Class action litigation in Canada continues to be marked by rapid and ongoing evolution. Significant developments in the Canadian class action world occur almost on a daily basis. There have been developments in many areas. This article focuses on national class, securities class actions, developments in Quebec, and "criminal interest rate" actions.
The National Class
After its birth in Nantais v. Telectronics Proprietary (Can. ) Ltd., the national class quickly became a part of the Canadian legal landscape. Acknowledging "the modern need to deal nationally with problems" and to have "questions of liability determined as far as possible once…for all Canadians," a host of Ontario decisions followed Nantais's lead: e.g., Carom v. Bre-X Minerals Ltd., Webb v. K-Mart Canada Ltd., Wilson v. Servier Canada Inc. The concept of the national class was also readily adopted by the courts of British Columbia after the seminal decision in Harrington v. Dow Corning Corp. The courts repeatedly stated that the tripartite objectives of class proceedings were served by the certification of inter-provincial classes. Accordingly, constitutional doctrines and concerns, such as the principle of extraterritoriality and the need to preserve order, were downplayed and adapted to meet the unique nature of class proceedings.
When the early cases that sang the virtues of the national class were decided, only Quebec and two common law provinces—Ontario and British Columbia —had class proceedings legislation. The legal landscape has now been dramatically altered. In the last few years, the jurisdictions which have enacted class action legislation or changed their rules to accommodate class proceedings have mushroomed to include Saskatchewan, Manitoba, Alberta and Newfoundland, as well as the Federal Court of Canada.
These legislative changes have been augmented by a dramatic shift in the common law effected by the Supreme Court of Canada's decision in Western Canadian Shopping Centres Inc. v. Dutton. In Dutton, the Supreme Court held that provincial rules of practice authorizing representative actions ought to be interpreted in provinces without a class action statute as, in effect, equivalent to legislation authorizing class proceedings. Chief Justice McLachlin, for the Court, set out a detailed procedural guideline by which such rules of practice could be converted into workable class action legislation. Effectively, then, the Court "judicially enacted" class proceedings legislation in every province in the country.
Ironically, these developments remove one of the important jurisprudential foundations for the national class. In birthing the notion of a national class, the courts were impelled by a desire to fill a legislative void and make the perceived benefits of class litigation available to all Canadians. This desire is a recurrent theme in the national class cases. For example, in Webb, Justice Brockenshire cited "the lack of comparable class action legislation elsewhere in Canada " as a "telling argument for extending the reach of the Ontario legislation." In a similar vein, Justice Cumming in Wilson ruled that it was "efficacious" to extend the policy objectives of class legislation to all Canadians.
The policy goals served by class actions can now, to a greater extent, be met intra-provincially. Access to justice issues are adequately addressed by class proceedings that are provincial in scope. The choice is no longer between certifying a national class or denying, for all practical purposes, a means by which aggrieved parties can seek redress. To the extent that class or representative proceedings are available Canada-wide, the national class has therefore been undermined.
At the same time, the proliferation of class proceedings legislation and, in effect, the judicial "nationalization" of representative proceedings, have compounded the procedural and practical hurdles posed by inter-jurisdictional classes. Coordinating multiple, sometimes overlapping, actions in different jurisdictions has become increasingly difficult. In Harrington, the court of appeal acknowledged that the national coordination of parallel proceedings was founded on the "goodwill and cooperation" of counsel in resolving differences.
The decision in Pardy v. Bayer Inc. provides a glimpse of the types of difficulties that may arise in the new class action climate in Canada. In Pardy, the defendant pharmaceutical company, facing similar class action proceedings in both Manitoba and Newfoundland, sought to dismiss or permanently stay the latter proceeding. In light of the potential national scope of the Manitoba proceeding, the defendant argued that the Newfoundland proceeding was unnecessarily duplicative, wasteful of resources and raised the risk of inconsistent judgments, thereby constituting an abuse of process.
The court dismissed the motion, ruling that the two actions remained distinct until a common class had been certified. Indeed, the court ruled that the Manitoba plaintiffs did not owe a duty to the Newfoundland plaintiffs and that a premature dismissal would compromise the rights of the Newfoundland plaintiffs. Moreover, the court ruled that the defendants did not suffer prejudice from the potentially overlapping class proceedings. The decision represents an early example of the complexities that can arise when parallel class actions simultaneously proceed in multiple Canadian jurisdictions and the presumed spirit of cooperation is lacking.
