Canada: BLG Monthly Update — December 2011

Last Updated: January 2 2012
Article by Neil Guthrie

Most Read Contributor in Canada, September 2016

The BLG Monthly Update is a digest of recent developments in the law which Neil Guthrie, our National Director of Research, thinks you will find interesting or relevant – or both.


  • Administrative law/contracts: contract to make judicial appointment void and not made out on facts anyway
  • Civil procedure: law-firm error with possibly fatal consequences
  • Civil procedure/health law/torts: personal injury claim not inherently unassignable, but this assignment was champertous
  • Class actions: Ontario CA reverses judgment on merits in environmental class action
  • Commercial law: series of sell-offs not sufficiently related to be sale of 'all or substantially all' assets
  • Consumer protection: EU adopts new rules
  • Contracts: contract badly drafted and somewhat counterintuitive, but enforced
  • Contracts: the US view on third-party beneficiaries
  • Contracts: useful reminder that direct damages can include lost profits
  • Corporations: directors who rubber-stamped financial statements liable for breach of duty
  • Defamation: hyperlink to defamatory statement is not itself defamatory
  • Employment: be careful what you do with the results of that employee satisfaction survey
  • Evidence: limited waiver of privilege in dispute amongst oligarchs
  • Insolvency: no more three-ways (in terms of set-off, that is)
  • Intellectual property: 'where women glow and men plunder'
  • Mergers & acquisitions/torts: rescission of share sale awarded for fraudulent misrepresentation in forecasts
  • Not-for-profits: director of unincorporated association personally liable for association's breach of contract
  • Property/matrimonial law: if your intended breaks off the engagement, can you get the ring back?
  • Real estate/electronic commerce: sale of land by e-mail possible in England?
  • Securities/derivatives: OSC grants exemptive relief in response to 'regulatory uncertainty' about OTC derivatives
  • Securities regulation: New York court slams SEC's 'bureaucratic proclivity ... to avoid responsibility'
  • Torts: trial judge so wrong in negligence case
  • Torts/occupational health and safety: the problem of successive wrongdoers – material contribution yet again
  • Torts/occupier's liability: sliding down the banister like Mary Poppins not a good idea


Contract to make judicial appointment void and not made out on facts anyway

Donald Angevine, a Crown attorney, received a call in 1992 from Howard Hampton, the Attorney General of Ontario. What they discussed is disputed: Angevine says that Hampton congratulated him on his forthcoming appointment as a provincial court judge; Hampton says he congratulated Angevine on being recommended to the provincial judicial appointments advisory committee. In any event, Hampton lost office some months later without any appointment having been made. Angevine sued in 2007 for breach of contract: Angevine v Ontario, 2011 ONSC 4523. [Link available here].

Case dismissed, said Parayeski J of the Ontario SCJ. A judicial appointment is a matter of executive discretion; a contract to make one would be a fettering of discretion and would undermine public confidence in the justice system. Any purported contract to make a judicial appointment would be void as against public policy. Even if this were not the case, the nature of the judicial appointments process would make it impossible for the AG to have entered into a binding contract with Angevine, and these two parties were not ad idem in any event. Angevine's claim would also be statute-barred if viable.


Law-firm error with possibly fatal consequences

When the topic of professional negligence comes up at big firms, someone will often pipe up with the comment that 'well, at least nobody died'. Unfortunately for Sullivan & Cromwell (S&C), that might not turn out to be true.

Two of its associates took on a criminal appeal as a pro bono matter, but left the firm before it was concluded. The client, Cory Maples, had been sentenced to death in 2000 after an Alabama jury found that he killed two people. The court declined Maples's petition for an appeal, starting a 42-day limitation period for the filing of a further appeal. The court clerk sent the required notice to Maples c/o S&C in New York; the S&C mailroom sent it back, unopened and stamped 'Return to sender – left firm'. The clerk didn't open the letter. S&C has presented arguments before the US Supreme Court that the Alabama court should have done more to ensure that a death-row inmate received notice of his right to appeal. Counsel for the state of Alabama contend that the clerk did everything required and that there was no obligation to go beyond that. [Link available here].


