Published by the Litigation Group
McCarthy Tétrault FRANÇAIS VOL.5,
ISSUE 1
2011
October
28
Litigation Co-Counsel


In This Issue


Letter From the Editors

The Shape of Things to Come
by: Geoff R. Hall, Martin B. Halpern

Welcome to Volume 5, Issue 1 of McCarthy Tétrault Co-Counsel: Litigation.

This publication not only highlights legal developments, but also offers the insights of our Litigation Group to each of the cases in the periodical.

We believe this insight makes this a reflective journal that points to important trends for the future, and "looking to the future" is a major skill set our lawyers bring to everything they do.

In the Arbitration arena, our case comment on Seidel v. Telus Communications analyzes whether there is a discernible approach toward private arbitration emerging from the Supreme Court of Canada.

In Class Actions, our writer questions if a single common issue can justify the authorization of a class action in Québec.

The Supreme Court of Canada’s latest pronouncement on government liability for negligence has made it more complex for litigants seeking to issue a claim against the government. We seek in this publication to shed some new light on this decision.

We comment on safety legislation which presents new challenges for Canadian businesses. We also take flight and put some additional thinking into how airlines are subject to a unique blend of national and international laws, particularly, when it comes to understanding the way our courts have interpreted "accident" in this industry sector.

Our look to the future also covers Financial Institutions, Securities, Pensions and Privilege, with a study of important cases worthy of closer consideration.

As always, our astute observer of things past, present and future, The Honourable James M. Farley peers through the "looking glass" in his commentary on the tort of conspiracy. He ends on a conspiratorial note of his own with a visit to Oxford and the Mad Hatter’s Tea Party.

You will have to read his article and the others in this issue for this particular journey into the shape of things to come.

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


Arbitration

Not Always Mandatory: in Seidel v. TELUS Communications, the Supreme Court of Canada Allows Exceptions to a Mandatory Arbitration Agreement
by: Jill Yates

Are mandatory arbitration agreements an effective bar to consumer class proceedings in common law jurisdictions? In reasons released in March 2011, a bare majority of the Supreme Court of Canada expressed concerns about the access to justice offered by private arbitrations, and held that, in a proposed class action, a mandatory arbitration agreement in a consumer contract was unenforceable regarding rights and benefits conferred by consumer protection legislation, but enforceable regarding other claims. A strong dissent held that the entire dispute was required to be resolved by arbitration, in accordance with the parties’ mandatory arbitration agreement, and confirmed that access to justice is fully preserved in private arbitration.

Facts

Ms. Seidel entered into a standard form consumer contract with Telus for cellular telephone service that included terms requiring all disputes between them be resolved by arbitration, and confirming she waived her right to participate in class proceedings.

Despite the mandatory arbitration clause, Ms. Seidel filed a class action against Telus alleging that it had unlawfully charged her for time when her telephone was not connected to a cellular network. She alleged various causes of action including violation of B.C.’s consumer protection legislation (now called the Business Practices and Consumer Protection Act (Act).

Telus applied to stay the class proceeding based on the Commercial Arbitration Act and the Supreme Court of Canada’s recent rulings in Dell Computer Corp. v. Union des Consommateurs (Dell) and Rogers Wireless Inc. v. Muroff (Rogers); both proposed class actions based on consumer contracts. There, the Court stayed the class proceedings and referred the parties back to arbitration on the basis that the procedural rights, in class proceedings legislation, do not affect parties’ substantive rights in an arbitration agreement. Both cases were out of Québec.

At the British Columbia Court of Appeal, on the basis of Dell and Rogers, Ms. Seidel’s proposed class proceeding was stayed in favour of mandatory arbitration.

All judges at the Supreme Court of Canada agreed that the key issue was access to justice and whether this end could be served through private arbitration.

The tone of the majority’s reasons was hostile toward private arbitration. The majority confirmed that, in general, parties’ agreements to arbitrate are to be enforced in the absence of express legislative language restricting arbitration agreements. However, the Act conferred rights that could not be protected within any private arbitration and that the parties could not contract out of such rights. The majority distinguished Dell and Rogers on the basis that there was no legislation analogous to the Act in force in Quebec at the time of those decisions.

The minority was critical of the majority’s hostility toward private arbitration and held that justice, including the remedies sought by Ms. Seidel pursuant to the Act, could be obtained through private arbitration.

McCarthy Tétrault Notes

Seidel v. TELUS provides guidance on the enforceability of mandatory arbitration provisions in consumer contracts in the class proceeding context and shows a split in the Court’s view of private arbitration.

In provinces like Ontario, Québec and Alberta, there is consumer protection legislation that expressly prohibits arbitration agreements and waiver of class proceedings clauses in consumer agreements. However, in provinces like B.C. that lack such legislation, it remains that such arbitration provisions are likely enforceable, even in the face of a proposed class proceeding, except for with respect to a relatively narrow set of consumer claims.

The majority’s hostility toward private arbitration, criticized in the minority’s reasons, may be further explored in future judgments from the Court. For the present, mandatory arbitration provisions remain a useful and important tool for many defendants, with some limited exceptions.

Additional Contact: 

Stephen G. Schenke


Class Action

A Common Sens Approach to Common Issues? CDDM c. Centre hospitalier régional du Suroît du Centre de santé et des services sociaux du Suroît and the Evolving Approach to Common Issues in Québec
by: Shaun E. Finn

Can a single common issue justify the authorization of a class action in Québec? Yes, according to CDDM c. Centre hospitalier régional du Suroît du Centre de santé et des services sociaux du Suroît, 2011 QCCA 826 (available in French only), but only if that issue furthers the claims of the class members in a meaningful way.

