Solution Manual for Law and Business Administration

in Canada Canadian 14th Smyth Soberman Easson

McGill 0133251675 9780133251678
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CHAPTER 5

PROFESSIONAL LIABILITY: THE LEGAL CHALLENGES

This chapter is exceptionally important for business students. It applies the principles of
tort law to professional liability in relation to the basic elements of negligence law; that
is, the duty owed to the plaintiff, breach of that duty, and causation. This chapter also
introduces the tort of deceit and negligent misprepresentation.
However, in many of the examples discussed there is also a contractual relationship
between the plaintiff (client) and defendant (professional). The duty of care that is owed
in the law of torts, to a person who may foreseeably suffer injury may be reinforced by a
contractual duty to take proper care in the performance of one's obligations under the
contract; or it may be imposed by statute. There may also exist, in some circumstances, a
fiduciary duty between professional and client.
The three relationships that may therefore arise in any business relationship are:
Contractual
Fiduciary
In tort (Source p. 102)
It is important for students to be able to examine any business relationship and determine
what obligations exist. Students need to understand, as discussed on pp. 105-107, that a
professional may owe a duty both in contract and in tort, and that the choice of cause of
actin may affect the limitation periods and the remedies. A professional in a contractual
relationship is under an obligation to provide the services, set out in the contract, in a
competent manner. This obligation is implied if not specifically set out in the contract.
When a contractual relationship exists, only the parties to the contract can sue for a
breach.

FIDUCIARY DUTY (Source p. 103)

It is important to review the difference between the ordinary tort duty of care and the
fiduciary duty. Students often wish to extend the fiduciary duty to ordinary situtations
where it clearly does not apply. The parties must be in a fiduciary relationship. Reviewing
the law set out in the Alberta v Elder case, page 103, is critical to ascertaining if a
fiduciary exists. Importantly, a breach of fiduciary duty can occur without a breach of
contract or negligence being present..

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While some professionals are considered to be inherently fiduciaries, this does not apply
to all professionals and determining whether a fiduciary duty exists will depend on the
facts of each case. However, even in situations where an inherent fiduciary duty exists
(for example, solicitor-client), there are times when a breach of the duty will not attach
because of the facts of the case. See Galambos v. Perez 2009 SCC 48, [2009] 2 S.C.R.
678 (Case 5.3 at p. 104).

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The Strother v 3464920 Canada Inc. case, a recent case decided by the Supreme Court of
Canada, is a good case for a dicusssion of fiduciary duty. Strother began a business which
competed with a former client of his at a large law firm – he then left the law firm to
continue the business. The court discusses Strother’s fiduciary duty and its’ concern for
his law partners, explicityly stating that the fiduciary duty to the client remained in place
even when the client was not longer a client of the firm.

LIABILITY FOR INACCURATE STATEMENTS

A misrepresentation, a false statement of a material fact which induced a party to enter
into a contract, is the most likely source of tort liability for professionals. The courts have
defined who a duty of care is owed to, and discussion of cases such as Hedley Byrne v.
Heller and Hercules Management v. Ernst & Young is important for what they have to
say about defining the boundaries of the duty of care in negligent misrepresentation
actions.
A more student centered example of misrepresentation can be found in Olar v.
Laurentian University (2007), Carswell Ont. 3595 (Superior Court of Ontario) aff’d 2008
ONCA 699 (Ontario Court of Appeal) referenced in Chapter 31 because of its online
context.
The online (and hard copy) of the Laurentian University calendar stated that a student
enrolled in the two year engineering program could transfer to another Ontario
university to obtain a degree. When Olar attempted this, he discovered that although
transfer was possible, other Ontario universities would not give full credit for the
courses taken at Laurentian. The trial judge found that the calendar contained a
negligent misrepresentation. Olar was awarded $115,000 for the economic loss
associated with lost income due to increased time in school. Total judgment was
$120,620.00. The Court of Appeal dismissed Laurentian’s appeal.
Another scenario that instructors may want to consider using in the class room is
employer representations to prospective employees. This was the scenario considered by
the Supreme Court of Canada in Queen v. Cognos Inc. [1993] 1 S.C.R. 87. This case
involved a failure to advise job applicants that the project being hired for was subject to
budgetary approval. The case imposed liability on the employer, because the applicants
were in a special relationship within the meaning of Hedley Byrne and that this special
duty was not reserved for professionals but could be found anytime.
With the intentional tort of deceit, or fraudulent misrepresentation, there must be an
element of “guilty knowledge” or a “willful disregard for the falseness of the
information.” (Source p. 107)
Negligent misrepresentation, as discussed in more detail in the 14th edition, occurs where
advice, which was relied upon, is inaccurate – was given negligently. It is the tort of
negligent misrepresentation which professionals may find themselves liable for, but only
if they fit within the criteria set out as”Elements of Negligent Misrepresentation”on page
109. The case of Hedley Byrne deserves attention, as it was the first case of negligent
misrepresentation, holding a bank liable for negligent advice it gave, stating a duty of care

