March 2011 Newsletter

Babin Bessner Spry Newsletter

Top Legal Fiction

Ed's Pick: Inherit the Wind (Jerome Lawrence and Robert Edwin Lee)

This is actually a play, not a novel. It is a fictionalized account of the Scopes Monkey trial, written in 1955, not coincidently during the McCarthy era. The Scopes trial took place in the late 1920s in Tennessee. It resulted in the conviction of a young teacher for teaching evolution to his high school science class. The state law he was alleged to have violated prohibited the teaching of evolution as it related to humans (although not as it related to other living things). The trial, as you can imagine, turned into a circus, complete with the participation of larger-than-life lawyers William Jennings Bryan for the prosecution and Clarence Darrow for Scopes.

I read the play when I was quite young – 12 or 13 years old. It has always stuck with me, both for its message against religious and political intolerance and for its courtroom drama. In particular, I have always remembered the cross-examination conducted by the lawyer for the defence (the Clarence Darrow character) of the lawyer for the state (the William Jennings Bryan character) in which the cross-examiner exposes the frailty of a literal interpretation of the Bible. What lawyer wouldn’t love to cross-examine the other side’s lawyer, especially on such a topic!

Cynthia's Pick: To Kill A Mockingbird (Harper Lee)

There’s no doubt that media representations shape the public’s idea of what it means to be a lawyer. While I hope to one day become immune to lawyer jokes, until then books like this keep me going. One of my favourite things about To Kill a Mockingbird is that it depicts Atticus Finch: lawyer and exceptional human being.

Cliff's Pick: Imperium (Robert Harris)

Marcus Tullius Cicero was elected Consul of the Roman Empire in 63 B.C., but before he was a politician he was renowned as the greatest lawyer in the world. Robert Harris’s gripping historical novel describes Cicero’s rise to power in fascinating detail, including the prosecution of a corrupt governor that made his name as an advocate. I enjoyed this novel because it did a great job of showing just how much our legal system has changed, but also drew numerous parallels with modern legal and political issues. The more things change, the more they stay the same.

False Advertising: Ontario Courts Show Reluctance to Grant Interlocutory Injunctions Under Section 52 of the Competition Act

In 2009 and 2010, Ontario courts continued to demonstrate that they are reluctant to grant interlocutory injunctions for alleged breaches of the false advertising provisions contained in section 52 of the Competition Act. In contrast to the approach of the Ontario courts, there are seemingly conflicting decisions in somewhat similar circumstances in New Brunswick and British Columbia.

The Ontario decisions described below are also consistent with the courts’ general approach to interlocutory injunctions: to treat them as a rare and exceptional remedy, to be granted only in the clearest of cases.


On July 24, 2009, Justice M.A. Code of the Ontario Superior Court of Justice refused to grant Bell Canada an interlocutory injunction under the Competition Act restraining Rogers Communications Inc. from continuing an advertising campaign that claimed, among other things, that Rogers’ Internet services provide "speeds you can count on", in contrast to its competitors (Bell Canada v. Rogers Communications Inc. et al., 2009 CanLII 39481 (ON S.C.)).

In a persuasive attempt to reconcile conflicting case law in this area, Justice Code held that the irreparable harm necessary to justify an injunction might be inferred in a particularly strong case. However, when the party moving for the injunction is unable to establish a strong case, irreparable harm must be proved independently. He found that Bell had not established such a strong case, particularly as Rogers had undertaken not to repeat some of the representations that Bell objected to.

Further, Justice Code found that the balance of convenience (a factor Ontario courts will consider in dealing with an injunction application) favoured Rogers. Balanced against the "uncertain risks" of ongoing harm to Bell was the fact that "Rogers has a legitimate interest in making commercial representations about the relative merits of the two competing internet services". Also, there was "a public interest in this debate as it contributes to consumer education".

On April 28, 2010, Justice A.D. Grace of the Ontario Superior Court of Justice refused to grant Bell Canada an interlocutory injunction restraining Rogers from making certain claims in a television advertisement allegedly concerning the reliability of Bell’s television, Internet or wireless services. By the time of hearing, the television commercial that was the subject of the motion had ceased airing (Bell Canada v. Rogers Communications Inc. et al., 2010 ONSC 2788).

