Published by the Litigation Group
McCarthy Tétrault FRANÇAIS VOL.4,
ISSUE 2
2011
January
12
Litigation Co-Counsel

 



In This Issue


Letter from the Editor

Welcome to Volume 4, Issue 2 of McCarthy Tétrault Co-Counsel: Litigation.

Bringing together legal developments with value-added context gives our lawyers the opportunity, in this publication, to share important analysis with you.

In this issue, you will get more than a bird’s-eye "tweet" or a foggy "blog" on significant cases that have impact both nationally and internationally.

Our authors go global and ask Canadian counsel (both in-house and external) to take careful note of a European Court of Justice ruling that found that no privilege attaches to communications with in-house counsel in European Commission’s competition investigations.

We also look at the complex intersection of corporate law and securities law with the decision in Icahn Partners and Lions Gate Entertainment.

This issue also includes a substantial conflict of laws perspective on the test for jurisdiction simpliciter in the long-awaited Ontario Court of Appeal reasons in Van Breda v. Village Resorts Limited.

We also take a closer look at Canada’s experience with "overtime" class actions in McCracken v. Canadian National Railway Co.

We ask some of the difficult questions facing clients and we look to decided cases for helpful answers. Banks are often convenient deep pockets to sue when someone suffers a loss but cannot recover it from the perpetrator who has caused the loss. Here, we review a very important decision that should serve as a deterrent to plaintiffs seeking recovery from the banks.

You will find that an arbitrator has jurisdiction to oversee the termination of any employee credited with at least two years of uninterrupted service under certain conditions.

At the same time, you will receive a detailed briefing on one of the few reported cases dealing with exclusive jurisdiction of the CRTC. MTS Allstream Inc. v. TELUS Communications Company is the first case in which the general principles of exclusive jurisdiction were applied to the interpretation of a CRTC decision.

In Western Canada, we look at the new Alberta Rules of Court as a dramatic change to the procedural landscape of litigation in that province.

And, we have other jurisdictional case commentary from our Québec region with relevance to class action proceedings.

We conclude, as we do in all issues, with reflections from "the Bard of Litigation Co-Counsel," the Honourable James M. Farley QC, and his Shakespearian ode to good faith in "execution" of agreements. What’s in a word? Everything.

Please enjoy the nuance and scope of this publication, a depth of analysis in law firm publications second to none.

If you have any questions, please contact Geoff R. Hall (Editor-in-Chief) or Martin Halpern (Knowledge Management Lawyer).


Administrative

MTS Allstream Inc. v. TELUS Communications Company: Further Confirmation of the Exclusive Jurisdiction of the CRTC
by: Ariel Z. Breitman, Lesley Clayton

The recent Alberta Court of Appeal decision in MTS Allstream Inc. v. TELUS Communications Company affirmed the exclusive jurisdiction of the Canadian Radio-television and Telecommunications Commission (CRTC) to regulate telecommunications services in Canada, including setting the rates and tariffs for such services. Efforts to litigate disputes over such matters in Canadian courts have routinely been referred back to the CRTC in recognition of the CRTC’s broad policy mandate and specialized expertise.

In MTS v. TELUS, MTS Allstream applied to Alberta’s superior court, the Court of Queen’s Bench, for a declaration that the Alberta Limitations Act does not apply to refunds that the respondent, TELUS, was required to pay to MTS pursuant to CRTC Decision 2007-10. That decision had resolved a dispute about the rates for one particular element (BSEF) of a service (CDN) provided by telecommunications carriers known as incumbent local exchange carriers (ILECs) to their competitors.

McCarthy Tétrault, as counsel for TELUS, sought an order staying or dismissing MTS’s application on the basis that the subject-matter of the application fell within the exclusive jurisdiction of the CRTC. Alternatively, TELUS argued, if there was concurrent jurisdiction, the Alberta Courts should defer to the specialized expertise of the CRTC. The Chambers judge characterized the dispute as one involving the interpretation and application of the Alberta Limitations Act to a claim for payment of a debt, over which the Alberta courts and the CRTC had concurrent jurisdiction. The Chambers judge declined to defer to the CRTC. TELUS appealed this decision to the Court of Appeal.

In determining whether an administrative tribunal has exclusive jurisdiction over a dispute, the courts are required first to review the tribunal’s governing legislation to determine the matters over which the legislation intended the tribunal to have jurisdiction. Next, the courts must determine the essential nature of the parties’ dispute and decide whether it falls within the tribunal’s exclusive jurisdiction.

Although the MTS application was framed as a request for interpretation of the Alberta Limitations Act, TELUS argued that MTS’s application, in substance, asked the Alberta court to interpret Decision 2007-10. In this decision, the CRTC had found that the ILECs were incorrectly billing competitors for the BSEF service, and directed the ILECs to refund competitors for those charges "back to the date of the error, subject to the applicable limitations periods provided by law." This decision formed part of a series of decisions by the CRTC that expanded the range of services to be provided by ILECs to competitors and set the rates, terms and conditions for those services.

MTS argued that the words "subject to the applicable limitations periods provided by law" were a reference to the Alberta Limitations Act. TELUS argued that it was not at all clear what limitations period the CRTC was referring to. Agreeing with TELUS, the Court of Appeal held that resolution of the dispute involved the interpretation and implementation of both the CRTC-approved Terms of Service and Decision 2007-10. To the extent that such a task involved the consideration of telecommunications policy, it would fall within the exclusive jurisdiction of the CRTC. Further, even if it had determined that there was concurrent jurisdiction in this case, the Court of Appeal would still have deferred to the CRTC in light of the comprehensive dispute resolution scheme provided by the Telecommunications Act and the fact that resolution of the dispute would require the court to rule on the CRTC’s intentions.

MTS Allstream’s application to the Supreme Court of Canada for leave to appeal the Court of Appeal’s decision was dismissed with costs. The CRTC subsequently clarified the meaning of "subject to the applicable limitations period provided by law" in CRTC Decision 2010-462.

McCarthy Tétrault Notes

This decision is notable as there are few reported cases dealing with exclusive jurisdiction of the CRTC. Further, MTS v. TELUS was the first case in which the general principles of exclusive jurisdiction set out in existing case law from the Federal courts and Supreme Court of Canada were applied to the interpretation of a CRTC decision.

This decision also provides further guidance regarding what courts will characterize as private law matters (over which courts have concurrent jurisdiction), and matters that fall within the exclusive jurisdiction of the CRTC. Although the facts in this instance were unique, the Court of Appeal’s reasoning highlights the broad jurisdiction of the CRTC and the consequent difficulties faced by a party seeking adjudication of telecommunications disputes in provincial courts.


Class Action

Is McCracken v. Canadian National Railway Co. a Sign of Things to Come in Overtime Class Actions?
by: Eric S. Block and Paul Morrison

Although Canada’s experience with "overtime" class actions is relatively recent, there have been some significant developments. One such development has occurred in the "misclassification" class action McCracken v. Canadian National Railway Co. A question that has been lingering in the context of overtime class actions is: Can the provisions of the Canada Labour Code be seen as implied terms of employment contracts, and if so, can they be the foundation of a direct claim in breach of contract? McCracken has now answered this question in the affirmative.