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was owed as the bank should have know their advice would be relied upon. Although the
defendant was held not to be liable in the case (because of the express disclaimer of
liability), the decision established the potential liability for negligent mis-statements in
tort.
The Supreme Court of Canada set out five requirements for proving negligent
misrepresentation – this checklist, reproduced on p.109 should be brought to students’
attention. It needs to be noted that the elements of negligence are required, that is duty of
care, breach of the standard of care, and causation, but with professional negligence the
requirements are limited.

THE DUTY OF CARE (Source p. 109)

The question of setting standards for professional services is essentially one of
determining when a professional is in breach of her duty of care, which in turn requires a
determination of the appropriate standard of care to be expected of a professional. In the
Canadian case of Hercules Management Ltd. v. Ernst & Young (1997), 146 D.L.R. (4th)
577 the Supreme Court reiterates the duty of care and adds an examination of policy
considerations that may “negative or limit the scope of the duty.” The court recognized
the need to avoid placing indeterminate liability on parties. The duty is owed where the
information is being used for the purpose for which it was prepared or given for. The
cases on pp. 110-111 will provide students with an understanding of the broad range of
situations where negligent misrepresentation may occur.

THE STANDARD OF CARE FOR PROFESSIONALS (Source p. 112)

As discussed in Chapter 4, the standard of care is set as the ordinary, reasonably person,
but in a professional context the standard is higher. The standard is that of the diligent
and competent professional in that field, who possesses the same degree of skill and
knowledge of a competent member of that profession.
Courts will often look to codes of conduct (see below) within a profession in setting a
standard, although they are not restricted to that code and will base the standard on what
is normal in the industry. For business risk management, it is important that all
professionals keep abreast of changes in the code of conduct of the professional body and
maintain a system of continuing education. It is important for professionals to recognize
that the standard of care has not been met where an omission occurs, or incomplete
information given. Informed consent is a major element of consent, and time should be
taken to discuss the law set out on p. 113.

RELIANCE AND DETRIMENT (Source p. 113)

There must also be a clear causal link, not only in fact but in law, between the breach of
the duty by the defendant and the injury suffered by the plaintiff. This requirement has an
interesting application in negligent misrepresentation actions. A plaintiff must have relied
on the negligent misrepresentation before that misrepresentation can be said to have

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"caused" the plaintiff's loss. Therefore, reasonable reliance is an important element in

these actions. To what extent, for example, do investors rely on audited financial
statements of companies before they decide to buy or sell shares? The information must
be used for the purpose that it was provided in order for reliance to be reasonable (See
Hercules and Olar both cited above). Sometines plaintiffs have a duty to independently
investigate or confirm before reliance is reasonable (Crearer v. Grande Prairie Regional
College [2004] A.J. No. 1782 (Q. B.).

THE ROLE OF PROFESSIONAL ORGANIZATIONS (Source p. 114)

An important question to consider in this part is the extent to which a professional code
of conduct may affect the civil liability of the members of that profession. Is compliance
with the accepted standards of the profession a sufficient defence in a negligence action?
Does breach of the code necessarily mean that a professional has been negligent?
Instructors may want to examine the importance of the professional code of conduct by
referring to the development of the Public Accountability Board designed to supervise
public accountants. A dispute arose between the new board and the professional
organization of the Certified General Accountants of Canada over whether the CMA’s
current code of conduct met the board’s requirements. The requirements set by the Public
Accountability Board were reviewed by the Divisional Court in Certified General
Accounts Association of Canada v. Canadian Public Accountability Board, (2008)
O.A.C.129, Ontario Superior Court of Justice, Divisional Court. Importantly, the Court
recognized the CMA’s standing to seek court intervention on behalf of its members.