Personal injury claim not inherently unassignable, but this assignment was champertous

Alan Catchpole, a patient at the Norfolk & Norwich University Hospital, contracted an infection caused by methicillin-resistant staphylococcus aureus (MRSA), allegedly as a result of the hospital's negligence. He initiated proceedings against the hospital. John Simpson also contracted MRSA at the hospital and later died of an unrelated condition. His widow Jennifer felt strongly that MRSA made his last days more difficult. She also sued the hospital. Nothing terribly controversial so far. Catchpole and Mrs Simpson then entered into a contract under which he assigned his claim against the hospital to her for a payment of £1.

The hospital moved successfully to have the purportedly assigned claim struck on the grounds that Mrs Simpson had no legitimate interest in it.

On appeal, the English Court of Appeal took a different tack. A claim for damages for personal injury is a chose in action and as such not inherently unassignable. The law does regard a chose in action that is 'essentially personal in nature' as unassignable, but Moore-Bick LJ didn't think that the judge below was correct to assume Catchpole's claim was necessarily one of these. While a right to recover damages for personal injury is personal in nature, the obligation to pay compensation (which arises by operation of law) is not: Catchpole's claim being a hybrid, the claim should not have been struck.

So far, so good for Mrs Simpson. Her interest in the claim was, however, found to be champertous because she was not ensuring that Catchpole received compensation (which could have been achieved through litigation in his own name) but instead pursuing her own campaign against the hospital. This was 'officious intermeddling' in litigation and thus champertous. Moore-Bick LJ declined to say definitively what a legitimate interest in someone else's personal injury claim might be, but left the door open to the possibility.[Link available here].


ONCA reverses judgment on merits in environmental class action

The claimants in Smith v Inco Ltd argued successfully at trial that they suffered damages as a result of the discharge of nickel from Inco's refinery in Port Colborne, Ont. – not because their health suffered but because the value of their residential properties diminished owing to the presence of discharged nickel in the soil.[Link available here]

At trial Henderson J found that Inco was liable in private nuisance and under the principle of strict liability in Rylands v Fletcher (1866) LR 1 Ex 265, aff'd (1868) LR 3 HL 330. He was wrong on both counts, said the Court of Appeal: 2011 ONCA 628.

There was no liability in private nuisance because the plaintiffs could not establish that the presence of nickel in the soil caused any actual damage to the properties or rights associated with it. Concerns about potential health risks were insufficient. On Rylands, the Court of Appeal observed that strict liability is predicated on 'non-natural' use of the alleged tortfeasor's property. This doesn't mean that anything not found naturally on the property (like nickel brought to a refinery) will automatically give rise to strict liability if it escapes, nor does the characterisation of an activity as 'ultra-hazardous'. The plaintiffs failed to show that Inco's use of the refinery was 'non-natural', 'exceptionally dangerous' or 'extraordinary or unusual' (for a nickel refinery). The trial judge's award of $36 million in damages was therefore set aside.

Given that the plaintiffs' claims failed on both counts, it wasn't necessary to reconsider the trial judge's findings on causation or limitation periods. On the latter point the court did note that where it isn't established that all class members were or ought to have been aware of the claim, then the application of the Limitations Act will not be a common issue but instead the subject of individual determinations. The fact that most of the class is aware of the claim doesn't set the clock running for those who aren't.


Series of sell-offs not sufficiently related to be sale of 'all or substantially all' assets

One of Liberty Media's bondholders challenged what it called a 'disaggregation strategy' by the company, consisting of a series of four sales of assets since 2004. The bondholder alleged that this violated a covenant with bondholders that Liberty Media would not divest itself of 'all or substantially all' of its assets unless the transferee assumed all of its obligations under the agreement.

The Delaware Supreme Court has affirmed the Chancery court's decision that the transactions were not sufficiently connected so as to require aggregation; each resulted from a distinct and independent business decision on the facts as they existed at the time, not as part of a single scheme or master plan to liquidate assets. The agreement itself did not incorporate the 'step transaction' doctrine, which would have treated the series of sales as a single transaction.

