In Waxman v. Waxman (2004), 186 OAC 201, the Ontario
Court of Appeal considered whether the Hercules
Managements analysis is applicable in a case brought by a
shareholder of a small, closely- held corporation where concerns
about indeterminate liability arguably do not arise.
This case involved an oppression remedy claim brought by one
brother (Morris) against the other (Chester) based upon allegations
that his brother had defrauded him out of an interest in the
company. Morris also sued the company's auditors,
alleging that they had a duty to warn him that he was being
exploited by Chester. The trial judge and the Court of Appeal
found in favour of Morris in respect of virtually all allegations
made against Chester.
However, at both levels of Court, the case against the auditors
was dismissed on the basis that the auditors did not owe Morris a
duty of care – even though the auditors had acted for the
corporation for some 49 years and had even acted as Morris's
personal accountants from time to time.
The trial judge held that there was an undeniable relationship
of proximity between the auditors and Morris. He was well
known to them and there was a long history between the auditors and
the corporation. The limited class of persons test was met.
Nevertheless, the auditors were not liable because they were not
retained to look after Morris's personal interests in general,
even though they were occasionally retained for specific advice and
as his accountants. The trial judge found that the
audit engagements from year to year never contemplated that either
of the brothers would rely on the audited financial statements for
his own personal interests.
The trial judge applied the principles in Hercules
Managements to hold that the audited financial statements were
prepared for the purpose of permitting the controlling
shareholders, the brothers, to manage their business. This
has been described as the shareholder "stewardship
function". The limited purpose test was not met because Morris
had used the financial statements for a personal purpose. The Court
of Appeal accepted the trial judge's conclusion that to hold
otherwise could expose the auditors to indeterminate liability,
potentially over $50 million over the course of more than a
The decision in Waxman v. Waxman is significant for two
reasons. Firstly, it demonstrates that the Hercules
Managements analysis will be applicable in contexts other than
statutory audits, where the purpose of the audit is defined.
Here, it can be presumed that the engagement letters adequately
defined the purpose of the audit to enable the Courts to apply the
same analysis. Secondly, it demonstrates that the Courts are
concerned about indeterminate liability even in small, closely-held
It's not often that our little blog intersects with such titanic struggles as the U.S. presidential race – and by using the term "titanic" I certainly don't mean to suggest that anything disastrous is in the future.
J.J. v. C.C., is an interesting case in which the court held that an automotive garage owes a duty to minor children to secure the vehicles on the premises by locking the cars and safely storing the car keys...
In Irwin v. Alberta Veterinary Medical Association, 2015 ABCA 396, the Alberta Court of Appeal found that the "ABVMA" failed to afford procedural fairness to a veterinarian undergoing an incapacity assessment.
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