STRATEGIES TO MANAGE THE LEGAL RISKS (Source pp. 118-119)

Any person engaged in one of the professions, must especially consider the importance of
setting out a code of conduct, as well as compliance with continuous education
requirements of the governing body of the profession for all employees. Equally
important is putting preventataive measures in place, such as the use of disclaimers and
control mechanisms such as having more that one professional work on every file. Even
businesses not engaged in the professions, should be concerned about the possibility of
misrepresentation and a risk management plan should, therefore, contemplate appropriate
training for employees dealing with the public.
A useful exercise would be to have students prepare a strategic plan for a professional
organization.

ETHICAL ISSUE (Source p. 105)

Lessons from Enron
The “Enron Affair” raises a number of legal issues that are suitable for discussion in
class. Apart from the questions of standard of care and duty of care, the case highlights
the huge potential liability that professionals, such as accountants, now face.

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Question 1 - Are there any other answers, beyond the Sarbanes-Oxley Act of 2002 (SOX)
legislation that would minimize conflicts of interest? Should government go further and
set up independent government run auditing groups responsible for auditing all
corporations. The cost of this to the general public would be enormous. Should there be a
government body responsible for overseeing the internal affairs of corporations to ensure
that proper procedures are followed? Would this be too much interference in the private
enterprises of business? What other solutions, more or less intrusive, may be considered?
Question 2 - Should the American government be allowed to enforce SOX on Canadian
and other foreign corporations that trade on U.S. exchanges? The purpose of the
legislation is to protect the American investor, however, should not American investors
being given the choice to make educated decisions about investing in foreign
corporations, knowing that the foreign corporation is not subject to SOX? If not, then
should ALL U.S. legislation regarding corporations be applied to foreign corporations
trading on U.S. exchanges?
Question 3 - Perhaps the most disturbing feature of the case is the ethical issue associated
with the conflict of interest that can arise if accounting firms provide a variety of services
to their clients and the danger that such conflict of interest poses to the general public.
Ethical values such as fairness, respect, integrity and accountability come into question.
Some suggest that Enron represents a failure of professional self-regulation of the
professions demonstrating an inability to prevent abuse. Alternatively, SOX imposes
much stricter government regulation aimed at public corporations. In light of the 2008
market crisis, is stricter regulation the answer? Instructors should be prepared to discuss
the professional standards imposed by the new Public Company Accounting Oversight
Board (United States <www.pcaobus.org>).Some consider this organization as a hybrid
(combination) of government and self regulation. The discussion should also include the
broad inspection powers of the Canadian Public Accountablility Board (<www.cpab-
ccrc.ca>). On February 29, 2008, CPAB released its fifth report describing the results of
its most recent inspections.

INTERNATIONAL ISSUE (Source p. 117)

Solicitor-Client Privilege
The international reach of SOX is mentioned under the Ethical Issue as well and students
should be reminded of the jurisdictional limitations of law and sovereignty issues
associated with reaching beyond national boarders. However, the ethical complexity of
noisy withdrawal should form the biggest part of the class discussion. Ethical issues of
loyalty and confidentiality are raised by this issue as well.
Question 1 - The first question asks students to discuss why lawyers should not be
reporting a corporate client’s improper activity to the Securities and Exchange
Commission. Students will likely point out that doing so would not be in the client’s best
interest. Consequently, a noisy withdrawal could result in a breach of the lawyer’s
fiduciary duty. Reporting such activity also presents a conflict between a lawyer’s duty of
confidentiality and the obligation not to assist or encourage wrongdoing. This may trigger

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professional discipline and a number of State Bar Associations announced that they
would discipline any lawyer complying with noisy withdrawl.
Question 2 - Are there any arguments to consider in favour of noisy withdrawals? Noisy
withdrawals can protect the public from corporate wrongdoing. Also, depending on the
students’ knowledge of business law, they may discuss how a corporation’s management
is supposed to act in the best interest of the corporation. Lawyers owe a duty of
confidentiality in the form of solicitor-client privilege but also a duty to the public and the
courts not to participate in illegal activities. A natural comparison exists with a criminal
lawyer’s position when representing a guilty and dangerous client. An obligation for
lawyers to report ongoing illegal or unethical activity in a noisy withdrawal acts as a
safeguard for shareholders and for the public more generally. The Supreme Court recently
endorsed the priority of solicitor-client privilege over another societal value – privacy. In
Canada (Privacy Commissioner) v. Blood Tribe 2008 SCC 44, the Court refused to allow
the Privacy Commissioner to demand production of documents for which privilege was
claimed. One would think that Canada would take a similar position on noisy withdrawl.
Question 3 - “Optional reporting” is not much of an option. It places the lawyer in a
position of choosing between breaching a fiduciary duty of confidentiality and the
competing interest of safeguarding the public. The solicitor-client privilege rule was
developed to allow freedom for clients to be open and honest with their lawyers.
Knowing the lawyer may report wrongdoing under SOX, closes that open communication
between the client and lawyer, making it difficult for a lawyer to be effective in providing
appropriate advice to the client and nullifying the effect of the rule.
Solicitor-client privilege and anti-money laundering legislation are the Ethical Issue
discussed in Chapter 22 at p. 541. Instructors may want to link these two topics.

