COURT FILE AND PARTIES
COURT FILE NO.: CV-10-CV295644
MOTION HEARD: 20140623
REASONS RELEASED: 20141003
SUPERIOR COURT OF JUSTICE – ONTARIO
RE:
Oakdale Kitchens Inc.
Plaintiff
- and-
Williams & Partners, Chartered Accountants LLP
Defendants
BEFORE: MASTER D. E. SHORT
COUNSEL: Joshua Freeman Fax: 416 941.8852
- for Plaintiff, Moving Party
Christopher Hluchan Fax: 905 948.8065
- for Defendant
BEFORE: MASTER D. E. SHORT
HEARD: June 23, 2014
Reasons for Decision
I. Overview
[1] Just over three years ago I heard a motion in this matter. My reasons (found at 2011 ONSC 3375) opened with the following paragraphs:
“[1] This action involves two parties involved in a dispute arising from the actions of former employees (the “Rogues”) who are said to have defrauded the plaintiff of a substantial sum of money.
[2] A forensic accountant was retained by the plaintiff for the purpose of seeking to recover its losses from the Rogues. I understand an application for an injunction was made and that eventually there was a criminal conviction entered against at least one of the Rogues.
[3] The plaintiff now brings an action against its chartered accountant seeking, in part, to recover losses suffered as a result of the alleged failure to detect the fraud in the course of annual reviews of the financial records of the plaintiff.
[4] It appears that the defendant firm was retained to conduct a review engagement, rather than a formal audit, in each of the years from 2004 through 2009.
[5] The plaintiff claims the sum of $2 million for negligence, breach of contract and breach of fiduciary duty, in its action commenced in February of 2010.”
[2] On the original motion I was required to determine the extent of production that was appropriate from the defendant firm of chartered accountants. While an appeal was taken from that decision, I understand that it was upheld both at first instance and on a leave application to the Divisional Court.
[3] My reasons addressed the need for a Discovery Plan and the role of proportionality in discovery under the then relatively recently introduced amendments to the Rules of Civil Procedure. My conclusion read in part:
[46] As a consequence I have determined that the appropriate resolution of this motion would be to require the defendant accounting firm to produce all relevant documents falling within the scope identified by the plaintiff’s counsel (i.e. all of the documents created by Williams in the course of its retainer with Oakdale, including working papers, notes, internal and external correspondence, reports and memoranda).
[47] However, the documents to be produced which I regard as relevant at this stage are only those relating to the work performed by Williams & Partners in the areas identified in the forensic auditor’s report where fraud by the Rogues is alleged to have taken place. [my present emphasis]
[4] Now three years later, with examinations for discovery having been held, counsel for the plaintiff returns to assert that the highlighted portion above arguably permitted a return application to revisit the direction made in my order (which was confirmed on the appeals referred to above).
[5] Of some importance is the manner in which this claim was asserted and supported. The forensic accountant who delivered the report on the original thefts, that was the basis for my earlier reasons, has now delivered a second report. In this Second Report he outlines in detail the information he now feels it is necessary for him to obtain in order to properly comment on whether or not the defendant accounting firm complied with its professional duties and responsibilities in reviewing the financial records of the plaintiff.
[6] Clearly “circumstances alter cases”. However in my view it is still necessary to establish that there has been a change in circumstances and to point to the newly obtained evidence relied upon to justify the request for further production at this point in the case.
[7] In this case the expert is seeking data which may be relevant to his third report on the problems he determines with respect to the defendant accounting firm’s work. There is no indication of any preliminary report on this key issue rather he has provided a report setting out what he would like to see and asserts is necessary to properly and professionally the conduct of the defendant accountants.
[8] The forensic expert which the plaintiff has consulted has access to all the company’s financial records which might have been reviewed by the defendant accountants. The defendants’ retainer was not for an audit let alone a forensic audit. They instead were retained each year for a more general review engagement.
[9] The documentation relating to that engagement reads in part:
“…we only have to tell you what we find if we find it.”
[10] The plaintiff in effect asserts that the defendant firm ought to have found more and in failing to do so, failed in its duty to the plaintiff company.