In this recent decision of Justice Perell of the Ontario Superior Court of Justice, certification of the class action against CN Railway Co. was granted despite some initial concerns regarding commonality. The claim, brought by the proposed representative plaintiff Michael Ian McCracken, seeks a total of $300 million in damages. The claim alleges that CN intentionally classified all of its "first-line supervisors" as "managers" in order to deprive them of overtime and holiday wages payable under the Code.

While the decision is instructive in revealing how commonality issues will be confronted in cases of "misclassification," more important is Justice Perell’s finding that:

The effect of a conclusion that courts have a jurisdiction to enforce the statutory right [referring to the Code] is that the right is an implied term of the contract of employment by force of statute. In other words, as a matter of law, the statutory provisions become contractual stipulations.

Justice Perell went on to clarify that his conclusion did not merely mean that it was possible that a cause of action for breach of an implied contract existed, but that the representative plaintiff actually had a cause of action for breach of a statutory implied term.

It is not clear if this decision settles the debate of whether a civil claim can be advanced directly under the provisions of the Code. Prior to McCracken, another overtime class action, Fulawka v. The Bank of Nova Scotia, considered the same issue and came to the opposite conclusion. The Fulawka claim is currently only months away from being re-considered on appeal. In Fulawka, Justice Strathy decided that the Code could not be used to bring a civil claim. However, Justice Strathy went on to apply it indirectly by concluding that it could influence and inform existing contractual duties. By comparison, Justice Perell’s decision, which specifically discussed Justice Strathy’s, provided extensive reasoning as to why the Code could be used as the basis of a direct civil claim. In fact, Justice Perell remarked that his methodology would have allowed Justice Strathy to do directly that which was done indirectly. How the Divisional Court chooses to deal with this issue on appeal remains to be seen. However, there are compelling reasons for why Justice Perell’s decision may be seen as more enticing. For instance, Justice Perell undertook a thorough analysis of the Code and several of its provisions; this was not done in the Fulawka decision.

It is likely that McCracken, like the other major overtime class actions, will be the subject of an appeal. Until then, it may delineate the basis on which class claims will be brought against federally regulated employers.

McCarthy Tétrault Notes

This conclusion is important to employers and class action defendants generally. If the McCracken analysis is affirmed at the appellate level, there will be little doubt that the Code can be used as a vehicle to launch a direct civil class action claim. As a result, employers should be mindful of their definitions of "managers" or "supervisors" and ensure compliance with Code provisions as they will be held to be contractual stipulations of the employment relationship.

The authors wish to thank Kosta Kalogiros for his substantial work on this article.

Additional Contacts:

Warren B. Milman

Sean S. Smyth

Dana M. Peebles


Can Collective Prejudice be Inferred? Biondi v. Syndicats des cols bleus regroupés de Montréal — Lowering the burden of proof for class-wide "prejudice"
by: Shaun E. Finn

If the elements of fault, damage and causal connection are established, can a court infer from the evidence that all members of a class action have suffered similar harm (or prejudice?) Yes, according to the recent decision in Biondi v. Syndicat des cols bleus regroupés de Montréal (SCFP-301) et Ville de Montréal (500-06-000265-047, September 3, 2010, Grenier J).

This was a class action on the merits instituted further to events that took place between December 5 and 12, 2004. Plaintiff alleged that the City of Montréal and the Syndicat des cols bleus regroupés de Montréal (Blue Collar Workers Union or Union) were responsible for falls that had occurred on icy sidewalks and other related injuries. She contended that failing to de-ice and spread abrasives was negligent considering the weather conditions at the time and that the pressure tactics used by the Union were illegal and had been undertaken in bad faith. Furthermore, she contended that the City had acted negligently and wrongfully, among other things, by changing the dispatching system at the very beginning of winter, by failing to give proper training to supervisors and by omitting to inform the Union of its decisions. She asked that the Union be held responsible for punitive damages and that the City be found liable jointly and severally for compensatory damages.

According to the Court, the evidence adduced easily led to the conclusion that the Union was at fault since there was negligence in the maintenance of sidewalks during the ice storm. Furthermore, circumstances were such that punitive damages were in order as the Union knew the likely consequences of its behaviour.

The City attempted to eschew its liability by stating that it did not commit any actual fault and that it could not be considered a principal since the blue collar workers were not on duty at the relevant times. These two arguments were rejected given that other cities had delayed the implementation of comparable changes. Hence, the City could not plead superior force.

The City applied for the dismissal of the class action on the grounds that causality could not be determined on a collective basis, the evidence did not show a common causal relation involving all members of the class and it was impossible to conclude that all of the injuries in question were due to the blue collar workers' pressure tactics.

In answer to this motion for dismissal, the Court first stated that the rules of evidence are the same whether they are applied to individual actions or class actions. Consequently, if the elements of fault, damage and causal connection are proven, a court may infer from the evidence that the members have sustained a similar prejudice. The Court added that it could be presumed that if an individual had suffered a fall during this period, it was most likely due to the poor maintenance of the road. The testimony of an individual about his fall would be more credible than that of the City or the Union since fault had already been established. Causality was therefore logical, direct and immediate.

As to the causal connection, the City stated that the possibility of contributory negligence had to be assessed on an individual basis by considering the type of footwear used by each class member as well as his or her knowledge of the general condition of sidewalks and other public places. The court found that these factors could be assessed in the context of individual claims made by each member.

The Court ordered the Union to pay $2M to the class members on a collective basis.

McCarthy Tétrault Notes

This decision is unexpected given the principle that a class action, a procedural mechanism, may not alter substantive law. Might Quebec courts be tempted to lower the burden of proof of the representative with regard to the establishment of an essential element of liability — namely, the existence of harm — on a purely presumptive and therefore speculative basis? To date, the approach adopted in Biondi remains exceptional and will hopefully not be followed in subsequent decisions.

Additional Contacts:

Donald Bisson

Erick Block

 


Competition

European Court of Justice rules that no privilege attaches to communications with in-house counsel in European Commission’s competition investigations
by: Donald B. Houston, Randal T. Hughes, Emily Rix

On September 14, 2010, the European Court of Justice, Europe’s highest court, ruled that communications between a company and its in-house lawyers are not covered by legal professional privilege (i.e., solicitor-client privilege in Canada) when the company comes under investigation by the European Union competition authorities. Akzo Nobel Chemicals Ltd. v. Commission involved an appeal by Akzo challenging the Commission’s seizure and use of two e-mail messages between the company and its in-house counsel during a 2003 search at the company’s offices in the United Kingdom. The Commission was seeking evidence of possible anti-competitive practices. Akzo argued that e-mail communications between the company and its in-house lawyers were privileged, while the Commission asserted they were not. In 2007, the Court of First Instance held that the communications were not privileged; the European Court of Justice has now upheld this decision.