The Bank of New York Mellon Trust Co. NA v Liberty Media Corp. (Del SC, 21 September 2011).


EU adopts new rules on consumer protection

The EU has formally adopted new measures aimed at enhancing consumer rights, which must be implemented by member states within 2 years. [Link available here].

The most significant provisions:

  • no hidden charges on the internet (consumers will have to confirm that they understand there is a fee to be paid)
  • merchants must disclose the total cost of a product or service (online customers not liable for charges not fully disclosed)
  • pre-ticked boxes on websites prohibited (extra services must be selected by the customer, not set as default options)
  • enhanced cooling-off and refund rights for sales contracts, clearer information to be required for the cost of returning goods
  • extra charges for paying with a credit card or to use telephone hotlines prohibited
  • improved disclosure with respect to digital purchases (software and hardware compatibility, application of digital locks, withdrawal rights up to the moment download begins)
  • standardised rules for contracts for sales of goods and services


Contract badly drafted and somewhat counterintuitive, but enforced

A contract for the construction and sale of an aircraft by Bombardier provided in clause 8.4 that the buyer could terminate immediately after 90 days of 'non-excusable delay' (as defined). There were delays in construction and the buyer exercised its clause 8.4 right to terminate. Not so fast, said Bombardier: clause 9.2 required written notice specifying default or breach and granted the seller the opportunity to remedy the problem.

At first blush the English Court of Appeal thought Bombardier's position had 'a certain air of unreality' to it: why should the seller have a second chance when it has already been notified of 90 days of non-excusable delay sufficient to justify termination?

Well, because that was what the parties had actually agreed to, on a careful reading of the interlocking and poorly drafted clauses: Gesner Investments Ltd v Bombardier Inc., [2011] EWCA Civ 1118. Where the drafting is poor, a court may be less willing to take literally a clause which leads to an improbable or commercially unreasonable result, but on the other hand will not reformulate provisions which are relatively clear but which appear to be one-sided or unfair. On balance, it did appear that the parties intended ('for better or worse') to build in some additional leeway for the seller after 90 days of non-excusable delay – even if this led to the somewhat odd result that while 90 days of 'non-excusable delay' qualified for the grace period, the same amount of 'excusable delay' did not. [Link available here].

Third-party beneficiaries: the US view

The contract between Ohio Edison Co. (OEC), an electricity utility, and its tree expert provided that the expert was required to conduct any work with an adequate view to safeguarding 'all persons and property from injury'. Lisa Huff was injured when a maple tree located near one of OEC's power lines split as a result of lightning strike and hit her. The tree was outside the easement maintained by OEC but was within the tree inspector's mandate. Huff sued OEC, its tree expert and the owner of the tree in both tort and contract.

The Ohio Supreme Court's discussion of the contract claim provides an interesting snapshot of US law on third-party beneficiaries: Huff v First Energy Corp (SC Ohio, 5 Oct. 2011). The court concluded that Huff was not able to sue on the contract between OEC and the tree expert because there was no clear intention in the contract that a person in her position was a direct beneficiary of it. The contract was designed to support OEC's electrical service by keeping its lines free of interfering vegetation, not 'for the general benefit of the public walking on public roads'. Receipt by the public of indirect benefits from tree-maintenance wasn't enough to found contractual liability to a member of the public – but the corollary is that clear drafting could have extended such a benefit.

Canadian law has been edging towards recognition of third-party benefits under contract, but we're not there yet (except in New Brunswick, which has enacted legislation to provide for third-party contractual rights). [Links available here and here].

Useful reminder that direct damages can include lost profits

Remember Hadley v Baxendale (1854) 9 Ex Ch 341, 156 ER 145, from first-year law school? Lawyers think they do, but are often surprised when they go back and read what it actually says. [Link available here].

