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Home > Supreme Court Judgments > Haig v. Bamford et al.
Haig v. Bamford et al.
Ralph L. Bamford, Nairn Hagan, Alfred R. Wickens and John Gibson (Defendants) Respondents.
1975: November 13, 14; 1976: April 1.
Present: Laskin C.J. and Martland, Judson, Ritchie, Spence, Pigeon, Dickson. Beetz and de Grandpré JJ.
Negligence — Chartered accountants — Preparation of defective financial statement — Statement relied on by investor to his loss — Identity of investor not known to accountants — Right of recovery.
One Scholler carried on a woodworking business as sole proprietor. Early in 1964, following a fire, the Saskatchewan Economic Development Corporation (Sedco) agreed to advance Scholler $34,000 for the purpose of establishing a plant to undertake millwork and the manufacture of furniture, conditional upon incorporation of the sole proprietorship. A company was incorporated and some months later it became apparent that there was a serious shortage of working capital. Scholler approached Sedco for a further loan of $20,000 which was approved, contingent upon (i) production of a satisfactory audited financial statement of the company for the period from the date of incorporation, February 10, 1964, to March 31, 1965, and (ii) the infusion of $20,000 of equity capital.
Instructions were issued to a firm of chartered accountants, of which the respondents were partners, to prepare the required financial statement and Scholler began a search for an outside investor. He made it known to the accountants that he was seeking an inves­tor. The statement, when completed, showed that the operations of the company were profitable; the potential was promising, and a $20,000 loan from Sedco and $20,000 of equity money would provide necessary work­ing capital. Influenced by these considerations, the appellant purchased in mid-August, 1965, shares in the capital stock of the company for $20,075 and guaran­teed the bank loan to the extent of $20,000.
$28,000 prepayment received by the company in March 1965 on two contracts, upon which work had not started, had been treated as if the work had been completed and the moneys earned. The $28,000 had been credited to revenue by the company's bookkeeper rather than shown as a liability. The accountants had failed to spot the error.
Instead of making a profit in the period, as shown by the statement, the company had suffered a loss; instead of buying into a thriving business, as the financial statement would have suggested, the appellant bought into a distressed enterprise which never showed a profit. During the six months from March 31, 1965, to August 31, 1965, a net loss of $21,460.10 was sustained. By early December, the company had reached the limit of its bank line of credit. To meet the payroll the appellant made a further investment of $2,500, matched by a like amount from Sedco. A meeting of creditors, held late in the month, decided against further support and at year-end, the company ceased business. The appellant lost the $20,075 paid for shares, the loan of $2,500, and $6,500 under the bank guarantee. He sued the accountants, the company and Scholler to recover $20,075 and $2,500 but later discontinued against Scholler and the company.
The trial judge allowed recovery. An appeal by the accountants was allowed by a majority of the Court of Appeal, and an appeal by the investor to this Court followed.
Held: The appeal should be allowed and the trial judgment reinstated, subject only to disallowance of the claim of $2,500.
Per Laskin C.J. and Ritchie, Spence, Pigeon, Dickson and Beetz JJ.: The respondents owed the appellant a duty to use reasonable care in the preparation of the accounts. Also, in representing to have done an audit when they were aware that an audit had not been done, the respondents were guilty of a serious dereliction of duty.
very limited class. The appellant was a member of the class. The fact that the accountants did not know his name was not of importance. There was no good reason for distinguishing between the case in which a defendant accountant delivers information directly to the plaintiff at the request of his employer (Candler v. Crane, Christmas & Co.,  1 All E.R. 426, and Glanzer v. Shepard (1922), 233 N.Y. 236) and the case in which the information is handed to the employer who, to the knowledge of the accountant, passes it to members of a limited class (whose identity is unknown to the account-ant) in furtherance of a transaction the nature of which is known to the accountant.
The appellant could not recover from the respondents the sum of $2,500 which he advanced to the company in December 1965, because by that time he was fully cognizant of the true state of affairs. It could not be said that the sum was advanced in reliance upon false statements.