[11] They rely upon the views of a forensic accountant retained when the fraud was first discovered
II. Rosen Affidavit
[12] At the outset of his affidavit filed before me in support of the present motion, the plaintiff’s expert Lawrence Rosen deposes:
Rosen & Associates was retained by the Plaintiff … to render an opinion as to the sufficiency of the productions of the working papers that were provided by the Defendant, Williams & Partners, Chartered Accountants LLP ("W &P") and of other information related to the various engagements for which W &P were retained. (my emphasis)
[13] Mr. Rosen’s report (the “Second Report”) is annexed to the affidavit upon which he was cross-examined prior to the motion.
[14] It appears to me that there has not yet been any determination of any failures of the defendants. Rather the position taken is that in order to properly determine if there were failures additional productions are essential.
[15] The balance of the four paragraph affidavit of Mr. Rosen reads in part:
In order to prepare our opinion as aforesaid, we have assessed the sufficiency and appropriateness of the productions delivered by W &P in the within action to date. …
It is the opinion of Rosen & Associates, for all of the reasons elucidated in full in our report … that a professional accountant requires the complete set of documentation and correspondence for W&P's work for Oakdale, from fiscal 2001 to 2009, inclusive, both to ascertain W&P's knowledge of Mr. Legge and his then authority at Oakdale, and to examine the impact this knowledge had on W&P's Review Engagements. These productions would specifically have to include W&P's communications with Mr. Legge [the main Rogue] (hardcopy and electronic, including emails) as well as the documentation relating to the involvement between W&P and Mr. Legge in any engagement for Oakdale (Review Engagements or otherwise). Further, these productions should span the time of Mr. Legge's tenure, since W&P was involved in the hiring of Mr. Legge and remained engaged by Oakdale until his departure.” (my emphasis)
[16] The difficulty in these requests is that they were or could (and perhaps should) have been addressed in the application three years ago. My determination of the extent of production required was addressed taking into proportionality and the first report of Mr Rosen at that time.
[17] The Second Report itself is nineteen pages in length and outlines what I expect an expert in his position would likely regard as a near perfect database. It is to be noted that this was not the ultimate report on liability but rather only dealt with the extent of production the firm now felt was appropriate and required. The Introduction to the Second Report addressed to counsel dated March 21, 2014 (with my emphasis added) reads in part:
“You have asked us, as professional accountants experienced in evaluating assurance engagements and professional conduct of accountants, to render an opinion as to the sufficiency of the productions of the working papers that were provided by Williams & Partners ("W&P") and for other information related to the various engagements for which W &P were retained (the "Productions").
In particular, we are not being engaged at this time to evaluate W&P' s professional conduct with respect to the range of engagements for which they were retained by Oakdale Kitchens Inc.' s ("Oakdale"). Rather, you have asked us to assess the sufficiency and appropriateness of the Productions received to date based on what would be required for a professional accountant to be able to evaluate W &P's professional conduct in the Oakdale engagements, with respect to:
A. the period-end and year-end review engagements ("Review Engagements") that were performed by W &P;
B. their relationships, given that they had various advisory roles to Oakdale management and owners;
C. their assistance in the implementation of Oakdale's accounting systems and programs, and practices policies; and
D. their assistance in selection of accounting employee(s) for Oakdale.”
[18] The Second Report then provides a summary of the Firm’s opinion:
“In our opinion, as professional accountants, the Productions received to date are not nearly sufficient to evaluate W &P’s professional conduct with respect to the work performed for Oakdale. Thus, a professional accountant would not be able to complete the Evaluation. In order to conduct the Evaluation, a professional accountant requires access to the complete set of documentation and correspondence for W&P's work for Oakdale, from fiscal 2001 to 2009, inclusive. This complete set consists of both the physical and electronic documentation and correspondence for engagements by W &P, which includes the Review Engagements, advisory roles, implementation of systems, programs and policies, and assistance in employee selection (referred to herein as the "Complete Productions")….