In McCain Foods (GB) Ltd v Eco-Tec Europe Ltd, [2011] EWHC 66, the English Technology and Construction Court held that the clause in the contract between the parties which excluded liability for 'indirect, special, incidental and consequential damages' did NOT preclude the plaintiff's claim for lost revenue resulting from the complete failure of the system provided by the defendant for the removal of a chemical from biogas at a waste water treatment plant. Such losses arose naturally, according to the usual course of things, from the breach (branch 1 of Hadley v Baxendale), and were not special circumstances that required being communicated to the defendant in order to be recoverable (branch 2). Where the contract is for the use of a thing or process, losses arising from its unusability or dangerousness may well be direct rather than consequential – and thus not excluded by a boilerplate indirect/consequential damages clause. [Link available here].


Directors who rubber-stamped financial statements liable for breach of duty

The 2007 annual reports of Centro Properties Group and Centro Retail Group failed to disclose significant matters: AUS$2 billion in short-term liabilities were misclassified as 'non-current' and the financials omitted to mention a US$1.75 billion guarantee of the liabilities of an associated company as a significant post-balance date matter. This was no 'mere technical oversight', but the directors nevertheless signed off on the financials as being true and fair. The Australian Securities and Investments Commission (ASIC) went after the directors for breaches of their statutory duties, including the duty of care and diligence.

In a 589-paragraph judgment, Middleton J of the Federal Court found that the directors were liable for failing to read and understand the financial statements before signing off on them: ASIC v Healey, [2011] FCA 717. They could rely on the advice of external auditors and management only so far: 'there is a core, irreducible requirement of directors to be involved in the management of the company' and (even though accounting treatment of the matters at issue was to some extent a 'grey area') the deficiencies 'could have been seen without difficulty ... upon a careful and diligent consideration of the financial statements'. The liabilities and the guarantee were all things the directors either knew about or ought to have known about; they failed to spot 'obvious errors' by relying exclusively on advisers, without standing back, 'armed with [their] own knowledge', and making due inquiry.[Link available here].

The judge expressed the view that his ruling should not 'cause the boardrooms of Australia to empty overnight', but at the very least it will make people think twice about corporate directorships.

The decision on penalties is reported as ASIC v Healey (No 2), [2011] FCA 1003. [Link available here].


Hyperlink to defamatory statement is not itself defamation

Jon Newton posted an article on his website which contained shallow and deep hyperlinks to other websites, which in turn contained statements about Wayne Crookes. Crookes said the statements were defamatory and sued Newton for having published libels after Newton refused to remove the links from his site.

The trial judge rejected the claim: the hyperlinks were analogous to footnotes in that they referred to another source but did not repeat its contents. No repetition, no publication for defamation purposes. The BC Court of Appeal agreed, declining to say that these particular hyperlinks were an 'encouragement or invitation' to view the allegedly defamatory material or that one could draw the inference that a third party had read the material on the basis of the number of hits for the linked article. Prowse JA dissented, finding hits relevant and encouragement present.

The SCC dismissed Crookes's appeal. Abella J (Binnie, LeBel, Charron, Rothstein and Cromwell JJ concurring) held that hyperlinks, like footnotes, are content-neutral; the publisher of the libel is the author of the material at the end of the link. McLachlin CJC and Fish J concurred, but thought that where a hyperlink, seen in context, adopts or endorses the linked content, then it can be defamatory – but that Newton's links did not actually approve or agree with the alleged libels.

Deschamps J concurred in the result, but thought her colleagues took too simplistic an approach. No bright lines for her: it is not enough to say that references and hyperlinks are neutral, since they make defamatory material available in different ways, some of which can be defamatory. Newton's act in posting the links was deliberate, but because a reader who followed the shallow links had to take further action to read the stories, Newton had not made the alleged libels readily available. The deep link, which took a reader straight to an article about Crookes, presented no similar barrier and Newton could therefore be said to have published the actual content of the article. The facts (method of presentation, number of hits) did not, however, support the inference that Newton had made the material readily available to a third party. The fact that people had clicked on the deep link didn't necessarily mean they had then read the article. [Link available here].