The Facts

The Collectif de défense des droits de la Montérégie (Collectif) alleged that the Centre hospitalier du Suroît (Centre), between June 2005 and June 2008, had violated the rights of all mental health patients by encouraging, tolerating or allowing the automatic imposition of isolation and restraint measures on them, without first assessing whether it was necessary to protect either the patients or third parties. This practice was supposedly a violation of section 118.1 of an Act Respecting Health Services and Social Services (Act):

Force, isolation, mechanical means or chemicals may not be used to place a person under control in an installation maintained by an institution except to prevent the person from inflicting harm upon himself or others. The use of such means must be minimal and resorted to only exceptionally, and must be appropriate having regard to the person's physical and mental state. […]

In support of their allegations, the class members referred to reports written by the Québec Ombudsman relating to some complaints about the care given to mental health patients by the Centre. The reports recognized the existence of automatic restraint and isolation measures imposed by the Centre, as well as, an institutional culture that was in violation of the Act.

The Decisions in First Instance and Appeal

The Québec Court of Appeal (Court) overturned the Superior Court decision and authorized a class action against the Centre.

The Motion to Institute a Class Action (Motion) was brought on behalf of all mental health patients of the Centre who were subjected to isolation and restraint measures from June 11, 2005, to June 11, 2008. The Motion alleged that the protocols and practices employed at the time caused damage to the class members in the form of physical and psychological harm. Moreover, these protocols and practices allegedly breached the patients’ fundamental rights.

The Superior Court had previously decided that there were no common issues to bind the class members together. According to the Superior Court, it was impossible to conclude that all mental health patients who were subject to restraint and isolation measures were treated abusively. On the contrary, some of the patients were dangerous to themselves or third parties. The treatment they received was therefore appropriate and justified under the circumstances.

The real question was whether the class action raised identical, similar or related questions of fact since it was acknowledged that it already raised similar questions of law. According to the Superior Court, a hearing would have to be held with respect to each class member to determine whether he or she was subject to unjustified isolation and restraint measures. Practically speaking, such a process was ill-suited to class proceedings since the success or failure of the representative of the class action would not further or hinder the claims of the other persons likely to be affected by the Motion.

In reaching its decision, the Court of Appeal primarily focused on whether the class action raised common issues. The Court reiterated that the three objectives of a class action are judicial economy, access to justice and behaviour modification. Yet it also explained that the objective of judicial economy can only be achieved if the determination of the common issues is likely to significantly further the individual actions of each member.

According to the Court, the presence of only one identical, similar or related question is sufficient to satisfy article 1003 a) of the Code of Civil Procedure if it is not immaterial to the outcome of the action. The question does not have to be decisive to the outcome. It is enough that it furthers the claims without requiring a repetition of the judicial analysis. It is possible that the determination of the common issues will not resolve the litigation completely, but may give rise to smaller cases at the recovery stage of the claims process.

The Court concluded that the questions could be rephrased to satisfy article 1003 a):

  • Do the protocols and customs relating to isolation and restraint measures in force at the Centre between June 2005 and June 2008 contravene article 118.1 of An Act Respecting Health Services and Social Services?
  • If so, what is the responsibility of the Centre with respect to the class members?

It follows that if the judge who hears the case concludes that the protocols and practices were compliant with the patients’ rights, the proceeding will end there. If, however, the judge reaches the opposite conclusion, he or she will have to specify in which cases and to what extent the Centre and the other respondents can be held liable. Afterwards, the class members will only have to provide evidence as to how many times and under which circumstances they were subjected to unjustified isolation and restraint measures. At this final stage, the class members will benefit from a presumption of fault, stemming from the prejudicial protocols or practices in question, and it will remain the respondent’s burden to make full answer and defence.

For these reasons, the Court reversed the judgment in first instance and authorized the class action against the Centre and the other respondents.

McCarthy Tétrault Notes

Although the Court of Appeal held in Citoyens pour une qualité de vie c. Aéroports de Montréal, 2004 Can LII 48024, that the common issues cannot be drowned in a sea of individual issues, the CDDM case has refined this analysis. Rather than approach common issues quantitatively, the decision suggests a qualitative assessment. According to the decision, a single common issue can suffice in some instances if it is significant enough to move the litigation forward in a meaningful way.

Additional Contacts:

Donald Bisson

David Hamer

Jill Yates


Constitutional

"The Elusiveness of a Workable Test": Government Liability for Negligence
by: Michael Feder, Angela Juba

The Supreme Court of Canada’s latest pronouncement on government liability for negligence has muddied the waters. It is now more difficult than ever to determine whether particular government conduct falls within the protected realm of policy, foreclosing any negligence claim.

R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42 arose from two lawsuits against tobacco companies alleging wrongful conduct towards smokers in British Columbia. A central plank of the lawsuits was that the tobacco companies communicated to smokers that low-tar cigarettes were safer than regular cigarettes when they allegedly were not.

While denying the allegations against them, the tobacco companies made third-party claims against the government of Canada. The companies alleged that Health Canada had told them, and smokers, that low-tar cigarettes were safer and had urged smokers to switch to those cigarettes. It had also told the companies when and how to warn smokers about the risks of smoking. For its part, Agriculture Canada had designed, manufactured, promoted and licensed new breeds of tobacco for use in low-tar cigarettes.

The federal government moved to strike the third-party claims on the basis that they had no reasonable prospect of success. On appeal, one major question for the Supreme Court was whether the third-party claims attacked policy decisions. Since Kamloops v. Nielsen, [1984] 2 S.C.R. 2, the law in Canada’s common law provinces has been that the government owes no duty of care with respect to policy decisions, but that the implementation of those decisions – so-called operational conduct – is actionable, if not done with reasonable care.

Writing for the court, Chief Justice McLachlin began by describing the "elusiveness of a workable test" for identifying policy decisions. After reviewing jurisprudence from the United Kingdom, Australia and the United States, the Chief Justice defined policy decisions as "decisions as to a course or principle of action that are based on public policy considerations, such as economic, social and political factors, provided they are neither irrational nor taken in bad faith."

