Attacking Expert Preference: Cooperatieve Centrale Raiffeisen-Boerenleenbank BA v Stout & Company LLP, 2019 ABCA 455

By Don Dear, Q.C., Marco Baldasaro, and Michelle Terris

A recent Alberta Court of Appeal decision regarding standard of care, negligent misrepresentation, and auditor’s liability involved a rare successful attack on the trial judge’s reasoning for preferring the evidence of one expert over another.  

Factual Background

Beginning in 2001, Rabobank agreed to finance Agra by purchasing its receivables. By 2004 the parties had entered into an agreement requiring Agra to provide audited financial statements to Rabobank. The respondent here was an accounting firm, Stout & Company LLP, which performed the audits from 2007 to 2010. Agra began to provide false purchase and sale agreements in 2009, distorting their sales and costs of sales for 2009 and 2010 by at least 25 percent and 40 percent respectively. As a result of the fraud, Rabobank suffered a loss of over $36 million.

While performing the audits, Stout assessed the fraud risk as low and the fraud continued undiscovered. Rabobank sued for negligent misrepresentation alleging it had relied on Stout’s audit opinions in continuing to provide financing to Agra. It argued that if the risk had been properly assessed as high, the fraud would have been identified. Rabobank’s expert, Mr. Henry, opined that Stout’s failure to assess Agra’s fraud risk as high was negligent. Both parties agreed that the audit procedures were appropriate if the fraud risk had actually been low.

Queen’s Bench Decision

The initial Statement of Claim named a multi-national accounting firm as a co-defendant. That firm had purchased Stout assets after the Agra audits had been concluded. The multi-national accounting firm, represented by McLennan Ross LLP, successfully applied for summary judgment and had the case against it dismissed.[1]

 

At trial, the judge preferred the opinion of Stout’s expert, Mr. Muccilli, over Rabobank’s expert based on the belief that Mr. Muccilli had conducted a broader review of the available information, and that Mr. Henry was influenced by his knowledge of the fraud and the benefit of hindsight. Based on this preference, the trial judge found that Stout had met the standard of care expected of an auditor. On a provisional basis only, the trial judge also found that reliance and damages had been proven by Rabobank. 

Court of Appeal

While there were three grounds of appeal, the Court of Appeal focused on the trial judge’s alleged error in preferring Stout’s expert on the standard of care. Stout cross-appealed the trial judge’s assessment of damages and failure to address Rabobank’s contributory negligence.  

The Court of Appeal found that the trial judge erred in concluding that Stout’s expert had conducted a broader review of the available information. After reviewing the evidence, it found there was no justification for inferring a significant difference between the files reviewed by the experts, particularly with respect to the relevant documents. This error was found to be a palpable and overriding error of fact.

As this was the only reason the trial judge gave for rejecting Mr. Henry’s assertion that Stout should have set the risk of fraud at high, the Court of Appeal concluded that there was no rational basis to accept the opinion of one expert over the other. The Court of Appeal was unable to determine on the evidence whether to accept one expert’s opinion over the other and directed a new trial.  

There was a brief discussion of the recent Supreme Court decision of Deloitte & Touche v Livent Inc. (Receiver of), 2017 SCC 63, which expanded the duty of care framework owed by an auditor. Livent was released after the trial judge gave her decision and whether it alters the trial judge’s conclusion that a duty of care exists will be determined in a new trial.

Conclusion

This case provides us with an important lesson in dealing with experts in accountants professional liability cases. Namely, it is extremely important that you control/identify clearly what documents your independent expert is reviewing and which he or she is relying upon for the purposes of his or her expert opinion. Unfortunately both parties are heading towards a new trial, absent settlement.

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[1] Cooperatieve Centrale Raiffeisen-BoerenleenBank BA (Rabobank International) v Liebig & Keown LLP, 2016 ABQB 417 (https://www.canlii.org/en/ab/abqb/doc/2016/2016abqb417/2016abqb417.html)

Write it Down: Revisiting the Rules of Affidavit Evidence

By Katherine Hagan, Student-at-Law

As a litigant, it may seem imperative that every possible document, conversation and e-mail related to your matter is presented before the Court. However, a court’s decision ultimately turns on evidence that is necessary and reliable to prove an issue, not the sheer volume of evidence compiled. Judicial decision-making requires evidence, but litigants must adhere to the rules of civil evidence to ensure that the evidence provided will be considered by the Court.