Justice Grace was not satisfied that Bell Canada had or would suffer irreparable harm as a result of Rogers’ advertising. He found that Bell Canada had adduced "no proof that a single customer had been lost", and, although Bell Canada’s case was not frivolous or vexatious, it was not sufficiently strong that irreparable harm could be inferred. The balance of convenience also favoured Rogers, as Bell Canada’s "[u]ltimate success is very much in doubt", and "[t]he exercise of freedom of speech should be constrained only where there is good reason to believe it has been abused". Justice Grace added that the court has no interest in micro-managing an advertising battle between two weighty competitors.

On May 19, 2010, Justice Darla Wilson of the Ontario Superior Court of Justice refused to grant Bell Canada an interlocutory injunction restraining Rogers from claiming in Ontario that its Internet service is the "fastest" and/or the "most reliable" and/or that Rogers’ Internet service offers the "Fastest and Most Reliable Speed" (Bell Canada v. Rogers Communications Inc. et al., 2010 ONSC 3010 (S.C.J.)).

Justice Wilson held that Bell Canada had failed to discharge its onus to show compelling evidence of irreparable harm. Rather, Bell Canada’s evidence was "speculative, suggestive of the possibility that some customers may terminate with Bell". The balance of convenience favoured Rogers, as it was unclear whether Bell would be successful at trial, and "it would be inappropriate to grant an injunction in circumstances where the risk of harm to the defendant is greater than the risk of harm to the plaintiff". Justice Wilson also held that Bell Canada’s delay in bringing the injunction was strong evidence that it was not suffering irreparable harm. Justice Wilson adopted the following comments from a decision of Justice Nordheimer regarding an application for an interlocutory injunction under the Competition Act:

In my view, courts should generally be averse to entering into the competitive fray unless it is clear that a false statement is being made which has the prospect of causing irreparable harm or which may impact on the health and welfare of members of the public. Neither of these situations present themselves here. I am also concerned that the injunction being sought has a very real impact on freedom of speech and, as a consequence, carries the genuine prospect of creating a chilling effect on person who has a legitimate interest in engaging in the debate. Even commercial speech is worth [sic] of protection…

New Brunswick

In contrast to these Ontario decisions, on May 4, 2010, Justice Clendening of the New Brunswick Court of Queen’s Bench granted Bell Aliant an injunction restraining Rogers from advertising in New Brunswick that it offers the "fastest and most reliable speed", "the fastest speed", or the "most reliable speed" in respect of its Internet service. She did so despite finding that "I have no idea who, between these two parties, provides the fastest and most reliable speed" (Bell Aliant Regional Communications, Limited Partnership v. Rogers Communications Inc. et al., 2010 NBQB 166 (Q.B.), aff’d 2010 CanLII 32837 (NB C.A.)).

Instead, Clendening J. found that Bell Aliant had shown a triable issue because Rogers had failed to prove that it was the fastest: "[i]f one advertises itself to be the ‘fastest’ or ‘the best, or the most reliable’ then on the basis of common sense there should be a preponderance of technical evidence to support this claim".

After finding that Bell Aliant’s case was not frivolous or vexatious, her Ladyship found that damages for false advertising were difficult to assess, but appeared to find that there was doubt that irreparable harm would actually occur. The case therefore turned on the balance of convenience. Since there was a near equality of disadvantage at that stage, her Ladyship returned to the strength of the case, and held that Bell Aliant had a strong case. Therefore, as Bell would be able to compensate Rogers for any damages Rogers suffered as a result of the injunction, the injunction should be granted.

 Specifically, Clendening J. held as follows:

If this injunction is not granted will the Plaintiff, Bell Aliant, suffer irreparable harm? It is conceded by the parties that the loss of business is difficult to assess. It is also conceded that the loss of customers and the potential loss of new customers is also difficult to assess. The evidence of the parties is that they both offer "bundles of service" to their customers for cheaper rates if the customer has, for example, internet, cell phone and regular phone service with the provider. It would be difficult to track which component of the bundle is lost. Mr. Hartling, with Rogers, conceded in cross-examination that it would be difficult to calculate harm caused by misleading advertising. Justice Grauer in Telus Communication Co. v. Rogers Communication Inc., said at para 45 "… if the harm is difficult to quantify that would qualify as irreparable harm." Rogers contends that Bell Aliant has not provided any evidence that the damages would be difficult to quantify except for Ms. Duplisea’s "bald assertion." If there is a doubt as to the adequacy of the respective remedies in damages, the case then turns on the balance of convenience. As Justice Grauer said in Telus at para 46 – 47 "the near equality of disadvantage indicates that the strength of a Plaintiff’s case becomes material." I agree. Because of the problems with Rogers’ testing and the lack of clarity in comparative studies between the two networks, I conclude Bell Aliant does have a strong case. My assessment is that because there is a strong case and because there is a risk of irreparable harm to the Plaintiff, the risk of harm to the Defendant is minimized because Bell Aliant can well afford to pay for any damages for any harm caused to Rogers."

