- Schaeffer v. Wood, 2001 ONCA 716 (Sharpe, Armstrong
and Rouleau JJ.A.), November 15, 2011
- Oz Optics Limited v. Timbercon, Inc., 2011
ONCA 714 (Simmons, Armstrong and LaForme JJ.A.), November 15,
- Kaiser (Re), 2011 ONCA 713 (Cronk J.A. in chambers),
November 14, 2011
- Title v. Canadian Asset Based Lending Enterprise (CABLE
Inc.), 2011 ONCA 715 (Sharpe, Juriansz and Watt JJ.A.),
November 11, 2015
- Jeffery v. London Life Insurance Co., 2011 ONCA 683 (O'Connor ACJO, Blair and LaForme JJ.A.), November 3, 2011
1. Schaeffer v. Wood, 2001 ONCA 716 (Sharpe, Armstrong and Rouleau JJ.A.), November 15, 2011
The appellants were family members of two deceased who died in incidents involving the use of police force. In the court below, they sought a declaratory judgment that, among other things, police officers who are involved in incidents attracting the attention of the Special Investigations Unit ("SIU") were not entitled to legal assistance in the preparation of their notes regarding the incident. The application judge dismissed the application on the basis that the applicants lacked standing to sue for declaratory relief and that the issues raised were moot and not justiciable. The appellants sought to reverse that decision and have their application decided on its merits.
At the heart of the appeal lay the legislative framework for SIU investigations, the Conduct and Duties of Police Officers Respecting Investigations by the Special Investigations Unit, O.Reg. 267/10, as amended by O.Reg. 283/11 ("SIU Regulation"), and certain practices adopted by police officers in the course of SIU investigations. The key requirements, which include amendments to the SIU Regulation that were put in place after the application was heard include: (i) that police officers involved in the incident should be segregated from each other until after the SIU has completed its interviews; (ii) a police officer involved in the incident shall not communicate directly or indirectly with any other police officer involved in the incident concerning the incident until after the SIU interviews; (iii) every police officer is entitled to consult with legal counsel or a representative of a police association and to have legal counsel or a representative of a police association present during his or her interview with the SIU unless it would cause an unreasonable delay in the investigation; (iv) witness officers may not be represented by the same legal counsel as subject officers; (v) a witness officer shall complete in full the notes on the incident in accordance with his or her duty and shall provide the notes to the chief of police within 24 hours after a request for the notes is made by the SIU; (vi) a subject officer shall complete in full the notes on the incident in accordance with his or her duty, but no member of the police force shall provide copies of the notes at the request of the SIU; and (vii) the notes made shall be completed by the end of the officer's tour of duty, except where excused by the chief of police.
Subject officers are defined to mean a "police officer whose conduct appears, in the opinion of the SIU Director, to have caused the death or serious injury under investigation". Witness officers are defined as "a police officer who, in the opinion of the SIU director, is involved in the incident under investigation but is not a subject officer."
The applicants complained that the SIU Regulation was not followed in the course of the SIU investigations into the deaths of their family members. In one incident, the subject and witness officers involved were advised by their senior officer to delay making their notebook entries until they had consulted with counsel. Those notes were prepared for counsel's review or with counsel's advice and were completed two days after the incident. Both the subject and witness officers consulted the same counsel. In the other incident, the subject and witness officers were again represented by the same counsel and had been advised by their senior officer that they should make no further notes until after they had spoken to legal counsel. The Director of the SIU had complained that these practices undermined the integrity of the SIU investigations.
On the issue of whether the applicants had standing to bring the application, the Court of Appeal concluded that the application judge erred in characterizing the issue of the retention of counsel in the preparation of an officer's notes as a matter of private right. The definition and exercises of rights and duties of police officers involved in SIU investigations have significant consequences for the public at large. The content and definition of those rights and duties turns on the interpretation of legislation. When the Supreme Court extended the scope of public interest standing to non-constitutional challenges to the legality of administrative authority, it prevented the immunization of legislation or public acts from any challenge (Canadian Council of Churches v. Canada (Minister of Employment and Immigration),  1 S.C.R. 236, at para. 36). The court found that purpose was met by allowing the appellants to advance their claim for declaratory relief.
In addition, the appellants presented a strong case that they were directly affected by and had a genuine interest in the issues raised by the application. They were family members of the deceased and the conduct of which they complain was found by the Director of the SIU to undermine the integrity of the investigation. The court said "the appellants have suffered immeasurable losses and to be told that their losses cannot be fully investigated because of the very conduct they seek to challenge, is sufficient to demonstrate that they are directly affected by, and have a genuine interest in, the issue."
Finally, the court disagreed with the applications judge that an action for misfeasance of public office or a complaint to the Law Society constituted another reasonable or effective manner to bring the issue before the courts. The tort of misfeasance of public office is difficult to establish, and whether the police officers are entitled to legal assistance in the preparation of their notes does not necessarily engage the Law Society's Rules of Professional Conduct. Even if it did, the appellants would not be parties to any Law Society proceedings.