QUESTIONS FOR REVIEW

1. In terms of distributive justice, the benefits (or utility) gained by the plaintiff who
recovers damages will exceed the losses (or reduced utility) of a professional
defendant who has to pay them but who can recoup the loss by increasing fees and by
purchasing insurance protection to safeguard against liability. (Source p. 102)
2. Due to the uncertainty concerning liability and the risk of heavy damages, insurance
premiums have been rising. Professional fees, in turn, increase to cover insurance
costs. As fees rise, clients expect more for their money, and when they are
disappointed are more likely to sue. (Source p. 102)
3. Equity imposes a fiduciary duty of care where a person is in a special relationship of
trust such as usually exists in professional-client relations. This fiduciary duty arises
even when the professional donates services free of charge, so that no contract exists.
(Source p. 103)
4. Recent court decisions have established that a plaintiff might choose to sue in either
contract or in tort. The difference is that the common law duty of care is not confined
to relationships that arise apart from contract; it exists independently to the duty owed

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under the contract and as such has the potential to be broader in scope. The choice
may be important, since the rules governing time limits for bringing an action might
make it advantageous to sue in tort. (Source p. 107)
5. The reluctance of the courts to find persons liable for negligent misstatements in the
absence of direct contractual or fiduciary relationship was based on a fear that the
scope of potential liability might be virtually unlimited. (Source p.108)
6. The House of Lords found that although Heller neither dealt with nor even knew the
identity of Hedley Byrne, Heller should have foreseen that its information would be
used by a customer of the other bank. Accordingly, it owed that customer a duty to
take reasonable care in expressing an opinion about the financial state of Easipower.
The courts have also added a second part to the test for duty of care and that is to
determine if there are any policy reasons to negative or limit the duty of care to avoid
the problem of indeterminate liability. (Source p. 108)
7. A two-part test is applied. The first part requires the court to determine whether there
is a sufficiently close relationship between the plaintiff and the defendant that the
defendant can reasonably foresee the possibility of damage to the plaintiff if he or she
acts negligently. The second branch of the test deals with what is essentially a policy
issue—would it be consistent with public policy to impose liability? (Source p. 110)
8. The fiduciary duty only applies in situations where the three part test from Alberta v
Elder Advocates of Alberta Society applies. Once a fiduciary duty is established it
imposes a greater range of obligations on the professional than is expressly stated in
the contract or required under tort law. The professional must act honestly, in good
faith, and only in the best interests of the client. (Source p. 103)

9. The test for negligent misrepresentation is a five part test. The plaintiff must
demonstrate: (1) that there is a duty of care based on a “special relationship” between
the representor and the representee; (2) the representation in question must be untrue,
inaccurate, or misleading; (3) the representor must have acted negligently in making
the misrepresentation—that is, he or she must have fallen below the requisite standard
of care required of a professional making such a representation; (4) the representee
must have relied, in a reasonable manner, on the negligent misrepresentation; and (5)
the reliance must have been detrimental to the representee in the sense that damages
resulted. (Source p. 109)
10. It is a requirement for liability for a negligent misrepresentation, that the plaintiff
relied on the misrepresentation and that the reliance was reasonable. Therefore, it can
be argued that, if the plaintiff was also negligent, the reliance could not have been
reasonable. (The court rejected that argument in Avco v. Norman). (Source p. 114)
11. The duty to take reasonable care includes the duty to not omit essential steps in
providing professional services. It embraces sins of omission as well as sins of
commission where a duty to disclose is required. (Source p. 112)
12. One possible approach is simply to wait and see whether a client incurs any loss from
relying on professional advice—a hindsight or ex post approach. If the client suffers

