Canada: Statement Of Defence Ordered In Advance Of Certification Motion Despite Objections

In a recent decision on a procedural motion in Labourers' Pension Fund of Central and Eastern Canada v. Sino-Forest Corporation (one of the largest proposed securities class actions to be brought in Canada to date), Justice Perell added to the list of cases in which he has ordered the Defendants to deliver a statement of defence in advance of the hearing of the certification motion.1

On the same motion, Justice Perell also considered the fairness and efficiency of allowing the certification motion and the motion to obtain leave to advance secondary market claims under Part XXIII.1 of the Ontario Securities Act (OSA) to be heard at the same time.  The Defendants advocated for a sequential approach to the hearing of the motions (leave motion, Rule 21 motions, followed by the certification motion), however Justice Perell, anticipating appeals from every motion, found judicial economy in hearing everything at once and denying the appellate courts "the pleasure of three visits from one or two generations of Class and Defence Counsel."


Sino-Forest is a Canadian public company incorporated under the Canada Business Corporations Act with its registered office in Mississauga, Ontario, its head office in Hong Kong and its forestry plantation operations centered in the People's Republic of China.  Its shares traded on the TSX from 1995 until August 26, 2011 when the Ontario Securities Commission issued an order suspending trading.  Just prior to the issuance of the cease trade, a report released on June 2, 2011 by Muddy Waters Research, a short-seller of Sino-Forest stock, alleged that Sino-Forest had massively exaggerated its assets and fabricated sales.  The release of the Muddy Waters Report had a significant impact on the value of the Sino-Forest shares: within two days of its release the value of Sino-Forest's notes plummeted and the company lost $3 billion of market capitalization.

In the proposed class action, the Plaintiffs allege that Sino-Forest and certain other named Defendants made misrepresentations in both the primary and secondary markets (the value of these claims include: $0.8 billion for primary market claims; $1.8 billion (U.S.) for note-holders; and $6.5 billion for secondary market claims).  The Plaintiffs have also put forward claims against some of the defendants for oppression, negligence, negligent misrepresentation, conspiracy and unjust enrichment. 


Delivery of a Statement of Defence in Advance of Certification

This decision is the third in a series of proposed class actions in which Justice Perell has ordered delivery of a Statement of Defence in advance of the hearing of the certification motion, contrary to the general practice in class actions which existed from 1996 to 2011 that a defendant not be required to deliver a pre-certification statement of defence because of the likelihood of amendments to the Statement of Claim post-certification. 

In his Reasons, Justice Perell stood by his recent decision in Pennyfeather v. Timminco (Pennyfeather) where he had discussed and identified what were, in his opinion, examples of the advantages of closing the pleadings before certification, including that (i) controversies about the first of the five criteria for certification might be resolved, narrowed or confined before the certification motion; (ii) the delivery of a Statement of Defence could be a fresh step that could foreclose any subsequent attack by the defendant for any pleadings irregularities by calling out the defendant to make its challenges to the statement of claim, thus removing issues with the first criterion of demonstrating a cause of action and potentially reducing the number of interlocutory steps to complete the pleadings, facilitating the analysis of the other four certification criteria; and that (iii) having the Statement of Defence before the certification motion would provide useful information for analyzing the preferable procedure criterion and the plaintiff's litigation plan.

While in Pennyfeather the Defendants did not oppose delivery of a pre-certification statement of defence, in Sino-Forest they did.   The Defendants argued that delivery of a statement of defence in advance of the certification motion would be contrary to law because: the Plaintiffs' Statement of Claim could be commenced only with leave pursuant to s. 138.8 of the OSA; the recent ruling of the Court of Appeal in Sharma v. Timminco (Sharma) indicating that a cause of action does not exist until leave is granted; and, because the Statement of Claim was essentially a "moving target".  They further argued that having to plead their Statement of Defence would be a denial of due process because the Plaintiffs' Statement of Claim includes causes of action that might not survive a challenge under Rule 21 of the Rules of Civil Procedure (the Rules).

The Plaintiffs, on the other hand, submitted that they are entitled to know the defence they confront and that neither the law nor due process precluded ordering delivery of a Statement of Defence in accordance with the Rules and further, that they could rely on s. 12 of the Class Proceedings Act, 1992 (the CPA) and His Honour's decision in Pennyfeather.

Justice Perell noted that he regarded the "moving target" complaint as a "proper objection that if the Defendants are to be ordered to deliver a Statement of Defence, the content of the Statement of Claim needs first to be finalized" and so ordered that for the purposes of the leave and certification motion, the "Proposed Fresh as Amended Statement of Claim" would be the Statement of Claim and that pleading could not be amended without leave of the court. 

However, in deciding that it was not contrary to law or a denial of due process to order the pre-certification delivery of a Statement of Defence, Justice Perell emphasized that it was the "clear intention of the Legislature that the pleadings be closed before certification" and that "the Legislature indicated by s. 35 of the [CPA] that the [Rules] apply to class proceedings, reserving the courts' authority to make adjustments to that procedure under s. 12 of the Act."  Following a lengthy analysis of the Rules, his decision in Pennyfeather, the Defendants' arguments with respect to the meaning of the Court of Appeal's decision in Sharma and s. 138.8 of the OSA which provides the test for leave and governs the procedure for the leave motion, Justice Perell held:

...while it would be inappropriate to order all of the Defendants to deliver a Statement of Defence to a secondary market claim under the Securities Act, it would be proper to order that any Defendant who delivers an affidavit pursuant to s. 138.8(2) of the Act shall also deliver a Statement of Defence.  I so order.

His Honour also ordered that any other Defendant may, if so advised, deliver a Statement of Defence, leaving to them the tactical decision of whether or not to deliver a pleading.  Despite ordering some of the Defendants to deliver a Statement of Defence, Justice Perell agreed that their right to challenge the reasonableness of the Statement of Claim should be preserved and protected and so, using the authority of s. 12 of the CPA, ordered that if a Defendant delivers a Statement of Defence, it is not a fresh step in the proceeding and the Defendant is not precluded from bringing a Rule 21 motion at the leave and certification motion, nor is the Defendant precluded from disputing that the Plaintiffs have shown a cause of action under s. 5(1)(a) of the CPA.

Combination of the Certification and Leave Motions

In the only two contested leave motions to date ( Silver v. Imax and Dobbie v. Arctic Glacier Income Fund) the certification motion and the motion for leave to commence an action under the secondary market provisions of the OSA were heard together.  In this case, the Defendants opposed that approach and advocated for a sequential hearing of the motions, arguing that because the criteria for leave differs from the criteria for certification (as does the burden of proof for both motions), a joint hearing would be inappropriate.  Justice Perell, however, rejected these arguments holding that, "the evidentiary footprint for the leave and certification motions are the same and it makes for little efficiency for the parties and little judicial economy to have the evidence and argument for leave and for certification heard more than once."


While delivery of a pre-certification Statement of Defence is not yet a procedural step advocated by all judges or required in all proposed class proceedings, this decision is yet another signal to Defendants that they may be compelled, and should be prepared, to put forward their defences prior to their arguments opposing certification.


1. See also Pennyfeather v. Timminco Limited and Kang v. Sun Life Assurance Company of Canada

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