As to whether the issues raised by the application were justiciable, the court again found that the application judge erred in her conclusion that they were not. The legal regime the court was being asked to interpret is shaped by policy considerations and the need to balance competing interests cannot preclude the court from exercising its customary role of interpreting the legal instruments that the legislature has provided. Where policy issues provide the context for, rather than the substance of, the questions before the court, the matter is justiciable.
The Court of Appeal concluded that, since the amendment to the SIU Regulations clearly forbids the joint retainer of counsel by subject and witness officers, the issue of double retainer was moot. However, the issue of whether officers involved in SIU investigations are entitled to obtain legal advice in the preparation of their notes was not answered by the amended SIU Regulation and remained live.
The court then considered the central issue before it: are officers entitled to the assistance of counsel in the preparation of their notes? It held that that the legislation governing SIU investigations should be interpreted in a manner that "provides complainants with a mechanism for an impartial and independent review of complaints and thereby enhances public confidence and trust in the administration of justice" (Metcalf v. Scott, 2001 ONSC 1292 (S.C.J.) at para. 91).
The court observed that the SIU Regulation (giving police officers the right to consult with legal counsel) significantly enhances the rights of both witness and subject officers beyond those enjoyed by ordinary citizens. The right to retain and instruct counsel conferred by s. 10(b) of the Canadian Charter of Rights and Freedoms arises upon arrest or detention. In contrast, witness and subject officers have a statutory right to consult counsel in connection with an SIU investigation, without any arrest or detention. The right to consult counsel and have counsel present during an interview with the SIU is a right not accorded to ordinary citizen but is accorded to police officers because, unlike the ordinary citizen, police officers do not enjoy the right to silence in the face of an SIU investigation. They instead have a statutory obligation to cooperate, to prepare their notes and to submit to an SIU interview.
However, the right to counsel is not without limit. Its meaning must be discerned with reference to the other provisions of the SIU Regulation to achieving a harmonious and coherent interpretation of the entire scheme.
The SIU Regulation reinforces an officer's duty to complete his or her notes in full in accordance with his or her duty. It would thus be wrong to interpret the right to counsel in a manner that would undermine or contradict the duty to complete notes. It was common ground on this appeal that the duty to create independent and contemporaneous notes of events is fundamental to the professional role of a police officer and central to the integrity of the administration of criminal justice. An officer's notes are also used to assist the officer in testifying at trial. It is thus vitally important to the reliability and integrity of the officer's evidence that the notes used record the officer's own independent recollection. Otherwise, the officer will be refreshing his or her memory with observations made by somebody else, and effectively giving hearsay evidence as if it was his or her own recollection.
The concern with a police officer seeking legal assistance before preparing his or her notes is not that the lawyer would do anything improper. Instead, the concern is that seeking legal advice is geared to the officer's own self-interest, or the interests of fellow officers, rather than the officer's overriding public duty. Focusing on the officer's private interests is inconsistent with the officer's public duty. Providing the police officer with information as to the ingredients of an offence or possible legal defence is likely to influence how the police officer writes his notes. Thus, lawyer involvement undermines the very purpose of a police officer's notes. The fact that an officer is required to complete his or her notes by the end of their tour of duty is inconsistent with the proposition that the police officer is entitled to await the arrival of counsel and obtain counsel's assistance in preparation of the notes.
An officer is also entitled to obtain some legal advice prior to making his or her notes provided it can be obtained without delay and does not relate to the content of the notes the officers is required to prepare. For example, a police officer has the right to some basic legal advice as to the nature of his or her rights and obligations in connection with the incident and the SIU investigation.
The court noted that advice of this nature can be quickly given and received by telephone, but if legal counsel is not available the officer must complete the notes prior to the end of his or her tour of duty. The period cannot be extended for the purpose of getting legal advice.
2. Oz Optics Limited v. Timbercon, Inc., 2011 ONCA 714 (Simmons, Armstrong and LaForme JJ.A.), November 15, 2011
This appeal involves an interesting commercial dispute and includes the court's latest comments on the duty to negotiate in good faith. The parties were both engaged in the fibre-optic industry. In late 2002, Timbercon, the respondent, approached Oz, the appellant, to design and manufacture a fibre-optic product known as a manual attenuator which Timbercon intended to supply to Lockheed Martin for use in the construction of jet fighter planes. Oz initially manufactured ten manual attenuators which were delivered to, and paid for by, Timbercon. By March 2003, Timbercon advised Oz that it expected a further order of 900 manual attenuators.
A March 27, 2003, conversation between the president of Timbercon and the vice-president of Oz was the subject of dispute. According to Oz, Timbercon required the attenuators to be provided over a 12 month period and would pay when it received payments from Lockheed Martin. Timbercon claimed that it was surprised to learn that Oz had already produced 900 attenuators and it agreed that it would sell Oz's manual attenuators by way of a consignment order. Shortly thereafter, Timbercon faxed a purchase order to Oz for 500 manual attenuators and included a notation that the purchase order was issued under a consignment agreement only. On Oz's request, Timbercon increased the order to 900 units. Oz shipped the additional 400 manual attenuators, increasing the total due to approximately $130,000. Timbercon paid just over $50,000 for the attenuators, leaving the balance remaining. Thus, one issue before the panel was whether Timbercon owed the balance for the manual attenuators to Oz, or if its sole requirement was to return the unsold attenuators.