The New Brunswick decision appears to conflict with the recent Ontario decisions on similar issues.

British Columbia

On November 24, 2009, the British Columbia Supreme Court granted an injunction sought by Telus Communications Co. restraining Rogers Communications Inc. from claiming that it was "Canada’s Most Reliable Network" based on testing comparing Rogers’ wireless network and Telus’ "old" network (Telus Communications Co. v. Rogers Communications Inc., 2009 BCSC 1610, aff’d 2009 BCCA 581)).

The court held that, while Rogers’ representation that it was the most reliable had been true when compared to Telus’ old technology, Telus had recently implemented a new network and there was no evidence that Rogers’ network continued to be more reliable than Telus’. The court found that the balance of convenience favoured neither party, but as Telus had shown a strong case, it was willing to grant the injunction.

Subsequently, on December 16, 2009, the British Columbia Supreme Court granted an injunction restraining Bell Canada and Bell Mobility Inc. from claiming that they operate the "most reliable network in Canada". Rogers had sought an order preventing Bell from claiming that it operates the "largest, fastest, and most reliable network in Canada" or that it has the "best" or "best and more powerful" wireless network in Canada (Rogers Wireless v. Bell Canada, 2009 BCSC 1884).

The court held that there was a fair question to be tried because Rogers had produced evidence indicating that Bell’s testing to support its claim was "meaningless" in that it was conducted when Bell’s new network had no subscribers on it. The court held that the balance of convenience favoured neither party, but as Bell’s claim to be the "most reliable", or the most dependable, was "spurious", it was willing to enjoin this claim.

The Canadian Securities Act: Is it Constitutional?


In a move that some observers feel is long overdue, the federal government is attempting to create a national securities regulator through the Canadian Securities Act (the "Act").

The Act has met with spirited opposition from many provinces and is officially supported only by Ontario. The Alberta Court of Appeal has already ruled that the Act is unconstitutional. The federal government has referred the question of Act’s constitutionality to the Supreme Court of Canada. The hearing is scheduled for April 13 and 14, 2011.

To better understand the debate, we have reviewed the facta available on the Supreme Court of Canada website and have summarized some of the arguments on either side.

The Supporters

The Attorney Generals of Canada ("Canada") and Ontario have each filed a factum supporting the constitutionality of the Act. They are supported by the Canadian Coalition for Good Governance, the Investment Industry Association of Canada, the Canadian Bankers Association, and the Ontario Teachers' Pension Plan Board ("Teachers").

The Supporters list several aspects of modern capital markets that they say support the need for a national regulator: the evolution of such markets from predominately local to national or international, the rise of the institutional investor, the increasing complexity of securities products, and the recent financial crisis.

Teachers suggests that its decision to increase its investments outside of Canada was motivated in part by inefficient regulation of Canadian capital markets. Teachers argues there is a "Canadian discount" effect caused by the current regime that requires Canadian companies to pay more for capital. It points to the long delay in implementing a response to the U.S. Sarbanes Oxley Act and banning short-selling following the 2008 banking crisis.

The Supporters note that all the "experts" agree that greater integration of securities regulators is necessary, although they disagree on the model. The current debate in Canada tends to focus on two models: the "passport" system (securities regulators attempt to harmonize their requirements and accept the decision of the "principal regulator", which to some extent already exists in Canada), and a single national regulator.

As Canada notes: "[o]ne of the ironies of the passport system is that the more effectively it achieves the goal of greater integration, the more it diminishes two of the theoretical strengths of having multiple regulators: responsiveness to distinct local issues; and regulatory experimentation and innovation".

The Supporters also argue that Canada is the only major industrialized country and the only member of the International Organization of Securities Commissions ("IOSCO") without a single national regulator, and that a single national regulator is best suited to combat systemic risk (the risk of default by one market participant having negative effects elsewhere), both on the national and international stage.

The two-stage test to determine the constitutionality of legislation, as articulated in the Reference re Firearms Act, 2000 SCC 31, requires the court to determine: (a) the pith and substance of the law; and (b) whether the law falls under one of the heads of power exclusive to the Parliament of Canada pursuant to s. 91 of the Constitution Act, 1867.

The Supporters note that, as with all legislation, there is a rebuttable presumption that the Act is constitutional.