The recent Alberta decision ANC Timber Ltd. v Alberta (Minister of Agriculture and Forestry) (“ANC Timber”) revisits the basic principles of civil evidence and discusses how these principles apply to a party tendering evidence by affidavit. The Minister of Agriculture and Forestry sought an Order pursuant to Rule 3.68 of the Alberta Rules of Court to strike out portions of ANC Timber Ltd.’s affidavits due to the inclusion of inadmissible evidence. 

The Fundamental Rules of Evidence Apply to Affidavits

The purpose of an affidavit is to bring a litigant’s admissible evidence before the court. Topolniski J. prefaced her decision in ANC Timber by stating, to be admissible, evidence must be both reliable and necessary to prove a fact in the litigation. Further, even admissible evidence may still be excluded if its prejudicial effect outweighs its probative value. Prejudice is not narrowly defined and can include:

• Evidence that potentially undermines an accurate result, or complicates, frustrates, or degrades the process; and
• Adverse practical consequences such as the undue consumption of time, unfair surprise, the creation of distracting side issues, and a potential to confuse the trier of fact.

Topolniski J. assessed the evidence in the witness’ filed affidavit and categorised its admissibility on four different evidentiary rules: argument and/or conclusion, relevance, hearsay, and opinion evidence. Ultimately, several portions of ANC Timber Ltd.’s witness’ affidavit were struck out on the basis of being inadmissible, both by the Court’s decision and by ANC Timber Ltd.’s concessions.

Application of Rules to Affidavit Evidence 

 

1. Argumentative and/or conclusory evidence is impermissible

Simply: an affidavit is written evidence used to state facts, not to provide argument or conclusions. The inclusion of arguments and/or conclusions is a common fallacy of affidavit evidence, and is inadmissible.

2. Irrelevant evidence is impermissible

Topolniski J. cited the Supreme Court of Canada’s definition of relevance stating, the evidence “must have some tendency as a matter of logic and human experience to make the proposition for which it is advanced more likely than the proposition would be in the absence of that evidence". In sum, the evidence must relate to a material issue before the Court. In ANC Timber, the issue before the Court was whether an interim stay or injunction should be granted. Therefore, for evidence to qualify as relevant, it needed to relate to the test for interim relief.

3. Hearsay Evidence

Affidavits must be sworn on the basis of personal information with one exception provided by the Alberta Rule of Court. Rule 13.18 of the Alberta Rules of Court allows hearsay evidence on a motion for interim relief if the evidence is accompanied by the source of the evidence and the party’s belief in the evidence’s truth. Still, a court is not mandated to hold such evidence admissible. Even with this exception, hearsay evidence may be excluded if its probative value is outweighed by its prejudicial effect, or if the Court determines the evidence inadmissible for other reasons.

The seriousness of the case, the importance of the evidence, the consequences to the parties, and costs or efforts to secure the original evidence are all considered in determining the admissibility of the hearsay evidence. Topolniski J. acknowledged that all of these considerations of hearsay evidence result in the Court being granted broad discretion, which may ultimately result in conflicting judicial decisions on the same piece of evidence.

4. Opinion Evidence

Opinion evidence is presumptively inadmissible. One exception to this presumption is expert opinion evidence on issues that require specialised knowledge. The Alberta Court of Appeal in Kon Construction Ltd. v Terranova Developments Ltd defined three categories of ‘witnesses of expertise’, who may provide admissible expert opinion:

1. Independent experts retained to provide opinions about issues in the litigation, but not otherwise involved in the underlying events;
2. Witnesses with expertise who were involved in the events underlying the litigation, but are not themselves litigants; and
3. Litigants who have expertise, and who were actually involved in the events underlying the litigation.

Rule 6.11 of the Alberta Rules of Court allows expert opinion evidence in affidavits for interim motions, however Topolniski J. concluded “the regime for admitting expert evidence should parallel that for trial”. Thus, if admitting expert opinion evidence by way of affidavit, the Court requires the expert’s qualifications, the information and assumptions on which the opinion is based, and a summary of the expert opinion.

Once provided this information, the Court must assess the expert evidence to determine its admissibility. First, it must consider whether the evidence meets the following four criteria: relevance; necessity; absence of an exclusionary rule; and special expertise. Second, the benefits of admitting the expert opinion evidence must outweigh the potential risks. If the evidence does not satisfy both components, the opinion evidence will be inadmissible and struck from the affidavit.

Finally, opinions that qualify as ‘ordinary observations' are admissible through a lay witness.

Conclusion

Alberta courts have acknowledged that affidavits are often filled with impermissible evidence. Rule 3.68 of the Alberta Rules of Court enables a litigant to have impermissible evidence struck from an affidavit. While Topolniski J. acknowledges that a motion under Rule 3.68 may be costly and time-consuming, upholding the rules of civil evidence and acting as gatekeeper is an essential role of the Court. ANC Timber provides a helpful guide in assessing your own or an opposing party’s affidavit evidence, and determining what evidence a court may deem inadmissible.