Applying that definition to the third-party claims, the Chief Justice said it was plain and obvious that the government had, out of concern for the health of Canadians and the costs associated with tobacco-related disease, made a policy decision to encourage smokers to switch to low-tar cigarettes. Since the government’s impugned conduct was all "part and parcel of," "integral to" or "relate[d] to" that policy decision, none of it was actionable in negligence.

McCarthy Tétrault Notes

On its own, Imperial Tobacco’s new definition of policy decisions is nothing remarkable; more than two decades ago, in Just v. British Columbia, [1989] 2 S.C.R. 1228, the Supreme Court similarly endorsed the view that policy decisions "involve or are dictated by financial, economic, social or political factors or constraints."

However, by situating all of the government’s impugned conduct within the policy realm, Imperial Tobacco blurs the scope of the government’s immunity for negligence.

It may be plausible to describe a high-level government strategy to reduce the risks of smoking as a policy decision driven by on the one hand, concerns about health and, on the other, societal acceptance of smoking’s risks, and the importance of taxes on cigarettes to the public purse. However, it is doubtful that the choice to promote low-tar cigarettes to implement this strategy was itself public policy. It seems more likely that this choice was driven by scientific and expert judgments as to the health qualities of those cigarettes and their palatability to smokers. Under Just, the choice would have been operational conduct and subject to a duty of care.

It is also a significant development to treat government conduct as immune from liability in tort to the extent that it is part and parcel of, integral to or related to a policy decision. As a result of this development, the viability of a negligence claim against government may no longer depend on the old distinction between policy and its implementation. The central debate may now concern the strength of the link between policy and the government conduct in question.

In light of Imperial Tobacco, parties who wish to sue the government, for negligence in the absence of clear irrationality or bad faith will need to closely consider whether the government conduct in question is a policy decision or perhaps just integral to one. They must be prepared to deal with increased uncertainty in the event that they bring suit.

Additional Contacts:

Simon Potter

Harry C. G. Underwood


Financial Institutions

Canada Trustco Mortgage Co. v. Canada: Focus on Financial Institutions
by: Thomas N.T. Sutton

It is not often that the Supreme Court of Canada grants leave to appeal a decision relating to the Income Tax Act (ITA) or the law relating to how cheques are processed and paid. It is even less common when both the trial and appellate courts were in agreement. Canada Trustco Mortgage Co. v. Canada is one of those rare cases and should be of interest to financial institutions that are involved with the processing and payment of cheques.

In Canada Trustco Mortgage Co. v. Canada, the specific issue before the Court was whether the act of delivering a cheque drawn by a tax debtor for deposit into a joint account constitutes a demand for payment of the cheque sufficient to require the appellant, Canada Trustco Mortgage Co. (Bank), to remit the proceeds of the cheque to the Canada Revenue Agency (CRA) pursuant to section 224(1) of the ITA. Section 224(1) of the ITA is a summary procedure that gives the CRA extraordinary power to garnish funds payable to a tax debtor without first obtaining a court order or judgment.

The facts underlying the decision involved the activities of a tax debtor, (a lawyer), who held two accounts with the Bank: a lawyer’s trust account and a joint personal account that he held with another lawyer. Over a period of several months:

  • the tax debtor wrote a number of cheques on the trust account identifying himself as the payee;
  • on each occasion, the cheques were delivered to the Bank for deposit into the joint account;
  • these deposits, and the related credits to the joint account, were subject to the terms and conditions of the joint account agreement;
  • when the Bank accepted the cheques for deposit, it provisionally credited the joint account an amount equal to the face value of the cheques;
  • the Bank then sent the cheques through the standard third party clearing process; and
  • after clearing, the cheques were presented for payment and the trust account was debited for the amounts of the cheques.

The arguments accepted by the Tax Court of Canada and the Federal Court of Appeal conflated the act of delivering a cheque for deposit with the act of presenting a cheque for payment. By doing so, the courts below disregarded the legal significance of each step that was undertaken between the time the cheque was drawn, and the moment the funds were debited from the trust account.

Justice Deschamps, writing for the majority, noted that important as electronic transactions have become in an increasingly paperless world, cheques are still popular bills of exchange that are processed daily in a multitude of transactions across Canada based on recognized mechanisms. In setting aside the decisions of the courts below, Justice Deschamps took the opportunity to review over 150 years of case law relating to the processing of cheques and to carefully explain why the law applicable to these recognized mechanisms must be understood and applied consistently. Justice Deschamps carefully distinguished the legal significance of each step in the life of a cheque, from the time it is created, to the time it is paid and in particular, carefully reviewed the different ramifications for the Bank and its customers when a cheque is deposited, compared to when a cheque is presented for payment.

This decision is important for two reasons. The first relates to the role of cheques in commercial transactions. The second relates to the scope of CRA’s power to garnish funds on deposit with financial institutions pursuant to section 224(1) of the ITA.

a) Cheques in Commercial Transactions

Parliament, in conjunction with the courts of this country, and throughout the Commonwealth, have developed a coherent set of principles to govern the relationship between and a bank and its customer, and the use of cheques as a convenient means to access the funds on deposit for a wide variety of commercial transactions. All financial institutions, and the clearing agencies they use, rely on these legal principles for the efficient operation of the clearing system that facilitates millions of commercial transactions each day.

In the interest of commercial efficacy and certainty, these principles must be applied consistently in all legal contexts including in the application of section 224(1) of the ITA. However, an inconsistent application of these legal principles, as was done by the Tax Court and Federal Court of Appeal, would have created risks for financial institutions and affected the commercial efficacy and certainty of the clearing system.

Although the CRA may have been simply trying to facilitate the collection of unpaid taxes from a very small and limited class of tax debtors, namely lawyers, the Tax Court and Federal Court of Appeal took what was intended to be a straightforward and summary procedure for the collection of tax debts under the ITA, and applied it in a manner that was based upon a fundamental misunderstanding of the law that applied to collection, presentment and payment of cheques and other negotiable instruments in a commercially efficient and predictable ways.