Interestingly, the parallel Ontario action, in which the putative representative plaintiff also sought the certification of a multi-provincial class, also gave rise to coordination issues. However, the court stated that "problems of overlapping actions, although regrettable, [were] not insuperable." The court noted that the principle of comity could be invoked to "prevent overlapping orders that might…expose the defendants to a risk of double jeopardy." Ultimately, the court concluded that if a multi-jurisdictional class which overlapped with a proceeding in a different province, was certified the class definition could be amended. Moreover, the court recognized the power of other provinces to "ignore" a multi-provincial settlement reached in Ontario, and to certify actions for persons within their own jurisdiction instead, thus depriving the Ontario settlement of its effect.
These cases indicate the growing complexity of managing national classes in the current legal milieu. Perhaps the Canadian courts and legislatures can draw upon the American model to help coordinate inter-jurisdictional actions. In the U.S., a "multidistrict litigation" procedure is often utilized in the class action context to transfer to a single federal judge all pending federal civil cases of a similar type. A judicial panel of seven judges makes the decision to transfer such cases, and the transferee judge sets down ground rules, deadlines and procedures, thus helping to coordinate complex actions filed in multiple districts.
Further judicial developments are likely as the courts continue to grapple with the viability of national classes and the practical procedural problems which they pose.
Securities Class Actions
Kerr v. Danier Leather Inc. was the first securities class action ever to go to trial in Canada. It was also the first case ever to be tried based on s. 130 of the Ontario Securities Act.
The judgment of Justice Lederman of the Ontario Superior Court, handed down May 7, 2004, contains several important rulings affecting the definition of "material change" under the Securities Act and the level of prospectus disclosure required in order to satisfy statutory and common law obligations.
Danier filed its prospectus for an initial public offering ("IPO") of its shares on May 6, 1998, with the offering to close on May 20, 1998, at $11.25 per share. Included in the prospectus disclosure were the company's financial results for the first three quarters of its 1998 fiscal year, (which concluded June 30, 1998) together with future-oriented financial information for the fourth quarter. On May 16, 1998, the company's internal analysis showed decreased revenues and profits for the fourth quarter to date, well below the forecast results published in the prospectus. Senior management continued to believe that the company's final results would meet the forecasts in the prospectus. Accordingly, they did not amend the prospectus or otherwise disclose the recent actual results.
Following the closing, the interim Q4 results were released, and the share price dropped from the initial issue price of $11.25 to $8.90 by June 10, 1998. A class action was commenced, alleging that the failure to disclose the mid-May actual results violated s. 130.
Lederman J. held that Danier ought to have disclosed the fact that the interim Q4 results were markedly below the forecast contained in the prospectus. He imposed liability on that basis, notwithstanding that the prospectus contained cautionary language with respect to the financial forecasts, including the statement:
"Actual results achieved during the forecast period will vary from the forecast results and such variations may be material. There is no guarantee that such forecast will be achieved in whole or in part."
Lederman J. held that even though management continued subjectively to believe in the forecast, objectively, the forecast was not capable to be believed after the mid-May actual results were available. On that basis, he held that there was a "misrepresentation," i.e., "an untrue statement of material fact, or…an omission to state a material fact…" for purposes of s. 130 of the Securities Act. As s. 130 presumes reliance on a misrepresentation in the context of an initial public offering, damages were awarded to the plaintiff class.
In the context of disclosure in securities class actions, Kerr v. Danier Leather may be compared to the recent decision of the Ontario Court of Appeal in Shaw v. BCE Inc., et al. Shaw commenced a proposed class action on behalf of minority shareholders in Bell Canada International ("BCI"), which was 74% owned by BCE. The action alleged that the terms of a recapitalization plan for BCI, which included a rights offering to all shareholders of BCI, was designed to favour the interests of BCE and was oppressive to the minority shareholders. The action further alleged that the rights offering Prospectus misled investors to believe that the recapitalization plan would result in financial stability for BCI, which was not fulfilled. Rather, BCI filed a plan of arrangement within six months of the rights offering.