On a daily basis, the commercial litigation group at McLennan Ross LLP assists clients with the gathering, assessing, presentation and challenging of evidence in a wide variety of disputes. Any member of our group would be pleased to answer questions you might have about the use and value of information being considered in a present dispute.

Professional Negligence Revisited

By Eric Appelt

No professional wants to hear their work described as “cursory at best” – particularly when the statement is made by a Justice of Alberta’s Court of Queen’s Bench in a lengthy written decision. Such was the position of a local engineer in Kent v MacDonald, 2019 ABQB 669, a recent decision which clarifies the test for “negligent misrepresentation” and, perhaps more importantly, acts as a caution to professionals of all backgrounds with respect to expected levels of competency.

Kent v MacDonald concerned the purchase of a residential property in Edmonton’s Parkallen neighbourhood. The standard real estate agreement entered into by the purchasers (Edward Kent and Teresa Tomsky) and sellers (Patrick MacDonald and Rhonda McEachen) was subject to the condition of a satisfactory inspection. Lance White, P. Eng., who had served as both an Edmonton city councilor and MLA before transitioning to a career in structural engineering, was retained by the sellers to provide a professional opinion as to the structural integrity of the house.

Mr. White inspected the home in May 2010, concluding in part that it “far exceeds the definition of a structurally sound house”, with “no threat of any structural damage”. Mr. White’s sole recommendation was that the slope of the property, particularly that which was immediately adjacent to the foundation, be regraded in the next several years. The buyers accordingly removed the inspection condition, and the sale closed in June 2010.

Just four months later, however, the purchasers noticed signs of concern in one corner of the basement, including a musty smell, water staining, and the presence of mould. Portions of drywall were removed, leading the buyers to discover “concrete spalling” (i.e. loose foundation, broken down into smaller pieces) and a large horizontal crack, both necessitating repairs.

The buyers proceeded with legal actions against Mr. White (under the tort of negligent misrepresentation), as well as the sellers (based primarily on breach of the sales agreement) for the expenses they incurred in conducting the necessary repairs.

The Court ultimately accepted the buyers’ position that Mr. White had failed to meet the applicable standard of care in such circumstances. In doing so, Justice Loparco found that the buyers had discharged their burden of meeting the five-part test for negligent misrepresentation (also known as the Hedley Byrne principles, after an oft-cited decision of the English House of Lords).

First, because Mr. White ought to have reasonably foreseen that the purchasers would rely on his inspection report, the requisite “special relationship” (or duty of care) existed between the parties. Second, as illustrated through the use of expert witnesses at trial, Mr. White’s representations as to the home’s structural integrity were indeed inaccurate and/or misleading. Third, Mr. White was found to have failed to exercise the skill, care and diligence which would reasonably be expected of a structural engineer of ordinary competence. The Court held that a mere visual inspection, in such circumstances – as opposed to actually removing the basement’s drywall – will often be insufficient to ensure a particular concern is addressed. Fourth, it was clear that the purchasers had reasonably relied on Mr. White’s inspection report in making their decision to purchase the property. Fifth, as the expenses incurred by the purchasers were directly related to the home’s structural problems, their losses were properly compensable in damages.

Justice Loparco concluded that the repairs undertaken by the purchasers were “entirely reasonable in the circumstances”, and assessed their total damages at $113,064.74. 75% of the loss was attributed to Mr. White, while the sellers – who, for their part, had failed to disclose a prior home inspection to the purchasers – were deemed responsible for the remaining 25%.

Although the decision doesn’t necessarily break new ground in terms of legal analysis, it serves as a clear reminder to professionals as to the standard of care expected of their services. While a range of competencies can reasonably be expected in any professional area, allowing “cracks” to develop in the foundation of your practice can lead to the uncomfortable consequence of having your work evaluated, and reprimanded, on the public stage. It is imperative that such individuals stay up to date on current industry standards, particularly when making representations (contractual or otherwise) upon which others are likely to rely.

McLennan Ross LLP has years of experience and a strong reputation in a variety of areas, including professional liability and negligent misrepresentations in the context of contractual disputes. If you or your company have questions about these, or any other litigation-related issue, please do not hesitate to contact Eric Appelt, Peter Major, Q.C., or anyone in the commercial litigation practice group.

