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Hercules Managements Ltd v Ernst & Young, [1997] 2 SCR 165 (Link)

Facts:

H hired E to prepare financial statements; the statements were required by statute. H claimed that E was careless in preparing the statements and that, as a result, H suffered:
** A. Economic loss as a result of relying on the statements in other investments
** B. Economic loss based on their existing shareholdings

At trial, the court found in favour of E (no duty of care was owed). On appeal, the court affirmed trial decision.

Issue(s):

Did Ernst & Young owe Hercules a duty of care?
** Is the duty of care test in cases of negligent representation and pure economic loss the same as in cases of negligence causing physical damage?

Ratio:

In cases of negligent representation, the reasonable foreseeability component of the Anns Test is replaced with "reasonable reliance."
** 1. The defendant ought reasonably to foresee that the plaintiff will rely on their representation
** 2. Reliance by the plaintiff would, in the particular circumstances of the case, be reasonable

A note on indeterminate liability: if it cannot be shown to exist on the facts of the case in cases of negligent misrepresentation, a duty of care can be found to exist

Analysis:

Ann’s two-stage test applies here:

I: Prima facie duty of care?
** Special kind of proximity here; looking at the relationship between a representor and representee
*** In regular physical damage cases, we’re looking at reasonable foreseeability: determining whether harm to the plaintiff was reasonably foreseeable to the defendant alone is enough for deciding proximity
*** In negligence misrepresentation cases, we’re looking at reasonable reliance: the plaintiff’s claim stem from their detrimental reliance on the defendant’s negligent statement; and it is clear that reliance on the statement or representation of another will not, in all circumstances, be reasonable
** So, in negligent misrepresentation cases: proximity pertains to the relationship of reliance. There is proximity when there is reasonable reliance:
*** 1. The defendant ought reasonably to foresee that the plaintiff will rely on their representation
*** 2. Reliance by the plaintiff would, in the particular circumstances of the case, be reasonable
** Therefore: Yes, duty of care here

II: Policy considerations
** Fear of indeterminate liability: we don’t want to expose potential defendants to (as per Cardozo): “liability in an indeterminate amount for an indeterminate time to an indeterminate class”
** The auditor reports may be reasonably relied upon by many parties, not just the appellants: Only for oversight mechanisms (reliance had to be for the purpose by which the statements were made); Problem of increased liability (lower economic efficiency: higher insurance costs, opportunity costs and general costs to protect themselves -- thus, supply of accounting services would decrease, and costs to consumers would increase)

Holding:

Decision in favour of defendant: a duty of care was owned, but was negated for policy reasons (indeterminate liability)


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