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loss, the advice must have been unsatisfactory. The danger of this approach is that it
makes no allowance for mere errors of judgment. The fact that advice may have been
wrong does not mean that it was given negligently. (Source p. 111)
13. The essence of causation, in professional-client relationships, is reliance. Did the
client rely and act upon the advice of the professional? Would the client not have
acted in that way if he had not received that advice? (Source p. 113)
14. Professional bodies have a number of special responsibilities: (a) to set educational
and entrance standards for candidates wishing to become members; (b) to examine
and accredit educational institutions that prepare candidates for membership; (c) to set
and adjust standards of ethical conduct and professional competence; (d) to hear
complaints about and administer discipline to members who fail to live up to the
established standards; and (e) to defend the profession against attacks that it considers
unfair, and to look after the general welfare of the profession. (Source pp. 114-115)
15. In isolated cases of negligence, governing bodies ordinarily leave the matter to the
regular courts, allowing the client to seek the appropriate remedy. In cases of repeated
or very serious violations of professional standards, the governing body might be
expected to take disciplinary action to protect the public and the reputation of the
profession as a whole. (Source p. 116)

16. Advocates of MDPs claim a number of advantages: they benefit clients whose
problems cannot readily be compartmentalized into legal and non-legal; they provide
a more efficient “one stop shop” for business clients who require both accounting and
legal services; and by working together as a team, the quality of service provided by
both professions is improved. The possible disadvantages are the possibility that
professional duties and codes of conduct may conflict, and the increased size of the
firm and diversity of services provided may give rise to conflicts of interest. (Source
pp. 117-118)

CASES AND PROBLEMS

1. Does Ashley have a claim against Bill? Is Bill in a professional relationship with her?
Probably, as he is her insurance agent, and she is in a vulnerable position when she relies
on his advice, so he is in a fiduciary relationship with her. He breached his fiduciary
relationship by not telling her of his relationship to Smith’s Appliance. She could bring a
claim for breach of fiduciary duty against Bill.
The Restaurant Association has given an opinion on the best stove – it is probably not an
actionable misrepresentation. A misrepresentation is a false statement of a material fact
which induces someone to enter into a contract.
Did Smith’s Appliance make a misrepresentation? Perhaps, as they stated that the
coolness of the induction was the basis for her choice, and it turned out that this was not
correct. She must have relied upon this advice and it did not form part of the contract for
there to be a misrepresentation.

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2. A problem facing Mitchell, so far as tort law is concerned, is that it may be difficult to
show that Gordon’s failure to disclose Simpson’s true identity and background was
actually a cause of his loss. This is especially so in the case of the investments made
before Mitchell was introduced to Gordon. As to the later investments, Mitchell may be
able to convince the Court that he would not have acted on Simpson’s advice if Gordon
had told him of Simpson’s real identity.

Was Gordon under a duty to disclose what he knew to Mitchell? This case is based upon
Martin v. Goldfarb (1998), 163 D.L.R. (4th) 639, a decision of the Ontario Court of
Appeal. At trial, the judge based his decision on a breach of fiduciary duty, rather than on
negligence, and held that the plaintiff had suffered personal losses following a breach of
fiduciary duty owed to him by his solicitor, and awarded him substantial damages. The
breach consisted of the solicitor's failing to inform the plaintiff about what he knew of the
disbarred lawyer's past.

The appeal court allowed the lawyer’s appeal in part and ordered a new trial. The lawyer
had not been a party to the fraud, had not profited from it, and was unaware that a secret
profit was being made at the plaintiff's expense. He could not be held to have caused all
losses suffered by the plaintiff, and was responsible only for the direct losses suffered
after the date on which he breached his fiduciary duty.

[NOTE: A further problem in the Martin v. Goldfarb case was that the losses were mostly
suffered by a corporation of which the plaintiff was the controlling shareholder, rather
than by the plaintiff himself. This aspect of the case is considered in Chapter 25.]

3. This case is based on Edgeworth Construction Ltd. v. N.D. Lea & Associates Ltd.
(1993), 107 D.L.R. (4th) 169, a decision of the Supreme Court of Canada. In that case the
action was brought against the firm of engineers and against the two employees of the
firm personally. No action was brought against the province, presumably because it was
considered that it was protected by the disclaimer clause (that any representations made
therein were "general information" only and were not guaranteed by the province).
The British Columbia Supreme Court and Court of Appeal dismissed the plaintiff’s
claim, holding that no duty was owed by the engineering firm, or by their employees, to
those firms submitting tenders. The Supreme Court of Canada allowed the plaintiff’s
appeal. The engineering firm owed a duty of care to the construction company. It had
made a negligent misrepresentation and should have known that the construction
company might rely on it. Given the brief tendering period, it was reasonable and to be
expected that the construction company would continue to rely on the engineering firm
(which could have protected itself by a disclaimer). The construction company did in fact
rely on the statement, to its detriment. The contract between the province and the
construction company did not limit the construction company's right of action against the
engineering firm. However, the court held that the individual employees of the
engineering firm did not owe a duty to the plaintiffs. (It is difficult to see why not.)