Justice Deschamps recognized the importance of the legal principles applicable to these transactions and was not prepared to disregard, contort or change principles, that have been established over such a long period of time, and which are essential for commercial efficacy in order to deal with a narrow category of tax debtor.

b) The Application of Section 224(1) of the ITA

CRA has the discretion to rely on the summary garnishment procedures in section 224(1) of the ITA only if two conditions precedent exist: (a) funds are or will be "payable" to the tax debtor; and (b) a person, such as the Bank, is or will become "liable to make a payment" of the funds. What the Court’s decision in Canada Trustco Mortgage Co. v. Canada demonstrates is that upon receiving a Requirement to Pay, financial institutions should carefully consider their various legal relationships with their customers who are tax debtors before remitting funds to the Receiver General.

Additional Contact:

R. Paul Steep


International

What Does "Accident" Mean in a Canadian Court? The Interpretation of Article 17 of the Warsaw and Montreal Conventions in Canadian Jurisprudence
by: Curtis E Marble

Airlines are subject to a unique blend of national and international laws. Among the most interesting questions arising from this milieu is what the word "accident" means. This is important since, if a person is injured on board an aircraft and no "accident" has occurred causing the injury, the airline cannot be held liable.

The Law

Canada signed the 1999 Montreal Convention (designed to update the 1929 Warsaw Convention, to which Canada also belongs) which provides at Article 17 that:

The carrier is liable for damage sustained in case of death or bodily injury of a passenger upon condition only that the accident which caused the death or injury took place on board the aircraft or in the course of any of the operations of embarking or disembarking.

This wording resembles that in the Warsaw Convention, allowing older cases under the Warsaw Convention to inform interpretation of the Montreal Convention.

The 1985 United States Supreme Court judgement in Air France v. Valerie Hermien Saks is the leading decision on the meaning of "accident." In Saks, the Court determined that it must be the accident that occurs that causes the injury for an airline to be liable. To clarify, injury must be "… caused by an unexpected or unusual event or happening that is external to the passenger." The Court explains this definition is to be flexibly applied, considering all of the surrounding circumstances.

Given the judgement in Saks, it seems and accident is something "unusual" or "unexpected."

Canadian Courts followed the American lead. In two cases related to turbulence, the 1994 decision in Rena Ann Quinn v. Canadian Airlines International Ltd. and in 2001, Koor v. Air Canada, the Courts determined that the plaintiffs who suffered injury during turbulence were not entitled to compensation since the turbulence was not severe enough to be called "unusual."

What About Omissions?

Until recently, unlike in tort law, omissions did not seem to be enough to cause liability. In the 2002 Ontario case McDonald v. Korean Air, the plaintiff, McDonald, contracted deep vein thrombosis and was hospitalized for 11 days. McDonald claimed the airline was negligent, as it did not inform him of the risk of DVT associated with long flights, and that this failure to warn was an "accident" under Article 17. The Court held that:

… in not advising passengers of the risk they assume, an airline may be negligent, but this negligence is not in itself an accident within the meaning of Article 17 in the sense that the DVT sustained by the passenger is not linked to an unusual and unexpected event external to him as a passenger.

This decision was upheld at the Court of Appeal, and leave to appeal to the Supreme Court of Canada was denied.

What "Accident" Means in Canada

Given the weight of case law above, "accident" in Canada seems to mean an "unusual or unexpected event or happening" taking into account the specific circumstances.

Until recently, case law indicated that an accident could not be merely an omission to do something. A positive event or action had to occur. Airlines must be conscious, however, of a trend in the jurisprudence making airlines liable for omissions.

McCarthy Tétrault Notes

While airlines have until recently been sheltered from liability stemming from omissions, this is changing. In the 2004 American decision in Husain v. Olympic Airways the passenger was allergic to cigarette smoke. The flight attendant refused to move the passenger away from the smoking section. The passenger died, and Olympic Airways was held liable. The United States Supreme Court determined:

The distinction between action and inaction (…) would perhaps be relevant were this a tort law negligence case. But (the airline) vigorously rejects that a negligence regime applies under Article 17 of the Convention. The relevant "accident" inquiry under Saks is whether there is an "unexpected or unusual event or happening."

While ultimately determining that it did not have jurisdiction to decide the matter, the Ontario Superior Court followed Husain in the 2010 case Balani v. Lufthansa German Airlines Corp. The Court decided Lufthansa’s refusal to provide a wheelchair was sufficient to found liability, after a passenger fell and sustained injuries.

In short, recent case law puts airlines on notice that there is a movement in Canadian interpretation of the Montreal Convention to assign more liability to airlines. The effect is to impose a positive, tort-like duty upon airlines.


Pensions

Re Indalex Limited: A Question of Priorities
by: Mark Firman

The Ontario Court of Appeal’s decision in Re Indalex Limited (Indalex) in April has raised a number of questions about the strength of secured creditors’ interests, and the scope of an employer’s duty as administrator of a pension plan under the Companies’ Creditors Arrangement Act (CCAA). This article focuses on the decision’s pension law implications for employers. While the decision is generally unfavourable for employers, the silver lining may be that the particular facts influencing the decision could limit its future application.

Background

Indalex Limited (Indalex Canada) sponsored and administered two defined benefit (DB) pension plans, one for eligible unionized employees (Union Plan), and the other for eligible executives (Executive Plan).

In April 2009, Indalex Canada obtained protection under the CCAA, following a Chapter 11 filing by its U.S.-based parent company (Indalex U.S.). At the time of the CCAA filing, the Union Plan was subject to an ongoing wind up; the Executive Plan was not. Both plans were underfunded.

The CCAA court authorized a debtor in possession (DIP) loan to Indalex Canada which was secured by a super-priority charge that, by the CCAA court order, ranked "in priority to all other … trusts ... statutory or otherwise." Indalex U.S. guaranteed the loan.