The court based its decision largely on in-house counsel’s lack of independence due to the employment relationship: "An in-house lawyer cannot […] be treated in the same way as an external lawyer, because he occupies the position of an employee which, by its very nature, does not allow him to ignore the commercial strategies pursued by his employer, and thereby affects his ability to exercise professional independence."

This reasoning is consistent with the same court’s 1982 decision in AM & S Europe Ltd. v. Commission, in which the court set out two conditions for privilege to attach to written communications with lawyers: the exchange with the lawyer must be connected to "the client’s rights of defence," and the exchange must emanate from an "independent lawyer," where an independent lawyer is "one who is not bound to his client by a relationship of employment." The Court in Akzo considered these conditions, and found that "It follows, both from the in-house lawyer’s economic dependence and the close ties with his employer, that he does not enjoy a level of professional independence comparable to that of an external lawyer."

The court rejected Azko’s argument that an in-house lawyer enrolled at a Bar or Law Society — as was the case here — is, on account of his obligations of professional conduct, subject to a high expectation of discipline and ethics, and is therefore as independent as external counsel. In addition, the appellants argued that there had been significant recent developments in the legal landscape since 1982 — notably, several Member States had extended legal professional privilege to communications with in-house lawyers — and thus the judgment in AM & S should be revisited. The court also rejected this argument, noting that there was no clear move to recognize legal professional privilege for in-house counsel across the membership.

The judgment is perhaps not surprising in light of the Advocate General’s advisory opinion issued in April, which suggested that the court dismiss the appeal for similar reasons as were ultimately accepted by the court. (The Advocate General — in this case, Juliane Kokott — is one of eight appointed legal advisors to the European Court of Justice; Advocates General deliver opinions to the court on legal questions though their opinions are not binding on the court).

The court’s decision is the final ruling on this subject.

McCarthy Tétrault Notes

The reasoning in Akzo diverges from Canadian and US law under which solicitor-client privilege attaches to communications with all lawyers, in-house or external, for the purpose of seeking or providing legal advice, and has significant implications for dealings with companies operating in Europe and those involved in European Commission competition proceedings.

It would be prudent for in-house counsel in Europe to provide competition law advice only in a non-written or otherwise recordable manner. Companies may also wish to engage external counsel early on to ensure privilege is protected, and should even consider excluding in-house counsel from discussions. This ruling will be expensive and time-consuming for companies that will now have to rely more heavily on external lawyers.

The decision has been heavily criticized by competition lawyers, both domestically and in Europe, for failing to recognize the value and independent judgement of in-house counsel. It also runs contrary to the notion that in-house counsel should be the primary enforcer of and advisor on competition law compliance and, in that sense, may detract from the objective of encouraging compliance with those laws.

With respect to communications with non-European-qualified counsel, although not specifically addressed in the decision, the Advocate General opined that legal professional privilege should not be extended to communications with in-house lawyers who are members of a Bar or Law Society in a third country, on the basis of a lack of recognition of the qualifications and ethical obligations of those lawyers. Thus, Canadian in-house counsel, as well as non-European-qualified external counsel here, should be cautious when advising companies that are active in Europe, particularly when contemplating providing (or copying) written (e-mail) advice to employees of those companies in Europe.

Another reason that Canadian counsel (both in-house and external) should take note of this decision is that competition investigations are frequently international in nature and can involve sharing of information among antitrust authorities. This decision raises the spectre that European in-house communications obtained by the European Commission could be shared with foreign authorities.

While the decision in Akzo applies only to communications between companies and in-house counsel during European Commission competition investigations, there is also a concern that the reasoning could eventually be applied to further limit legal professional privilege under European Union law more generally.


Corporate

BCSC Says "NO" to Board’s "Just-Say-No" Response to Hostile Takeover Bid
by: Robert Cooper

The British Columbia Securities Commission (BCSC) has issued its final majority reasons in the case of Icahn Partners and Lions Gate Entertainment. The BCSC had issued a ruling that cease traded the Lions Gate shareholders' rights plan (SRP) at the conclusion of a hearing in April, 2010. In summary reasons that followed, a majority of the hearing panel expressed reservations that the decisions of the Alberta Securities Commission in Pulse Data Inc. and the Ontario Securities Commission in NEO Materials Technologies may have departed from the Canadian Securities Regulators’ view of the public interest as it relates to SRPs in prior decisions of Canadian Securities Commissions and in National Policy 62-202 on defensive tactics and takeover bids.

It was expected that the final reasons would address the question of when, if ever, a Board acting in its fiduciary capacity could use defensive tactics to "Just say ‘No’" to a hostile takeover bid without giving the shareholders the opportunity to decide whether to tender to the offer.

The majority reasons are a clear statement of the established view that defensive tactics in the face of a hostile takeover bid are temporary measures that are permissible only for as long as they facilitate the effort to maximize shareholder value through enhancements to the bid, competing bids or alternative transactions. However, defensive tactics will be set aside if they will likely result in shareholders being deprived of the opportunity to decide whether to tender into the bid.

Notwithstanding the strong position taken by the majority, this decision leaves open the issue of whether informed shareholders’ support of an SRP adopted in response to either a specific bid, or a decision of a Board, acting in its fiduciary capacity, that the long-term interest of the corporation is best served by just saying "No" to a hostile bid, could be an adequate basis for refusing to set aside an SRP.

The background to this decision begins on March 1, 2010, when the Icahn Group offered to acquire up to 10 per cent of the outstanding shares of Lions Gate at US $6.00 per share. The Lions Gate Board recommenced rejection of the offer on the basis that it was financially inadequate, coercive and not in the best interests of the Company. The Lions Gate Board adopted an SRP and set a shareholders’ meeting for May 4, 2010 for the shareholders to vote on the plan. Icahn amended the offer to seek to acquire all outstanding shares of Lions Gate at US $7.00 per share; this amended offer expired April 30, 2010.

Icahn’s offer had a minimum tendering condition that the number of shares tendered when combined with those owned by Icahn must exceed 50.1 per cent of the outstanding Lions Gate shares. The amended offer reserved the right to waive this minimum-tender condition. Icahn applied to the BCSC to cease trade the Lions Gate SRP, and on April 27, 2010, following a hearing that day, the BCSC ordered that the SRP be cease traded.

The majority reasons elaborated on the BCSC’s decision that it was in the public interest to order that the Lions Gate SRP be cease traded in light of Icahn’s bid: "The majority adapts the principle that each shareholder of a target company should have the opportunity to decide whether to tender their shares into the bid. The Board of a target company has a fiduciary duty to act in the best interest of the corporation, and Canadian Securities Regulators are reluctant to interfere with a target company board’s discharge of its fiduciary duty in a face of a hostile bid."

Defensive tactics such as SRPs are not contrary to the public interest when they are used as part of an effort to maximize shareholder value through enhancements to the existing bid, competing bids or alternative transactions. However, defensive tactics are only temporary measures and will not be allowed to stand when they will deprive the shareholders of the opportunity to decide whether to accept a bid.

