Livent Inc. v. Deloitte & Touche LLP, 2014 ONSC 4085

COURT FILE NO.: 04-CL-5321

(02-CV-225823)

DATE: 20140709

SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

RE: LIVENT INC., THROUGH ITS SPECIAL RECEIVER AND MANAGER, ROMAN DORONIUK, Plaintiff

AND:

DELOITTE & TOUCHE AND DELOITTE & TOUCHE LLP, Defendant

BEFORE: Justice Gans

COUNSEL:
Peter F.C. Howard, Patrick O’Kelly, Jonathan Levy, and Aaron Kreaden, for the Plaintiff

John Lorn McDougall, Q.C., Matthew Fleming, and Jeremy C. Millard, for the Defendant

HEARD: In Writing

ENDORSEMENT

1The last issue for me to deal with in this continuing saga is the amount of interest to which Livent is entitled on the damages awarded under the judgment proper. Mercifully, after some forceful urging on my part, the parties were able to agree on costs, albeit with the assistance of the Hon. Dennis O’Connor.

Interest

Interest

2There was no agreement in respect of the applicable interest rate or the date from which interest on the award of damages was to run. Hence, I was compelled to return to the enabling legislation and the cases decided thereunder.

Applicable Rate

3The operative sections of the Courts of Justice Act¹ (the “Act”) are as follows:

127. (1) In this section and in sections 128 and 129,

“prejudgment interest rate” means the bank rate at the end of the first day of the last month of the quarter preceding the quarter in which the proceeding was commenced, rounded to the nearest tenth of a percentage point;

(2) After the first day of the last month of each quarter, a person designated by the Deputy Attorney General shall forthwith,

(a) determine the prejudgment and postjudgment interest rate for the next quarter; and

(b) publish in the prescribed manner a table showing the rate determined under clause (a) for the next quarter and the rates determined under clause (a) or under a predecessor of that clause for all the previous quarters during the preceding 10 years.

128. (1) A person who is entitled to an order for the payment of money is entitled to claim and have included in the order an award of interest thereon at the prejudgment interest rate, calculated from the date the cause of action arose to the date of the order.

(3) If the order includes an amount for past pecuniary loss, the interest calculated under subsection (1) shall be calculated on the total past pecuniary loss at the end of each six-month period and at the date of the order.

130. (1) The court may, where it considers it just to do so, in respect of the whole or any part of the amount on which interest is payable under section 128 or 129,

(a) disallow interest under either section;

(b) allow interest at a rate higher or lower than that provided in either section;

(c) allow interest for a period other than that provided in either section.

(2) For the purpose of subsection (1), the court shall take into account,

(a) changes in market interest rates;

(b) the circumstances of the case;

(c) the fact that an advance payment was made;

(d) the circumstances of medical disclosure by the plaintiff;

(e) the amount claimed and the amount recovered in the proceeding;

(f) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding; and

(g) any other relevant consideration.

4The plaintiff’s claim was commenced by way of notice of action issued on 28 February 2002. Using the table published by the Ministry of the Attorney General, Court Services Division, which is reproduced for use by the profession in the various practice manuals in circulation, as well as on the Ministry’s website, the plaintiff argues that the applicable “rate” to be employed is 4.3%, which it argues is the posted rate for the quarter preceding the quarter in which the action was commenced. In support of this choice of rate, the plaintiff relies on two decisions which it says interpret the table in the same fashion as it propounds: Mathkour v. Abomadkoor² and Vallie Construction Inc. v. Minaker.³

5I beg to differ with the conclusions reached in those two cases, if in fact it can be said that either reached any conclusion in the absence of full argument on the issue. The plaintiff’s suggested approach to the interpretation of the table is in error. The table does not purport to set out the applicable “bank rate” that is the basis for calculating pre and postjudgment interest, as described in the definitions of those terms. On the contrary, as is detailed in s. 127(2), the table reproduces the “prejudgment and postjudgment” interest rate for the applicable quarter and not the bank rate. Essentially, the Ministry has taken the adjustment out of the equation for the benefit of the profession and the judiciary. One need only identify the quarter in the table which corresponds to the quarter in which the action was commenced. The exercise is no more complicated than that.

6Indeed, the same conclusion is set out in the manual authored by Messrs. Carthy, Millar and Cowan, where the following note is found:

The interest rates noted above are the interest rates to use for each Quarter. The Ministry, when it publishes the interest rates, does the necessary adjustment. For example, the interest rate for the first Quarter of 1993 is the interest rate for the first day of the last month of the fourth Quarter of 1992 adjusted in accordance with the Act. Accordingly, if … an action is commenced in the first Quarter of 1993, the interest rate shown for the first Quarter of 1993 in the above tables is used.⁴

7The plaintiff initially submitted that the choice of rate was driven, alternatively, by the date the cause of action was discoverable.⁵ Respectfully, the plaintiff misinterprets, if not misstates, the case upon which it relies, Walker Estate v. York-Finch General Hospital.⁶ That case does not discuss the applicable rate, but rather the period for which prejudgment interest should be awarded.⁷