Be careful what you do with the results of that employee satisfaction survey

Over the course of his 18 years with his employer, Adrian Chandran received consistent reviews stating that he performed 'above expectations'. In 2007, management conducted an employee satisfaction survey in which 9 of 11 of Chandran's direct reports indicated that he made condescending remarks and engaged in bullying.

Chandran denied the allegations and, in response to the employer's disciplinary letter to him and removal of his supervisory duties, sued for constructive dismissal: Chandran v National Bank of Canada, 2011 ONSC 777. [Link available here].

Pollak J found that Chandran had been constructively dismissed. The employer made no investigation of the allegations in the survey and unilaterally transferred Chandran to a position which did not involve the supervision of others; it was reasonable for him to conclude that he had been demoted, thereby fundamentally altering his employment. On the facts, Chandran adequately mitigated his damages. He was awarded 14 months' salary plus interest and costs.


Limited waiver of privilege in dispute amongst oligarchs

Boris Berezovsky (oligarch B) brought a claim in the court of Chancery against the heirs of Arkadi Patarkatshishvili (AP, for ease of reference) for a 25% interest in Rusal, an aluminium company, under the terms of an alleged oral agreement. Oligarch B is seeking to recover the assets from AP's estate or an award of damages for the estate's failure to secure the property. Another oligarch, Roman Abramovich (oligarch A) is alleged to have agreed – again orally – to hold half of his Rusal interests in trust for oligarch B and AP, the subject of an action by oligarch B in the Commercial Court. There is considerable overlap between oligarch B's claims against oligarch A in the Commercial Court and the Chancery claim against the AP estate. [Link available here].

The issue for the Court of Appeal in Berezovsky v Hine, [2011] EWCA Civ 1089, was whether oligarch B had waived privilege over draft witness statements prepared by his counsel for his use in the Commercial Court action by sending them to the solicitors acting for AP to assist the latter with his claim for asylum in the UK. The AP estate wished to make use of the statements in defending oligarch B's Chancery claim against it. Mann J of the Commercial Court thought that oligarch B had waived his privilege by sharing the documents. On appeal, the Master of the Rolls concluded that the statements had been disclosed for a limited purpose only (the asylum claim) and that use for any other purpose was impliedly prohibited without oligarch B's consent, unless AP's use (despite oligarch B's objection) could not cause prejudice to oligarch B or could be achieved without disclosing the contents of the statements to anyone but AP, his successors or counsel. A number of facts supported the conclusion that disclosure had been made for a limited purpose only, notably that oligarch B would clearly have wanted to keep the draft statements from the eyes of adverse parties in the overlapping proceedings (i.e., oligarch A) and that AP would have appreciated this. The fact that the statements were labelled 'privileged and confidential' when disclosed also helped. Assertion of a continuing common-interest privilege might have led to the same conclusion, but it was unnecessary to decide the issues on that basis. AP's estate could not read or use the documents for the purposes of the Chancery proceedings. {Link available here].

Canadian law, as it stands, would have had more difficulty with all of this: limited waiver of privilege has so far been recognised only in, er, limited circumstances, for example when an auditor requires disclosure of privileged material: Philip Services (Receiver of) v OSC (2005) 77 OR (3d) 209 (Div Ct). There is no reason why the principle should not be more widely available, as demonstrated by the English Court of Appeal. [Link available here].


No more three-ways (with respect to set-off in insolvency, that is)

The District Court in Manhattan seems to have put the nail in the coffin of triangular set-off in insolvency – that is, the ability of affiliates to set off their claims against an insolvent debtor: In re Lehman Brothers Inc. (SDNY, 4 October 2011).

UBS terminated a swap agreement with Lehman on the eve of a stay of proceedings against the latter under the Securities Investor Protection Act. UBS wanted to set off against the $76 million that it owed to the insolvent estate a total of $23 million owed by Lehman to UBS affiliates. Judge Peck said no, on the grounds that the requirement under the US bankruptcy code for mutuality of obligations was not satisfied in a 'triangular' set-off involving affiliates. He hastened to add, however, that such an arrangement would be fine outside the context of insolvency – the point in insolvency being to ensure that the estate gets what it is owed, subject to settling mutual obligations, but without having to dilute that through preferential claims by affiliates of the other party to the set-off.

