Operation of limitation periods in the context of a class proceeding in Canada

The issue of how limitation periods should operate in the context of a class action was recently dealt with by Justice P. Perell of the Ontario Superior Court of Justice (Canada) in Coulson v. Citigroup Global Markets Inc., 2010 ONSC1596 (released March 18, 2010) ("Coulson").

The Coulson case arose from the distribution of shares of Philip Services Corp. through a public offering in November 1997. Mr. Coulson was a purchaser in the primary distribution and brought this proposed class action on July 8, 2003 under s. 130 of the Ontario Securities Act against the underwriters and auditors for rescission and/or damages. S. 138 of the Ontario Securities Act precludes the commencement of an action to enforce a right for rescission more than 180 days after the transaction, and precludes an action for damages more than the earlier of: (a) three years after the transaction; or (b) 180 days after the events giving rise to the s.130 claim were known.

A key question was whether Mr. Coulson's s.130 claim was statute barred. Mr. Coulson argued that its claim was timely because the running of limitation periods was suspended by a similar class action that was brought in 1998 by Mr. Joseph Menegon. Unlike Mr. Coulson, Mr. Menegon was a purchaser of Philip shares in the secondary market and not a purchaser from the primary distribution. However, Mr. Menegon's proposed class action in 1998 asserted two causes of action: a statutory claim under s. 130 of the Ontario Securities Act on behalf of purchasers in the primary distribution, and a common law claim for negligent misrepresentation on behalf of those who purchased in the secondary market. On March 6, 2001, Justice Gans dismissed Mr. Menegon's certification motion on two grounds: (1) he did not have a common law cause of action for misrepresentation; and (2) since he had not purchased under the prospectus, he could not represent the s.130 claimants and assert their cause of action. Mr. Menegon appealed challenging the first ground only. On January 9, 2003, the Court of Appeal dismissed Mr. Menegon’s appeal with respect to the common law cause of action. He sought leave to appeal to the Supreme Court of Canada on the grounds that the Court of Appeal had erred in deciding that he did not have a common law action for misrepresentation.

On July 8, 2003, while Mr. Menegon’s leave to appeal application was pending, Mr. Coulson commenced a separate class action for the s.130 claimants. The auditor and the underwriters argued that Mr. Coulson’s action was statute barred under s.138 of the Ontario Securities Act. Mr. Coulson relied on the commencement of Mr. Menegon's proposed class action and took the position that his action was timely.

In concluding that Mr. Coulson's proposed class action was statute barred, Justice Perell set out the following general principles on how limitation periods operate in the context of a class proceeding:

· S. 28 of the Class Proceedings Act suspends the running of an applicable limitation period until it is determined whether the class members will have access to justice by the vehicle of a class action. However, the s.28 protection applies only to causes of action that are being asserted in the class proceeding.
· When the proposed class action is dismissed without a determination on the merits (for example through an unsuccessful certification motion), the limitation period resumes, and the calculation of the running of the limitation period resumes at the time when the suspension started - not at the time when the suspension ended.
· If the dismissal decision is under appeal, the appeal would continue to suspend the running of the limitation period, but only for the cause of action that is the subject of the appeal. In this case, Mr. Menegon's appeal only asserted the common law claim and not the statutory claim under s. 130 of the Ontario Securities Act. Therefore, it did not provide further protection under s.28 of the Class Proceedings Act to Mr. Coulson and other s.130 claimants.
· If the representative plaintiff's appeal to the Court of Appeal suspends the running of limitation periods for causes of action asserted in the class proceeding, and if leave to appeal to the Supreme Court of Canada is sought, the protection provided by s.28 of the Class Proceedings Act would continue for those asserted causes of action.

Supreme Court of Canada clarifies the analytical framework for exclusion of liability clauses in commercial contracts

On February 12, 2010, the Supreme Court of Canada released its decision in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 ("Tercon"). The Court dealt with the question of whether, and in what circumstances, a court will refuse to enforce an exclusion of liability clause contained in an agreement entered into between sophisticated corporations with equal bargaining power. Although the 9-judge Court was split on the final disposition of the case, the Court unanimously agreed that the appropriate framework of analysis for exclusion of liability clauses in commercial contracts should involve three questions:

First, as a matter of contract interpretation, based on the parties' intention as expressed in the contract, whether the exclusion clause applies to the facts established in evidence.

Second, if the exclusion clause applies, then as a matter of contract formation, whether the exclusion clause was unconscionable at the time the contract was made and therefore invalid. Unconscionability might be found in situations involving contracting parties with unequal bargaining power.

Third, if the exclusion clause is held to be valid and applicable, then as a matter of contract enforcement, whether the Court should nevertheless refuse to enforce the valid exclusion clause because of the existence of an overriding public policy that outweighs the very strong public interest in the enforcement of contracts.

To obtain a copy of this decision, please follow the link here: http://www.canlii.ca/en/ca/scc/doc/2010/2010scc4/2010scc4.html

Shareholder Disputes: Arbitrator's Power to Grant Statutory Oppression Remedy

The statutory shareholder oppression remedy in Canada has been considered "the broadest, most comprehensive and most open-ended shareholder remedy in the common law world". But if a shareholder dispute is caught by an arbitration agreement, will the aggrieved shareholder be able to obtain from the arbitrator whatever relief that is appropriate under the statutory oppression remedy provisions? The answer to this question is unclear.

I invite you to read my paper on this issue, which was recently published in the Advocates' Quarterly, Vol. 36, No. 4 (March 2010). And feel free to drop me a note if you have any thoughts.