Indalex Canada sold its assets on a going-concern basis in July 2009. The buyer did not assume the pension plans. The proceeds of the sale were insufficient to satisfy the DIP loan in full, with the result that Indalex U.S., as guarantor, paid $10.75 million to the DIP lender and thereby assumed this portion of the DIP lender’s claim. The court-appointed monitor (Monitor) set aside $6.75 million from the sale proceeds (Reserve Fund), which was the approximate amount of the Union and Executive Plans’ combined funding deficiency.

Former employees with entitlements, under the Union and Executive Plans, moved for an order that they be paid from the Reserve Fund the amount necessary to liquidate the funding shortfalls in both plans. Both groups relied in part on the Ontario Pension Benefits Act (PBA), which provides that, "employer contributions accrued to the date of the wind up [of a pension plan] but not yet due under the plan or regulations," are deemed to be held in trust.

Shortly after the former employees’ motion, Indalex Canada moved to lift the CCAA stay of proceedings and assign itself into bankruptcy. Hearing both motions together, the CCAA court found that the DIP claim had priority over the pension claims of former employees. As a result, it was unnecessary to hear the bankruptcy motion.

The former employees appealed.

The Decision

A unanimous Court of Appeal held that the Union and Executive Plans had priority to the Reserve Fund in the amount of their respective deficiencies.

Underlying this holding, was the Court’s finding that Indalex Canada had breached its fiduciary duty as administrator of the Union and Executive Plans by filing for CCAA protection and applying for the DIP loan without providing sufficient notice to pension plan beneficiaries, and without adequately considering ways to address the Union and Executive Plans’ underfunding.

The Court also found that Indalex Canada breached its duty to avoid conflicts of interest in the administration of both pension plans because its actions, in respect of the CCAA filing and DIP loan, inappropriately preferred Indalex Canada’s corporate interests to the interests of pension plan beneficiaries.

Regarding the Union Plan, the Court found that the wording of the PBA created a statutory deemed trust over the Union Plan’s entire funding deficiency, since this amount crystallizes or "accrues" on the date of wind up, even if the regulations under the PBA allow an employer to liquidate this deficiency over a period of up to five years.

In an unusual turn, the Court then found that the deemed trust had priority over the DIP claim, despite the CCAA court’s order approving the DIP loan, which provided for super-priority over statutory trusts. The Court found that such a remedy was necessary, because of Indalex Canada’s breach of its fiduciary duty, and because plan beneficiaries did not have sufficient opportunity to put the deemed trust before the judge authorizing the DIP loan.

Regarding the Executive Plan, the Court declined to find that the PBA’s deemed trust applied, because that plan was not being wound up at the time of the sale of Indalex Canada’s business.

The Court, however, found that given Indalex Canada’s breach of its fiduciary duty, it was appropriate in this case to award a constructive trust over the Reserve Fund, in priority to the DIP claim, in an amount equal to the Executive Plan’s deficiency. The Court noted that if it was wrong about the PBA’s deemed trust in favour of the Union Plan, it would have also awarded a constructive trust in favour of that plan, too.

The Court’s decision was largely influenced by the case’s particular facts. First, the Court noted that one of Indalex Canada’s directors had sworn an affidavit in support of the initial CCAA, filing in which he deposed that Indalex intended to comply with all applicable laws including "regulatory deemed trust requirements." Second, the Court noted that because the original DIP lender had been fully repaid by Indalex U.S., awarding priority to the pension claims did not in this case prejudice the rights of intervening creditors. Third, the Court appears to have given weight to the fact that Indalex Canada had attempted a voluntary assignment into bankruptcy, after former employees asserted their pension claims. Finally, the Court noted the complicated relationship between the Chief Restructuring Officer for Indalex U.S., who was authorized to direct the affairs of Indalex Canada, and who was also Senior Managing Director of the Monitor’s parent company. This relationship influenced the Court’s finding that Indalex Canada had developed a conflict of interest.

Indalex Canada, Indalex U.S. and their supporting interveners have applied for leave to appeal to the Supreme Court of Canada. Currently, that application remains pending.

McCarthy Tétrault Notes

Should the Supreme Court agree to hear the appeal, it is possible that the Court of Appeal’s decision could be overturned. In this regard, the Court of Appeal’s decision departs in a number of ways, from previous decisions of the Court of Appeal and the Supreme Court of Canada, in respect of the administration of restructuring cases under the CCAA.

In the meantime, the Court of Appeal’s judgment stands. What are its ramifications from a pension law perspective for employers who also act as administrators of DB pension plans? The answer, unfortunately, remains unclear.

It is important to note that the Court’s decision was heavily influenced by what it found to be Indalex Canada’s breach of fiduciary duty. The Court did not articulate a general principle that the PBA’s deemed trust or a constructive trust will always, or even often, take priority over other secured claims. In fact, the Court was careful to suggest otherwise and limit its own decision to the facts. Nevertheless, creditors will no doubt be more cautious in lending to employers who provide DB pension plans.

The case also suggests that if the employer fails to provide adequate advance notice to plan beneficiaries of a CCAA filing, application for DIP financing, or other material events affecting plan beneficiaries’ interests, the employer may be found to be in breach of its fiduciary duties. An employer-administrator entering CCAA may wish to consider the appointment of an independent third-party pension plan administrator, if possible. In those jurisdictions in which the plan administrator must be the employer, it may be useful to consider delegating administrative authority to an independent third party. Whether such steps would be advisable may ultimately depend on the applicable pension standards legislation, as well as, the facts of the particular CCAA proceedings, including whether the intended goal is liquidation on the one hand, or restructuring and emergence as a viable enterprise on the other.

To view McCarthy Tétrault’s previous alerts on Indalex, including more fulsome commentary on the decision’s potential effect for secured lenders, please click here.

