Historically, the doctrine of privity of contract prevented
third parties from claiming against auditors for negligently
prepared audited reports. The landscape changed with the
recognition of the tort of negligent misrepresentation and the
possibility that auditors could be held liable to anyone to whom
they were found to owe a duty of care. The concern arose that
auditors might be unfairly exposed to "liability in an
indeterminate amount for an indeterminate time to an indeterminate
class", a phrase memorably coined by U.S. Justice Cardozo.
In Canada, Hercules Managements Ltd. v. Ernst Young, [1997] 2
S.C.R. 165 ("Hercules Managements") was hailed as an
answer to these concerns about auditors' indeterminate
liability. The plaintiff shareholders brought claims against the
companies' auditors for negligently prepared statutory audit
reports upon which they claimed to have relied, causing them
damages. The Court considered whether the auditors owed the
shareholders a