The issue around the manual attenuators, however, was minor compared to the issue around the automated attenuators. By January 2003, Oz and Timbercon had begun to consider an automated attenuator and entered into a non-disclosure agreement to protect their respective proprietary and confidential information. From the outset of the discussions around the automated attenuator, Timbercon represented that Oz would be the sole supplier of the part, telling it that there was no competition, and providing repeated reassurances that an order for automated attenuators would be coming from Lockheed Martin.
Throughout spring and summer of 2003, Timbercon made a number of e-mail representations to Oz indicating that an order for the automated attenuators for Lockheed Martin was imminent. Lockheed Martin attended a meeting at Timbercon's facilities on August 14, 2003 to conduct a technical audit of the product. Timbercon asked Oz to send an engineer for the meeting to answer technical questions. In advance of the meeting, a conference call was arranged between Oz and Timbercon. The evidence conflicted as to what was said during the call. According to Timbercon, Oz demanded an upfront fee for the engineer's attendance at the meeting in Portland and raised the issue of the outstanding payment for the manual attenuators.
After that call, Timbercon adopted a completely different stance toward Oz, but did not advise Oz of its change in position for several weeks. The day after the telephone call, Timbercon contacted DiCon Fiberoptics, Inc. ("DiCon"), a competitor of Oz, with a view to involving it as a potential supplier of the automated attenuators. Meanwhile, OZ continued to work on the project. Timbercon confirmed to Oz that it was expecting a purchase order soon from Lockheed Martin and advised that there was no other bidder or competitor involved in the project.
When Timbercon received the DiCon quotation, it informed DiCon that its price was higher than Oz's price. DiCon accordingly reduced its quote. With both quotes in hand, Timbercon marked up the Oz unit price by 72% and the DiCon unit price by 42%, and submitted them to Lockheed Martin. Oz's delivery dates were less favourable than those quoted by DiCon, although the evidence at trial suggested that if production had proceeded on the basis of the expedited dates offered by Oz, the timeline would have been acceptable to Lockheed Martin. A representative of Lockheed Martin testified that if Oz had been the only bidder, its bid would have been acceptable.
In early October, Lockheed Martin sent a letter of contract to Timbercon incorporating the purchase of the automated attenuators as quoted by DiCon. A purchase order followed on October 6, 2003. The next day, Oz learned that DiCon had been granted the order to supply the automated attenuators.
The trial judge considered whether the order for the 900 manual attenuators was a consignment order, whether Timbercon misappropriated confidential and/or proprietary information belonging to Oz, whether Timbercon made fraudulent and/or negligent misrepresentations to Oz concerning the opportunities for sale of both the manual and automated attenuators and whether Timbercon acted in bad faith in the bidding process. The trial judge found in favour of Timbercon and dismissed Oz's action.
At the Court of Appeal, counsel for Oz argued that the trial judge made three errors: first, in concluding that the order for manual attenuators was a consignment order; second, in failing to find that Timbercon committed the tort of negligent misrepresentation; and, third, in failing to find that Timbercon breached its obligation to act in good faith.
On the issue of whether the manual attenuators were delivered pursuant to a consignment order, the panel saw no basis on which to interfere with the trial judge's conclusion. She reviewed and analyzed all of the relevant information on the factual issue and the court found no palpable and overriding error.
In contrast, in its discussion of the negligent misrepresentation claim, the court found that the trial judge erred in failing to consider the central misrepresentation by Timbercon that Oz remained the sole potential supplier for the production of the attenuators. Throughout the project, Timbercon represented to Oz that it was the sole supplier. Oz accepted the representation and proceeded on that basis. Once Timbercon began discussing the potential proposal with DiCon, the representation that Oz was the sole supplier was no longer accurate.
The Court of Appeal concluded that Timbercon acted negligently, if not nearly fraudulently, in continuing to make the representation that Oz remained the sole supplier under consideration. It expressed its view that Oz acted reasonably and to its detriment in relying on the representation. Oz was disadvantaged because it was not informed of the competing bid, a fact the trial judge recognized in her reasons. As a result, the Court of Appeal concluded that Oz established its case for negligent misrepresentation and the appeal on that ground was allowed.
Lastly, and most interestingly, the Court of Appeal turned to the breach of duty of good faith, noting that the obligation to act in good faith has been the subject of considerable discussion by judiciary and legal academia. The court provided a useful review of the law around the duty of good faith.
It noted that the common law has not recognized a free-standing duty of good faith based in tort or a general duty to bargain in good faith in contract. A duty to enforce or perform a contract in good faith has been recognized in specific circumstances. However, this has not been without criticism, as some courts have expressed the view that holding that such a duty exists runs counter to the individualistic and adversarial nature of contract.