A "pith and substance" determination requires the court to look at the purpose of the law, in the sense of what Parliament intended to accomplish, and the practical and legal effects of the law. The Supporters argue, however, that the effects of the law are only relevant where they establish some alternative or ulterior purpose to the law. A consideration of the law's efficacy is not relevant to this analysis, as "Parliament is the judge of whether a measure is likely to achieve its intended purposes".

The Supporters argue the pith and substance of the Act is comprehensive national securities regulation of a type that is beyond the ability of any single province or group of provinces to provide.

The Supporters do not argue that the provinces lack the authority to pass the provincial securities acts. Instead, they argue that Parliament may legislate in the same area, primarily because the Act’s pith and substance falls under the general branch of the trade and commerce power (and sections 158-165 are within Parliament’s criminal law power).

In this respect, they note that under the "double aspect" doctrine, both levels of government may legislate in similar ways. Teachers cites Multiple Access Ltd. v. McCutcheon, [1982] 2 S.C.R. 161, for the principle that "in determining the validity of each law, the existence and terms of the other law are irrelevant" and "[t]he validity of the federal legislation must be determined without heed to the Ontario legislation".

The general branch of the trade and commerce power applies where the subject matter of the legislation affects "the whole of the Dominion" and applies to "trade as a whole". The leading case interpreting the Parliament’s trade and commerce power is General Motors of Canada Ltd. v. City National Leasing, [1989] 1 S.C.R. 641, which lays out five indicators of whether a particular issue requires national rather than local regulation, in an attempt to strike a balance between the Parliament’s "trade and commerce" power and the provinces’ "property and civil rights" power.

The first indicator asks whether the impugned legislation is part of a regulatory scheme. The Supporters argue that, like the Combines Investigation Act (replaced by the Competition Act), the Act embodies a complex scheme of economic regulation. In particular, the Act is directed towards "systemic risk" caused by many modern financial products that blur the boundaries between "banking" (a federal matter) and "securities". Given the international nature of many of these new products, a national regulator would be best positioned to regulate them.

Ontario argues that the issue for the court to decide is whether Parliament has a rational basis for concluding that the regulation of the capital markets raises an economic concern of genuine interest. The "rational basis" is the complex, international and highly integrated character of capital markets.

The second indicator asks whether the scheme is monitored by the continuing oversight of a regulatory agency. Part 2 of the Act creates the Canadian Securities Regulatory Authority, which will cooperate with other federal agencies and represent Canada on an international level.

The third indicator asks whether the legislation is concerned with trade as a whole rather than a particular industry. The Supporters disagree with Alberta and Quebec’s argument that there is a "securities industry" in Canada, and argue that the issue of capital markets regulation transcends any one industry sector. The Act regulates many more market participants than dealers and brokers. Further, capital markets are national and international in scope, are rapidly evolving and increasingly complex and affect the well-being of all Canadians.

The fourth indicator asks whether the legislation is of a nature that the provinces jointly or severally would be constitutionally incapable of enacting. The Supporters submit that the provinces’ ability to address "systemic risk" is limited, as they cannot regulate interprovincial or international trade or pass criminal laws.

The Supporters also argue the provinces cannot achieve these goals by banding together, as demonstrated by the weaknesses in the current passport system. Such weaknesses include that:

  • The provinces are often unable to agree or achieve unanimity, which means implementation of policy is slow and uncertain;   
  • Any province may withdraw at any time;
  • Provincial resources are not combined (meaning that when a serious issue occurs in a smaller province, it cannot draw on the resources of the others);
  • It does not provide Canada with a strong international voice;
  • It is costly and inefficient for market actors to pay fees in each jurisdiction;  
  • It does not allow for effective regulation in many areas; and   
  • Reciprocal enforcement is poor.

The Supporters also note that, in any event, the fact that the provinces could theoretically band together to act does not demonstrate a lack of federal authority.

The Supporters further submit, in respect of this fourth indicator, that competition between jurisdictions, one of the supposed advantages of multiple regulators, necessarily means that any province could be expected to abandon the passport system when doing so would provide it with a competitive advantage.

The Canadian Coalition for Good Governance ("CCGG") provides numerous examples of "jurisdiction-hopping" and argues that this is an inevitable result of provincial securities regulators’ inability to impose nationwide sanctions. It provides statistics that demonstrate that reciprocal enforcement orders are only rarely made.

CCGG emphasizes that "[t]he provinces are incapable of coordinating administrative and criminal enforcement in one body, under one Act. Parliament’s national reach, and exclusive jurisdiction over criminal law, gives it a unique ability to create an integrated, national enforcement regime".