Per Martland, Judson and de Grandpré JJ.: On the finding that the respondents knew, prior to the comple­tion of the financial statement, that it would be used by Sedco, by the bank with which the company was doing business and by a potential investor in equity capital, the respondents owed a duty of care, in the preparation of that financial statement, to that potential investor (the appellant), even though they were not aware of his actual identity.
APPEAL from a judgment of the Court of Appeal for Saskatchewan, allowing an appeal from a judgment of MacPherson J. Appeal allowed.
R. W. Thompson, for the plaintiff, appellant.
E. R. Gritsfeld, Q.C., for the defendants, respondents.
DICKSON J.—This appeal concerns the liability of an accountant to parties other than his employ­er for negligent statements. The Court is asked to decide whether there was in the relationship of the parties to the appeal such kind or degree of prox­imity as to give rise to a duty of care owed by the respondents to the appellant. The damages involved are not large but the question raised is of importance to the accounting profession and to the investing public.
In October 1961, Siegfried Scholler and his brother entered into partnership under the firm name of Scholler Brothers Millwork in the City of Moose Jaw. The firm made cabinets and other furniture and also undertook contracts for interior woodwork. The partnership was dissolved in December 1962, and from then until February 1964, Siegfried Scholler carried on the business as sole proprietor. In early 1964, following a fire, Saskatchewan Economic Development Corpora­tion (Sedco) agreed to advance Scholler $34,000 for the purpose of establishing a plant to undertake millwork and the manufacture of furniture in Moose Jaw, conditional upon incorporation of the sole proprietorship. Scholler Furniture & Fixtures Ltd. (the company) was incorporated and the sole proprietorship came to an end. Scholler was an excellent workman but poor financial planner. He evinced a compulsive urge to expand the business of the company with the result that by January 1965, a serious shortage of working capital became apparent. Scholler approached Sedco for a further loan of $20,000 which was approved, contingent upon (i) production of a satisfactory audited finan­cial statement of the company for the period from date of incorporation, February 10, 1964, to March 31, 1965, and (ii) the infusion of $20,000 of equity capital.
Instructions were issued to the firm of R. L. Bamford & Co. (the accountants), of whom the respondents (defendants) were partners, to prepare the required financial statement and Scholler began a search for an outside investor. He made it known to the accountants that he was seeking an investor. The trial judge, MacPherson J., made a crucial finding, not disturbed by the Court of Appeal for Saskatchewan, that the accountants knew, prior to completion of the financial statement, dated June 18, 1965, at the root of the present litigation, that the statement would be used by Sedco, by the bank with whom the com­pany was doing business, and by a potential inves­tor in equity capital.
Instead of making a profit in the period, as shown by the June statement, the company had suffered a loss: instead of buying into a thriving business, as the financial statement of June 18, 1965, would have suggested, Haig bought into a distressed enterprise which never showed a profit. During the six months from March 31, 1965, to August 31, 1965, a net loss of $21,460.10 was sustained. By early December, the company had reached the limit of its bank line of credit. To meet the payroll Haig made a further investment of $2,500, matched by a like amount from Sedco. A meeting of creditors, held late in the month, decided against further support and at year-end, the com­pany ceased business. Haig lost the $20,075 paid for shares, the loan of $2,500, and $6,500 under the bank guarantee. He sued the accountants, the company and Scholler to recover $20,075 and $2,500 but later discontinued against Scholler and the company.
The trial judge found negligence on the part of the accountants. I think the evidence amply supports that finding. From the expert testimony, it appears that the engagement of a chartered accountant can be on either an "audit" basis or a "non-audit" basis. If the engagement is for an audit, the accountant does what he considers necessary by way of auditing procedures, tests and verification of internal controls, accounts, and records to permit him to give an opinion on the financial statements. In an engagement of the non-audit type, the accountant merely helps the client in the preparation of the financial statement on terms which permit him to accept the client's records and dispense with the checks and verifica­tions expected in an audit. The product of an audit is a financial statement accompanied by an audi­tor's report expressing an opinion on the financial statement. At the end of a non-audit engagement, a financial statement is issued to which is appended a comment in which the auditor expressly disclaims responsibility.