The majority reasons recognize that takeover bids are fact-specific and that different factors will apply in each case. Factors that are often relevant to determining whether it is time to cease trade the SRP or whether there are realistic potential alternatives to the existing bid include: (i) when the SRP was adopted; (ii) whether it has broad shareholder support; and (iii) whether the existing bid is coercive or unfair.

The most significant factor in the majority reasons was the decision by the Lions Gate Board not to seek an improved or alternative transaction to the Icahn bid. In other words, the Lions Gate Board just said "No" to the Icahn bid.

The BCSC did not consider whether this decision was a breach of the Boards’ fiduciary duty but did conclude that, having made the decision, the Lions Gate Board should not expect securities regulators to allow the SRP to interfere with the shareholders’ right to decide whether to tender into the bid.

The BCSC concluded that, in the absence of any attempts by the target company board to take any steps to increase shareholder value through an improvement to the bid or the presentation of alternative transactions, there is no basis for allowing an SRP to continue.

The majority reasons pointed to National Policy 62-202 and the line of decisions from Canadian Securities Commission Panels as establishing two things:

  1. The only reason a Canadian Securities Regulator will tolerate an SRP is to give the target company board time to discharge its fiduciary duty.
  2. The focus of that duty is to improve the existing bid or to find a better one.

The majority rejected the interpretation of "Pulse" and "Neo" as authority for the proposition that the target company boards can enshrine an SRP and "Just say ‘No’" to offers not permitted under the SRP if the target’s shareholders have approved the SRP in the face of a bid. Instead, the BCSC interpreted "Pulse" and "Neo" as not representing any significant change to the Canadian Securities Regulators’ public interest policy principles governing SRPs, and specifically refer to the fact that both of those decisions had contemplated that a change in circumstances could lead to the SRPs being cease traded.

Notwithstanding the clear rejection of the "Just say ‘No’" regime, questions remain about the legitimate scope of defensive tactics in response to a hostile takeover bid and whether the target board’s fiduciary duty is solely focused on seeking an improved or alternative transaction to the hostile bid.

The intersection of Corporate Law and Securities Law is at the centre of these questions. If the shareholders’ right to decide whether to sell their shares in response to a takeover bid is given primacy over the board’s fiduciary duty to manage with a view to the best interest of the corporation, there is a risk that short-term or exceptional circumstances will overtake what the board determines is in the long-term best interest of the Corporation. Put the other way, the shareholders could lose the right to determine what they do with their shares.

The decision in Lions Gate is a strong endorsement of the view that shareholders cannot be deprived of their opportunity to tender into a bid by defensive tactics adopted by the target board. However, when read together with "Pulse" and "Neo," it remains uncertain whether a target company will always be required to demonstrate a realistic possibility of a better bid or alternative transaction as a condition of supporting an SRP. A minority number of the panel agreed with the result, but not with the reasoning. At the time of writing, those reasons have not been released.

To read our related article discussing, among other things, Canadian Heritage approval of the acquisition of Lions Gate by Icahn, click here.


Financial Services

Only actual knowledge will suffice: the Ontario Court of Appeal clarifies and limits the liability of banks to non-customers
by: Geoff R. Hall

Banks are convenient deep pockets to sue when someone suffers a loss but cannot recover from the perpetrator who has caused the loss. But the recent decision of the Ontario Court of Appeal in Dynasty Furniture Manufacturing Ltd. v. The Toronto-Dominion Bank, 2010 ONCA 514 puts serious roadblocks in the way of non-customers seeking to pick the deep pockets of a bank. Dynasty Furniture held that the scope of a bank’s liability to non-customers is extremely narrow. It is only if the bank has actual knowledge (including wilful blindness and recklessness) of its customer’s wrongful activities that liability to third parties who have been harmed by the customer’s activities can arise. Mere negligence on the part of the bank is not enough. This is an important ruling for Canadian banks, and should serve as a serious deterrent to those looking to banks as a convenient deep pocket to sue.

The plaintiffs in Dynasty Furniture alleged that they lost money in a fraud. Unable to recover from the perpetrators of the fraud, they sued a bank that had provided correspondent banking services to the alleged fraudsters, alleging that the bank owed the plaintiffs a broad duty of care in negligence even though the plaintiffs had no direct dealings with the bank. In essence, the plaintiffs alleged that the bank ought to have detected the fraud (even though the primary regulatory agency, the U.S. Securities and Exchange Commission, had not managed to do so) and ought to have frozen the relevant bank accounts.

The implications of the duty of care alleged by the plaintiffs would be dire. The proposed duty would effectively require banks to constantly monitor the activities of all of their customers for signs of anything that might be suspicious. It could lead to literally billions of dollars in liability if a court concluded that a bank ought to have been able to detect a fraud but had failed to do so.

The bank responded with a motion to strike the statement of claim to the extent that it pleaded a duty of care based on constructive as opposed to actual knowledge. In other words, the bank acknowledged that if it had actual knowledge that its customer was engaged in a fraud, it might be liable to non-customer victims of the fraud. But it contested the ability of the plaintiffs to sue on the basis that the bank did not actually know of the fraud but ought to have known of it.

In very comprehensive reasons for judgment (2010 ONSC 436), Justice Wilton-Siegel of the Ontario Superior Court of Justice (Commercial List) granted the motion at first instance. Applying the Anns/Cooper test of whether a duty of care exists in tort (based on Anns v. Merton Borough Council, [1978] A.C. 728 (H.L) and Cooper v. Hobart, [2001] 2 S.C.R. 2), he first concluded that the alleged duty of care did not fall within any recognized category of negligence. He then applied the two-part test for a novel duty of care. First, he concluded that there was insufficient proximity between the bank and the plaintiffs to give rise to a prima facie duty of care in tort. Second, he concluded that even if a prima facie duty of care arose, it would be negated on policy grounds. He referred to a number of policy reasons for this conclusion. The duty proposed by the plaintiffs could give rise to indeterminate liability to an undetermined class. The duty would effectively make banks into regulators, an unnecessary role where a well developed regulatory regime already exists. Fulfilling the duty would require international investigatory activities beyond the capabilities of a single bank, since many frauds are trans-national in scope. The proposed duty would effectively make banks insurers in those who invest with the bank’s customers.

On appeal, the Ontario Court of Appeal affirmed the Superior Court decision in its entirety. The Court of Appeal concluded that in opening its customer’s account, a bank does not owe a duty to non-customers to ensure that the account will not be used for an unlawful purpose. It further concluded that a bank does not owe a duty to non-customers to inquire into its customer’s activities because it ought to have known that those activities were suspicious, unusual or fraudulent.

McCarthy Tétrault Notes

Dynasty Furniture is an extremely important and welcome ruling for Canadian banks. It has clarified that a bank does not owe a duty of care to non-customers except where the bank has actual knowledge that one of its customers is engaged in unlawful activity. This is an extremely narrow basis for liability, and should serve as a serious deterrent to plaintiffs who look to banks as convenient deep pockets to sue when recovery is not possible from the perpetrators who caused their losses.