The fifth and final indicator asks whether the failure to include one or more provinces or localities in the scheme would jeopardize the successful operation of the scheme in other parts of the country. This, of course, is a problem for the federal government because it has decided to allow provinces to "opt in".

Canada handles this issue by submitting that "[t]he validity of the legislation should be judged in terms of the intended scope of the legislation, not the efficacy of what would result if the intention was not fully realized, nor the means chosen by the government to achieve the intention. In choosing the means, Parliament should be entitled to a large measure of deference". Canada adds: "the scheme has to be, and is intended to be, national in scope to ensure its fully successful operation, while adopting a progressive implementation scheme to achieve that goal".

The Opponents

The Attorney Generals of British Columbia, Alberta, Saskatchewan, Manitoba and New Brunswick filed factums arguing that the Act is unconstitutional. They are supported by the Barreau du Québec and the Mouvement d’éducation et de defense des actionnaires.

The Opponents, with some exceptions, accept that proposed sections 158-165 of the Act are a valid exercise of Parliament’s criminal law power. However, they all strongly disagree that the remainder of the Act is a valid exercise of Parliament’s trade and commerce power.

The Opponents note that despite the international and provincial elements of capital markets, they retain an important local component. They note that Ontario only has 28% of Canada’s exchange listed companies while B.C. and Alberta have 58% between them (B.C. alone has 36%) and that there are important regional differences between provinces (including B.C. and Alberta’s focus on the natural resources sector).

The Opponents argue (in detail) that the current system is working very well, thanks to cooperation between the different provinces that allows for harmonization without mandating uniformity or unanimity.

The Opponents also point out that Canada weathered the recent financial crisis as well or better than most, if not all, other industrialized countries, all of whom had national securities regulators. Alberta argues that primary responsibility for protecting against systemic risks lies with "federal institutions" such as the Bank of Canada and the Office of the Superintendent of Financial Institutions, and concedes that they have been performing at a high level.

The Opponents also point out that the Act essentially mirrors provincial legislation, and that there is a long line of authority, going all the way back to the decision of the Judicial Committee of the Privy Council in Lymbum v. Mayland, [1932] A.C. 318, that makes it clear that the provinces have the constitutional authority to create securities regulation under its power over "property and civil rights" in section 92 of the Constitution Act, 1867.

The Opponents characterize provincial securities acts as consumer protection legislation. They also argue that regulating trading in securities constitutes regulating contracts made within the province for the purchase and sale of securities, which also falls within provincial jurisdiction. In particular, Alberta argues that a typical cross-border transaction is actually a series of separate contractual arrangements, none of which involve any movement of property.

The Opponents argue that the doctrine of "interjurisdictional immunity" arises when the legislation of one level of government impairs the core jurisdiction of another level. The "core" of the property and civil rights power has been identified as the ability to "regulate by legislation the contracts of a particular business or trade". The Opponents argue that the Act replicates existing valid provincial legislation, and by so doing, impairs the "core" jurisdiction of the province.

The Opponents warn against an overbroad interpretation of the trade and commerce power and invoke the principle of subsidiarity, which states that "decisions are often best [made] at a level of government that is not only effective, but closest to the citizens affected".

The Opponents argue that the trade and commerce clause is used for legislation that affects industry and commerce at large, or in a sweeping general sense, or where it is aimed at the economy as a single integrated national unit. It is insufficient to simply state that the legislation applies throughout Canada.

The Opponents note that the first stage of the General Motors analysis is whether the impugned legislation encroaches onto a provincial power, and if so, to what extent.

The Opponents argue that more than a "rational connection" is necessary in this case. Because the pith and substance of the Act is securities regulation, which is squarely within property and civil rights, and because the Act substantially recreates provincial securities regulation, the Act represents a major encroachment on provincial jurisdiction. In such circumstances, a stricter test is appropriate.

Turning to the General Motors criteria, the Opponents generally focus on the final three.

On the third indicator, they argue that the legislation is concerned with a particular industry, not trade as a whole. They point to various decisions referring to "the securities industry" or "the securities business". They distinguish prior jurisprudence where legislation was found to be valid under the trade and commerce power, such as the Combines Investigation Act (replaced by the Competition Act) and the Trade-marks Act,by noting that there were no references to the "anti-combines industry" or the "trade-marks industry". They claim the securities industry is analogous to the insurance industry, which falls within provincial jurisdiction. Despite the interprovincial and international elements of the insurance industry, and its close relationship to the banking and broader financial system, it was found to fall under the property and civil rights head of power.