The plaintiff moved for certification. The defendants cross-moved to strike out the Statement of Claim as disclosing no cause of action. Justice Farley of the Ontario Superior Court refused the plaintiff's motion for certification, ruling that it failed to meet any of the five statutory criteria, and granted the defendant's motion to strike out the statement of claim, with leave to amend.
The plaintiff delivered an amended statement of claim. The defendants again moved to strike it out. This motion was again granted by Farley J. His order was upheld by the Court of Appeal.
The plaintiff's claim challenged the accuracy of disclosure in the rights offering prospectus. Farley J. and the court of appeal held that as the prospectus was referred to in the statement of claim, the court was obliged to consider the entirety of the document. The court held that the disclosure in the prospectus was sufficient to warn investors of the financial instability of BCI and of the prospect that, notwithstanding the recapitalization plan, BCI might not survive. The Court of Appeal stated:
"The bold type on the face of the prospectus made it crystal clear that BCI faced a significant financial crisis and that the rights offered were speculative investments with a significant element of risk…. The prospectus specifically cautioned BCI investors that the significant increase in the number of shares was likely to have a negative effect on the price of the shares; that BCE had no obligation to fund BCI after the implementation of the recapitalization plan; that BCI would require further additional capital in the near future; and that BCI might need to secure protection from its creditors."
One might think that the Court of Appeal's decision conflicts with that of Lederman J. on the extent of disclosure required in a securities offering. A closer reading indicates that this is not so. Rather, the difference in the cases is fact-based. Lederman J. simply held that the disclosure in the Danier Leather prospectus was not sufficient to absolve the company from its failure to release known financial results that were materially at variance with the disclosed forecast. By contrast, in Shaw, the rights offering prospectus contained clear and repeated warnings about the very possibility on which the minority shareholders' action was based. Both decisions highlight the importance of accurate disclosure in public offering documents and will undoubtedly cause securities lawyers to focus their efforts on meeting the now judicially-defined standards.
New Developments in Quebec
Since January 1, 2003, when the provisions of the Code of Civil Procedure ("CCP") on class actions were changed, the nature of the evidence that a defendant can present on a motion to institute a class action in Quebec has substantially changed. Now the motion need not be accompanied by an affidavit and may only be contested orally. However, the legality of those new provisions is being challenged in court.
The backdrop to the challenge is a motion to authorize a class action against pharmaceutical companies providing generic drugs filed by a consumers protection organization and two individuals. The pharmaceutical companies filed a series of preliminary motions seeking permission to examine the petitioners, to file expert reports and affidavits contesting the petitioners' allegations and contesting the constitutional validity of the key articles of the CCP regarding class action procedures.
The respondents maintain that Article 1002 CCP is unconstitutional because it violates procedural rights protected by the Quebec Charter of Human Rights and Freedoms. In foregoing the usual requirement that a motion alleging facts be supported by one or more affidavits, Article 1002 deprives a respondent on a motion to authorize a class action of any control over the veracity of the allegations. The same article also prevents a respondent from presenting its own version of the case, except with permission of the court. The generic drug manufacturers claim this mechanism thwarts their charter right to a full and equal, public and fair hearing and their fundamental right to a complete defence, without a rational link to any societal objective.
Weighing these arguments in the initial days of the authorization/hearing, Madam Justice Roy concluded that only three of the challenged CCP provisions would be deemed invalid if respondents were successful. A variety of remedies would remain available such that the court would not act ultra vires by continuing the hearing on authorization and delaying final analysis of the constitutional arguments until the decision on the merits.
One respondent sought leave to appeal. On August 30, 2004, Chief Justice Robert granted leave and suspended the motion to authorize the class action, since the questions in appeal appeared serious and the answers far from evident. Just a week after Chief Justice Robert's decision, the Court of Appeal held in a unanimous decision in Société Asbestos Limited v. Lacroix that a preliminary motion to dismiss a motion to authorize a class action based on the absence of competence of the court not only could but should be presented as soon as possible. The question of the court's jurisdiction should be addressed at the outset.