8In the further alternative, the plaintiff argues that I should adopt an average of the quarterly rates between the date of breach and the date of judgment, which comes to 3.1%. While I do have discretion to massage rates if the circumstances warrant such an approach, I am obliged to exercise that authority according to law and not blindly adhere to or adopt the “law of averages”. Doherty J.A. has expressed certain reservations to the application of that discretion to average prejudgment interest rates in two cases. First, in Graham v. Rourke, he cautioned against “replac[ing] the statutory regime premised on a specified rate subject to variation by the exercise of judicial discretion with a judge-made presumption in favour of the averaged rate”, because “it is not for the court to rewrite that legislation to reflect a different policy.”⁸ More recently, in Novakovic v. Kapusniak, he re-emphasized that the onus is on the party seeking to depart from the statutory rate to justify a departure.⁹ The approach mandated by both decisions was captured by my colleague Frank J. in Monarch Construction Ltd. v. Axidata Inc., where she made the following observations:

The defendant bears the onus of justifying a deviation from the presumptive rate prescribed in s. 137 of the Act. … For a rate other than the statutory rate to be applied, the deviation between the average rate and the statutory rate must be substantial. … The defendant relies on a fluctuation in rates of approximately 5% and a difference between the statutory rate and the averaged rate of .3%. This is not a sufficient difference in the circumstances of this case to justify deviating from the prescribed rate.¹⁰

9The plaintiff has failed to persuade me that in the instant case a deviation from the statutory rate should be applied. Averaging is still an exception and not the rule and should be applied in instances of marked swings in interest rates driven by the fiscal and monetary policies of the day.

Operative Date

Operative Date

10The plaintiff submits that prejudgment interest should run from the breach date, which I set in the Judgment as 31 August 1997. It cites three cases in support of its position: Whitefish Lake Band of Indians v. Canada (Attorney General);¹¹ Mincom Corona Realty Inc. v. Mincom Realty Systems Inc.;¹² and Kinbauri Gold Corp. v. IAMGOLD International African Mining Gold Corp.¹³ I am not persuaded that the cases cited establish an invariable rule that the breach date is the operative date from which interest should run. In my view, the correct date should more properly be tied to the date that the losses occasioned as a result of the negligence or breach of contract, as the case may be, start to be incurred or realized.

11Deloitte takes the position that the operative date should be 18 November 1998, which date corresponds to the date that Livent made an assignment in bankruptcy. It argues, presumably based on an earlier statement made by the plaintiff in various of its written arguments before judgment, that this date also corresponds with the date of discoverability, as defined by the Supreme Court in Peixeiro v. Haberman.¹⁴ In support of this argument, Deloitte also relies on s. 128(1) of the Act, which provides:

A person who is entitled to an order for the payment of money is entitled to claim and have included in the order an award of interest thereon at the prejudgment interest rate, calculated from the date the cause of action arose to the date of the order. [emphasis added]

12I am not persuaded that the discoverability date is in fact 18 November 1998 as opposed to some date in August 1998 when multiple plaintiffs started actions against the Deloitte firms in Canada and the U.S., in addition to actions against Livent and Messrs. Drabinsky and Gottlieb. Obviously, there were litigants in the U.S. who believed they had enough information to launch suit against the auditors after the frauds and irregularities first came to light. Alternatively, I am not persuaded that the November date is any more appropriate than the date of the publication of the Restated Financial Statements or the date that certain bondholders commenced suit in October.

13In any event, it is not at all clear why the phrase “cause of actions arose” in the Act should be given the same meaning as the phrase “cause of action accrues” in a statute imposing limitation periods. In the limitation period context, “discoverability is a general rule applied to avoid the injustice of precluding an action before the person is able to raise it”.¹⁵ In the prejudgment interest context, by contrast, using the date of discoverability as the start date would have the potential to work an injustice by undercompensating any plaintiff who had suffered some or all of his losses before his cause of action was discoverable.

14The cases hold that there are multiple reasons for an award of interest, including encouragement of settlement¹⁶ and compensation of the plaintiff for loss of the time value of money,¹⁷ both of which factors impact the selection of the operative date. At the same time, a court should not lose sight of the fact that the date chosen should not provide a windfall to the plaintiff in circumstances where damages have not actually been incurred.¹⁸

15As was observed by Professor Waddams in his oft-cited text, where a plaintiff does not suffer a loss until sometime after the breach date, interest should only accrue from the date of the loss and not the date of the breach:

Where, however, the plaintiff claims in respect of expenses incurred after the date of the wrong, for example repair costs or medical expenses in personal injury cases, interest runs only from the date the cost is incurred, for it would normally be on that day that the defendant (if meeting obligations instantly) could have been expected to make reimbursement.¹⁹

16There are two other subsections found in the interest regime in the Act which bear repeating:

128(3) If the order includes an amount for past pecuniary loss, the interest calculated under subsection (1) shall be calculated on the total past pecuniary loss at the end of each six-month period and at the date of the order.