See also In re SemCrude LP (Bankr. D. Del., 2009).


'Where women glow and men plunder'

Classic 80s lyrics from Men at Work's biggest hit: 'Do you come from a land down under, where women glow and men plunder?'

There is a certain irony in the use of the word 'plunder', now that the High Court of Australia has refused leave to appeal the findings of courts below that the band borrowed the song's opening flute passage, without permission and to a substantial degree, from that earlier Aussie classic, 'Kookaburra Sits in the Old Gum Tree', originally published in 1934: see EMI Songs Australia Pty Ltd v Larrikin Music Publishing Pty Ltd, [2011] FCAFC 47.

The Federal Court of Australia concluded that the band had infringed copyright in the older song and that EMI, its record company, was required to pay 5% of royalties earned since 2002 to Larrikin, the current owner of the 'Kookaburra' copyright; claims arising before that date were barred by the applicable limitation period.

The remedy of disgorgement calls to mind another line from the song: 'I come from a land down under, where beer does flow and men chunder...' [Links available here and here].


Rescission of share sale awarded for fraudulent misrepresentation in forecasts

Hampson plc, a large public company, wanted to divest itself of one of its subsidiaries, Hampson Precision Automotive (HPA), which had had its shares of ups and downs. Hampson provided income and sales forecasts to potential buyers, and Grove Industries eventually agreed to buy all of the shares of HPA through Erlson Precision Holdings, an acquisition vehicle. What Grove did not know at the time was that about 3 months before the sale, one of HPA's largest customers had indicated that it was severing its business relationship with HPA. The buyer later found out and sued Hampson: Erlson Precision Holdings Ltd v Hampson Industries plc, [2011] EWHC 1137 (Comm).

Field J of the English Commercial Court found that the forecasts, while statements of opinion, carried an implied representation of fact, namely reasonable belief in or knowledge of facts justifying the figures that had been given. Boilerplate exclusion clauses in the sale agreement precluded a claim for innocent or negligent misrepresentation, leaving a claim for fraudulent misrep. The judge concluded that Hampson was liable because its CEO knew the representations in the forecasts were false and, knowing that, failed to correct them. Hampson's counsel argued that liability would arise only if it could be established that the CEO knew he had an obligation to correct the misrepresentation and dishonestly failed to do so. The judge disagreed but thought that even if this were required, the plaintiff had satisfied that additional burden. The plaintiff was entitled to unwind the share sale.

The parties have since agreed that the purchaser will keep the shares and receive from the seller a payment of £1.5 million plus legal costs. [Link available here].


Director of unincorporated association personally liable for association's breach of contract

An English rugby club (an unincorporated association of its members) engaged the services of Barnes Webster & Sons (BWS), a construction company. The club's treasurer signed the contract, which was witnessed by Davies, the club's president. The club agreed to pay BWS a fixed price plus additional amounts for certain variations in the work, should they arise. The variations were required, but the club did not pay the £147,000 bill for them that BWS presented. BWS made a demand on Davies personally, which he moved to set aside.

The English district judge held that Davies was liable: he voted in favour of the contract at a club meeting; he was a trustee of the club; he witnessed the contract; and he knew that a requirement for the variations had arisen and had not objected. Mann J of the Chancery Division dismissed Davies's appeal (Davies v Barnes Webster & Sons Ltd, unreported, 29 June 2011), holding that while a member of an unincorporated association is not liable per se for contracts entered into on the association's behalf, members who have the association's authority to enter into contracts will be found personally liable. Davies was one such, as he was on the management committee that had contracting authority from club members. BWS could recover from him or any other member of the committee.

In light of the fact that coming up with the money himself would bankrupt Davies, the judge gave him 3 months to arrange for payment before BWS could bring a petition for his bankruptcy.


If your intended breaks off the engagement, can you get the ring back?