However, the existence of a pre-contractual duty of good faith is less certain. In Martel Building Ltd. v. Canada, 2000 SCC 60, the Supreme Court held that a duty to bargain in good faith has not been recognized to date in Canadian law. Although a pre-contractual duty or good faith was not directly before it, the Supreme Court raised policy considerations in dismissing the existence of duty of care in negligence that are instructive on whether a duty to bargain in good faith should be recognized. Those policy considerations included whether other causes of action already provide appropriate remedies.
In 978011 Ontario Limited v. Cornell Engineering Co. (2001), 53 O.R. (3d) 783, the Court of Appeal left open the possibility of the duty of good faith in bargaining in cases of a special relationship. A special relationship may exist where the law requires more than self-interested dealing on the part of a party. This happens when one party relies on another for information necessary to make an informed choice and the party in possession of the information has an opportunity by withholding or concealing information to bring about the choice made by the other party. If there is such reliance, it must be justified.
The court held that the Cornell Engineering case could be distinguished from the case that was before it, as Cornell Engineering dealt with the situation where a contract had eventually formed. Arguably, if relief had been granted in that case, the remedy would have been grounded in contract. However, in this case, no agreement was ever reached. The court recognized in Coco Paving (1990) Inc. v. Ontario (Minister of Transportation), 2009 ONCA 503 at para. 4, that if a duty of good faith in bargaining exists, it is a remedy granted in contract. It is not a freestanding obligation.
A duty of good faith and fair dealing also arises during the commercial tendering process, in the context of the model of the imputed contract A/contract B between the parties, but the situation in the case before the Court of Appeal did not fit that paradigm either. There was no formal bidding process as is typically found in such situations. It could not be said that the intention of Timbercon and Oz was to enter into contractual relations with each other upon the submission of Oz's quote.
It was tempting to extend the good faith doctrine to the present circumstances, given the representations made by the respondent, its involvement of DiCon, the fact that it provided advice to DiCon while not providing similar information to Oz and that it rigged the two bids in favour of DiCon. The court allowed that it might be arguable that Timbercon unilaterally imposed a commercial relationship akin to the tendering process in light of its choice to seek an alternative quote from DiCon. However, in light of the reluctance of the courts, and in particular the Supreme Court of Canada, to extend the doctrine of good faith beyond the context of a contractual relationship, the court was hesitant to invoke the doctrine here, given that recovery could be grounded in negligent misrepresentation. As a result, it did not consider the issue further.
The court allowed the appeal in respect of negligent misrepresentation and ordered a new trial on the issue of damages before a different judge. The court ordered a different judge to hear the damages trial because the trial judge in this case had already made an adverse finding of credibility against one of Oz's key witnesses in respect of part of his evidence. In order that the requirement that justice must appear to be done be met, another judge should deal with the new trial on damages.
3. Kaiser (Re), 2011 ONCA 713 (Cronk J.A. in chambers), November 14, 2011
This was a motion for leave to appeal to the Court of Appeal from an order refusing to order the removal of a law firm as counsel of record for a trustee in bankruptcy. The applicant, Kaiser, was adjudged bankrupt on October 17, 2009. The respondent, Soberman Inc., was appointed trustee of the bankrupt estate. Mr. D and his firm were counsel to the trustee. Over more than a decade, Mr. D had acted as counsel in approximately 20 individual or corporate litigants in more than 14 actions against Kaiser or his interests. As a result, he gained considerable knowledge of Kaiser as a litigant.
The trustee deposed that it regarded Mr. D and his firm to be the best-suited counsel to be acting on its behalf in this bankruptcy, as a result of its extensive experience with Kaiser. Representatives of three of Kaiser's largest creditors served as inspectors in Kaiser's bankruptcy. Each of these unequivocally advised the trustee of their desire to continue to have Mr. D act for the trustee in the Kaiser bankruptcy.
Kaiser moved for an order removing the firm as counsel of record for the trustee. It alleged that the firm was in a conflict position because while acting for the trustee, it was also acting for one of Kaiser's largest creditors, and it was acting in breach of the obligations Kaiser claimed were owed to him by Mr. D and the trustee, and in particular, the alleged duty to protect Kaiser's right to solicitor-client privilege. Kaiser alleged that Mr. D advised and permitted the trustee to take steps that preferred the creditors' interests over those of the trustee and the Kaiser estate. Kaiser's motion was dismissed.
The first issue the court considered was whether leave to appeal the motion judge's decision was required. Kaiser took the position that leave to appeal under s. 193(e) of the Bankruptcy and Insolvency Act (BIA) was not required. However, he advanced no argument as to why his was an appeal as of right, which could be founded under ss. 193(a)-(d) of the BIA. In view of his contradictory position, the motion proceeded on the basis that leave was required.
The court noted that a flexible approach should be applied to the factors to be considered on a motion for leave under s. 193(e) of the BIA. The factors to consider include whether the judgment at issue appears to be contrary to law, amounts to an abuse of judicial power or involves an obvious error causing prejudice for which there is no remedy; whether the point of the appeal is of significance to the practice or the action itself; whether the appeal is prima facie meritorious or frivolous; and whether the appeal will unduly prejudice the progress of the action.