130.(1) The court may, where it considers it just to do so, in respect of the whole or any part of the amount on which interest is payable under section 128 or 129,…

(c) allow interest for a period other than that provided in either section.

17The first subsection was judicially interpreted in Celanese Canada Inc. v. Canadian National Railway Co. as follows:

The purpose of s. 128(3) is to achieve fairness in the payment of the prejudgment interest on pecuniary damages by ensuring that a plaintiff will not recover a windfall that would otherwise result were s. 128(1) to be applied. It does so by providing a formula for the accrual of interest on pecuniary damages as they are incurred, in lieu of requiring the court to conduct a series of individual calculations. Section 128(3) accords with the underlying compensatory principle for awarding prejudgment interest, which is to compensate a party for the loss of the use of its money.²⁰

18The application of the second subsection is equally designed to ensure fairness as between the parties. In my view, both subsections can and should be applied in concert to the circumstances of the instant case having regard to the manner in which damages were calculated by the parties from and after the breach date to the date of the assignment in bankruptcy when the losses of Livent were said to have crystallized. The losses caused by the defendant’s breach were not all incurred at once—they were mounting from the date of the breach until the date of the assignment in bankruptcy.

19To revisit for a moment the damage calculation found in the judgment proper, I calculated the total damages incurred after 31 August 1997 to be $84,750,000, net of contingencies. I also calculated one of two alternative damage dates as of the end of March 1998, to correspond, roughly, with the date that the 1997 statements were released. The latter date yielded a gross damage number of $53.9 million and a net number after the application of the contingencies of $39.75 million. The difference between the net damages numbers is $45 million.²¹

20While the second date chosen falls outside the six months calculation date set out under s. 128(3), the latitude provided by s. 130(c) permits a massaging of the dates where the court is of the view that it is just and reasonable to do so.

21To repeat, because I was not provided with damage calculations except as at benchmark dates, and because the evidence indicated that damages could not be calculated on a straight line basis, it is my view that no interest should be assessed on the first $45 million for the period from the date of breach to 31 March 1998. Interest will be calculated at the rate of 2.5% on $45 million from 31 March 1998 to the date of the assignment in bankruptcy, 18 November 1998. Thereafter, interest will be calculated on the total award of $84,750,000 to the date of judgment, namely 4 April 2014.

22From my reckoning, that analysis will yield the following result:

31 March 1998 to 18 November 1998: 2.5% on $45,000,000 for 7.6 months = $712,500

19 November 1998 to 4 April 2014: 2.5% on $84,750,000 for 184.53 months = $32,581,078

Total PJI = $712,500 + $32,581,078 = $33,293,578

23If I am wrong in my arithmetic, I may be contacted by counsel with a view to correcting the same.

Footnotes

1. 1R.S.O. 1990, c. C.43.
2. 22012 ONSC 2997, at para. 123.
3. 32012 ONSC 4577, at para. 58.
4. 4Ontario Annual Practice 2013-2014 (Toronto: Canada Law Book, 2013), at p. 213.
5. 5Part V—Supplemental Submission on Damages, at para. 123.
6. 6(1997), 39 C.C.L.T. (2d) 1 (Ont. Gen. Div.), rev’d on other grounds (1999), 1999 2158 (ON CA), aff’d 2001 SCC 23.
7. 7The other case to which the plaintiff makes reference in support of this notion actually adopted the commencement of proceedings as the operative date: Ragin v. Ven-Cor Vending Distributors Ltd., 2001 CarswellOnt 3376 (S.C.J.), at paras. 22-28.
8. 8(1990), 1990 7005 (ON CA), at p. 628.
9. 92008 ONCA 381, at paras. 43-44.
10. 10(2008), 35 C.E.L.R. (3d) 141 (Ont. S.C.J.), aff’d 2009 ONCA 166, at paras. 13-15.
11. 11(2007), 2007 ONCA 744.
12. 122004 CarswellOnt 4779 (C.A.).
13. 13(2004), 2004 36051 (ON CA).
14. 141997 325 (SCC), at paras. 18, 36.
15. 15Ibid., at para. 36.
16. 16Kinbauri Gold Corp., supra note 13, at para. 120.
17. 17Bank of America Canada v. Mutual Trust Co., 2002 SCC 43, at paras. 36-39.
18. 18Stellarbridge Management Inc. v. Magna International (Canada) Inc., 2004 9852 (ON CA), at paras. 79-81.
19. 19The Law of Damages (loose-leaf, November 2013 Rel.) (Toronto: Canada Law Book, 2013), ch. 7, at p. 23. See also Lowndes v. Summit Ford Sales Ltd., 2006 14 (ON CA), at paras. 26-27.
20. 20(2005), 2005 8663 (ON CA), leave to appeal to S.C.C. refused [2005] S.C.C.A. No. 245, at para. 17.
21. 21Livent Inc. v. Deloitte & Touche LLP, 2014 ONSC 2176, at paras. 291-94, 303, 306, 326, 369.