On February 3, 2014, the Ontario Court of Appeal released its decision Green v Canadian Imperial Bank of Commerce. This decision set aside the Court’s previous interpretation of the leave process under Part XXIII.1 of the Ontario Securities Act with respect to the limitation period. In doing so, the Court has brought rationality back to the leave process, clarified the leave standard, and addressed issues involved in the certification of common law negligent misrepresentation claims. This decision will have a critical role in the future of securities class actions.
On February 3, 2014, the Ontario Court of Appeal (“ONCA”) released its decision Green v Canadian Imperial Bank of Commerce, which treated three appeals heard last May: Green v Canadian Imperial Bank of Commerce, Silver v Imax, and Millwright Regional Council of Ontario Pension Trust Fund (Trustees of) v Celestica Inc. The unanimous decision of the 5 judge panel confirms that investors with legitimate claims will have access to the courts in Ontario by way of the class action mechanism.
The decision has three important features:
- First, it reverses the same Court’s 2 year old decision in Sharma v Timminco Ltd, which imposed a highly restrictive interpretation of the limitation period contained in section 138.14 of the Ontario Securities Act;
- Next, the decision confirms that the barrier presented by the merits test contained in the statutory leave requirement for the commencement of an action under section 138.8 of the OSA, is a very low bar, intended to preclude only unmeritorious strike suits; and
- Third, it confirms that common law negligent misrepresentations claims are suitable for certification even if reliance cannot be dealt with as a common issue.
Each of the three appeals challenged Timminco in some respect. In each case, the plaintiff had commenced proceedings against the defendants prior to the expiry of the section 138.14 limitation period, but leave was not granted until after that limitation period had arguably run.
In Green, Justice Strathy had dismissed the plaintiff’s motion for leave pursuant to section 138.8 of the OSA, after finding that the case otherwise met the standard for the granting of leave, because leave had not been granted within 3 years of the making of the misrepresentation. The Green plaintiffs thus appealed from the dismissal of their leave motion.
In Imax, the plaintiffs brought and litigated the leave motion (successfully), but the limitation period expired while the decision on the leave motion was under reserve. After Timminco was released, the defendants sought summary judgment on the basis that the limitation period barred the plaintiffs’ claims. The motions judge then exercised her discretion to backdate her order granting leave to the date that the argument of the leave motion was completed. The defendants thus appealed the dismissal of their summary judgment motion.
In Celestica, prior to a leave motion actually being litigated, the case management judge determined that such a motion could still be brought by operation of the special circumstances, notwithstanding the expiry of the limitation period operation of Timminco.
The Timminco Problem
Because of the ruling in Timminco, each case had an issue as to whether the claims were extinguished by operation of the limitation period, even though proceedings had been commenced which, in each case, invoked Part XXIII.1 of the OSA and stated the intention to seek leave. In Timminco, the ONCA had ruled that simply commencing proceedings was not sufficient to halt the running of the limitation period either for the plaintiff or absent class members.
In Timminco, the action was commenced, but leave was not sought prior to the three year anniversary of the making of the alleged misrepresentation. As that anniversary approached, the plaintiff sought a tolling agreement and, failing that, a declaration that the limitation period was tolled by way of section 28 of the Class Proceedings Act, 1992. That order was granted at first instance, resulting in an appeal to the ONCA.
Timminco struck like a “thunderbolt” on February 16, 2012. The ONCA in Timminco determined that a plaintiff must seek and obtain leave to pursue a claim under Part XXIII.1 in order for the claim to be “asserted” and thus for the protection of section 28 of the CPA to be invoked. Because the OSA limitation period runs from the date that the misrepresentation is made (rather than discovered), the result was that claims could, and did, disappear by operation of the limitation period, and there was not a thing that a plaintiff could unilaterally do. The only recourse was (i) a tolling agreement, which required the agreement of the defendants, or (ii) in some cases, a very speedy determination of the leave motion. This latter scenario placed immense pressure on both litigants and courts, as leave motions are commonly hotly contested on voluminous records.
Seeking and obtaining leave within three years of the alleged misrepresentation is often difficult or even impossible for two reasons. First, because the Part XXIII.1 limitation period is not a function of discovery or discoverability of the misrepresentation, the limitation period may already be significantly truncated once the representative plaintiff becomes aware of the misrepresentation. Second, even if a motion for leave is brought within the limitation period, it is out of the moving party’s control whether leave will be obtained within the requisite time period. Factors such as a defendant’s tactical delays and the availability of counsel or the court are outside a plaintiff’s control. The Timminco decision created perverse incentives and irrational results.
Section 28 of the CPA
Timminco rested on the interpretation of section 28 of the CPA and its interaction with the leave requirement under Part XXIII.1. As such, a large component of the Court’s analysis in CIBC focused on the genesis and goals of section 28. The Court reviewed the analysis in Timminco that concluded that the word “assert” within its statutory context denoted the ability to “enforce” a claim or legal right, rather than to “invoke” or “make” a claim to one’s legal right. The Court in Timminco had held that since a right couldn’t be enforced before leave to bring the action claiming one’s right was granted, leave was required to “assert” the right of action.
