of interest on the amount of retail sales tax assessed, the non-recoverable income tax paid on the unremitted sales tax, the interest costs related to the overpayment of income tax, the interest income lost due to federal corporate income tax years deemed to be statute barred, and professional fees, both legal and accounting, which were incurred to rectify the various problems caused by the sales tax assessment. The plaintiffs' expert, John M. Rosenthal, C.A., calculated these damages in the total amount of $791,925, including prejudgment interest.

[[44]] Did Dixon's negligence cause these losses? The trial judge did not make a finding on whether the retail sales tax assessments covering the period December 1985 to December 1991 would have been avoided had Dixon noticed the inadequate remittance levels. Nor did the defendants' expert address the probable consequences of bringing the implausibility of the retail sales tax figures to management's attention. The plaintiffs' expert was of the view that had Dixon done so, it could have been the triggering event for a wholesale review. Dixon himself testified that if he had noticed the discrepancies between sales and remittance levels, he would have made inquiries to determine the source of the problem.

[[45]] The evidence supports a finding of a causal nexus between Dixon's failure to detect the remittance problem and the imposition of the penalty imposed by the Ministry. The penalty was foreseeable in light of Dixon's past experience with the consequences of an assessment against his client and in light of the fact that s. 20(4) of the Retail Sales Tax Act provides that the Ministry may levy a penalty where a vendor's failure to collect tax is attributable to neglect, carelessness, wilful default or fraud. Indeed, the Ministry specifically relied on the language of this provision in making its decision to impose a penalty.

[[46]] I reach the same conclusion with respect to the interest that was levied by the Ministry in the notices of assessment. It was foreseeable by Dixon that interest would be charged on inadequate remittance levels; his negligence in failing to detect the retail sales tax problem was a cause of the imposition of this interest.

[[47]] It was also foreseeable that overstating Bloor Italian's income by treating unremitted retail sales tax as income would lead to an overpayment in income tax that might not be recoverable. The heads of damages in the plaintiffs' evidence referred to as non-recoverable corporate income taxes, interest costs relating to non-recoverable corporate income taxes and interest income lost are thus recoverable by the appellant.

[[48]] However, I would agree with the decision of the majority of the Divisional Court not to interfere with the trial judge's finding that Dixon was not the cause of the interest charges incurred by Bloor Italian following the due date for complying with the notices of assessment. Nor is he liable for the professional fees claimed by Bloor Italian. Over the course of December 1985 to December 1991, Bloor Italian had the use of over $1 million for its own investment purposes, which funds ought to have been remitted to the province. It was not foreseeable by Dixon that Bloor Italian would be unable to repay these funds without incurring debt and associated interest charges. Considering that most of the professional services claimed by the plaintiffs arose from refinancing efforts to pay the unremitted sales tax, these costs similarly were not a foreseeable consequence of Dixon's negligence.

(b) Contributory negligence

[[49]] In their contingent cross-appeal, the respondents raise the issue of contributory negligence. The Negligence Act, R.S.O. 1990, c. N.1, provides in s. 3 that, "if fault or negligence is found on the part of the plaintiff that contributed to the damages, the court shall apportion the damages in proportion to the degree of fault or negligence found against the parties respectively." In my view, it is essential to consider contributory negligence in calculating damages in this case.

[[50]] The personal plaintiffs, in particular Matteo, were unobservant in failing to notice the underpayment of retail sales tax. Each month Matteo submitted forms to the Ministry, many of which revealed grossly inadequate levels of retail sales tax remittances. The plaintiffs' failure to notice this recurring shortfall is particularly glaring in light of the owners' past experience with the 1981 and 1983 audits. One would have thought this experience would have heightened awareness of the need to accurately calculate and remit retail sales tax.

[[51]] The respondents assert that the record is insufficient to permit this court to deal with the issue of contributory negligence. I disagree. In my view, the record amply demonstrates that both Dixon and Bloor Italian were very remiss in not detecting the problem relating to the remission of retail sales tax. I would attribute equal responsibility to each party for this omission. Accordingly, I would hold the respondents liable for only 50 per cent of the recoverable damages specified in these reasons.

Disposition

[[52]] In the result, I would allow the appellant's appeal from the decision of the Divisional Court and order judgment in favour of the appellant in the amount of 50 per cent of the damages claimed by the appellant, not including the claim for interest incurred to repay the unremitted retail sales tax and the claim for professional fees. Counsel may arrange a further appearance before the panel if they cannot agree on the quantum of any of the components of the damages.

[[53]] I would award the appellant its costs of the appeal in this court and in the Divisional Court. In light of the finding of equal responsibility on the liability issue, I would order that each party bear its own trial costs.

Appeal allowed.

Notes

Note 1: Matteo and Claudio Lauriola were plaintiffs in the action, but chose not to pursue the appeal.