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4. The case law since Hedley Byrne clearly establishes that there may be liability for
damage suffered as a result of negligent mis-statements. The two principal questions here
are:
(1) Did the auditors owe a duty of care to the bank; and
(2) Were they negligent in performing the audits?

The extent of the duty of care owed by professionals, such as auditors, is a difficult issue.
It is clear that they do not owe a duty to everyone who might conceivably read and rely
upon their statements. To determine whether or not a duty exists, the Supreme Court of
Canada laid down a two-part test, in Hercules Managements Ltd. v. Ernst & Young
(1997) 146 D.L.R. (4th) 577. First, there must be a reasonably close relationship between
the plaintiff and the person making the statement, so that the latter can reasonably foresee
that a negligent statement could cause loss to the plaintiff. Second, the courts must deal
with a policy question. Is it in society’s interest to impose liability? The case is based
upon Canadian Commercial Bank v. Crawford, Smith & Swallow (1994), 21 C.C.L.T.
(2d) 89, a decision of the Ontario Court of Justice—General Division. In that case, it was
held that the plaintiff had not established that a duty of care existed. The auditors should
not face unlimited liability. Although the auditors could expect that persons other than the
shareholders (for whom the accounts were prepared) might look at, and rely on, the
accounts, they were not specifically aware that the bank was taking over the account or
that the financial statements were being considered by it. This was not like the situation in
Haig v. Bamford (1976), 72 D.L.R. (3d) 68 (Supreme Court of Canada), where the
accountants knew that the accounts were being prepared in connection with an actual
takeover offer.

5. This question is based on the facts from Queen v. Cognos Ltd. [1993] 1 S.C.R. 87. In
order to rely on the misrepresentation of the employer, the plaintiff, Prince would have to
to prove the five elements of negligent misrepresetantion.

First, did the employer owe a duty of care to Prince? Was there a sufficient proximity of
relationship between the parties that in the contemplation of the employer that
carelessness on its part could cause harm to the plaintiff? Specifically, in this case, was it
reasonably foreseeable that the carelessness by Paulson in describing the job could cause
the plaintiff to suffer the harm that he did; that is, leaving previously secure employment
(both he and his wife), and the expense of moving to Ottawa from Calgary. The second
part of the duty of care test is to determine if there are any policy considerations that
should negative or limit the scope of the duty. The number of job applicants would be a
definable group and therefore indeterminate liability would not be applicable here.

The second element of negligent misrepresentation is that the representation in question

must be untrue, inaccurate or misleading. In this case the representation was “that the
company would commit to significant funds to the project for the next ten years.” By
making this statement Paulson negligently misrepresented the nature and existence of the
job. At the time the statement was made, Paulson may have believed that it would

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become true, but the statement was not true at the time it was made, and this was later
borne out by the failure of the Excutive Committee to approve the project.

The third element of the test is that the person making the statement fell below the
standard of care. Paulson was not careful in making the representation to Prince. He did
not act with the care of the reasonable, ordinary person in the circumstances. The standard
of care required by a person making representations is an objective one: it is a duty to
exercise such reasonable care as the circumstances require to ensure that representations
made are accurate and not misleading. The statement was not a mere puffery, but a fact
regarding the terms of employment that was not true.

The fourth element of misrepresentation is that the representee reasonably relied on the
statement. Prince was looking for a new challenging job. If he had been informed that he
would be doing the new job for only five months and then reverting to his present job, it
is reasonable to assume that he would have declined the position. Under these
circumstances it is demonstrable that Prince reasonably relied on the statement of a ten
year commitment to the project in making his decision to quit his job, uproot his family,
and move across the country.

The final element of misrepresentation is that the reliance must have been detrimental to
the representee. Prince suffered the loss of existing secure employment, the expense of
moving, plus the loss of his wife’s income, etc. by accepting the job.