In contrast, the Court in CIBC focused their analysis on the purpose of section 28 in class proceedings. The Court’s conclusion is that the purpose of section 28 is to shelter absent class members from the expiry of limitation periods applicable to their claims, thus encouraging a representative plaintiff to properly begin an action within the limitation period. The Court explored the alternative interpretation, as preferred in Timminco, and found that requiring leave be granted before section 28 suspends the limitation clock from running would require individual class members to also bring a motion for leave forward to ensure the timeliness of their claims. The ONCA relied on Justice Winkler’s analysis in Logan v Canada (Minister of Health) to conclude that the Timminco interpretation defeats the purpose of section 28, and fails to acknowledge the CPA’s role as a piece of remedial legislation which serves to increase access to justice for those with financially unviable individual claims.
In deciding to reverse Timminco, the ONCA squarely addressed a number of concerns raised in support of its analysis. First, there was a concern that actions would languish absent an urgent impetus to get them resolved. A more appropriate response to this concern is for the defendants and courts to ensure that the motion for leave is brought in a timely manner or that the action is dismissed. If a representative plaintiff is not advancing the action, the protection of section 28 is necessary to permit a new plaintiff to come forward and advance class members’ claims.
It was argued that permitting the application of section 28 prior to the granting of leave puts class action plaintiffs in a better position than individual plaintiffs because individual plaintiffs do not get the benefit of section 28. The Court noted while such a result might appear anomalous, it is not inappropriate or necessarily unintended in light of the clear legislative intention that most Part XXIII.1 actions would be class actions.
Timminco reasoned that the object of section 134.14 of the OSA was advanced by forcing a plaintiff to proceed with a leave motion quickly. However, the CIBC Court concludes that the Timminco interpretation undermines the overall objectives of Part XXIII.1, by inappropriately limiting access to the remedies it provides. An interpretation of Part XXIII.1 which circumvents investors’ ability to access those provisions through the class proceedings mechanism undermines these goals.
Having thoroughly canvassed all of the factors and arguments weighing in favour of the Timminco interpretation of the interplay between the leave requirement and the OSA limitation period, the ONCA decided that Timminco must be overturned, and a more traditional approach to the tolling of the limitation should be applied:
Timminco wrongly held that: 1) a class action properly commenced cannot also assert a cause of action for the statutory remedy under s. 138.3 unless leave has first been obtained, and 2) before leave is obtained, s. 28 of the CPA does not suspend the limitation period for all class members in a properly commenced class proceeding that claims a remedy under s. 138.3 and proposes to seek leave. Allowing the statutory claim to be asserted with the common law claim provides for procedural simplicity and reconciliation of the respective purposes of the CPA and the Securities Act.
For the above reasons, I would set aside the interpretation given to s. 28 of the CPA in Timminco. I would hold that when a representative plaintiff in a class action brought within the Securities Act s. 138.14 limitation period, also pleads a cause of action based on s. 138.3 of the Securities Act, together with the facts that found that claim, and further pleads the intent to seek leave to commence an action under the Securities Act, then that claim has been “asserted” for the purpose of s. 28 of the CPA, and the limitation period is thereby suspended for all class members.
With this decision, the ONCA has brought rationality back to the litigation of leave motions under Part XXIII.1 of the OSA. Counsel can now give their clients advice as to what they can do to ensure that their rights are not extinguished by the passage of time. Parties can litigate these motions with the certainty that a procedural delay will not result in the extinction of the plaintiffs’ claims.
The News Gets Better: Leave and Certification
Because the appeal in Green was from the dismissal of a motion for leave and certification, the ONCA also had the opportunity to consider some of the other commonly litigated issues in securities class actions: the leave standard, and the certification of common law negligent misrepresentation claims.
In particular, the ONCA considered the merits test contained in section 138.8 of the OSA, which requires a plaintiff to establish a “reasonable possibility” of success at trial in order to obtain leave. The Court equates the “reasonable possibility” standard with the requirement that a pleading disclose a cause of action as required by s. 5(1)(a) of the CPA. The Court pointedly observed that the purpose of the leave provision under Part XXIII.1 is “to discourage and eliminate bad faith strike suits that do not have a reasonable possibility of being successful.” The Court also noted that “prospect”, “chance” and “possibility” of success were all synonymous ways to articulate the low level threshold required to evaluate whether the action could be resolved at trial in the plaintiff’s favour. Following Chief Justice McLachlin in R v Imperial Tobacco Canada Ltd, the Court noted the purpose of the test is to “weed out the hopeless claims” and ensure only those with the possibility of success go to trial. The Court added that this overlap with the certification test may assist in avoiding procedural redundancy.
What constitutes a “reasonable possibility” of success has been at the heart of every leave motion litigated to date. With this decision, the Court has made it clear that this is a very low barrier to pass, one intended only to screen out “bad faith strike suits”.
Finally, the Court considered the certification of the plaintiff’s common law claims, which were being pursued simultaneously with the statutory claims. In finally settling a contentious and frequently litigated question, the Court held that common issues raised by negligent misrepresentation claims can be appropriately certified, even if reliance remains an individual issue. Those common issues include questions relating to whether a duty of care is owed, the content of any misrepresentations made, and the negligence of the defendants. Such issues are substantial and can significantly advance the claims of class members, even if individual reliance remains to be proven.
With this decision, the Court of Appeal has signaled once more that Ontario’s courts are open to investors, and that the CPA presents a potentially powerful tool both for investor compensation and imposing discipline on capital markets participants. This is good news for everyone.