Additional Contact:

Junior Sirivar


Procedure

A Real and Substantial "Tune-Up": The Ontario Court of Appeal Reformulates the Test for Asserting Jurisdiction Against Out-of-Province Defendants
by: Brandon Kain, Byron Shaw

On February 2, 2010, a five-member panel of the Ontario Court of Appeal released its long-awaited reasons in Van Breda v. Village Resorts Limited (2010), 98 O.R. (3d) 721 (CA) (sub nom. Charron Estate v. Bel Air Travel Group Ltd.), leave to appeal to SCC granted, [2010] SCCA. Nos. 114 and 174. The decision in Van Breda significantly reformulates the test for "jurisdiction simpliciter," i.e., the court’s ability to assert jurisdiction against an out-of-province defendant who has not submitted or attorned to an action against it in Ontario. While Van Breda represents a much needed reassessment, both the judgment itself, and its recent application in two further decisions of the Ontario Court of Appeal, suggest that uncertainty will remain so long as jurisdiction simpliciter continues to be based upon the "deliberately general" concept of a "real and substantial connection."

In a series of cases beginning with Morguard Investments Ltd. v. De Savoye, [1990] 3 S.C.R. 1077, the Supreme Court of Canada held that principles of "order and fairness" require there to be a "real and substantial connection" in order for a domestic court to assert jurisdiction against an out-of-province defendant. In Muscutt v. Courcelles (2002), 60 O.R. (3d) 20 (CA), the Ontario Court of Appeal attempted to add some clarity to this "deliberately general" concept laid down by the Supreme Court. The Muscutt Court listed eight factors for Ontario courts to consider when determining whether there is a real and substantial connection for the purposes of jurisdiction simpliciter: (1) the connection between the forum and the plaintiff’s claim; (2) the connection between the forum and the defendant; (3) unfairness to the defendant in assuming jurisdiction; (4) unfairness to the plaintiff in not assuming jurisdiction; (5) the involvement of other parties to the suit; (6) the court’s willingness to recognize and enforce an extra-provincial judgment rendered on the same jurisdictional basis; (7) whether the case is interprovincial or international in nature; and (8) comity and the standards of jurisdiction, recognition and enforcement prevailing elsewhere. If the court had jurisdiction simpliciter, it would then go on to determine whether jurisdiction should be declined, as a matter of judicial discretion, pursuant to the doctrine of forum non conveniens. Factors relevant to this determination were said to include: the location of the majority of the parties; the location of key witnesses and evidence; contractual provisions that specify applicable law or accord jurisdiction; the avoidance of a multiplicity of proceedings; the applicable law and its weight in comparison to the factual questions to be decided; geographical factors suggesting the natural forum; and whether declining jurisdiction would deprive the plaintiff of a legitimate juridical advantage available in the domestic court.

In Van Breda, the Court of Appeal agreed that after seven years, the Muscutt framework was due for a "tune-up." The Court reviewed an extensive body of judicial and academic commentary containing criticisms that the Muscutt factors —especially "fairness"— led to uncertainty, unnecessary complication and conflation of jurisdiction simpliciter with forum non conveniens. Furthermore, the court observed that there had been considerable development in other provinces through the enactment of the Uniform Law Conference of Canada’s Court Jurisdiction and Proceedings Transfer Act (CJPTA), which attempts to codify and clarify the rules for jurisdiction following Morguard and its progeny. The Van Breda Court adopted an approach modelled in part on the CJPTA. The essence of the Van Breda test may be summarized as follows:

  • First, the court must decide whether the claim falls within Rule 17.02 of the Ontario Rules of Civil Procedure (which permit service ex juris without leave) to determine whether a real and substantial connection with Ontario is presumed. If one of the connections identified in Rule 17.02 is made out, the defendant bears the burden of showing that a real and substantial connection does not exist. If none of the Rule 17.02 connections are made out, the burden falls to the plaintiff to demonstrate that the real and substantial connection test is met. Rules 17.02(h) (damages sustained in Ontario) and 17.02(o) (necessary or proper party) do not have presumptive effect.
  • At the second stage, the "core" of the real and substantial connection analysis rests upon the connections between: (a) Ontario and the plaintiff’s claim (e.g., whether the plaintiff suffered damages in Ontario, or entered into a contract with the defendant in Ontario); and (b) Ontario and the defendant (e.g., whether the defendant could reasonably foresee that its conduct would harm a person within Ontario, with the primary focus being upon the actions of the defendant or its agents in Ontario). The remaining considerations for jurisdiction simpliciter set out in Muscutt "should not be treated as independent factors having more or less equal weight … but as general legal principles that bear upon the analysis," in the form of "analytic tools to assist the court in assessing the significance of the connections between the forum, the claim and the defendant." In particular, the fairness of assuming or refusing jurisdiction – while not a "free-standing factor capable of trumping weak connections" – is a "necessary tool in assessing the strengths of the connections between the forum and the plaintiff’s claim and the defendant."
  • The distinction between jurisdiction simpliciter (a question of law) and forum non conveniens (a question of judicial discretion) should be maintained. The forum non conveniens analysis should not be replicated in determining whether the court has jurisdiction simpliciter.

The Van Breda test has been applied by the Ontario Court of Appeal in two recent cases. In Black v. Breeden, 2010 ONCA 547, the plaintiff brought several libel actions in Ontario against a U.S. company’s directors, officers and advisors. The plaintiff alleged that the company’s website posted defamatory statements about him that were downloaded, read and published by newspapers in Ontario, damaging his reputation in that province. The court found that a presumption of a real and substantial connection arose, since the tort of defamation was committed in Ontario pursuant to Rule 17.02(g). The court clarified that the core sub-test for a connection between Ontario and the plaintiff’s claim should focus only upon ties that are relevant to the claim, or to the subject matter of the suit (and not upon ties between Ontario and the plaintiff in the abstract, such as whether the plaintiff is an Ontario resident). Since the plaintiff’s claim in Black alleged publication in Ontario, and damage to his reputation in Ontario, there was a significant connection between Ontario and the claim, even though the plaintiff was not resident in Ontario. This, coupled with the connection between Ontario and the defendants (arising from the fact that the statements were directed towards the Ontario media), supported the presumption of a real and substantial connection. The court also placed great emphasis upon considerations of fairness, treating this as the most important of the "analytical tools" from Muscutt. In the court’s view, it would be unfair to deprive the plaintiff of a trial in the community where his reputation was damaged, and fair to require that the defendants defend in the place where both the tort and the damages occurred.