The attached financial statements have been prepared from the books and records and information furnished, without audit, and we are not able to express an opinion as to the financial position of the business.
We have examined the records of Scholler Furniture & Fixtures Ltd. for the period from incorporation, February 10, 1964 to March 31, 1965 and have prepared therefrom the attached Balance Sheet as at the latter date and Statement of Profit and Loss for the period. Our examination included a general review of the accounting procedures and such tests of the account­ing records and other supporting evidence as we con­sidered necessary in the circumstances.
The accounts receivable are as shown by the records and we have not confirmed them by direct communica­tion with the recorded debtors.
The inventories of materials and work-in-process were not taken by us or under our supervision and have been accepted as certified to us by Mr. Siegfried Scholler.
Subject to the foregoing reservations we report that, in our opinion, the attached Balance Sheet and related Statement of Profit and Loss present fairly the financial position of Scholler Furniture & Fixtures Ltd. as at March 31, 1965 and the results of operations for the period ended on that date in accordance with generally accepted accounting principles and as shown by the books of the Company.
financial statements of Scholler Brothers Millwork. Notwithstanding all of this, the auditors rendered the quoted opinion in which they said that their examination had included a general review of the accounting records and other supporting evidence as they considered necessary in the circumstances. That was not true. They also expressed the opin­ion, subject to the three reservations earlier referred to, that the balance sheet and related statement of profit and loss fairly presented the financial position of the company as at March 31, 1965. The work done by or on behalf of the accountants did not warrant any such affirmation. In representing to have done an audit when they were aware that an audit had not been done, in my view the accountants were guilty of a serious derel­iction of duty. This was more than honest blunder or error in judgment.
I come then to the question whether Haig, who received the defective financial statements, and relied on them to his loss, as a right of recovery from the accountants. Mr. Justice MacPherson at trial allowed recovery. He held that the accountants knew or ought to have known that the state­ments would be used by a potential investor in the company; although Haig was not, in the judge's words, "in the picture," when the statement was prepared, he must be included in the category of persons who could be foreseen by the accountants as relying on the statement and therefore the accountants owed a duty to Haig. The judge applied a test of foreseeability.
they were not aware that he had been shown a copy of the statement or that he had been approached to invest in the company. The learned justice of appeal observed that the financial statement had been given to Haig without the knowl­edge of Scholler or the company. With respect, I think this observation is in error as Wiltshire testified that before giving a copy of the statement to Haig he had received Scholler's permission. The point is, however, of no great consequence for if the accountants, at the request of the company, prepared financial statements for distribution to, inter alia, potential investors, and furnished the company with copies for that purpose, I fail to understand why the company or anyone on its behalf would be expected to seek permission of the accountants before releasing a copy. The learned justice of appeal concluded that the accountants owed Haig the duty to be honest but that they were not liable to him for negligence and, since the misrepresentation contained in the financial statement was the result of an "honest blunder", the appeal should be allowed with costs. The dissent­ing judge, Mr. Justice Woods, was of opinion that the accountants knew that the statement was intended for a special purpose, a purpose that would affect the economic interests of those from whom Scholler would attempt to secure funds and that Haig fell within this category. The outcome of this appeal rests, it would seem, on whether, to create a duty of care, it is sufficient that the accountants knew that the information was intended to be disseminated among a specific group or class, as Mr. Justice MacPherson and Mr. Justice Woods would have it, or whether the accountants also needed to be apprised of the plaintiff's identi­ty, as Mr. Justice Hall and Mr. Justice McGuire would have it.
of taxation, urbanization, the separation of ownership from management, the rise of professional corporate managers, and a host of other factors, have led to marked changes in the role and respon­sibilities of the accountant, and in the reliance which the public must place upon his work. The financial statements of the corporations upon which he reports can affect the economic interests of the general public as well as of shareholders and potential shareholders.
limited class, is the proper test to apply in this case.