Arbitration and Demand for Particulars in Litigation Proceedings

On January 18, 2010, the Court of Appeal for British Columbia (Canada) released its decision in Larc Developments Ltd. v. Levelton Engineering Ltd., 2010 BCCA 18. In this decision, the Court dealt with the issue of when a demand for particulars in a court proceeding would disentitle a party from subsequently seeking or obtaining a stay of the proceeding in favour of arbitration. The answer depends on the language of the request, instead of the stated intent of the party making the request.

If the demand is for information required to prepare a statement of defence, it would constitute a demand for particulars under the rules of court and a step in the litigation proceeding thereby precluding a subsequent stay application in favour of arbitration. However, by making a request for information solely to determine whether a claim is subject to arbitration, the party may still bring a stay application for arbitration because such request does not amount to an acceptance of the litigation process.

In this case, the demand letter was drafted to request information for the preparation of the statement of defence, followed by the party's intent to seek arbitration. The Court held that since the demand constituted a step in the litigation proceeding, the defendant was no longer entitled to seek to refer the matter to arbitration even though such intent was stated in the demand letter: "It cannot undo what has been done".

Case Alert: An Arbitrator's Powers to Issue a Corrected Award

On January 25, 2010, the Court of Appeal for British Columbia (Canada) released its decision in Westnav Container Services Ltd. V. Freeport on the jurisdiction of an arbitrator to issue a corrected award. In that case, the arbitrator issued an award and then a corrected award offering clarification in relation to a reference in his original reasoning. The Court set the arbitral award aside on the basis that the arbitrator exceeded his powers in issuing a correction ruling that appeared to offer “an alternate explanation for the result rather than clarification of the original reasoning”. The Court acknowledged that section 27 of the British Columbia Commercial Arbitration Act allows an arbitrator to correct a clerical or accidental error in an arbitral award. The Court also acknowledged that an arbitrator may issue a post-award alteration to provide parties with “more precise expression of the thought”. However, the Court held that an arbitrator does not have powers to issue an alteration that appears to change either the arbitrator’s thought process or the basis of the award.

For a copy of this decision, please follow the link here: http://www.canlii.com/en/bc/bcca/doc/2010/2010bcca33/2010bcca33.html

Arbitration Clauses in Consumer Contracts Will Not Stop Class Actions in Ontario

Many businesses use standard-form sales agreements in offering products or services to the public. With the increased frequency of class litigation across Canada, vendors often insert an arbitration clause in the standard-form contract as part of their risk management strategy against consumer class actions. This strategy may work in some other Canadian provinces, but not in Ontario, which was confirmed in a very recent decision released by the Ontario Court of Appeal in Griffin v. Dell Canada Inc.

In 2008, Dell brought a motion before the Ontario Superior Court of Justice to stay the putative class action invoking the arbitration clause in the Terms and Conditions. It should be noted that prior to this Ontario class action, Dell Computer Corporation ("Dell Computer") was the defendant in a separate class action commenced in 2003 in Quebec under the Code of Civil Procedure: Union des consommateurs c. Dell Computer Corp. ("Dell Computer"). There, Dell Computer also relied on the standard arbitration clause contained in the terms and conditions of the sale for a stay of the class action. Although its stay request was refused by the Quebec Superior Court and Court of Appeal, it was granted by the majority of the Supreme Court of Canada. Deschamps J. held that the class action is a civil procedure that does not create new rights, and "cannot serve as a basis for legal proceedings if the various claims it covers, taken individually would not do so." Therefore, a class action is unavailable if there is a valid arbitration clause applicable to the disputes. It is the arbitrator, not a court, who must rule, in the first instance, on the validity or applicability of an arbitration agreement.

In this Ontario class action, Justice Lax dismissed Dell's motion for stay. She noted Dell Computer in her decisions but distinguished it on the basis that the applicable statutes in Ontario were different from those in Quebec, and that the Supreme Court's holding in Dell Computer was specific to Quebec and not applicable in Ontario. In her view, the law in Ontario was that a motion for stay in favour of arbitration should be considered within the context of the preferable procedure analysis of a certification motion of that action. In the preferrability analysis, Justice Lax then compared the class action with arbitration of the class members' claims on an individual basis. Because of the costs of proof inherent in this complex product liability case, Justice Lax thought it was unlikely that class members would realistically commence individual and separate arbitration proceedings before NAF to assert their rights. As a result, she concluded that a class proceeding, not arbitration, was the preferred procedure. Accordingly, the class action against Dell was certified on February 3, 2009. In April 2009, Dell brought a motion asking Justice Lax to reconsider her decision. Justice Lax dismissed the motion and confirmed her prior decision.

The appeal from Justice Lax's decisions was dismissed on January 10, 2010. The Court of Appeal considered the Ontario Consumer Protection Act ("CPA") determinative of Dell's stay request. Unlike the consumer protection statutes in other common law provinces in Canada, Ontario's CPA expressly invalidates mandatory arbitration clauses in consumer contracts and , at the same time, specifically preserves a consumer's right to commence, or participate in, a class proceeding despite any class action waiver in the consumer agreement. Accordingly, Dell could not rely on the arbitration clause in the Terms and Conditions to stay the class action.

A Corporation's Action Against Its Former Directors: When Is It Statute-Barred?

It is well established in corporate law that directors of a corporation - who have been given broad powers to oversee and direct the business of the corporation - owe a fiduciary duty to the corporation they serve, and must discharge such duty by acting in the company's best interests. If a director breaches his or her fiduciary duty, and the corporation wishes to commence a legal proceeding against the culpable director, when will the limitation period start to run for that action?

The answer to this question is not straightforward, in spite of Ontario's basic two-year limitation period. This issue is discussed in my recent paper, "A Corporation's Action Against Its Former Directors: When Is It Statute-Barred," (2009), Volume XIV, No. 4, Corporate Liability 878-883.

Feel free to contact me if you would like to receive a copy of this paper.