Subsequently, in Dilkas v. Red Seal Tours Inc. (Sunwing Vacations), 2010 ONCA 634, the Ontario Court of Appeal applied the Van Breda test to a claim arising out of a bus accident occurring in Mexico. The claim was brought by Ontario tourists against a Mexican defendant (Best Day), who had subcontracted the bus service to a non-party, pursuant to a contract between the defendant and another defendant that had served as the plaintiffs’ Ontario tourist agency (Sunwing). The court relied upon contracts between Best Day and these parties in finding that there was a real and substantial connection. The contracts included: (1) a bus transportation contract between Best Day and Sunwing, entered into before the accident, which contained an Ontario choice of law clause; and (2) indemnity agreements among the parties entered into after the accident, which contained Ontario choice of law and forum selection clauses. In rejecting Best Day’s motion to dismiss the claim, the court found that these agreements amounted to an acknowledgment by Best Day that it expected claims arising out of the accident could be brought in Ontario, even though the plaintiffs were not party to any of them. Further, the Court observed that Best Day had agreed to litigate in Ontario against Sunwing, an essential party to the action. Because Sunwing had brought a cross-claim against Best Day seeking indemnity, Best Day would be brought into the action as a third party in any event. The court appeared to regard these factors as determinative with respect to the jurisdiction simpliciter inquiry, even though there was no presumption of a real and substantial connection under Rule 17.02. The court also noted that it would not be "unfair" for Best Day to defend against the plaintiffs in Ontario in light of the agreements.

Please note that, as of the date of this publication, the Supreme Court of Canada has granted leave to appeal in Black v. Breeden.

McCarthy Tétrault Notes

  • In the wake of Van Breda, Black and Dilkas, the test for jurisdiction simpliciter in Ontario involves a two-part inquiry that must be kept distinct from the subsequent forum non conveniens test. The first part requires the court to determine whether the claim falls within Rule 17.02, in which case a rebuttable presumption of a real and substantial connection will arise (and failing which the plaintiff bears the onus of establishing jurisdiction simpliciter). The second part requires the court to assess the connections between: (a) Ontario and the plaintiff’s claim; and (b) Ontario and the defendant. The remaining considerations from Muscutt should not be considered as independent factors, but as analytical tools used to assist the court in assessing the significance of the connections between Ontario, the claim and the defendant. The most important "tool" appears to be the "fairness" of the Ontario court’s decision to assert jurisdiction.
  • In assessing the connection between Ontario and the plaintiff’s claim, the court should focus only upon ties that are relevant to the plaintiff’s claim, or to the subject matter of the suit (e.g., whether the plaintiff suffered damages in Ontario, entered into a contract with the defendant in Ontario, or sued another party who brought a cross-claim against the defendant over which the Ontario courts had jurisdiction), and not upon ties between the plaintiff and Ontario in the abstract (e.g., whether the plaintiff is an Ontario resident). In assessing the connection between Ontario and the defendant, the primary focus is on things done by the defendant or its agents within the forum. However, other matters may also be relevant (e.g., whether the defendant released a product or statement that it could reasonably foresee would injure a person in Ontario, or entered into a contract with a third party disclosing an expectation that the plaintiff’s claim would be brought in Ontario).
  • The Van Breda test clarifies the test for jurisdiction and is a welcome improvement over Muscutt. The focus on connections between Ontario the plaintiff’s claimi.e. and Ontario and the defendant’s claim should simplify jurisdiction simpliciter and avoid duplication of analysis at the forum non conveniens stage. The move to a category-based approach under Rule 17.02 will also go some way towards assisting litigants and courts in identifying the types of situations in which a real and substantial connection will be satisfied. However, the fact that the Rule 17.02 presumptions are rebuttable and non-exhaustive will require courts to consider whether there is a "real and substantial connection" in all the circumstances of each case, such that the inquiry will remain in large part discretionary. Furthermore, despite the de-emphasis of the peripheral Muscutt factors, Van Breda, Black and Dilkas suggest that the inherently unpredictable notion of "fairness" continues to play a key role in the analysis of jurisdiction simpliciter. Accordingly, despite the Van Breda "tune-up," a considerable degree of uncertainty will remain in the law of jurisdiction simpliciter unless and until the Supreme Court of Canada performs a total overhaul of the "deliberately general" concept of a real and substantial connection.


New Alberta Rules of Court: A Client’s Perspective
by: Michael D. Briggs, Toni L. Eckes

On November 1, 2010, the new Alberta Rules of Court are scheduled to come into force, repealing the current Rules of Court. The New Rules represent a dramatic change to the procedural landscape of litigation in Alberta, and everything from timelines to case management has undergone significant and material change.

The main objective of the New Rules is to provide a timely and cost-effective court process for litigants. In order to achieve this objective, the New Rules begin with a foundational rule that is the basis for how the rules are to be interpreted and applied. Specifically, the New Rules are intended to be used: (1) to identify the real issues in dispute; (2) to facilitate the fastest means of resolving a claim at the least expense; (3) to encourage parties to resolve the claim themselves at an early stage in the proceedings; (4) to oblige the parties to communicate in an honest, open and timely way; and (5) to provide effective, efficient and credible remedies.

While not exhaustive (and setting aside the majority of the more technical and procedural rules that have been implemented), some of the changes that may be of particular interest from a client’s perspective are as follows:

1.  Limited Purpose Retainers

Another way of assisting litigants and making access to justice more affordable is through partial retainers for lawyers, that is, the "unbundling" of legal services. In other words, a lawyer is not hired for all aspects of a file, but rather assists with only a portion of the case. Under Rule 2.27, a litigant may retain a lawyer for a limited purpose such as conducting examinations for discovery, drafting a particular document, or making a specific appearance in court. Where the latter occurs, the Rule states that the lawyer must inform the court of his/her limited retainer.

2.  Standard and Complex Cases

The New Rules require that all actions be categorized as either standard or complex cases. Factors that will be considered by the parties — or by the court — in making this categorization include, among other things, the amount and nature of the claim, the number of parties, and the number of documents.

The classification of a case as either standard or complex will change the entire framework for managing litigation and dispute resolution. For example, with standard cases, the parties are obliged to take various steps (within a reasonable time) such as completing pleadings and participating in at least one of the dispute resolution processes described in the Rules. For complex actions, the parties must, within four months of categorizing the action as complex, agree to a complex case litigation plan that requires the parties to establish specific guidelines and timeframes for completing steps in the action.

3.  Service Outside Alberta

Under Rule 11.25, a court application is no longer required in order to serve a Statement of Claim or Originating Application outside Alberta and within Canada. As a result, litigants will no longer have to spend time or money obtaining orders for service ex juris in these situations. However, an application must still be made to permit commencement documents to be served outside of Canada.

4.  Mandatory Dispute Resolution Process

The New Rules are built around the premise that disputes should be resolved as soon as possible after they arise, in keeping with the civil justice system objectives of fairness, accessibility, timeliness and cost. As such, Rule 4.16 mandates that part of the parties’ responsibility for case management is the parties’ good-faith participation in a dispute resolution process: either in the private or governmental sectors with an impartial third party or a judicial dispute resolution process (JDR) that allows a judge to attempt to facilitate a resolution between the parties. Accordingly, the New Rules specifically state that a trial date cannot be set by the court unless the parties have engaged in a dispute resolution process, though the court may waive this requirement if the circumstances warrant.