Additional Contacts : 

Randy Bauslaugh

Kevin P. McElcheran


Privilege

Issues of Privilege: Scott & Associates Engineering Ltd. v. Ghost Pine Windfarm, LP
by: Sarah C.J. Louw, Renee Reichelt

The decision of the Alberta Court of Queen’s Bench in Scott & Associates Engineering Ltd. v. Ghost Pine Windfarm, LP addressed a variety of issues respecting the assertion of privilege by the respondents, Ghost Pine Windfarm, LP and Fortuna GP Inc. (collectively, Ghost Pine), over redacted portions of otherwise producible documents and, in particular, the redacted portions of an Asset Purchase Agreement (APA). An application was brought by the applicant Scott & Associates Engineering Ltd. (SAEL), challenging the validity of such redactions, and it was argued that even if the privilege claimed was proper, such privilege was displaced due to the operation of the fraud exception to privilege, and because Ghost Pine’s state of mind was at issue.

Ghost Pine and Finavera Renewables Inc. (Finavera) entered into the APA for the purchase of a wind farm project (the Ghost Pine Project). Prior to the parties’ entry into the APA, SAEL had commenced litigation against Finavera, the basis of which was SAEL’s alleged interest in the Ghost Pine Project. This litigation was ongoing at the time at which Ghost Pine and Finavera entered into the APA.

After Ghost Pine purchased the Ghost Pine Project, SAEL commenced litigation against, inter alia, Ghost Pine. In the course of this litigation, Ghost Pine disclosed a redacted version of the APA to SAEL, where such redactions were made by Ghost Pine, on the basis of common interest privilege based on either litigation privilege or solicitor-client privilege.

SAEL challenged, inter alia, the validity of the privilege claimed by Ghost Pine over the redacted portions of the APA.

McCarthy Tétrault Notes

Ghost Pine was successful in maintaining its claim of common interest privilege over all of the redactions in the APA.

Mahoney J.’s comments, on the application of common interest privilege to commercial transactions and the exchange of information that is subject to solicitor-client privilege in the context of such transactions, are noteworthy. Mahoney J. noted that, in Alberta, common interest privilege has been extended past the litigation context, and applied to parties that have a common interest in bringing a commercial transaction to a successful completion. In this context, for common interest privilege to apply, there must be an expectation between the parties that their communication was confidential.

Mahoney J. accepted that in commercial transactions, common interest privilege could be based on litigation privilege. He then reviewed the law, regarding the possible extension of common interest privilege to information, which is subject to solicitor-client privilege that is exchanged in the course of a commercial transaction. In this regard, he quoted from a Federal Court Trial Division decision, in which it was held that legal opinions exchanged in the course of a commercial transaction could be covered by common interest privilege, based on solicitor-client privilege where the purpose of such legal opinions was to put the parties to the transaction on an equal footing during negotiations, and were for the benefit of multiple parties.

In his decision, Mahoney J. affirmed Ghost Pine’s claim of common interest privilege based on solicitor-client privilege over certain redactions in the APA. In coming to this decision, Mahoney J. noted the redacted information was subject to solicitor-client privilege, and was directly related to the formulation and provision of legal advice by Finavera’s counsel to the parties regarding the purchase and sale of the Ghost Pine Project, and that the parties intended such communication to remain confidential. Furthermore, because of the operation of common interest privilege, Finavera’s disclosure to Ghost Pine of information that was subject to solicitor-client privilege did not result in a waiver of such privilege.

This decision reaffirms the importance of privilege and the extension, in certain circumstances, of common interest privilege to information subject to solicitor-client privilege that is exchanged between parties in the course of a commercial transaction.


Securities

Materiality in Securities Legislation: Guidance From the Supreme Court of Canada Imposes Burdens on Both Plaintiffs and Issuers
by: Vanessa Grant, Geoff R. Hall

Until now, there has been little judicial guidance on how much or how little an issuer of securities should disclose in order to comply with securities law. In Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2011 SCC 23, the Supreme Court of Canada has provided such guidance by examining the test of what constitutes a "material false statement" under securities statutes. The result is to place burdens both on plaintiffs, who claim that there has been a misstatement, and on issuers to get the level of disclosure right.

The facts of Sharbern are sadly familiar: market hubris leads to a crash, which leads to litigation as disappointed investors seek to recoup their losses. In the mid-1990s, investors were tripping over themselves to invest in hotels near the Vancouver airport. There was much enthusiasm, with rosy projections of future profits. At the height of the boom, a developer built two interconnected hotels, (one a Marriott, the other a Hilton) and sold each of the hotels to public investors through strata lots. The developer remained as manager of both hotels once they were constructed.

However, by 2001 the bubble had burst, and the Richmond, B.C. hotel market was one of the weakest in Canada. Unhappy investors in the Hilton property brought a class action against the developer, alleging non-disclosure under securities law and specifically whether the developer was liable for making material false statements in the offering memorandum and disclosure statement used to sell the Hilton strata lots. (They also alleged common law negligent misrepresentation and breach of fiduciary duty; but those allegations are not considered in this article.)

At trial, the plaintiffs succeeded. They convinced the trial judge that the developer had a conflict of interest, because it had guaranteed a return to the Marriott investors but not to the Hilton investors, and because the developer had charged a lower management fee to the Hilton hotel than it did to the Marriott (the concern being that the developer would have an incentive to favour the Marriott in order to earn the higher fee). This conflict of interest had not been included in the disclosure statement provided to the Hilton investors under the applicable legislation. On appeal, the B.C. Court of Appeal reversed. A further appeal was heard by a full nine-member panel of the Supreme Court of Canada. In a unanimous decision authored by Justice Rothstein, the Supreme Court affirmed the B.C. Court of Appeal’s decision and dismissed the class action claim.

Although the provisions considered by the Supreme Court were under the British Columbia Real Estate Act (now repealed), which imposed liability for a "material false statement" the court’s description of the test of materiality in disclosure documents is relevant under securities legislation, generally. Specifically, the court emphasized five points.

The "Reasonable Investor Standard"

First, materiality is to be determined objectively, from the perspective of a reasonable investor.