The court concluded that Kaiser's appeal was not prima facie meritorious. He sought discretionary, equitable relief of a type that is granted only sparingly and cautiously. The motion judge found that the requested relief was sought for improper and tactical reasons. That factor alone suggested that the equitable relief sought should not be granted. Furthermore, the court did not regard any of the issues sought to be raised on appeal as important to either the administration of justice generally or to the rights of the parties. Therefore, Kaiser failed to satisfy the test for leave.
The court also noted other relevant factors. First, Kaiser had a demonstrated history of initiating proceedings, including removal motions, and including removal motions against Mr. D., for purely strategic reasons. His motive for bringing the removal motion bore directly on the merits of his proposed appeal. In particular, the motion judge found that the removal motion had been brought for tactical purposes to try to delay actions by the trustee to recover Kaiser's assets for the estate.
Second, Kaiser declined to cooperate with the trustee and sought to frustrate the disclosure of his financial resources and assets and the efficient administration of his bankrupt estate by the trustee. The court concluded that the removal motion and the associated leave motion were merely the latest steps taken by Kaiser to delay and impede the expeditious and efficient administration of his bankrupt estate. At the very least, they provided a solid foundation for the decision to deny discretionary equitable relief of the type sought by Kaiser.
Finally, the court considered the merits of the specific proposed grounds of appeal, concluding that they were "highly dubious". The principal complaint was that Mr. D, while acting as counsel for the trustee, also acted for one of Kaiser's major creditors. The allegation was that the dual engagement placed him and his firm in a conflict position, that he abused his role as counsel to the trustee and breached alleged duties to Kaiser by advising the trustee to take steps favouring the creditors' interests over those of the trustee and Kaiser. At the heart of the complaint was a waiver prepared by Mr. D and executed by the trustee pursuant to which the trustee purported to waive Kaiser's solicitor-client privilege and authorized certain solicitors to disclose information that might otherwise have been subject to privilege.
Kaiser argued that duties are owed directly by a trustee in bankruptcy's counsel to the bankrupt. The court found no error in the motion judge's reasoning or in the proposition that it is the trustee in bankruptcy as principal, rather than his or her solicitor as agent, who owes direct legal duties to the creditor of a bankrupt or the bankrupt. The court thus rejected Kaiser's contention that his proposed appeal raised an important question of law; that is, whether a trustee's counsel owes direct legal duties to a bankrupt and, if so, the scope of those duties.
With respect to the waiver, although it was sent to Kaiser's previous solicitors, Mr. D did not actually request the disclosure of privileged information by those solicitors. Furthermore, no privileged information was obtained as a result of the waiver. Thus, no prejudice was occasioned to Kaiser by its creation, execution or use. The motion judge had granted a declaration without opposition from the trustee that the waiver was "null, void and of no effect". The record also indicated that Kaiser instructed his counsel to object to Mr. D's representation of the trustee one month before the waiver was signed. Reliance on the waiver was thus an "after the fact" stratagem. Finally, the motion judge accepted the trustee's evidence that the waiver was used in an effort to trace funds that the trustee had grounds to believe either emanated from Kaiser or from persons who hold money at his behest. The trustee had a legitimate interest in attempting to trace the funds in question.
Accordingly, the court dismissed the leave motion.
4. Title v. Canadian Asset Based Lending Enterprise (CABLE Inc.), 2011 ONCA 715 (Sharpe, Juriansz and Watt JJ.A.), November 11, 2015
In this case, the court was asked to consider the jurisdiction of the Superior Court of Justice to entertain an action alleging a conspiracy to use fraudulent bankruptcy proceedings in Quebec to defeat the process of the Ontario courts. The plaintiff/respondent, Title, is an Ontario resident. The personal appellants/defendants in this appeal are residents of Quebec. The corporate defendants/appellants have their head offices in Quebec. The appellant, Druker, is a Quebec trustee in bankruptcy.
The Quebec bankruptcy proceedings at the heart of the claim involve two companies, Sistek and Premier. Title is a shareholder and officer of Sistek. In March, 2009, he commenced an Ontario action against Sistek, Premier, and Fred and Joel Leiberman, shareholders and directors of Sistek and Premier. The claim alleged breach of contract and oppression (the "first action"). That action was initially undefended. Title set down a motion for partial default judgment and sought the appointment of a receiver since Canadian Asset Based Lending Enterprise ("CABLE"), a secured creditor of Sistek, was entitled to enforce its security on the following day. Within a day of receiving notice of the motion, and without notice to Title, Sistek and Premier both made assignments in bankruptcy. Druker was appointed trustee. Shortly thereafter, a company newly formed by the Leibermans and their brother Michael ("9208"), purchased Sistek and Premier's assets for $2.26 and assumed CABLE's debt. Another company controlled by the Leibermans took over the operation of the business acquired by 9208 from the trustee.
In April, 2010, Title commenced a second action that was the subject of this appeal. The appellants moved to have the second action dismissed on the basis that Ontario lacked jurisdiction to entertain the claim, or to stay the action on the ground that Quebec was the more appropriate forum. Druker also moved to have the action dismissed against it on the grounds that Title did not obtain leave under the Bankruptcy and Insolvency Act ("BIA"). The motion was dismissed. The motion judge held that there was a sufficient real and substantial connection between the claim in Ontario to support jurisdiction simpliciter; the appellants failed to demonstrate that Quebec was a more appropriate forum and that the failure to obtain leave under the BIA was an irregularity.