On the fourth indicator, the Opponents argue that the Act is not of such a nature that the provinces are jointly and severally incapable of enacting it. They point out that the Act is very similar to existing, constitutionally valid legislation, and they point to the passport system and other ongoing provincial cooperation as an effective method of harmonizing and improving securities regulation. They also argue that there are advantages to decentralized regulation of the securities industry, including unique understanding of local markets, experimentation and innovation.

Finally, on the fifth indicator, the Opponents argue that due to its "opt-in" nature, the Act is not legislation where the failure to include one or more provinces would jeopardize the operation of the scheme in other parts of the country. The Opponents note there has not been a single case where federal legislation has been upheld under the general trade and commerce power where that legislation did not apply uniformly across the country.

The Opponents also argue that the "double aspect" doctrine does not apply, because the regulation of the trade in securities is a global concept that cannot be divided. Alberta refers to Bell Canada v. Québec (Commission de la santé et de la sécurité du travail), [1988] 1 S.C.R. 749, for the principle that the double aspect doctrine does not apply where one level of government essentially duplicates the legislation of another level. The Opponents note that previous double aspect cases did not involve an attempt to superimpose an entire regulatory scheme upon a scheme that had already been enacted. Instead, those cases involved single provisions in otherwise valid legislation. In other words, the double aspect doctrine should be limited to situations where there is only some overlap, instead of replication of existing legislation.


It is difficult to predict the outcome of this fight. Both sides make strong arguments. From a lawyer’s perspective, the entire process is fascinating and in many respects brings us all back to law school, which might be the last time any of us actually thought seriously about the Constitution and the division of powers. Hopefully, this note has helped you to understand and appreciate the issues. We will certainly follow up later this year with our take on the decision.

Securities Class Actions: Silver v. Imax

On February 14, 2011, Corbett J. of the Ontario Superior Court of Justice denied the defendants’ motion for leave to appeal two decisions of van Rensburg J., in which her Honour granted leave to plaintiff investors to pursue claims against Imax Corporation and certain of its current and former directors under Part XXIII.1 of the Ontario Securities Act (civil liability for secondary market disclosure), and certification of class proceedings for statutory and common law misrepresentation, conspiracy, and vicarious liability (2009 CanLII 72334 (ON S.C.) (Certification Decision) and 2009 CanLII 72342 (ON S.C.) (Leave Decision); leave to appeal ref'd, 2011 ONSC 1035).

To be granted leave to appeal under Rule 62.02(4) of the Rules of Civil Procedure, the appellants were required to show: (a) a conflicting decision by another judge or court in Ontario or elsewhere, and that it was desirable that leave be granted; or (b) good reason to doubt the correctness of the order, and that the proposed appeal involved matters of such importance that leave should be granted.

Leave To Pursue Statutory Claims Under the OSA

The statute requires that the court granting leave be satisfied that: (a) the action is brought in good faith; and (b) there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.

The defendants argued that van Rensburg J. had erred in setting the threshold for leave to bring statutory claims for misrepresentation under s. 138.8(1) of the OSA too low.

Justice van Rensburg concluded that "good faith" requires plaintiffs to show, on a balance of probabilities, that they are bringing the action in the honest belief that they have an arguable claim, for reasons that are consistent with the purposes of the statutory cause of action (permitting the recovery of damages by a shareholder, and to deter breach of a reporting issuer’s continuous disclosure obligations under the OSA). Self-interest (in seeking to recover personal losses on investments, for example) does not constitute a lack of good faith.

Justice van Rensburg found that the "good faith" requirement was satisfied in this case. The plaintiffs purchased shares in Imax during the material period, they had no oblique motive in doing so, and they wished to assert their claims to recover for losses and to deter other public issuers from behaving as Imax did. Corbett J. held that there was ample evidence on which to base these conclusions.

The defendants further argued that van Rensburg J. wrongly found that the plaintiffs bear the onus of establishing a "reasonable possibility" of success (a relatively low standard), after which the onus shifts to the defendants to establish affirmative defences to a standard sufficient to grant summary judgment dismissing a claim.  Corbett J. agreed that this was an important issue; however, his Honour saw no reason to doubt van Rensburg J.’s decision. Taking both the merits of the plaintiffs’ case and the difficulties with the defendants’ defences into account, he found that the plaintiffs had a good arguable case that was worthy of moving forward.