The Two-Part "Substantial Likelihood" Test

Second, a fact omitted from a disclosure document is material if there is a substantial likelihood that it would have been considered important by a reasonable investor in making an investment decision. It is not sufficient that the fact merely might have been considered important. In this regard, the Supreme Court adopted the test set out by the Supreme Court of the United States in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 428 (1976), and noted that the materiality standard is a balance between too much and too little disclosure. Too little disclosure is obviously problematic, but so is too much: it is not in the interests of investors to be buried in an avalanche of trivial information.

Third, the issue is not whether the fact would have changed the investment decision of the reasonable investor, but whether there is a substantial likelihood that the fact would have assumed actual significance in a reasonable investor’s deliberations.

Fact Specific

Fourth, materiality depends on the specific facts, determined in light of all relevant considerations and the surrounding circumstances forming the total mix of information made available to investors. The approach adopted by the Canadian Securities Administrators in National Policy 51-201 Disclosure Standards (July 12, 2002), and by the United States Securities and Exchange Commission in SEC Staff Accounting Bulletin: No. 99 – "Materiality" (August 12, 1999), a fact-driven and contextual approach, was endorsed.

Burden Is on the Plaintiff

Fifth, a plaintiff alleging non-disclosure has the onus of proving materiality and must lead evidence on the point, except where common sense inferences are sufficient.

Applying these principles, the Supreme Court held that the trial judge had made three legal errors in finding the developer’s alleged conflict of interest to be material. First, she erroneously concluded that the conflict of which the plaintiffs complained was inherently material. That conclusion implied that issuers have an obligation to disclose all facts in order to permit investors to sort out what is material and what is not. This approach would result in excessive disclosure by overwhelming investors with information. In turn, this outcome would impair, rather than enhance, investors’ abilities to make decisions. Second, the trial judge reversed the onus of proof, requiring the developer to show that the conflict of interest was not material, rather than requiring the plaintiffs to show that it was. Third, she failed to consider all the evidence available to her on the issue of materiality.

The Supreme Court was not only critical of the trial judge, but also critical of the plaintiffs, noting that they had failed to adduce sufficient evidence, including expert evidence, to support their allegations of material non-disclosure. The Supreme Court set out evidence which, had it been adduced, might have led to a conclusion of materiality. The plaintiffs could have shown that potential investors who knew of the alleged conflict of interest declined to invest or expressed concern. The plaintiffs could have shown that potential investors declined to invest because they found that there was insufficient disclosure. The plaintiffs could have shown that once the Hilton investors learned of the alleged conflict of interest, that they had expressed concerns about it. The plaintiffs could have shown that the developer did not act diligently and in good faith in managing the Hilton hotel, or that the developer actually acted on the conflict of interest to the detriment of the Hilton investors. The absence of evidence of this type was fatal to the plaintiffs’ claims of materiality.

Sharbern Holding Inc. v. Vancouver Airport Centre Ltd. makes it more difficult for plaintiffs to recover damages under securities legislation. The concept of materiality has been interpreted robustly, the onus of proving materiality has clearly been placed on the shoulders of plaintiffs, and subject to a limited exception plaintiffs are required to adduce evidence (including expert evidence) in support of an allegation of materiality. Yet while making life more difficult for plaintiffs, the decision does not necessarily make life easier for issuers. While Sharbern makes clear that it is not necessary for issuers to disclose every imaginable fact that might be considered in an investment decision, it also makes clear that issuers have an obligation not to defeat the purpose of disclosure by bombarding potential investors with a blizzard of non-material information.

McCarthy Tétrault Notes

Sharbern imposes burdens on plaintiffs and issuers alike; on plaintiffs to prove that an undisclosed fact really mattered, and on issuers to get the balance right by disclosing everything that is material, but without inundating potential investors with non-material information.

Additional Contacts:

Eric Block

Andrew Matheson


Farley's Reflections

Humpty Dumpty’s Views
by: James Farley

In Through the Looking Glass, Humpty Dumpty was of the view that the meaning of a word was what he said it meant. "When I use a word," Humpty Dumpty said in rather a scornful tone, "it means just what I choose it to mean — neither more nor less." "The question is," said Alice, "whether you can make words mean so many different things." "The question is," said Humpty Dumpty, "which is to be master — that’s all."

In Agribrands Purina Canada Inc. v. Kasamekas, 2011 ONCA 460, the Court of Appeal dealt with the tort of unlawful conduct conspiracy. You may recall, from the previous issue of Farley’s Reflections, that this court has difficulty determining the element of "unlawful means" in the tort of unlawful interference with economic relations (see "Does the Left Hand Know what the Right Hand is Doing?"). In Agribrands Purina, Goudge J.A. for the court observed in determining that the trial judge had confused the concept of "unlawful conduct" in regard to unlawful conduct conspiracy with that in unlawful interference with economic relations.

[34] Moreover, reliance on the tort of intentional interference [with economic relations] does not recognize that these two torts have evolved separately, and thus each has developed their own concept of unlawful conduct.

He went on to state:

[37] It is clear from that jurisprudence that quasi-criminal conduct, when undertaken in concert, is sufficient to constitute unlawful conduct for the purposes of the conspiracy tort, even though that conduct is not actionable in a private law sense by a third party. The seminal case of Canada Cement Lafarge [[1983] 1 S.C.R. 452] is an example. So too, is conduct that is in breach of the Criminal Code. These examples of "unlawful conduct" are not actionable in themselves, but they have been held to constitute conduct that is wrongful in law, and therefore sufficient to be considered "unlawful conduct" within the meaning of civil conspiracy. There are also many examples of conduct found to be unlawful for the purposes of this tort simply because the conduct is actionable as a matter of private law. In Peter T. Burns and Joost Blom, Economic Interests in Canadian Tort Law (Markham: LexisNexis, 2009), the authors say this at p. 167-168:

There are two distinct categories of conduct that can be described as comprising "unlawful means": conduct amounting to an independent tort or other actionable wrong, and conduct not actionable in itself.

