 This is Waylon Chow. Welcome to Necklidge's Torts in Professional Liability, Module 4B, Part C. In this part, we will look at the special rules that apply to determine the duty of care with regard to professional statements. Now I want to talk about the special way that the courts have dealt with imposing a duty of care on statements made by professionals. So quite often professionals such as financial advisors, bankers, stockbrokers, lawyers, accountants, engineers, we all make mistakes every now and then. And sometimes we make inaccurate statements and those statements are relied on the people who hear or read those statements. And those people can be most obviously clients, but they can also be non-clients. Now the concern the courts have with imposing liability for statements made by professionals is that negligent statements can cause, quote, liability in an indeterminate amount for an indeterminate time to an indeterminate class. So it could be an indeterminate amount because if I say something, let's say as a lawyer and then someone out there who has read what I've said, they might use it, rely on it in entering into a multi-million dollar transaction and then the information I gave turns out to be bad and they sue me for tens or hundreds of millions of dollars. So the amount can be indeterminate. And also it's an indeterminate time because when you make a statement and it's recorded in some way or another if it's written, it's out there floating, especially with the internet. The information could be floating out there for an indefinite period of time. And also it could be an indeterminate class meaning that you don't know exactly who or how many people will hear or read your statement. Another consideration is that negligent statements are more likely to cause pure economic loss instead of property damage or personal injury. So with property damage or personal injury, it's much more easier to ascertain or it's much more defined while economic loss is inherently more difficult to ascertain. So what the courts have done with the duty of care for professional statements is that they have created some special rules for determining duty of care where a negligent statement has caused pure economic loss. One of the leading cases here is a Supreme Court of Canada decision in Hercules Management and Ernst & Young. So Ernst & Young was an accounting firm which prepared the audit financial statements for a public company. The purpose of the statements were to allow shareholders to supervise the management of the company. The plaintiff as a shareholder of the company relied on these financial statements in deciding to continue his investment in the company. The company however later collapsed and it turned out that these financial statements contained some inaccurate information. The plaintiff sued E&Y, the accounting firm. Some of the questions considered by the court where the first was, was it reasonably foreseeable that the plaintiff would suffer a loss by relying on the financial statements? And the second question was, was there proximity between E&Y and the plaintiff in determining reasonable foreseeability? The Supreme Court gave some very specific guidance on what to look for to determine whether or not there was reasonable foreseeability. So it said that it's more likely to be reasonably foreseeable if the defendant claims some kind of special knowledge. The statement was communicated on a serious occasion. The statement was made in response to a specific inquiry. The defendant received some kind of financial benefit for making the statement. The statement was a statement of fact or an opinion or prediction based on fact rather than a pure opinion. And it's less likely to be reasonably foreseeable if the statement was accompanied by some kind of legal disclaimer. The Supreme Court here held that it was reasonably foreseeable that the plaintiff would rely on the defendant's statements. The second question in determining duty of care that the court dealt with was determining whether or not there was sufficient proximity between the plaintiff being Hercules management and the accounting firm Ernst & Young. The court pointed out two particular requirements needed for proximity in these situations. The first was the defendant knew that the plaintiff either individually or as a member of a defined group might rely upon the statement. And second requirement, the plaintiff relied on the statement for its intended purpose. So what the court found in this case was that the plaintiff used the statements as investment advice instead of for the intended purpose of management of the company. So it failed to meet the second requirement that it set out for proximity. So therefore the conclusion was there was no proximity in this case and thus no duty of care owed by the accounting firm to the plaintiff. Since the court in this case denied a duty of care on the basis of a lack of proximity, it did not have to get into considering the policy considerations of imposing a duty of care. However, let's consider it ourselves. Can you think of some policy considerations in deciding whether or not to impose a duty of care on the auditors in this Hercules case? So please pause this video at this point in time to consider this question. Some examples that I can think of and you might think of others of policy considerations that a court might look at is that if we impose a duty of care on the accounting firm here, fewer accounting firms in the future may be willing to perform audits of public companies. Also, another consequence could be that audit fees charged by accounting firms to public companies will increase significantly because these accounting firms will have to take into account the fact that they might be sued by investors or anyone who reads the financial statements. Another consequence, another policy consideration is that generally it will be more expensive and difficult to prepare financial statements of public companies. Also accounting firms may be motivated to be more careful and thorough in performing audits of accounting firms that know that they might be sued for any mistake that they make, they will be much more motivated to be very careful in performing audits. So that would be an argument in favor of imposing a duty of care.