The court found no error in the motion judge's conclusion that there was a real and substantial connection between the claim and Ontario. There was ample evidence that Title satisfied the test for real and substantial connection in Van Breda v. Village Resorts Limited, 2010 ONCA 84.
There was a strong connection between Title's claim and Ontario. Title is an Ontario resident who, when employed by Sistek, worked from his home in Ontario. The claim alleged a fraudulent conspiracy to deprive Title of the legal rights he asserted in the first action. The defendants also had a strong connection with Ontario. The personal appellants attorned to the first action in Ontario and were alleged to have conspired with the other appellants to defeat the process of the Ontario courts. The court's view was that where a party conspires to defeat the process of the Ontario courts, the party has participated in something of significance or been actively involved in Ontario and can be brought within the jurisdiction of Ontario. In addition, the successor businesses to Sistek and Premier sell products and conduct a substantial volume of their business in Ontario. They have a senior officer and employee responsible for sales residing in Ontario. CABLE has also been engaged in activity in Ontario, including having taken security over Title's Ontario home to secure a loan to Sistek and Premier. As a result, the real and substantial connection test was established.
The court also agreed with the motion judge's conclusion that Druker attorned to the Ontario jurisdiction by asking the court to stay proceedings against it on the ground that leave had not been obtained under the BIA.
The court did not agree that Title was required to proceed in Quebec as a result of the bankruptcy proceeding pending in that province. Title sought damages in the Ontario action against parties who, other than Druker, were not before the Quebec bankruptcy court. The court considered the bankruptcy to be a factual ingredient of the cause of action Title asserted. If Title succeeded with his Ontario claim, that finding would have no legal effect on the Quebec bankruptcy. As a result, the Ontario proceedings did not amount to either a direct or collateral attack on the Quebec bankruptcy proceeding.
The court also found the motion judge did not err in his analysis of forum non conveniens. It agreed that if Title were forced to sue in Quebec, the result would be a multiplicity of proceedings on closely related issues.
On the question of whether the motion judge erred by failing to stay the action against Druker because leave had not been obtained under the BIA, the court agreed with the motion judge that the failure to obtain leave was an irregularity that could be cured. However, until it was cured, the court held the action against Druker could not proceed. Thus, a stay of the action against Druker was warranted unless and until "the court" grants leave pursuant to s. 215. The court added that "the court" referred to in s. 215 is the court with jurisdiction over the bankruptcy proceedings, in this case, the Quebec Superior Court. Although the definition of "court" in the BIA includes the Ontario Superior Court of Justice, when read in the context of the BIA as a whole, the reference to "the court" in s. 215 (rather than "a court") indicates that it is the court that has control of the bankruptcy that must grant leave to allow a suit against a trustee to proceed.
Thus, the appeal against Druker was allowed with respect to a stay pursuant to s. 215 of the BIA. The other appeals were dismissed.
5. Jeffery v. London Life Insurance Co., 2011 ONCA 683 (O'Connor ACJO, Blair and LaForme JJ.A.), November 3, 2011
This decision involves an appeal of a common issues trial in two class actions in which the plaintiffs were successful, arising out of the acquisition of London Life Insurance Company ("London Life") by the Great-West Life Assurance Company ("Great-West Life") in 1997. It was anticipated that the merger of the two companies operations would lead to reduced expenses which, in part, would benefit the companies' participating insurance policy accounts ("PAR accounts"). This appeal addressed the validity of what is referred to as the participating account transactions ("PATs"), whereby $220 million in cash from the PAR accounts was exchanged for what were called pre-paid expense assets ("PPEA"), representing the anticipated expense savings to be realized by those accounts over a 25-year period. The $220 million from the PAR accounts was used to finance approximately 7.5% of the $2.9 billion acquisition price.
The trial judge found that the PATs breached four provisions of the Insurance Companies Act ("ICA"), namely:
- Section 462, which prohibits "transfers" from a participating account except in certain defined circumstances;
- Section 458, which deals with the allocation of expenses to participating accounts;
- Section 331(4), which requires that financial statements be prepared in accordance with generally accepted accounting principles ("GAAP"); and
- Section 166(2), which requires directors, officers and employees to comply with the ICA.
The trial judge made a number of remedial orders including an order that Great-West Life and London Life pay approximately $390 million to the PAR accounts, representing a return of the contributions of $220 million, together with a reasonable rate of return. The trial judge also ordered that litigation trusts be created with a view to distributing the $390 million to the participating policy holders. Great-West Life and London Life appealed the trial judge's finding of statutory breaches and the remedies ordered.
The participating policies that were at issue in this case are a contract of life insurance and an investment contract. In addition to being an insurance policy, they provide participation in the profits of the company. Accounts in respect of participating policies must be maintained separately from those in respect of insurance companies' other businesses. They are distinct from shareholder accounts. They are not legal entities. Rather, they are accounting records that record debits and credits and assets and liabilities associated with the participating policy business.