5.  Dismissal for Long Delay

One of the most significant changes is the reduced time period for what is commonly known as the "Drop-Dead" rule. Under the Old Rules, the court was required to dismiss an action where five or more years had passed from the time that the last thing was done to materially advance the action. Under the New Rules, this time period has been reduced to two years in order to encourage litigants to move their claims along more expeditiously. It should also be noted that there is a two-year "bridging provision" under the New Rules whereby a court must dismiss an action if the shorter of the following two periods has passed since the last thing was done to significantly advance the action: (1) two years since the coming into force of the New Rules; or (2) the period between the last thing done to significantly advance the action and five years.


Securities

US Supreme Court Limits Extraterritorial Reach of US Securities Law: Morrison v. National Australia Bank
by: Dana M. Peebles, Sarah Shody, Benjamin Silver

Out of the US Supreme Court comes a positive development for Canadian issuers of securities who have business operations in the United States: the US Supreme Court held, on June 24, 2010, that the principal statutory provisions used by security-holders to bring class actions in the US — s.10(b) of the Securities and Exchange Act of 1934 and SEC Rule 10b-5 (which is promulgated under s. 10(b)) — have no application to trades in securities that are not traded on a US exchange and that do not take place in the US.

In Morrison v. National Australia Bank (08-1191), three Australian investors held ordinary shares in the National Australia Bank that were not traded on any exchange in the US. They attempted, however, to bring fraud claims in the US against the Bank under s. 10(b) and Rule 10b-5 because, they alleged, a Florida subsidiary of the Bank was the source of the Bank’s fraud on the market (in that it had allegedly miscalculated the interest rates on the mortgages it services and provided fraudulent financial information to the Bank, leading to a write-down of millions of dollars by the Bank). The investors alleged that their shares fell when the fraud was revealed.

The court ruled that the Australian investors’ case could not proceed. Justice Antonin Scalia, in the court’s majority opinion, held that because s. 10(b) and Rule 10b-5 contain no indication as to whether they are intended to apply extraterritorially, they must be interpreted as applying only within the confines of the US. Justice Scalia further opined that s. 10(b) and Rule 10b-5 focus on the purchase and sale of securities in the US, not on the place where the alleged fraud arose.

The court’s reasoning that these provisions cannot be relied upon to start a US case even if there were allegedly significant fraudulent conduct in the US, or if there were some effect on US markets or investors, strongly criticized a significant body of lower court decisions that employed this "conduct and effects" test. In other words, Morrison stands for the proposition that the provisions cover only transactions in securities listed on US exchanges and transactions in securities that are not listed on a US exchange, but take place in the US.

Accordingly, the court’s decision bars so-called "foreign-cubed" claims; that is, claims brought in the US by foreign investors who purchased, on foreign exchanges, securities of a foreign issuer. The court’s decision also goes further: it appears to bar claims in the US by resident investors who claim in respect of securities not listed on a US exchange and who cannot prove that the transaction occurred in the US. Future US decisions will certainly have to grapple with the issue of when a transaction occurs in the US such that it is under the scope of s. 10(b) and Rule 10b-5.

Morrison has a number of positive implications for Canadian and other foreign issuers of securities who have operations in the US, but do not trade on US exchanges or transact in securities in the US. Claims brought by investors are more likely to be brought in the jurisdiction where their securities are transacted or traded on an exchange; for Canadian issuers of securities, this will likely be Canada.

In addition, the court’s ruling may, indirectly, limit the scope of the SEC’s power to extraterritorially investigate and bring proceedings against foreign issuers of securities in situations where there is significant fraudulent conduct in the US. However, the SEC is currently lobbying for financial regulation reform that would authorize it to have this power.


Farley's Reflections

Good Faith in Execution (aka Performance) of Agreements
by: James Farley

So what’s in a word? One is curiously reminded that one should use words carefully by an excerpt from Shakespeare’s Hamlet, Act V Scene I:

First Clown: What is he that builds stronger than the mason, the shipwright, or the carpenter?
Second Clown: The gallows-maker, for that frame outlives a thousand tenants.
First Clown: I like thy wit well, in good faith: the gallows does well; but does it well? It does well to keep those that do in.

The phrase "execution of an agreement" can have two meanings: (i) confirming the existence of a contract, usually by having it signed, although it is possible to execute an oral agreement and (ii) the performance of obligations agreed to in the contract.

An agreement to agree is not a binding contract, as my colleague Geoff Hall pointed out in his book Canadian Contractual Interpretation Law (2007, LexisNexis), at page 132:

Bawitko Investments Ltd. v. Kernels Popcorn Ltd. (1991), 79 D.L.R. (4th) 97 (Ont. C.A.) is a leading Canadian decision on agreements to agree and aptly sets out the various subissues raised by the proposition that an agreement to agree cannot be enforced … In other words there are three separate sub-propositions contained within the basic notion that an agreement to agree is unenforceable. First, there is no enforceable contract where essential terms have not been agreed but instead have been left by the parties for future agreement. Second, there is no enforceable contract where the provisions of what has been agreed are insufficiently certain. Third, there is no enforceable contract where the parties intend that a preliminary agreement is not to create binding contractual relation until a subsequent formal document is executed.

However, once a contract has been entered into, there is a duty on the parties to govern their actions in the performance or execution of the terms of that contract in good faith, notwithstanding that the words "in good faith" are likely not explicitly included within the contract.

As Blair J.A. stated in Nareerux Import Co. Ltd. v. Canadian Imperial Bank of Commerce, 2009 ONCA 764 (CanLII) at para. 69:

Although Canadian law has not yet recognized a standalone ‘duty of good faith’ in the performance of a contract that is independent from the terms of the contract, as the United States has done, the jurisprudence establishes that there is an implied contractual duty of good faith not to act in a way that defeats or eviscerates the very purpose and objective of the agreement.

What constitutes acting "in good faith"? The Supreme Court of Canada in Roncarelli v. Duplessis (1959), 16 D.L.R. (2d) 689 said that "‘good faith’ … means carrying out the statute according to its intent or purpose, it means good faith in acting with a rational appreciation of that interest and purpose." In that regard, the word "contract" could be substituted for "statute." McEachern C.J.S.C. in Nystad v. Harcrest Apt. Ltd. 1986 CanLII 1057 (BC S.C.) at para. 18 adopted the following interpretation of "good faith":

‘Good faith,’ according to Black’s Law Dictionary, 5th ed. (1979), has no technical meaning but is a term used to ‘describe that state of mind denoting honesty of purpose, freedom from intention to defraud and generally speaking, means being faithful to one’s duty or obligation,’ or ‘an honest intention to abstain from taking any unconscientious advantage of another, even though the technicalities of law, together with absence of all information, notice, or benefit or belief of facts which render the transaction unconscientious.’

But what would excuse a party for not carrying out its end of the bargain? Is the duty of good faith performance an obligation of "Do or Die"? Certainly it is obvious that one cannot rely on one’s own breach: see Southcott Estates Inc. v. Toronto Catholic School Board, 2010 ONCA 310 (CanLII) at paras. 13-14.

