Paradoxically, the application of the Hercules
Managements duty of care test in cases like Widdrington
(Estate of) v. Wightman, 2011 QCCS 1788, aff'd QCCA 1184
("Castor Holdings") may actually work to expand,
rather than narrow, liability.
In Castor Holdings, the plaintiff claimed against the
auditors of Castor Holdings, a private investment bank, for
misrepresentations made in various financial statements. The
audited financial statements were intended for several purposes,
among them, to obtain financing. The plaintiff had invested in the
company and suffered a loss when it was discovered that the
financial statements bore no resemblance to reality. This case was
a "test" case, whose results were binding in 75 other
cases with claims totalling over $1 billion.
Because the applicable law was in issue, the trial judge applied
both the civil law and, in obiter dicta, the common law
Hercules Managements test and found liability under both
The trial judge found that the auditors were negligent and that
they should have caught the discrepancies between the financial
statements that were prepared by management and the accounting
records they examined. There were numerous examples of audit
practice which fell below the standard of care. However, despite
the massive potential liability, the trial judge found that the
usual concerns of indeterminate liability did not arise here.
Firstly, the financial statements were prepared for a purpose which
was known to the auditors, although that purpose was very broad.
Secondly, the class of investors was identifiable to the auditors,
despite the fact that the auditors may not have known all of the
The result in Castor Holdings appears to produce a
paradox. While the decision may be consistent with Hercules
Managements from one perspective, from another, it does little
to assuage the policy concerns about indeterminate liability which
the Supreme Court of Canada sought to address. It is clear as a
result of Castor Holdings that massive liability is not
necessarily the same as indeterminate or unfair liability. Here,
the trial judge noted that the auditors could have taken steps to
protect themselves when they saw the broad purposes for which their
work product was being used.
The trial judge's decision was upheld by the Quebec Court of
Appeal on civil law principles and the Supreme Court of Canada
recently denied the auditors' motion for leave to appeal. It
could be speculated that the Supreme Court's decision may be
explained by the particular facts of this case in which the
auditors' conduct was held to have been particularly egregious
as well as the fact that the Quebec Court of Appeal decided the
appeal based on civil law principles effectively rendering
Hercules Managements irrelevant to the decision.
Alternatively, the Court may be signalling that it sees no need to
revisit Hercules Managements at this time. However, given
the current legal landscape, which we explore in a later blog, the
Supreme Court may soon be presented with yet another opportunity to
clarify its position on this topic.
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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