Livent v Deloitte: Has the Fat Lady Finally Sung?

The Executives of Livent were masters of live performance. Known for producing popular shows such as The Phantom of the Opera and Show Boat, they never thought their own escapades would play out in the media as a protracted drama with a final act orchestrated by the highest court in Ontario.

Early in January, the Court of Appeal for Ontario (“ONCA”) sealed a critical chapter in the decades-long saga between Livent Inc. (“Livent”) and Deloitte & Touche LLP (“Deloitte”) (Livent Inc. v Deloitte & Touche, [2016] ONCA 11). The management at Livent were engaged in fraudulent practices and were misleading creditors, investors, and the general public about the financial profitability of the production company. They were floundering in debt and walked a tight rope between suppression and discovery over the course of several years. Eventually, once the jig was finally up, not only were the executives of Livent in hot water but their auditors (Deloitte) were on the hook as well.

The leaders of Livent were handed criminal convictions and served prison time while Deloitte experienced a civil suit defeat to the tune of $118 million. The case determined that Deloitte was negligent in its auditing practices and contributed to the losses suffered by Livent.

The Appeal

Deloitte appealed the 2014 trial court decision. One key argument they proffered was how unfair it was for Livent to sue them because the executives were merely an extension of the actions of Livent and thus Livent (as a corporation) was not a victim but rather a perpetrator of fraud. In short, Livent should not place blame on the auditors at Deloitte but should itself be held accountable for the financial losses suffered by various stakeholders.

With this argument, Deloitte attempted to jump two legal hurdles. First, they sought application of the identification doctrine to equate the actions of individuals in leadership positions with the actions of the corporation itself and, second, they subsequently argued that if the corporation acted criminally, the auditor should be protected from liability (ex turpi causa defense).

Unfortunately for them, the ONCA did not buy the claim. The ONCA denied Deloitte’s reasoning as it relates to the use of the identification doctrine and the ex turpi causa defense. This ruling is important for many reasons, including the fact that it qualifies a longstanding precedent on when it is appropriate to use the identification doctrine and thereby activate the ex turpi causa defense.

A New Outlook

In the jurisprudence, Canadian Dredge & Dock Co. v The Queen, [1985] 1 SCR 662 [Canadian Dredge] sets out the indicia for when the identification doctrine should apply: (a) when that act was committed by a “directing mind” of a corporation within the field of operation assigned to that individual; (b) when the action is not totally in fraud of the corporation; and (c) when the action was partly for the benefit of the company that the individual represented.

When the above indicia are met for identification, a commonly held assumption was that the ex turpi causa defense would automatically apply, thereby protecting a third party from a lawsuit initiated by a troubled corporation. However, the present case has realigned the thinking on this issue. In particular, Justice Blair states that even if the corporate identification doctrine test is met, this does not mean that the ex turpi causa defense should be activated (Livent, para 156).

The court went on to say that Canadian Dredge is not “the complete answer” when it comes to attributing wrongful or illegal acts to a corporate plaintiff (Livent, para 157). Two additional factors must be considered: (1) whether applying attribution for the purpose of the defense doctrine is consistent with the contract or relationship between the plaintiff and the defendant, including contractual or other duties owed by the defendant to the plaintiff; and (2) whether the use of the defense doctrine is necessary to preserve the integrity of the justice system. In other words, whether the corporation would set to benefit from the alleged misconduct (Livent, para 158).

An Important Takeaway

The additional considerations articulated by Justice Blair circle back to the core of what these doctrines comprise. These considerations elevate the importance of context, especially in cases with a complicated set of facts. If we do not utilize these broader public policy elements of the test, it would allow negligent or criminal behaviour on the part of third parties to go unpunished. In this situation, it would mean that Deloitte would get away with not performing the service that they were hired to perform. They were an auditing service trying to avoid responsibility for performing poor audits of Livent’s accounts. To rule in favour of Deloitte would be sending a signal to the corporate world that it is fine for a third party to contribute to a catastrophe but not be held accountable to those that suffered loss as a result.

With its decision in this case, the court showed that even if strong facts exist for applying the identification doctrine, we have to be careful about automatically using the ex turpi causa defense because it may lead to further injustice. In this scenario, the court found that even if the actions of the executives of Livent could be attributed to Livent itself and technically meet the indicia from Canadian Dredge, it was still insufficient to rule in their favour.

Livent, as a corporation, did not profit in the end but became insolvent. As such, allowing Deloitte to use the combination of the identification and ex turpi causa defenses would create greater injustice. That injustice would be leaving stakeholders in Livent with no avenues to recover their losses. To allow this would diminish the integrity of the legal system.

What the court does in the present case is reject a narrow application of the doctrine to circumstances where serious, prolonged instances of fraud have taken place. Instead, the court turns its mind to the broader purpose of what these legal doctrines of identification and ex turpi causa defense are meant to do. This case is a return to basic principles and reiterates the importance of using the law as a strong force for justice. The combination of these legal tools should not be automatically applied to protect impugned parties in cases of fraud. Instead, the focus of the court should be fixed on the larger public policy goal of not allowing criminal or negligent behaviour to become profitable.