The defendants argued, more specifically, that van Rensburg J. erred in declining to assess the merits of the claims respecting non-core documents once she determined that the claims respecting core documents should proceed (pursuant to section 138.4(1) of the OSA, where a misrepresentation is contained in a non-core document, a finding of liability requires that the defendants knew of the misrepresentation, deliberately avoided acquiring knowledge, or were guilty of gross misconduct).

The defendants also argued that her Honour erred in permitting claims to proceed against certain defendants for damages in excess of the statutory limitations (permitted under section 138.7(2) of the OSA where the individual authorized, permitted, acquiesced in or influenced the making of the misrepresentation while knowing it was a misrepresentation), finding that the claim should be permitted to proceed where there is a reasonable possibility that the action will succeed against a particular respondent generally (as opposed to whether it will specifically result in liability for damages in excess of the cap). Justice van Rensburg held that the leave test does not require the court to make specific findings with respect to the measure of success the plaintiffs might hope to achieve against a particular respondent.

Corbett J. held that it was neither important nor desirable to grant leave to appeal on these issues, as there was a factual basis for inferring intent, and appellate review would be available on a full record, after trial.

Corbett J. also disagreed with the defendants’ submissions that van Rensburg J. erred in finding reporting issuers owe a duty of care to the "investing public" for statements made in continuous disclosure documents. He noted that van Rensburg J. was alive to the complexities of the law in this area, and to the novel nature of these claims. Corbett J. agreed that these issues were important, complex and controversial; however, there was no reason to doubt the correctness of the decision.

The defendants argued that van Rensburg J. erred in certifying detrimental reliance as a common issue, as the American "fraud on the market theory" (deemed reliance by the investing public on misrepresentations made to the marketplace) is not the law in Canada.

Corbett J. noted that there is a distinction between deemed reliance by operation of law and the plaintiffs’ argument that the court could make a factual finding that the "efficient market" theory applies to the specific statements allegedly made by Imax to the market. Justice van Rensburg correctly held that there is authority for proving class reliance as a matter of fact, even where it will not be deemed as a matter of Canadian law. Corbett J. found that the relationship between common law and statutory claims of misrepresentation is important, and merits appellate consideration; however, van Rensburg J.’s decision merely permitted the claims to proceed to trial, and there was no reason to doubt her analysis.

Corbett J. noted the irony that the first case to go to trial under Part XXIII.1 of the OSA could also be a case that dispensed with the requirement for establishing individual reliance in a claim for common law misrepresentation.

Certification as a Class Proceeding

With respect to certification as a class proceeding, the defendants argued that van Rensburg J. erred in defining the proposed class on the faulty premise of "rebuttable presumed reliance", defining the class as a global class, finding that the representative plaintiff could properly represent the class, and in awarding costs against the defendants for the OSA leave motion payable in 30 days.

Corbett J. disagreed. As described above, Corbett J. saw no reason to interfere with van Rensburg J.’s decision that reliance could be inferred as a matter of fact in this case. Accordingly, this premise was not faulty.

The defendants’ submissions that a global class was inappropriate were significantly undermined by the fact that, in the parallel proceedings against them in the United States, they argued that Ontario was the proper jurisdiction for all claims respecting the impugned statements.

In any event, Corbett J. saw no reason to doubt the correctness of the decision. Justice van Rensburg was alive to the issues inherent in certifying a global class, and had accurately stated and applied the test for defining classes. Corbett J. noted that there is integration of Canadian and American capital markets and legitimate bases for enforcement in both jurisdictions. The courts do not compete for jurisdiction; rather, the proceedings should be complementary, to achieve a proper vindication of the rights of plaintiffs, fair process, respect for the autonomous jurisdictions involved, and an integrated and efficient resolution of claims.

Corbett J. held that the representative plaintiffs were appropriate. Justice van Rensburg reviewed the position of the representative plaintiffs when she considered the "good faith" requirement in the test for leave. Read together with the decision on certification, there was an ample basis for concluding that the proposed representatives could represent the proposed class vigorously and capably. If different subgroups of investors emerged, the court could deal with this issue at that time.

Finally, Corbett J. held that the costs decision was appropriate. The ordinary rule is that costs follow the event of a motion. There were no conflicting decisions, and no reason to doubt its correctness.

Damages in Class Actions: Appeal of Smith v. Inco Coming Soon

On May 9, 2011, the Ontario Court of Appeal is scheduled to hear the appeal of the common issues decision in Smith v. Inco: the class proceeding brought against Inco Limited on behalf of owners of residential properties in Port Colborne (2010 ONSC 3790).