Alberta’s Recent Interpretation of the “Drop Dead” Rule

By: Marco Marrelli

As Alberta courtroom availability grows increasingly strained, the rules concerning delays in reasonably advancing lawsuits have received greater attention. Our blog returns from a short break with a two part summary of how these rules have been applied; specifically, Rule 4.33 which calls for mandatory dismissal of lawsuits that have not been significantly advanced for over three years. The first part covers the courts’ application of Rule 4.33 up to the end of 2018. The second part will cover the courts’ application of Rule 4.33 in 2019.

Application of Rule 4.33 to the end of 2018

The Courts recognize that the Alberta Rules of Court (the “Rules”) embody the dual purposes of fairness and efficiency. Rule 1.2 states:

1.2(1) The purpose of these rules is to provide a means by which claims can be fairly and justly resolved in or by a court process in a timely and cost effective way.

This guiding principle colours the Court’s interpretation of the Rules. The Rules use a functional approach that de-emphasizes trial as the primary mechanism for resolving civil disputes in favour of procedures such as summary dismissal and alternative dispute resolution.

In the overall scheme, the Rules provide mechanisms to dispose of litigation that has died, become inactive, or is unreasonably and prejudicially slow. Rules 4.33(2) and (4) state:

4.33(2) If 3 or more years have passed without a significant advance in an action, the Court, on application, must dismiss the action as against the applicant, unless

(a) the action has been stayed or adjourned by order, and order has been made under subrule (9) or the delay is provided for in a litigation plan under this Part, or

(b) an application has been filed or proceedings have been taken since the delay and the applicant has participated in them for a purpose and to the extent that, in the opinion of the Court, warrants the action continuing.

4.33(4) The period of time referred to in subrule (2) does not include the following, whichever ends earlier:

(a) the period of time between the service of a statement of claim on an applicant and the service of the applicant's statement of defence;

(b) the period of one year after the date of service of a statement of claim on an applicant.

From a trilogy of cases in 2016[1], we know that a court must analyze the steps taken using a functional approach, to determine whether a “litigation step” significantly advances the action.

In deciding this, the Courts will look to see whether the step in question helps to narrow the issues, provide new information, or invoke the litigation process - generally, whether these steps are seen to bring the action closer to a resolution.

From the trilogy we know that:

·       Rule 4.33 is a strict rule which says that any 3 years of inactivity will result in dismissal for long delay upon an application;

·         Mandated and informal steps in litigation will be judged using a functional approach;

·         Steps taken during the delay period cannot be of pure form and lack substance; and

·         The plaintiff in the action bears the ultimate responsibility for prosecuting its claim.

In 2018, there were numerous decisions reported that surround Rule 4.33 which speak to the strictness of the rule, and the application of the functional approach.

In Preston v. Bent Developments Co Limited, a successful application to dismiss the action for long delay was heard. It was held that a cross-examination and a single answered undertaking did not significantly advance the lawsuit or move it forward in a meaningful way. The cross-examination conducted by the Plaintiff was extremely limited and no information was ascertained that significantly advanced the plaintiff’s claim.

The Court reiterated that the functional test will consider the nature, value and quality, genuineness, timing, and in certain circumstances, the outcome of the steps in question to determine if there has been meaningful progress in the action.

This case sets out the current state of the law on questioning and answers to undertakings. For answers to undertakings, it must significantly assist in determining one or more of the issues raised in the pleadings, or to ascertain further evidence that would have this result. It is not significant just because it is asked.

Sutherland v Brown was an appeal to determine whether the Chambers Judge erred in dismissing an action for long delay pursuant to Rule 4.33. More specifically, the issue was whether a settlement offer significantly advanced the action and restarted the clock for the purpose of the three-year period contemplated in Rule 4.33. The appeal was dismissed.

The issue was whether the settlement offer represented a significant advance in the action. The settlement offer was a 12-page letter that reviewed statements provided to the police, transcripts from questioning, and case law on damages and their apportionment. It also summarized the plaintiff's injuries, and provided an assessment of the plaintiff's general damages and estimates of his loss of earnings since the accident, lost earning capacity, cost of future care, loss of housekeeping/yardwork capacity, retraining costs, special damages and costs. The offer proposed that liability be shared equally between the plaintiff and the defendants.

The Court of Appeal explained while the outcome of a step should not be over-emphasized, outcomes are not irrelevant. Rather, the functional approach to Rule 4.33 requires that the Court assess the step by reviewing the “whole picture of what transpired over the three year period”. In some cases, this necessarily includes the outcome of the step.