Dr Craig Fischer, a Houston surgeon, bought his girlfriend a 4.06-carat diamond engagement ring for US$73,000 (unclear whether the so-called two-month salary guideline was at work). She later broke off the engagement; Fischer has sued her for the return of the ring (plus his share of money in a joint bank account and half of the funds they advanced for the apartment they planned to share).

Will he succeed with respect to the rock?

Maybe. The answer depends on the jurisdiction: some states treat an engagement ring as an outright gift (no return), while the majority see it as a conditional one (returnable if things don't work out). In some states (e.g., California), fault matters: the party who instigates the break-up generally has no right to the ring. In common-law Canada, the dominant view is that the ring is a conditional gift, but that fault in breaking up is a relevant consideration: Iliopoulos v Gettas (1981) 32 OR (2d) 636 (Co Ct); Cohen v Sellar [1926] 1 KB 536. [Links available here and here].


Sale of land by e-mail possible in England?

In Ontario, transactions involving interests in land are specifically excluded from the scope of the Electronic Commerce Act. [Link available here].

In England, the Electronic Communications Act 2000 contains provisions which would allow amendments to other statutes in order to facilitate real estate transactions by electronic means, but no such amendments have been made. [Link available here].

Case law might fill the gap in England. In Green (Liquidator of Stealth Construction Ltd) v Ireland, [2011] EWHC 1305 (Ch), it has been suggested that the writing requirements of the (pre-electronic) Law of Property (Miscellaneous Provisions) Act 1989 could be satisfied by an exchange of e-mail correspondence (although on the facts of the case the electronic exchange did not give rise to a binding contract – in this instance to create a charge). [Links available here and here].


OSC grants exemptive relief in response to 'regulatory uncertainty' about OTC derivatives

Deutsche Bank AG and its subsidiary DB Commodities Canada Ltd have obtained an exemption from the registration and prospectus requirements in respect of trades in OTC derivatives with institutional 'permitted client' counterparties, subject to certain conditions: Deutsche Bank AG and DB Commodities Canada Ltd (OSC, 11 October 2011). [Link available here].

What is interesting about the OSC's order is the recognition of the patchwork that is the regulation (or non-regulation) of OTC derivatives in Canada: in Québec, they are regulated under separate legislation; in BC, Alberta, Saskatchewan, PEI, New Brunswick and the territories, they are regulated as securities; in Manitoba, Ontario and Nova Scotia, the position on them is unclear (in spite of a failed attempt by the OSC to assert jurisdiction in the 1990s). In 2009, OSC staff issued a notice stating that they would treat contracts for difference, forex contracts and similar OTC derivatives as 'investment contracts' (and thus 'securities') when offered to non-institutional investors, leaving institutional trading for another day. Deutsche Bank (but not its non-bank sub) would qualify for a registration exemption in Ontario. In BC, Alberta, Saskatchewan and New Brunswick, blanket orders exempt institutional OTC trades between certain institutional counterparties from regulation. All a bit of a mess, and clearly one that needs to be fixed.


New York court slams SEC's 'bureaucratic proclivity ... to avoid responsibility'

Zurich Financial Services (ZFS) entered into an $85-million settlement with the SEC arising from the alleged involvement of ZFS in inflating the financial performance of another company in connection with the latter's IPO. The SEC obtained court approval for distribution of the settlement funds to aggrieved investors under its Fair Funds programme, and appointed Garden City Group (GCG) to administer that distribution. GCG came to the court seeking approval of a payment of over $1 million in fees, expenses and costs, nearly ten times spent per dollar in the distribution of a related private class action.