Under the ICA, an insurance company that has participating policies must allocate incoming expenses of the company to its PAR account according to approved "allocation methods". Those methods are meant to ensure that the income and expenses of a company are divided between PAR accounts and shareholder accounts in a fair and equitable manner. The capital in a PAR account may only be invested in accordance with the ICA.
The PATs involved a contribution by the PAR accounts of both Great-West Life and London Life to the financing of the acquisition in exchange for PPEAs in the same amounts as the contributions, plus a return on investment of 6.91% per annum. The Great-West Life and London Life PAR accounts transferred $40 million and $180 million respectively to their company's shareholder accounts. The London Life shareholder account loaned Great-West Life the $180 million it had received from its PAR account to be used as part of the purchase price. The loan was repaid within a few months of closing. Neither the $180 million nor the $40 million paid from the Great-West Life shareholder account was repaid to the PAR accounts. Rather, in each of the PAR accounts, the funds were exchanged for PPEAs in the same amount.
It was expected that acquisition-related savings would flow through to the PAR accounts over a 25-year period, starting in 1997, in amounts sufficient to offset the financing. The PPEAs were to be amortized going forward each year for 25 years, as the annual expense savings were realized by the PAR accounts. The annual amortized amounts were to be equal to the annual merger expense savings attributed to the PAR accounts.
The primary concern, as articulated at trial, was not that the PAR accounts were required to make a contribution to the acquisition, but instead, if the accounts were to make a contribution, they should receive more benefits than those provided by the PATs and should receive those benefits more immediately than the ones that were provided. The class representative testified at trial that he recognized that at the end of the 25-year period, there would be continuing expense benefits with no offsetting amortization of the PPEAs. However, in the meantime, there would be no net benefit to the PAR accounts. In his view, had the $220 million in cash remained in the accounts, it would have been invested and received a return on investment. He also complained that the PATs created inter-generational problems as policy holders during the first 25 years would receive no net benefits. He did accept that if the PAR accounts did not make a contribution to the acquisition costs, then it was fair that those accounts not receive the benefit of the expense savings flowing from the acquisition.
On appeal, the court began with the analysis of the s. 331(4) GAAP compliance issue first because it was significant to the issues that followed. The issue of whether the financial statements were prepared in accordance with GAAP turned on the question of whether the prepaid PPEAs were assets for the purposes of GAAP. The court concluded it was open to the trial judge to find that they were not.
The trial judge considered a large body of evidence, including evidence from experts and accountants and the appellant's chief financial officer. The experts agreed that there were three requirements for an asset under GAAP. The dispute arose around the third requirement – that the "asset" granted embodies an incremental claim on cash – a future benefit that involves a capacity to contribute directly or indirectly to future cash flows. The trial judge was aware that the third requirement was critical. The main evidence concerning the incremental cash flow issue came from two experts, each of whom agreed that their starting premises were crucial to their opinions. Therefore, the question for the trial judge centered around the assumptions that underlay the expert reports, and in particular, whether the expense savings arising out of the merger would have flowed through to the PAR accounts. This was a question of fact and the Court of Appeal found no basis on which to interfere with the trial judge's findings of fact or her finding that she preferred the expert evidence over that of the auditors at the time.
The Court of Appeal also agreed with the trial judge's conclusion that once it was established that the PPEAs were not assets for GAAP purposes, the amortized charges stemming from the unlawful assets were not proper expenses within the meaning of s. 458 of the ICA.
The court then turned to s. 462 of the ICA which forbids transfers from a participating account unless certain exemptions exist. It was common ground that the exemptions did not apply. The issue was whether the payment of $220 million by the PAR accounts constituted a transfer prohibited by s. 462. The appellants argued that the PATs did not involve a transfer because there was an exchange for assets (the PPEAs) of equivalent value. They argued that the section prohibited the reduction of total assets in the participating accounts and was not a complete code prohibiting all but the limited exceptions.
The trial judge rejected the argument the transfer meant only net transfers. She found that, as a matter of common sense, a transfer involves a payment of money such as the $220 million paid from the PAR accounts. The Court of Appeal agreed that the PATs breached s. 462, but for a different reason. In view of the conclusion that the PPEAs were not assets within the meaning of GAAP, they could not be shown as assets on the financial statements of Great-West Life and London Life. Thus, there would be no way of recording, from an accounting standpoint, the transactions that gave rise to the "exchange" theory. Consequently, the transfer of cash from the PAR accounts resulted in a reduction in the PAR accounts' surplus. Section 462 is designed to protect the interests of participating policyholders which include that the financial affairs of the PAR accounts be properly recorded. Transactions such as the PATs, which do not comply with GAAP, should not be considered to be an exchange so as to avoid the prohibition in s. 462.
The court next considered s. 166(2), which requires that directors, officers and employees comply with the ICA. No directors, officers or employees were named in the actions. There was therefore no issue of liability by directors, officers or employees. There was thus no breach of s. 166(2). The court held that had directors, officers or employees been sued, it would have been open to them to rely upon the safe harbour defence under s. 220 of the ICA which is not open to corporations. Accordingly, the court allowed the appeal in respect of the trial judge's finding on s. 166(2).