The Court of Appeal noted that progress towards settlement, including the exchange of settlement offers, may constitute a significant advance in an action. However, in this case the failure of the defendant to counter-offer clearly indicated that they were not prepared to enter into negotiations, and as a result no advance in the settlement process was made.

Next, Deja Vu Holdings Ltd v Securex Master Limited Partnership involved a debt action where the defendant applied for an Order dismissing the Plaintiff’s action under Rule 4.33. At issue was a Statement of Defence to Counterclaim filed by the Plaintiff and a Supplemental Affidavit of Records served by the Plaintiff.

In the analysis, the Court reiterates that the functional approach should be used, and that the effects of the steps should be examined instead of its form. The Court also cites Sutherland, and reinforces that the outcomes of steps should not be overstated, but they are not irrelevant, because we must look at the “whole picture of the periods of delay with a qualitative assessment in mind”.

The decision applied the law based on the trilogy of cases above and indicated that “not all mandated steps in an action will significantly advance an action”. The specifics of the steps must be examined to ensure that a significant advance did actually occur. In this case, the Statement of Defence to Counterclaim consisted of five short paragraphs. It adopted the allegations in the Statement of Claim and set out a general, boilerplate denial. As a result, the Statement of Defence to Counterclaim did not significantly advance the action.

Also at issue was a Supplemental Affidavit of Records, which usually assists in discovering new information or documents. The Court applied the functional analysis to the Supplemental Affidavit of Records in question and examined the nature of the documents produced and their importance to the litigation. The Court noted that the a document that should have been produced in the original Affidavit of Records was produced. This didn’t convince the Court that the Supplemental Affidavit of Records significantly advanced the action. Therefore, the Court is looking not only for new and relevant information, but also information that should be discovered at that time in the litigation process (not 10 years earlier).

Finally, Ivkovic v Tingle Merrett LLP again cites Sutherland and emphasizes the importance of facilitating the litigation process, and that a culture shift is required to create an environment promoting timely and affordable access to the justice system.

In this case, a form called a Request to Schedule a Trial Date, was completed and trial dates were scheduled. However, neither party confirmed the dates with a further required form, called a Confirmation of Trial Dates.

The Plaintiff’s explanation for not filing the second form was because his lawyer's office had recently gone through extraordinary and unusual circumstances.  First,  co-counsel went into early labour. Her work was spread amongst other lawyers.  Second, Plaintiff's first counsel was ill and was to have surgery, which could have impacted the trial dates.

The Plaintiff argued that completing and filing a the first form was a step significantly advancing the action. However, the Defendant argued that without the second form actually confirming the trial dates, the step remained incomplete and nothing had been accomplished. Finally, the Plaintiff argued that the Defendant could have filed the necessary form and yet failed to do so. However, the Court maintained that it is the Plaintiff’s obligation to advance their claim, not the Defendant’s. As a result the Court concluded that no significant advance in the action took place, and the action was struck. The Court concluded by stating that while the Plaintiff in this action maintained certain reasons/excuses for the failure to file the required form, Rule 4.33 does not permit excuses. Once there has been a three year delay without the Plaintiff significantly advancing the action, the Court must dismiss the action.

Based on this case law surrounding Rule 4.33 it is crucial for a Plaintiff to ensure that steps being taken are truly significant. They must narrow the issues, provide new and relevant information, or advance the action toward resolution.

Defendants have little obligation to advance a claim, and so long as they are not directly interfering with the Plaintiff advancing their action they can bring forward an application to dismiss an action for long delay.

Finally, looks can be deceiving. When deciding whether an application under Rule 4.33 is appropriate, it may not be enough to simply look at the procedure card (the list of filed documents in a lawsuit) or rely on knowledge of mandatory litigation steps that have been conducted, such as questionings or cross examinations.  Just because the procedure card indicates that there has been activity, it does not mean that this activity significantly advanced the action. Looking into the content of these steps, such as the specifics of pleadings or transcripts, may indicate the step had no function and was merely a formality.

The Courts’ recent decisions can be summarized by saying that while the filing of pleadings, questioning, and the answering of undertakings all appear to significantly advance an action, each must be examined to ensure that such an advance did in fact occur.

With a strong reputation in commercial litigation, McLennan Ross LLP is well positioned to provide you with the exceptional advice and representation. If you have any questions or concerns with respect to the application of Rule 4.33, or any other litigation matter, please do not hesitate to contact a member of our Commercial Litigation Team.

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[1] Ro-Dar Contracting Ltd. v Verbreek Sand & Gravel Inc., 2016 ABCA 123; Ursa Ventures Ltd. v Edmonton (City), 2016 ABCA 135; Weaver v Cherniawsky, 2016 ABCA 152