Examples of conspiracies involving tortious conduct include breach of contract, wrongful interference with contractual rights, nuisance, intimidation and defamation. Of course, a breach of contract itself will support an action in civil conspiracy and, as one Australian court has held, the categories of "unlawful means" are not closed.

The second category of unlawful means is conduct comprising unlawful means not actionable in itself.

The first class of unlawful means not actionable in themselves, but which nevertheless supports a conspiracy action, is breach of a statute which does not grant a private right of action; the very instance rejected in Lonrho (1981) by the House of Lords. A common case is a breach of labour relations legislation, and another is the breach of a criminal statute, such as the Canadian Criminal Code.

[38] What is required, therefore, to meet the "unlawful conduct" element of the conspiracy tort, is that the defendants engage in concert, in acts that are wrong in law, whether actionable at private law or not. In the commercial world, even highly competitive activity, provided it is otherwise lawful, does not qualify as "unlawful conduct" for the purposes of this tort.

It was not disputed that Purina had breached its franchise contract with Raywalt. However, Goudge J.A. did not see that Ren’s or McGrath did anything sufficient to qualify as "unlawful conduct". Interestingly, it was also not disputed that Purina had terminated Ren’s as a dealer when it discovered Ren’s was also selling a competitor’s feed in breach of its dealership agreement with Purina. Raywalt was appointed as the replacement dealer pursuant to an agreement whereby Purina:

[6] ...agreed not to appoint any other dealer in Raywalt’s territory, previously Ren’s territory.

[7] Raywalt opened for business in mid-March 1991. However, despite giving Raywalt territorial exclusivity, Purina continued to supply feed to Ren’s until the end of April 1991. This enabled Ren’s to sell to its former customers in what was now Raywalt’s territory. When Purina finally ended this practice, Ren’s got McGrath (who was a friend), and the Purina dealer in a neighbouring territory, to supply Ren’s with Purina feed at dealer prices. This allowed Ren’s to continue to sell Purina feed in Raywalt’s territory. Purina knew of, condoned, and indeed approved of this arrangement. Purina provided McGrath with feed for resale to Ren’s. As a result, Raywalt’s business was not nearly as profitable as projected and, its cash flow problems caused it to cease business at the end of January, 1992.

So, it would seem that it was clear that Purina, Ren’s and McGrath, each knew that Purina was supplying feed to Ren’s through McGrath so Ren’s could continue supplying customers in what was now Raywalt’s exclusive territory. McGrath, as a Purina dealer, would indeed know that supplying Ren’s with Purina feed at no mark-up would breach its territorial area restriction. Ren’s would know that this bootlegging by its friend violated the exclusivity arrangement on which Raywalt was relying. Was not Raywalt at least a third party beneficiary so that Purina and McGrath could not supply Ren’s in this backdoor arrangement? Were Ren’s and McGrath acting in concert not inducing Purina to breach its contract with Raywalt? Certainly each of Purina, Ren’s and McGrath were acting in concert knowing that their joint action would cause economic harm to Raywalt. If any of the three defendants were a puppet, does it matter who was the puppet of whom? Indeed, it seems that each of them was pulling each other’s strings, knowing their actions would cause injury to Raywalt.

It appears that the Court of Appeal did not have its conscience shocked as it observed at para. 41, that Purina’s knowledge and approval of the Ren’s-McGrath arrangement, "leaves little room for the conduct required by the inducing breach of contract tort". Nor did the Court of Appeal see anything the matter with the fact that Purina’s condoning the Ren’s-McGrath arrangement would be breaching the exclusivity provisions of the dealership agreement with Raywalt; but, it seems to me that Purina was participating in this arrangement by continuing to supply McGrath. One may wonder whether there was any meaning given to the "exclusivity" arrangement in that dealership agreement. It would seem that the Court of Appeal did not appreciate that exclusivity of territory in a franchise agreement is a fundamental term on which the franchisees of a franchisor mutually rely and are obligated to respect each other’s exclusivity. Failure to protect such a term would weaken the protection for franchisees as to the value of their franchise.

A rose by any other name is still a rose; but, apparently this three-way gang up on Raywalt was not sufficient to ground the tort of civil conspiracy; as set forth in Canada Cement Lafarge where Estey J. for the court at p. 471 described two categories of conspiracy recognized by Canadian law:

Although the law concerning the scope of the tort of conspiracy is far from clear, I am of the opinion that whereas the law of tort does not permit an action against an individual defendant who has caused injury to the plaintiff, the law of torts does recognize a claim against them in combination as the tort of conspiracy if:

(1) whether the means used by the defendants are lawful or unlawful, the predominant purpose of the defendants’ conduct is to cause injury to the plaintiff; or

(2) where the conduct of the defendants is unlawful, the conduct is directed towards the plaintiff (alone or together with others), and the defendants should know in the circumstances that injury to the plaintiff is likely to and does result.

In situation (2) it is not necessary that the predominant purpose of the defendants’ conduct be to cause injury to the plaintiff but, in the prevailing circumstances, it must be constructive intent derived from the fact that the defendants should have known that injury to the plaintiff would ensue.

Perhaps the Court of Appeal in Agribrands Purina was looking through the wrong end of the microscope in its search for "unlawful means" to ground the second situation set forth by Estey J. The analysis engaged in by the court would suggest that there just happened to be an unconscious coincidence that Purina wanted to breach its contract with Raywalt, and by inadvertent happenstance, McGrath and Ren’s had decided to engage in competitive but legal conduct harmful to Raywalt. When one is looking for stars, it is better to use a telescope; but one should look through the right end of this optical instrument as well and avoid putting it up to one’s blind eye as Nelson did.

It seems that Alice was alive and well in peering into the looking glass and wondering: "Who in the world am I? Ah, that’s the great puzzle." As the comic strip character Pogo said: "We have met the enemy and they is us."

Postscript: Three days after writing this piece I found myself in Oxford. I lunched that day at the Ashmolean Museum which was celebrating Alice’s Day. I was seated beside the Mad Hatter’s Tea Party; I felt right at home.