Whether the disclaimers in the employment contract would apply, requires a

consideration of whether the representation was made a term of the contract or not. If it
was, then the plaintiff would be limited to the contractual remedies as per BG Checo
International Ltd. v. British Columbia Hydro and Power Authority, [1993] 1 S.C.R. 000,
rev'g in part (1990), 44 B.C.L.R. (2d) 145. However, in this case it is more likely that Prince
would not be held to the contractual terms and could instead look to the common law duty
under tort because there were no terms of the contract relating to the misrepresentation. In
Queen v. Cognos Ltd. the Supreme Court held that the Hedley Byrne principal regarding
misrepresentation was not limited to non-contractual situations. A plaintiff can sue in tort
or contract depending on the circumstances of the case.

6. This case is based (rather loosely) on Schilling v. Certified General Accountants Assn.
of British Columbia (1996), 135 D.L.R. (4th) 669, a decision of the British Columbia
Court of Appeal. There, the plaintiffs suffered a loss by the fraudulent conduct of an
accountant, and brought an action against the defendant association for negligence in
permitting the accountant, a former member, to continue to represent himself as
"certified" after the association had obliged him to resign. The court accepted that
professional bodies do owe a duty to the public to try to ensure that their members are
properly qualified. However, they are under no duty to initiate criminal proceedings
against their members. Nor can they be expected to ensure that former members do not
continue to practice and to hold themselves out as members.

Copyright © 2016 Pearson Canada Inc. 5-12

Professional Liability: The Legal Challenges Chapter 5

CASE SUMMARIES
Adams-Eden Furniture Ltd. v. Kansa General Insurance Co. (1996), 141 D.L.R. (4th)
288 (Manitoba Court of Appeal)
A furniture manufacturer asked an insurance broker to arrange insurance coverage for the
business. The broker arranged coverage with an insurer. The broker was not fully
informed about a previous claim, or about two previous fires. A loss occurred and the
manufacturer made a claim against the insurer; the insurer settled the claim and claimed
over against the broker for negligently failing to make full inquiry and full disclosure. The
claim over failed. The insurer appealed to the Manitoba Court of Appeal who held that
the broker was the agent of the insured and owed no duty of care to the insurer. The
insurer's remedy, in case of non-disclosure of material facts, was to deny liability on the
policy.

Air Canada v. M & L Travel Ltd. (1993), 108 D.L.R. (4th) 592 (Supreme Court of
Canada)

Two directors of a travel agency entered an agreement to sell Air Canada tickets directly
to the public. They were obliged to keep the funds in a trust account and to pay the
monies to Air Canada bimonthly. The funds were put in a general account, but were paid
to Air Canada until relations between the two directors broke down. The business closed
for a number of days. One of the directors tried to make payments to Air Canada, but the
bank refused as it had received conflicting instructions from the directors. The travel
agency did not pay its bank loan and the bank exercised its right to withdraw the funds
from the general account to pay off the loan. Air Canada sued the company and the
directors personally for the loss. At trial, the directors were not found personally liable,
but that was overturned on appeal. The Supreme Court upheld the decision of the
appellate court finding that the director was in a position of trust to Air Canada and had
breached that trust.

Anns v. Merton London Borough Council, [1978] A.C. 728 (England – House of
Lords)
This case was about faulty building construction. A series of maisonettes had been
approved by the local council (Merton) with a foundation depth of three feet or deeper,
with right of inspection by Merton prior to the completion of the buildings. The
maisonettes were completed and sold. Several years later the buildings shifted and the
cause was found to be that the foundation was inadequate, being only two feet, six inches
deep instead of the required three feet or deeper. The owners of the leases to the buildings
sued Merton for negligence. The court held that the test for duty of care was tow parts: (1)
proximity of relationship; and (2) considerations of reasons why there should not be a
duty owed.

Copyright © 2016 Pearson Canada Inc. 5-13

Professional Liability: The Legal Challenges Chapter 5

Avco Financial Services Realty Ltd. v. Norman (2003), 226 D.L.R. (4th) 175 (Ontario
Court of Appeal)
The defendant along with his wife obtained a mortgage from the plaintiff. The plaintiff
sold the defendant life insurance on the mortgage as well. The defendant took a one year
term on his mortagage. At the end of the term, he renewed the mortgage for a further
term. At that time he was told that he must reapply for life insurance coverage. He and his
wife both did this. The following year when the mortgage had to be renewed, the wife had
been diagnosed with cancer; and so, the insurance company denied her coverage. After
she died, the defendant was unable to support the mortgage payments and the plaintiff
recovered the property under power of sale. The plaintiff sued the defendant for the
shortfall and the defendant counterclaimed for negligent misrepresentation. The trial
judge held that the plaintiff had made a negligent misrepresentation, but further found
that the defendant had been contributorily negligent. The Court of Appeal agreed with the
trial judge’s position that a finding of negligent misrepresentation did not preclude a
finding of contributory negligence.