[19] The firm then summarizes below the reasons that the Complete Productions are necessary for the Evaluation. In view of the importance of this issue to the parties’ positions I feel it is appropriate to set out portions of those reasons in some detail, with various portions emphasized by me :
Issue of Independence: The determination of whether certain segments of W &P's work are significant to the alleged frauds has to be made by an independent professional accountant, and not just by the defendant (W &P), who did not detect the alleged fraud over several years of engagements. Accordingly, a different perspective is warranted to determine the breadth of the discrepancies that existed.
Fraud "Cover-up": Alleged frauds typically have two main elements: the fraud itself, and the "cover-up". The "cover-up" attempts to hide or minimize the dollars of fraud involved, by utilizing various tactics. The report produced by Rosen & Associates on July 29, 2009 ("2009 Report"), did not, and was not intended to, examine the "cover-up" element or the full extent of any alleged frauds at Oakdale.
The 2009 Report was restricted in scope, and only specifically discussed the findings from examining limited information on just two instances of alleged fraud. A professional accountant requires the Complete Productions to provide an opinion on the possible extent of the fraud and "cover-up", as well as an evaluation of W&P's professional conduct in light of any possible findings. Accordingly, the Complete Productions are required, and not just a portion thereof that is based on the viewpoint of W&P.
- Implications of the 2009 Report: The 2009 Report detailed that Mr. Christopher Legge's ("Mr. Legge") complete access and control over Oakdale's accounting records would have been the main cause behind his alleged perpetrating of the fraud and the subsequent cover-up. The Productions indicate the possibility existed that W&P knew of Mr. Legge's control over Oakdale's systems and of Oakdale management's inability to manage the accounting system before Mr. Legge was hired. A professional accountant thus requires the Complete Productions in order to provide an opinion as to the extent of W &P’s knowledge
of both Oakdale's accounting system (prior to and after Mr. Legge's hiring), and Mr. Legge's access and control over the accounting system.
- Evidence in the Productions: The range of services invoiced by W&P to Oakdale over the years reflects a significant involvement by W&P in Oakdale's accounting and business operations. W & P's Review Engagements' guidelines mandated that W&P discuss the impact of such services on their ability and independence to conduct a review. However, no discussion beyond a trivial "Yes / No / NA" was evident from the material that we received.
A professional accountant conducting an Evaluation requires the Complete Productions to provide an opinion on such discrepancies that occurred over the full range of W&P’s services to Oakdale over several years. A professional accountant has to determine W&P's awareness of the nature and risks involved in Oakdale's business operations by reviewing W&P's non-review engagement productions.
- Overreliance on One Client Source: A review engagement consists primarily of making enquiries, applying analytical procedures and having discussions with appropriate senior officials of the enterprise. W &P’s alleged overreliance on Mr. Legge for enquiries, or lack of robust discussions with senior officials and ownership represent possible serious shortcomings of W&P’s Review Engagements. To provide an opinion on any overreliance, or to consider the scope of the discussion, a professional accountant consequently requires the Complete Productions.
The Complete Productions are necessary in this case, because they will allow the professional accountant to determine the breadth of these issues across the whole range of engagements. For example, for a professional accountant to find evidence of overreliance in the limited Productions would be a concern. However, for the breadth of the overreliance on Mr. Legge to extend to the entire engagement reflects a much more serious flaw in the conduct of the review by W&P.
[20] The Second Report concludes with the observation that the reasons above are not intended to be exhaustive. Rather they are said to “individually represent one or more causes for the Complete Productions to be made available to an independent professional accountant.”
[21] Ultimately, it is asserted that, “Collectively, they represent an overwhelming set of causes”.
III. Analysis
[22] In my view, they may well be possible causes, but as yet Mr. Rosen, in effect, is asserting that he cannot come to a proper conclusion at this point in time, without access to virtually all the records of the defendant firm relating to the plaintiff’s business.
[23] He also seeks to have access to all dealings between the parties commencing with events that occurred more than five years before the alleged fraud. Rightly or wrongly I determined some years ago that an inquiry into those was outside the scope of relevancy in this action. The days of semblance of relevance have passed.
[24] I see no reason to change my views with respect to that material.
[25] Previously I held that the working papers for the each of the years in question would clearly be relevant.