At trial, Henderson J. held that nickel emissions from the nearby refinery operated by Inco had contaminated the plaintiffs’ soil, and that publicity regarding this contamination had negatively affected property values. The court awarded the plaintiffs aggregate damages of $36 million.

On the eve of trial, Inco admitted that it was the source of the vast majority of the elevated levels of nickel found on the plaintiffs’ lands. The court held that, as the intrusion of the nickel onto the plaintiffs’ lands was indirect rather than direct, the plaintiffs had a claim in nuisance but not in trespass.

The court further held that Inco was liable pursuant to the rule in Rylands v. Fletcher, as: Inco had engaged in a non-natural use of its lands, bringing with it increased danger to others (bringing nickel onto the Inco property and refining it); and, there had been an escape from Inco’s property of something likely to do mischief (nickel and nickel particles were emitted into the air, escaped from the Inco property, and were likely to do mischief).

On damages, the court held that class members were entitled to damages even if they had not sold or attempted to sell their properties, as they claimed for nuisance causing permanent damage to property, rather than nuisance causing loss of use or personal inconvenience.

The court noted that even if it was wrong in finding that a claim in nuisance for diminution of property value can be made in the absence of an attempt by the plaintiffs to sell their properties, in a class proceeding the claim should be allowed in any event. It would be inconceivable that the court should compel more than 7,000 property owners to sell or attempt to sell their property in order to establish a cause of action.

The court held that negative publicity regarding the nickel contamination caused a negative effect on property values in three Port Colborne areas. This finding was based on a common-sense principle posited by the experts: a property that has been or is thought to be contaminated will have a lower property value than one that is neither, as the potentially contaminated property has a lower use and investment value, and is considered to be a higher risk purchase. In addition, there was expert evidence showing that there was a downward drop in property values starting in 2000, and the only significant real estate event after 1997 was the announcement of nickel contamination in the soil in 2000.

The court found that the public disclosure of nickel contamination from and after September 2000 negatively affected the value of residential properties in Port Colborne in the approximate amount of $48 million. Housing prices in Welland, which was the best comparator city for Port Colborne based on similarity of housing market, demographics, and the composition of the labour force, had outperformed Port Colborne by 5.9% from 1999 to 2008, or approximately $6,100 per residential property, multiplied by 7,965 residential properties, for a total of $48,586,500.

Inco argued that some or all of the plaintiffs’ evidence that Port Colborne residential real estate prices had failed to keep pace with Welland was due to the inclusion of certain reclassified vacant building lots in its data set that lowered the average residential property assessment for certain years. On cross-examination, the plaintiffs’ expert agreed that if these lots were removed, the increase in property values for Welland and Port Colborne would be approximately the same; however, the expert said that there will always be some inaccuracies in the data. He testified that one cannot clean some of the data without cleaning all of the data, and in any event, the starting point for the plaintiffs’ expert’s calculations were assumptions and calculations prepared by the defendant’s expert.

The court accepted this explanation, but upon reviewing the relevant data set in its entirety, found that it suggested residential property values in Port Colborne were increasing faster than those in Welland prior to the negative publicity, and the drop in the rate of increase for that period (5.6%) was very close to the difference in the increase in property values between Welland and Port Colborne (5.9%). The court was willing to build in a discount for the inclusion of the vacant lots, and picked the midway point between the defendant’s expert evidence of a 2.8% loss (which the court found to be the minimum amount of the loss of property value) and the plaintiffs’ expert evidence of a 5.9% loss (the maximum amount of the loss). The damages were therefore losses of 4.35%, or approximately $36 million.

The court found that this value, although it included all of Port Colborne and not just the plaintiffs’ lands, was the aggregate loss to the class, as there was no evidence of a loss in property values in the areas that did not belong to class members.

The court allocated damages among three areas in Port Colborne in the amounts of $9 million, $15 million, and $12 million.

The court refused to award punitive damages against Inco, as punitive damages should be awarded only in exceptional cases for malicious, oppressive, and high-handed misconduct that offends the court’s sense of decency. Inco had been engaged in a lawful business operation in Port Colborne for many years, had provided gainful employment to many people during that time (including members of the class), had generally complied with regulations set by the Ministry of the Environment, and had paid for government-ordered remediation of a number of properties and a Community Based Risk Assessment.

Finally, the court held that the plaintiffs’ claims were not barred by a limitation period, as the effect of the nickel on the plaintiffs’ property values was not discoverable until 2000. Even if a few class members knew or ought to have known the material facts upon which the case was based prior to 2000, those class members would constitute only an insignificant minority of all the members of the class.