… They owe the duty, of course, to their employer or client, and also, I think, to any third person to whom they themselves show the accounts, or to whom they know their employer is going to show the accounts so as to induce him to invest money or take some other action on them. I do not think, however, the duty can be extended still further so as to include strangers of whom they have heard nothing and to whom their employer without their knowledge may choose to show their accounts.
The test of proximity in these cases is: Did the accountants know that the accounts were required for submission to the plaintiff for use by him?
"... liability in an indeterminate amount for an indeterminate time to an indeterminate class."
Whether he would be liable if he prepared his accounts for the guidance of a specific class of persons in a specific class of transactions, I do not say. I should have thought he might be, just as the analyst and lift inspec­tor would be liable in the instances I have given earlier.
In the case at bar, the accounts were prepared for the guidance of a "specific class of persons", potential investors, in a "specific class of transac­tions", the investment of $20,000 of equity capital. The number of potential investors would, of neces­sity, be limited because the company, as a private company, was prohibited by s. 3(o) (iii) of The Companies Act of Saskatchewan (R.S.S. 1965, c. 131) from extending any invitation to the public to subscribe for shares or debentures of the company.
… It is said that the respondents did not know the precise purpose of the inquiries and did not even know whether National Provincial Bank, Ltd. wanted the information for its own use or for the use of a customer: they knew nothing of the appellants. I would reject that argument. They knew that the inquiry was in connection with an advertising contract, and it was at least probable that the information was wanted by the advertising contractors. It seems to me quite immaterial that they did not know who these contractors were: there is no suggestion of any speciality which could have influenced them in deciding whether to give information or in what form to give it. I shall therefore treat this as if it were a case where a negligent misrepresentation is made direct­ly to the person seeking information, opinion or advice, and I shall not attempt to decide what kind of degree of proximity is necessary before there can be a duty owed by the defendant to the plaintiff.
It is, I think, a reasonable and proper inference that the bank must have known that the National Provincial were making their inquiry because some customer of theirs was or might be entering into some advertising contract in respect of which Easipower, Ltd., might become under a liability to such customer to the extent of the figures mentioned. The inquiries were from one bank to another. The name of the customer (Hedleys) was not mentioned by the inquiring bank (National Provincial) to the answering bank (the bank): nor did the inquiring bank (National Provincial) give to the customer (Hedleys) the name of the answering bank (the bank). These circumstances do not seem to me to be material. The bank must have known that the inquiry was being made by someone who was contemplating doing business with Easipower Ltd. and that their answer or the substance of it would in fact be passed on to such person.
a person should be bound by a legal duty of care to avoid causing economic loss to another in circumstances where a reasonable man in the position of the defendant would foresee that kind of loss and would assume responsibility for it.
How wide the sphere of the duty of care in negligence is to be laid depends ultimately on the courts' assessment of the demands of society for protection from the carelessness of others.
Lord Pearce in Hedley Byrne adopted Lord Den­ning's dissent in Candler's case, to which I have already referred, noting that the result produced was somewhat similar to the American Restatement of the Law of Torts.
Two other cases decided in England might be mentioned briefly, in one of which the ambit of the duty of care was extended and in the other, restricted. In Dutton v. Bognor Regis United Building Co. Ltd., it was held that the relationship between a building inspector, who had negli­gently approved the foundations of a house, and the plaintiff, subsequent purchaser of the house, was sufficiently proximate to form the basis of a duty of care. In Mutual Life & Citizens Assurance Co. Ltd. v. Evatt, a majority of the Privy Council denied recovery to Evatt for negligent advice given to him gratuitously by an insurance company, of which he was a policy holder, for the reason that he did not allege that at or prior to the time of his inquiry the company carried on the business of supplying information or advice on investments or that it claimed to possess any special skill or competence. These considerations are not, of course, present in the case at bar. Here the accountants held themselves out as possessing spe­cial qualifications, skill, and competence which, for reward, they were prepared to place at the disposal of the public.
a return of the weight and furnished the plaintiff buyer with a copy. The buyer paid the seller on the faith of the certificate which turned out to be erroneous. The buyers were entitled to recover from the weighers. The certificate was held to be the very "end and aim" of the transaction and not something issued in the expectation that the seller would use it thereafter in the operations of his business as occasion might require.