BAE—Newplan Group Ltd. v. Altius Minerals Corporation, 2010 NLTD (G) 133
(Supreme Court of Newfoundland and Labrador, Trial Division)

The plaintiff entered into a contract with the various defendants to provide engineering
services. The plaintiff alleges that the defendants were unable to pay for the engineering
services because of mismanagement of funds by the various corporate defendants and
specific directors of the corporate defendants. Four of the individual directors brought this
application to have their names struck from the suit, as the pleadings revealed no cause of
action against them. The plaintiff alleges that the failure to disclose relevant information
amounted to a misrepresentation. The court stated at para 20 that, “it is clear that silence
or inaction can become a representation but only in circumstances where the person
alleged to have misrepresented owes a legal duty to a plaintiff to make the disclosure in
question.”

Belknap v. Meakes (1989), 64 D.L.R. (4th) 452 (British Columbia Court of Appeal)
The plaintiff suffered a stroke during a surgical operation and sued the anaesthetist. The
trial judge found that the most likely cause of the stroke was a drop in the plaintiff's blood
pressure, and allowed the action in negligence to succeed. On appeal, the court held that
the onus of proof of negligence and causation is on the plaintiff. The evidence did not
establish that the drop in blood pressure caused the stroke or that the defendant had been
negligent. The fact that some practitioners used a different practice was insufficient to
support a finding of negligence where the defendant's practice conformed to that of a
reasonable body of opinion.

Copyright © 2016 Pearson Canada Inc. 5-14

Professional Liability: The Legal Challenges Chapter 5

Bell v. City of Sarnia (1987), 37 D.L.R. (4th) 438 (Ontario High Court of Justicce)
The plaintiff was working overseas for a number of years. He decided that he would like
to quit his job and move back to Sarnia. He investigated the possibility of operating his
own business. He found a property that was currently zoned for residential. He
approached the city’s zoning department and received assurances that the property could
be rezoned commercial and that his proposed businesses of variety store and fast-food
outlet would comply with the zoning. After investing much time and money, the City
refused to greant him permits with respect to the fast food outlet. He sued for negligent
misrepresentation. The court held that there was negligent misrepresentation and under
the Hedley Byrne principal the municipality was liable for the plaintiff’s economic losses.

Black v. Law Society of Alberta, [1989] 1 S.C.R. 591 (Supreme Court of Canada)
A law firm in Alberta wished to enter a partnership with a law firm in Ontario. The Law
Society enacted rules that prohibited these activities, specifically prohibiting lawyers from
joining in partnership with lawyers who did not normally reside in the province of Alberta
and secondly, prohibiting a lawyer from belonging to more than one law firm. The
Supreme Court struck down the rules as being contrary to the mobility rights and rights of
association as set out in the Charter of Rights and Freedoms ss. 6(2)(b) and 2(d) , nor
were they justified under s. 1 of the Charter.

Border Enterprises Ltd. v. Beazer East Inc. (2002), 216 D.L.R. (4th) 107 (British
Columbia Court of Appeal)
The plaintiff sued a number of defendants for losses arising from contaminated land. One
of the defendants was the Federal Crown. The Crown had requested that the statement of
claim against it for negligent misrepresentation be struck out. The judge agreed and the
plaintiff appealed the decision. The Court of Appeal held that even if the Crown had
made a negligent misrepresentation, the plaintiff was not in a position to rely upon it and
even if the plaintiff could rely upon it, then it would still not pass the test for negligence
as it would create indeterminate liability. The appeal was dismissed on this point.

Bruno Appliance & Furniture Inc. v Hryniak 2014 SCR 8

Page 107, footnote 8

347671 B.C. Ltd. v. Heenan Blaikie (2002), 113 A.C.W.S. (3d) 725: [2002]
B.C.J.No.347 (British Columbia Court of Appeal)
The plaintiffs loaned money to finance the promotion of a concert. The concert was a
financial failure and they lost their investment. They claimed that they relied on a
negligent misrepresentation made by the defendant law firm. The law firm did not act for
the plaintiffs, but acted for the parties with whom the plaintiffs invested. The court found
for the plaintiffs. The law firm owed them a duty of care even though they were not the

Copyright © 2016 Pearson Canada Inc. 5-15

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