It remains to be seen whether the constitutional attack will succeed. In the meantime, other class actions launched under the challenged provisions are proceeding both on the authorization stage and the merits. A constitutional challenge to another provision of the CCP that denies the respondent the right to appeal a judgment granting authorization of a class action, in place since 1978, was turned down unanimously in a two-page decision. Short of a declaration of constitutional invalidity of the CCP, there may be few obstacles to Quebec fulfilling the prophecy of becoming Canada 's class actions "heaven."
The Criminal Interest Rate Cases
Section 347 of the Criminal Code of Canada prohibits a creditor from receiving or agreeing to receive interest at an effective rate exceeding 60% per year. Prior to its enactment in 1981, creditors and debtors had almost complete freedom to contract at any interest rate they chose.
Early cases concerning section 347 involved sophisticated borrowers attempting to avoid commercially sensible but technically usurious credit arrangements and to recover monies received by creditors pursuant to such arrangements. Such cases are far removed from the concerns about "loan-sharking" that led Parliament to enact the provision.
More recent cases, however, are even farther removed. Section 347 is often used now as a vehicle for class proceedings against companies and financial institutions that supply goods or services on credit.
The leading class action case on section 347 is Garland v. Consumers' Gas Co. Ltd. This case concerned a flat charge "late payment penalty" of 5%, which Consumers' Gas, an Ontario natural gas utility, levied on outstanding balances each month regardless of when the customer paid the amount owing. The penalty was such that, if the customer paid the penalty in less than 37 days, the effective annual interest rate was greater than 60%.
Garland , the representative plaintiff, initiated this proceeding on behalf of some 500,000 customers seeking restitution in relation to penalties collected by Consumers' Gas between 1981 and 1994.
The Supreme Court of Canada held that the late payment penalty was an interest charge in relation to deferred payment for the utility's goods and services and was prohibited by section 347. Mr. Justice Major, writing for the majority, stated:
"It should be noted…that s. 347 is a deeply problematic law. Some of its terms are most comfortably understood in the narrow context of street-level loan-sharking, while others compel a much broader application. The two facets of the statute do not comfortably coexist. The court is aware that the present decision may have the effect of increasing the importance of s. 347 in some consumer and commercial transactions. Given the interpretive difficulties inherent in the provision and the volume of civil litigation which it has already spawned, it is with some reluctance that we are legally driven to this conclusion. However, the plain terms of s. 347 must govern its application. If the section is to be given a more directed focus, it lies with Parliament, not the courts, to take the required remedial action."
The Supreme Court of Canada had the opportunity to revisit this case in Garland v. Consumers' Gas Co. Ltd. The trial judge, having been directed to determine the appropriate remedy, accepted the utility's defence that the late payment penalty had been set by the Ontario Energy Board, and therefore, the utility had a complete defence to a claim for restitution. The Ontario Court of Appeal also accepted that the customers were not entitled to a remedy.
The Supreme Court of Canada differed. It found that from 1981, when section 347 was enacted, to 1994, when the class action was commenced, the utility had no reason to believe that it was charging a criminal rate of interest. Accordingly, the utility had a juridical reason for retaining the late payment penalty payments. However, the utility had no justification for retaining the payments made after the action was brought. Restitution of that amount was ordered.
Litigation under section 347 is quickly evolving. Since Garland, class actions have been initiated against other utility companies in Ontario. The case also has inspired class proceedings against "payday lenders," rent-to-own companies, toll road operators and credit card companies.
Despite the increase in class action litigation under section 347, the recent decision in Markson v. MBNA Canada Bank demonstrates that a court will not always view this as the appropriate method of proceeding. The representative plaintiff was seeking restitution for interest charges relating to cash advance transactions on MBNA credit cards. If the relief sought were granted, the defendant bank would be compelled to change its credit practices. Which could result in inconvenience and increased costs for cardholders. The court refused certification, stating that it did not believe other class members would support the objective of the proceedings if they understood that it meant that credit to them would be more difficult and expensive to obtain.
Section 347 has potential application to a range of consumer and commercial credit transactions. Utilities and provincial energy boards across Canada have already taken note and have adjusted their late payment penalties to comply with section 347.