... There, the plaintiff was a member of an undefined, unlimited class of remote lenders and potential equity holders not actually foreseen but only foreseeable.
The Rusch case was followed by the U.S. Court of Appeals (4th Circuit) in Rhode Island Hospital Trust National Bank v. Swartz. That case men­tions that Rusch has been followed in Iowa and Minnesota.
The case before us is closer to Glanzer than to Ultramares. The very end and aim of the financial statements prepared by the accountants in the present case was to secure additional financing for the company from Sedco and an equity investor; the statements were required primarily for these third parties and only incidentally for use by the company. In the Ultramares case, Touche would know that the statements were primarily for com­pany use although they might be read in the ordinary course of business by shareholders, inves­tors, banks and countless others.
But what if the defendant is informed that his representation is to be passed on to some more limited group, as a basis for action on the part of some one or more of them?
... where the group affected is a sufficiently small one, and particularly, as in the case of the successful bidder, only one person can be expected to suffer loss, the guess may be hazarded that the recovery will be allowed. Certificates of expert examination are intended to be exhibited, not hidden under a bushel; and a rule which denies recovery because the defendant who has provided one for such a purpose does not know the plaintiff's name, or the particulars of the transaction, has a very artificial aspect.
A is negotiating with a bank for a credit of $50,000. The bank requires an audit by certified public accountants. A employs B & Company, a firm of accountants, to make the audit, telling them he is going to negotiate a bank loan. A does not get his loan from the first bank but does negotiate a loan with another bank, which relies upon B & Company's certified statements. The audit carelessly overstates the financial resources of A, and in consequence the second bank suffers pecuniary loss. B & Company is subject to liability to the second bank.
I am of opinion that the case of Hedley Byrne represents the considered opinion of five members of the House of Lords to the effect that a negligent misrepre­sentation may give rise to an action for damages for economic loss occasioned thereby without any physical injury to person or property and apart from any contract or fiduciary relationship... .
distinguishing between the case in which a defendant accountant delivers information directly to the plaintiff at the request of his employer, (Candler's case and Glanzer's case) and the case in which the information is handed to the employer who, to the knowledge of the accountant, passes it to members of a limited class (whose identity is unknown to the accountant) in furtherance of a transaction the nature of which is known to the accountant. I would accordingly hold that the accountants owed Haig a duty to use reasonable care in the prepara­tion of the accounts.
I am of the view, however, that Haig cannot recover from the accountants the sum of $2,500 which he advanced to the company in December 1965, because by that time he was fully cognizant of the true state of affairs. It cannot be said that the sum was advanced in reliance upon false state­ments. Haig had the choice of advancing additional money in the hope of saving his original investment. He chose to make a further advance, but the choice was his and not one for which the accountants are liable.
I would allow the appeal, set aside the judgment of the Court of Appeal for Saskatchewan and reinstate the judgment of MacPherson J., subject only to disallowance of the claim of $2,500, the whole with costs in this Court and in the Courts below.
MARTLAND J.—I agree with the conclusion reached by my brother Dickson that, based upon the finding of the learned trial judge, which was not disturbed by the Court of Appeal, that the respondents knew, prior to the completion of the financial statement, that it would be used by Sedco, by the bank with which the company was doing business and by a potential investor in equity capital, the respondents owed a duty of care, in the preparation of that financial statement, to that potential investor (the appellant), even though they were not aware of his actual identity.
I would dispose of the appeal in the manner proposed by my brother Dickson.
Solicitors for the plaintiff appellant: Halvor­son, Scheibel, Thompson & Rath, Regina.
Solicitors for the defendants, respondents: Embury, Molisky, Gritzfeld & Embury, Regina.
  6 W.W.R. 236, 53 D.L.R. (3d) 85.
  1 All E.R. 426 (C.A.).
  2 All E.R. 575 (H.L.).
 (1968), 284 F. Supp. 85 (Dist. Ct., R.I.).
 (1972), 455 F. 2d 847.

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