Pauley DJ thought that GCG's application was an object lesson in 'the perils of judicial oversight of SEC settlements once the adversarial process has melted away': SEC v Zurich Financial Services (SDNY, 30 Sept. 2011). GCG provided a single, unitemised invoice in support of its claim; had spent over $500K on advertisements in publications the judge clearly thought excessive; failed to post a notice to potential claimants on the SEC website; and snail-mailed 55,000 claims packets that yielded just over a thousand eligible claims. The judge described the regulator's oversight of GCG as 'ostrich-like' and unquestioning, evidence of its 'natural, bureaucratic proclivity ... to avoid responsibility'. Its acquiescence to whatever GCG proposed being 'unseemly', Judge Pauley directed the SEC to evaluate the effectiveness of the GCG advertising campaign in light of its results. GCG's motion failed, until the SEC came back with a better story. [Link available here].


Trial judge so wrong in negligence case

Donley Investments and Canril Corp. occupied neighbouring premises. Water leaked from Canril's property into the basement of Donley's building; Donley brought claims in negligence and nuisance, and was successful at trial.

Not successful on appeal, however: Donley Investments Ltd v Canril Corp., 2011 ONCA 625. The Ontario CA held that the trial judge made three fatal errors: (1) she shifted the burden of proof to the defendants, incorrectly finding that their duty of care raised a presumption of negligence; (2) she found that Canril had a duty to join Donley in a claim against the local municipality for an earlier incident of water infiltration, and that in failing to do so Canril was somehow negligent and (3) she botched the causation analysis by departing from the 'but for' standard for 'material contribution' where this was unwarranted. The negligence claim was wholly unsustainable, and the nuisance claim couldn't stand on its own.

SCC take note: clarification of the 'material contribution' test urgently required. [Link available here].


The problem of successive wrongdoers: material contribution yet again

SDA, a structural engineering firm, designed an industrial gate but failed to include a stop mechanism that would have prevented the gate (which weighed 1,340 kg) from falling over if operated manually. The defect was noticed and an unknown third party was brought in to remedy the problem. The third party performed the work negligently. When Melissa Maybury manually opened the gate, it fell and killed her. SDA was charged and convicted under New South Wales occupational health and safety legislation.

SDA appealed, arguing that the Industrial Court had improperly rejected its defence based on the new, intervening act of the third party. The NSW Court of Appeal disagreed: SDA's design as originally executed presented a serious safety risk; it wasn't as though a negligible risk had been converted into a serious one by the third party. The fact that the third party could have eliminated the risk but did not do so would make it partly liable as well, but did not preclude the original finding that SDA's failures substantially contributed to the risk: Simpson Design Associates Pty Ltd v Industrial Court of New South Wales, [2011] NSWCA 316. [Link available here].


Sliding down the banister like Mary Poppins not a good idea

The Union Rooms, a bar and nightclub in Newcastle, are housed in a splendid 19th-century building which used to be a private club.

The banisters of its grand staircase are lower than what is now required under the municipal building code. English Heritage, a conservation authority, insisted that no changes to the staircase were to be made when the club was converted in 1998 and the municipal building safety people eventually agreed.

Ruth Geary went out for drinks with a group of work colleagues, ending up at the Union Rooms. She said she had a total of four vodka-and-tonics. At some point the topic of Mary Poppins appears to have come up, and Mrs Geary decided to slide down the banister of the grand staircase, in the manner of the magical nanny. She fell over backwards in doing so, crashing down on the marble floor 12 feet below, and was rendered a quadriplegic.

Coulson J accepted that Geary was not drunk at the time of the accident – but did conclude that she had voluntarily assumed the risk of her actions, which gave the bar owners a complete defence to her claim both at common law and under occupier's liability legislation: Geary v JD Weatherspoon plc, [2011] EWHC 1506 (QB). The injuries were not caused by any defects in the staircase but rather 'by the decision to slide'. There was no evidence that the defendant had assumed a responsibility sufficient to negate that defence, for example by failing to provide proper instruction or making a botched intervention. No duty of care could be established; it wasn't as though Geary had been pushed down the stairs by a drunken hooligan management had negligently allowed into the bar. The judge reached these conclusions with regret, but couldn't help echoing the words of an older case (The 'Carlgarth' [1927] P 93): 'When you invite a person into your house to use the staircase, you do not invite him to slide down the banisters, you invite him to use the staircase in the ordinary way in which it is used.' [Link available here].

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