II) Policy Concerns: The Issue of Indeterminacy

The prima facie duty of care may be negated under the second branch of the Anns test where a problem of indeterminacy arises. This occurs most acutely in respect of information that is initially prepared for a client under a contract but is subsequently circulated to a broad range of non-privity third parties who use it for a variety of purposes. This was the central issue in Hercules. The defendant was a firm of chartered accountants who prepared the annual audited financial statements for corporations in which the plaintiffs were shareholders and investors. The plaintiffs argued that they had relied on the negligently prepared audited statements and had made financial decisions relating to their shareholdings and investments based on them. In due course the companies went into receivership and the plaintiffs suffered financial loss.

The Supreme Court had no difficulty in finding a prima facie duty of care. It was readily foreseeable that the shareholders and investors would rely on the financial statements and it was reasonable for them to do so since the statements were prepared by professional persons under contract with the corporations. There were, however, in the Court's opinion, severe indeterminacy problems in the area of auditors' liability. A corporation's audited financial statements may be used by many different persons, including customers, creditors, shareholders, investors, employees, and takeover bidders, for a wide variety of purposes. The losses generated by an auditor's negligence may, therefore, be extravagant and disproportionate to the fault of the defendant. A flood of claims would lead to a heavy expenditure of time and money by accounting firms in defensive practices and in defending litigation. This would ultimately increase the cost of accounting services and possibly lead to a decrease in the availability of those services. These consequences would be detrimental to the profession and disadvantageous to the public. The Court held that these factors are sufficient to negate the prima facie duty of care to non-privity third parties unless the factual matrix of the case is such as to allay the fears of indeterminacy. This arises where the defendant knows that identifiable plaintiffs or members of an identifiable class of plaintiffs are going to rely on the information and the information is used by them for the precise or specific purpose for which it was prepared. In Hercules, the defendant knew the identity of the plaintiffs, since they had been the auditors of the corporations for many years, but the Court held that the audited statements were prepared solely for the statutory purpose of allowing the shareholders, as a collective, to supervise and oversee the management of the corporations, not to assist the plaintiffs in making personal investment decisions. This negated the prima facie duty of care owed to the plaintiffs.

Two earlier Supreme Court decisions provide illustrations of situations where the prima facie duty of care to non-privity third parties does not raise indeterminacy problems. In Haig v. Bamford, [Note 79: [1977] 1 S.C.R. 466.] the defendant auditors were requested by their client, a private corporation, to prepare an audited financial statement for the purposes of attracting equity investment. The plaintiff was one of a limited class of potential investors that the defendant knew would be relying on the statement to make that investment decision. The financial statement was prepared negligently and the plaintiff lost the equity investment that he made in reliance on it. The defendant was held liable for the plaintiff's investment loss. In Edgeworth Construction Ltd. v. N.D. Lea & Associates Ltd., [Note 80: [1993] 3 S.C.R. 206.] the defendant engineering firm contracted with the British Columbia government to design and provide drawings and specifications for the construction of a highway. The government incorporated the drawings and specifications in the information provided to tenderers for the construction contract. The plaintiff, Edgeworth, who was the successful tenderer, relied on the information that was incorporated into the construction contract with the government. The plaintiff suffered financial loss because of negligent errors in the drawings and specifications. Concerns about an indeterminate liability were allayed by the defendant's knowledge that a limited class of construction companies would rely on the information for the precise purpose for which it was prepared and, in the long run, only the successful tenderer could suffer any loss.

The Hercules decision will, nevertheless, keep liability to non-privity third parties in tight check. Some will regret that the Court did not entertain a more generous scope of liability for negligent advice and information. There are policy factors that support a more consumer- friendly approach. It may be argued, for example, that the indeterminacy concerns in the area of negligent statements are overstated and that reliable and accurate information is such an important component of a fair and efficient marketplace that negligence law ought not to be unduly restrained in an information age from providing consumer protection to a wider range of users.

b) Standard of Care, Causation, and Contributory Negligence

The importance and attention paid to the duty of care in negligent misrepresentation cases must not overshadow the other equally important components of the negligence action. It must not be overlooked, for example, that the liability for misrepresentations is not based solely on the inaccuracy of the information. The defendant is not a guarantor of the truth of the information he provides. The defendant is obliged only to take reasonable care to ensure that the information is accurate. The appropriate standard of care was discussed at some length by the Supreme Court in Queen v. Cognos, [Note 81: Above note 76.] which dealt with an employer's misrepresentation about the nature and existence of an employment opportunity for which the plaintiff successfully applied. The employer suggested that the only obligation was one of common honesty. The employee argued that the employer was under an obligation to make complete disclosure of all relevant information. The Supreme Court rejected both arguments, affirming the traditional standard of the care of a reasonable person. The defendant must "exercise such reasonable care as the circumstances require to ensure that representations made are accurate and not misleading." [Note 82: Ibid. at 121.]

There is little difficulty with the common case of an express statement made with a lack of care. The more difficult situations involve implied misrepresentations and the failure to volunteer information that, in the circumstances of the case, is highly relevant to the plaintiff. Courts have had no hesitation in imposing liability for implied misrepresentations. They are acutely aware of the possibility that statements which are technically accurate may, nevertheless, create a false impression because of the delicate choice of words, the relationship between the parties, or the surrounding circumstances. There may also be special circumstances where there is a duty to volunteer information that is highly relevant to the plaintiff. This involves considerations similar to those that are relevant to the duty of affirmative action. It all depends on the relationship between the parties and the circumstances of the case. Disclosure has been required, for example, in the context of insurance and employment contracts. An insurance broker has special expertise and information on which the average citizen is particularly dependent for guidance in respect of risk and coverage. A full discussion of insurable risks and available coverage may be necessary. [Note 83: Fletcher v. Manitoba Public Insurance Corp., [1990] 3 S.C.R. 191.] An employer has also been required to provide highly relevant information to a prospective applicant about the nature and existence of the employment opportunity. [Note 84: Cognos, above note 76.] The central importance of employment, the monopoly of information enjoyed by the employer, and the power differential between prospective employers and many job applicants all underline the importance of such disclosure.

The concept of reliance plays a dual role in negligent misrepresentation cases. In order to establish a duty of care under Hercules, it must be established that reliance by the plaintiff is foreseeable and reasonable in the particular circumstances of the case. The second role relates to causation. It must be shown that the plaintiff did, in fact, rely on the misrepresentation. Prior to Hercules, the common formulation of the cause-in-fact requirement was that the plaintiff must prove that the plaintiff did in fact reasonably rely on the representation. After Hercules, the issue has been narrowed to whether there was actual reliance. The reasonableness question has been subsumed within the duty issue since it must now be shown that the reliance would have been reasonable on the facts of the particular case to impose a duty of care. The proof of actual reliance, however, remains essential to show causation.

A final point of some debate is the applicability of the defence of contributory negligence in negligent misrepresentation cases. The current emphasis on reasonable reliance suggests that the plaintiff has acted prudently and that the defence will be difficult to establish. [Note 85: For a recent decision recognizing the availability of contributory negligence in this context, see Kripps v. Touche Ross & Co., [1997] 6 W.W.R. 421 (B.C.S.C.).]