[26] I am not satisfied that the seeking of the additional documentation is anything more than a fishing expedition at this point in the process. I received no satisfactory explanation as to why the guidance of the potential expert could not have been obtained prior to discovery in order to provide guidance to counsel with respect to specific matters to be canvassed on discovery.
[27] The plaintiff’s expert has access to all the original source documents constituting the documentation that could have been examined by the defendant firm. If there is something in those documents that called for a specific explanation it could have been put to the witness in discovery.
[28] A detailed discovery plan could have had such areas of enquiry flagged to permit an efficient examination.
IV. Disposition
[29] To seek further and better production after the discovery, without any evidence of specific identified omissions, with no clear evidence obtained to date of apparent failures to comply with the appropriate professional standards, strikes me as inappropriate.
[30] The motion for further production is dismissed.
[31] On the motion I also dealt with other specific refusals and counsel have my annotated Form 37C chart showing specific dispositions. In my view success on those items was divided.
[32] The formal order should reflect that at the hearing I extended the set down date for this action to January 31, 2015.
[33] If there any difficulty finalizing the form of Order, I may be contacted through my Assistant Trial Co-ordinator.
VI. Costs
[34] Normally, at the conclusion of a refusals and undertakings motion the question of costs is relatively straightforward with a consideration of the importance of the matters disputed and the degree of success of each side.
[35] At the end of the argument, I advised counsel that I was reserving my decision in this case and asked both sides for their Form 57B Cost Outlines in accordance with rule 57.01(6).
[36] Normally one would expect at the cost outlines would be relatively equal. I was therefore surprised and somewhat bewildered to find one side was looking for $11,355.20 for costs of this motion, and the other side was seeking $35,449.27
[37] Upon further review, it was apparent that the time periods for which legal fees were being sought roughly equal. The hourly rate for the bulk of the time claimed by the plaintiff was based upon an actual rate of $340 per hour and acclaimed partial indemnity rate for $225 per hour. What skewed the totals were the disbursement claims of the plaintiff which (perhaps partially before HST) totalled $26,319.27.
[38] On enquiry, it determine, I determined that the expert’s affidavit and the appended Second Report t filed in support of the motion resulted in a charge to the firm of $25,000.
[39] In the event I am ultimately found to have been in error in my determination of the issue of production. I want to be clear that it is my view that expert affidavits in support of a motion this nature, are not normally expected or necessary. If counsel chooses to retain such an expert, it seems to me that such costs are much better treated as a cost of the action to be dealt with after trial. Having regard to the total circumstances of litigation such as this, I do not feel that it is appropriate to resolve liability for such costs at this stage.
[40] Perhaps the rules committee will in the future might turn its collective minds to such endeavours. Certainly in the future, with growing complex technologies, it may be necessary to have the assistance of an expert on motions such as this in order that the court may properly understand the nature of the production sought.
[41] However, I do not think that the party opposite to be bound this stage in the litigation to expect to have to pay such costs in the most extraordinary circumstances. I do not regard this motion as such case. In any event, I have ruled in favour of the responding party on the key issue.
[42] Having regard to the need to apply principles of proportionality and considering the amount that the plaintiff thought was appropriate to award for costs on this motion; I see no reason not to award costs on a partial indemnity basis to the defendant.
[43] However, this costs claim also presents difficulties. Counsel for the defendant was called to the bar 20 years ago. I suspect as a result of his ongoing relationship with parties involved in the litigation the actual rate charged to his client is reported to be $260 per hour.
[44] However, the claim put before me is based upon a claim for a greater partial indemnity rate of $275 per hour. In my view, the courts have consistently held that a partial indemnity award cannot be greater than the actual costs incurred. (viz. Inter-Leasing,Inc. v. Ontario (Revenue), 2014 ONCA 683)
[45] As a consequence I have allowed 75% of the actual rate as the partial indemnity rate in this case. That works out to $190 per hour, which I have applied to all the hours recorded by the defendant’s counsel. Therefore I am fixing the total costs payable by the plaintiff to the defendant at an all-in, (inclusive of HST and disbursements) amount of $8857.90. .
[46] Such costs to be payable 30 days from the release of these reasons.
Released: October 3, 2014
Master D. E. Short
DS/ R.71