The court addressed the appellants' submission that the trial judge erred in refusing to give weight to OSFI's review of the legality of the PATs and its determination that the PATs complied with the ICA. The court held that OSFI's approval does not determine the legality of the PATs. The fact that there was regulatory approval did not alter the court's conclusion that various provisions of the ICA were breached. The court enumerated four reasons for not according any deference to OSFI's approval. First, the trial was not a judicial review of OSFI's decision to approve the PATs. Second, it was not clear on the record that OSFI considered the issue of whether PPEAs were assets within the meaning of GAAP. Much of the extensive evidence addressing the GAAP issue was from experts. It is not apparent that OSFI had the benefit of evidence similar to that before the trial judge, and in any event, it was up to the court to make that determination based on the evidence at trial. Third, to the extent that the resolution of the s. 462 issue depended on an interpretation of that section, the court has jurisdiction to determine questions of statutory interpretation. Finally, neither the trial judge nor the Court of Appeal had the benefit of OSFI's reasons for approving the PATs. OSFI's witnesses, pursuant to an order of the court, were restricted from testifying about how, why and by whom the PATs were reviewed. Thus, the limited nature of the OSFI evidence weighed against the court deferring to OSFI's approval of the PATs.
The court then considered the issue of remedy. The trial judge ordered monetary relief which was, in effect, an award of general damages to the individual class plaintiffs. In granting this relief, she relied on the language in s. 1031 of the ICA that allowed the court to "make any further order it thinks fit". She concluded that such power was consistent with the behaviour modification policy of the Class Proceedings Act 1992.
The court concluded that the trial judge misread the purpose of s. 1031 and the scope of her discretion under it in granting such broad relief. The nature of the remedy does not change because it is sought in the context of a class proceeding. The Court of Appeal viewed the purpose of the section as remedial rather a compensatory or punitive. It is remedial in the sense that it provides a mechanism for those who would have little recourse with respect to the internal affairs of a corporation to compel corporations to comply with the requirements of the ICA. The power to make any further order the court thinks fit must be construed in that context. While it affords considerable discretion to a judge, that discretion is tempered by the principle of minimal interference in corporate affairs and should be exercised in a way that is tailored to the non-compliance in issue and is proportional to the character of the breach.
The court reviewed three types of statutory procedural remedies: statutory derivative actions, compliance revisions, and oppression remedies. The court noted that, while there may be some overlap, the remedies are different. In this case, the relief sought by the respondents was normally associated with an oppression remedy claim. The problem was that there is no oppression remedy claim available under the ICA. The ICA contains only a compliance remedy.
In determining what the appropriate remedies should be, the court considered several factors. First, it noted that the appropriate corrective disposition under s. 1031 must reflect the balance between shareholders and participating policyholders. Second, the court noted that the breaches of the ICA were primarily of an accounting nature and were somewhat technical. It did not follow that they necessarily rendered the transactions unfair to the PAR accounts from an economic standpoint. Fairness was relevant when considering how to rectify non-compliance. Third, was the concession of the representative plaintiff that the PAR accounts had to contribute in order to benefit, along with other facts suggesting that the PATs did not have any negative impact on participating policyholder dividends, and the trial judge's conclusion that the participating policyholders were neither better nor worse off as a result of the PATs.
The trial judge's solution, ordering that monies, plus interest and tax gross-up, be returned to the PAR accounts, the PPEAs be cancelled as of January 1, 2011, and the appellants be forbidden from making any changes to the expense allocation methods relating to the merger synergies going forward, would result in the PAR accounts receiving substantial benefits in unpredicted savings, without having made any contribution to the price paid to achieve those savings. It would result in a significant windfall to the PAR accounts, which the court found unpalatable. In the court's view, the best option was to unwind the PATs as of now. It noted that while unwinding the PATs from the beginning could appear to be the most logical result, this option created the issue of determining what to do with the allocation methods in place from the transaction to present. Absent the PATs, the companies would have taken steps at the outset of the transaction to divert the flow of savings if there was to be no contribution from the PAR accounts. Since this was indeterminable, there were significant practical hurdles to fashioning a remedy to unwind the PATs from the beginning.
Having adopted this remedy, the court recognized that other issues must also be addressed. The monies to be returned to the PAR accounts as of now must be adjusted to account for the merger expense savings received by the accounts. That is, the PAR accounts are not entitled to get back all of their $220 million plus interest, but instead, are entitled to a discounted amount to reflect the purchase price for the benefits already received prior to the date of unwinding, including the additional expense savings identified by the adjustment mechanism. The court devised a formula to calculate the money that was to be returned to the PAR accounts which required the $220 million to be reduced by the total merger expense savings received in the PAR accounts and to which the PAR accounts would be called upon to contribute in order to give effect to the no contribution/no benefit principle. The court was unable to assign numbers to the formula it created and held that if the parties were unable to agree on the numbers, the matter be referred back to the trial judge for determination.www.lerners.ca
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