Parties are able to be excused from their legal obligations if they prove that there has been frustration: see Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58 at para. 53, where Binnie J. for the court stated:

Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance becomes ‘a thing radically different from that which was undertaken by the contract’: Peter Kiewit Sons’ Co. v. Eakins Construction Ltd., [1960] S.C.R. 361…

However, if the parties had contemplated the possibility of such a difficulty arising, then frustration would not have come into play.

What then of the old trio — force majeure, Act of God and vis major? Mozley & Whiteley’s Law Dictionary (1988, 10th ed., Butterworths) describes these terms as:

(a) force majeure — Irresistible compulsion or coercion; (b) Act of God — An extraordinary occurrence or circumstance which would not have been foreseen and which could not have been guarded against; an accident due to material causes, as e.g. a destructive storm or a sudden and unforeseen death; and (c) vis major — Irresistible force; e.g. an interposition of human agency as is from its nature and power absolutely uncontrollable; e.g. the inroads of a hostile army or forcible robberies, may relieve a person from liability under a contract.

It would seem that sometimes these phrases are haphazardly included in a contract without any thought as to their implications. If one wants to be certain that the occurrence of such a contingency will in fact excuse performance, then it would seem appropriate to describe that excuse as including specific types of events and anything of a similar nature or impact. It is well to note that force majeure clauses may exclude financial incapacity as was the case in Atcor Ltd. v. Continental Energy Marketing Ltd., [1996] 6 W.W.R. 274 (Alta C.A.). However, it should be noted, that even without such exclusionary wording, courts have accepted the traditional common law position that a party is not excused from performing its obligations because of what in Tandrin Aviation Holdings Ltd. v. Aero Toy Store LLC, [2010] EWHC 40 (Comm) was described as "unanticipated, unforeseeable and cataclysmic downward spiral of the world’s financial markets." In that case, Hamblen J. stated at para. 40:

It is well established under English law that a change in economic/market circumstances, affecting the profitability of a contract or the ease with which the parties’ obligations can be performed, is not regarded as being a force majeure event. Thus the failure of performance due to the provision of insufficient financial resources has been held not to amount to force majeure…

It is also important to appreciate that, as Kerans J.A. said at pages 288-9 of Atcor:

… in the absence of clearer words to the contrary, a supplier is not excused from non-performance by a force majeure event if the sole consequence of that event is to drive him to buy from another supplier and make a smaller profit. He is excused, however, if the solution in all the circumstances is not reasonable.

In Wal-Mart Canada Corp. v. Gerard Developments Ltd., 2010 ABCA 149 (CanLII), McDonald J.A. for the court observed at paragraph 15:

With respect to force majeure, the force majeure clause applies when circumstances occur which were unforeseen or beyond a party’s control and does not apply to normal business risk or to reallocate bargained for contractual risk: Atlantic Stock Limited v. St. Anne-Nackawic Pulp and Paper Co. Limited, [1976] 1 S.C.R. 580 at para. 4.

Given the desire for certainty (and thus the avoidance of protracted expensive litigation), it would seem helpful to specify an exclusion of financial incapacity if that is in fact desirable and to be explicit and expansive in defining that exclusion. "Belt and suspenders" fashion does not make for elegant dress, but it may well be safer in avoiding a wardrobe malfunction.

Then there is the issue of to what standard of performance does the good faith obligation hold a party? The cases generally seem to skirt this, seemingly relying upon the circumstances prevailing. In CEP Holdings Limited v. Steni AS, [2009] EWHC 2447 (Q.B.), a case regarding whether there had been a breach of an "all reasonable endeavours" clause, Gloster J. reviewed the plaintiff’s efforts to market and promote the sale of the defendant’s products, the nature of its marketing organization, the adequacy of systems for the preparation of rolling forecasts and logs of specifications and quotations, the extent of cooperation with the defendant, the distribution of the defendant’s literature and marketing materials, and its attendance at fairs and seminars.

There seems to be an almost inexhaustible list of possibilities of standards of performance for executing one’s obligations (as set forth hereafter in the paragraph listing alternatives (a) through (i)). It may be desirable to pick and choose which one fits the circumstances of the case at the time of drafting the contract. It would likely seem that the base foundation for performance would be to use one’s "reasonable efforts." Higher than reasonable efforts would "best efforts." One may query whether a party under a reasonable efforts clause is obligated to use its best efforts since employing one’s best efforts would be entirely possible for a party to achieve; however, it appears that the case law has accepted that a "reasonable efforts" clause does not require a party to leave no stone unturned.

The question of what are one’s "best efforts" was canvassed in Atmospheric Diving Systems Inc. v. International Hard Suits Inc., [1994] 5 W.W.R. 719 (B.C.S.C.) at pages 735-6:

  1. "Best efforts" imposes a higher obligation than a "reasonable effort."
  2. "Best efforts" means taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion, and leaving no stone unturned.
  3. "Best efforts" includes doing everything known to be usual, necessary and proper for ensuring the success of the endeavour.
  4. The meaning of "best efforts" is, however, not boundless. It must be approached in the light of the particular contract, the parties to it, and the contract’s overall purpose as reflected in its language.
  5. While "best efforts" of the defendant must be subject to such overriding obligations as honesty and fair dealing, it is not necessary for the plaintiff to prove that the defendant acted in bad faith.
  6. Evidence of "inevitable failure" is relevant to the issue of causation of damage, but not to the issue of liability. The onus to show that failure was inevitable regardless of whether the defendant made "best efforts" rests on the defendant.
  7. Evidence that the defendant had acted diligently, could have satisfied the "best efforts test as relevant evidence that the defendant did not use its best efforts."

But what of the following phrases, which are frequently found in contracts? How are these to be interpreted? Where on the spectrum do they fit?

  1. every effort;
  2. maximum efforts;
  3. good faith efforts;
  4. all reasonable bona fide (aka good faith) efforts;
  5. commercially reasonable best efforts;
  6. all reasonable endeavours;
  7. commercially reasonable efforts;
  8. all feasible efforts;
  9. in a commercially reasonable manner; and
  10. endless variations of this theme.

Perhaps the ranking from highest to lowest obligation would be as indicated from (a) to (i) with "best efforts" fitting in between (b) and (c).

Care should be taken to appreciate whether the nuances (sometimes referred to as "nuisances") of these phrases add — or subtract — to the burden (and to what degree). As was observed in Castledowns Law Office Management Ltd. v. FastTrack Technologies Inc., 2009 ABCA 148 (CanLII) by Slatter J.A. (in dissent, but not on this issue) at para. 67:

Some authorities hold that a ‘true’ condition precedent cannot be waived. Other cases discuss whether the contracting parties have a duty to act reasonably and diligently to have the conditions met. Neither of these issues need be discussed here. Both contracts specifically provide that the condition can be waived. They both have ‘good faith and diligence’ and ‘reasonable efforts’ clauses. Of course what would amount to good faith, diligence and reasonable efforts will vary depending on the nature of the condition.

So what’s in a word? In the end result, it is important to choose words carefully in drafting a contract. Otherwise one opens the door to Wonderland, where the Red Queen is able to say that a word means exactly what she says it means. In which case, the gallows may have another tenant.

Honourable James M. Farley, QC