Canada: The SCC Monitor (02/08/2016) - A Commentary On Recent Legal Developments By The Canadian Appeals Monitor

Last Updated: August 8 2016
Article by Kosta Kalogiros, Kelli McAllister and Sam Rogers

Most Read Contributor in Canada, September 2018

Since our last post, the Supreme Court has granted and denied leave in a few significant cases that will be of interest to our readers.

Leave to Appeal Granted

Auditor Liability: Livent Inc v Deloitte & Touche

The SCC granted leave to appeal from the judgment of the Ontario Court of Appeal in Livent Inc v Deloitte & Touche, 2016 ONCA 11, which is an important decision concerning the liability of auditors for negligence.

The case is extremely complex (indeed, the Court of Appeal's judgment is more than 150 pages). It arose out of the collapse of Livent, a well-known theatre production company headquartered in Toronto. The principles of the company engaged in an elaborate accounting fraud, which was uncovered in the late 1990s. Deloitte was Livent's auditor. Livent, through a special receiver appointed in insolvency proceedings, brought an action against Deloitte for negligence in failing to discover the financial fraud being perpetrated by Livent's principles.

Following the decisions by the Ontario Superior Court and Court of Appeal, the SCC has now agreed to hear this matter. This will be the Court's first chance to address auditor negligence since Hercules Managements Ltd v Ernst & Young, [1997] 2 SCR 165. That decision, which has been cited over 770 times since it was released, effectively blocked nearly all negligence claims against auditors based on public policy concerns of indeterminate liability. Depending on how the SCC rules, it may open the door to other claims against auditors or it may shut that door for good.

Leaves to Appeal Dismissed

Patent Legislative Regime is a Complete Code: Low v Pfizer Canada Inc

The SCC denied leave to appeal from the judgment of the British Columbia Court of Appeal ("BCCA") in Low v Pfizer Canada Inc, 2015 BCCA 506 ("Low"), an appeal of a class action certification based on "unlawful abuse of the patent system". The BCCA reversed the trial decision and held that the patent legislative regime was a complete code that foreclosed private-law consumer remedies based on breaches of the Patent Act.

The class action in Low sprung in part from a prior SCC decision, Pfizer Canada Inc v Novopharm, 2012 SCC 60, which held that Pfizer's patent for Viagra was invalid for insufficient disclosure contrary to the Patent Act. Consequently, generic drug manufacturers were able to enter the market at a lower price. The proposed class in Low was defined by the time period in which the generic version of Viagra – sildenafil – was prohibited from market entry as a result of Pfizer's invalid patent. This tenacious class action sought to hold Pfizer accountable to consumers for the difference between the revenue Pfizer collected by charging the actual price of Viagra and the revenue it would have collected had there been generic competition, in the absence of any statutory remedy for consumers under the patent legislative regime. The chambers judge certified the class action based on intentional interference with economic relations and unjust enrichment, finding it was not plain and obvious that the claims could not succeed.

The unanimous BCCA reversed the trial decision and held that the class action should not have been certified. The BCCA held that claims advanced by the proposed class were grounded in the breach of the Patent Act. Patent rights are statutory. The patent legislative regime is comprehensive and precludes common law rights. With respect to the tort of unlawful interference with economic relations, the BCCA held that a breach of a statute will only satisfy the "unlawful means" element if it is actionable outside the context of the statute.

Had the SCC granted leave in this case, it could have conclusively addressed the comprehensiveness of the patent legislative regime and, more generally, consumer class actions seeking a common law remedy based on statutory claims.

Standard Form Contracts Standard of Review & Trespass for Removal of Resources: Stewart Estate v TAQA North Ltd

Stewart Estate v TAQA North Ltd, 2015 ABCA 357 ("Stewart Estate") is a complicated and lengthy decision of the ABCA, with each of the justices on the panel writing separate reasons. Almost all permutations in which the panel could agree, concur, and disagree are on display in Stewart Estate, arguably showing the lack of clarity in the law relating to trespass by way of removal of a resource in the context of largely standard oil and gas leases.

Standard of Review

With respect to the standard of review for the interpretation of oil and gas leases, the majority (McDonald JA and O'Ferrall JA) held that the appropriate standard was correctness – to search for the intention of the parties when dealing with contracts of adhesion was "merely a legal fiction" (at para 273 per McDonald JA). In this case, the majority noted there were only two blank spaces within the leases that represented points of negotiation between the parties and the precedential value and importance beyond the dispute required correctness to be the standard of review. In contrast, Justice Rowbotham concluded that, given the reliance in Sattva on cases that appeared to have interpreted standard form contracts, the trial judge's interpretation of the leases was reviewable on the more deferential palpable and overriding error standard.

As previously discussed, the SCC's blockbuster decision in contractual interpretation – Sattva1 changed the standard of review for appellate courts from correctness to one requiring deference to the trial judge (unless an extricable error of law is shown) and emphasized the importance of the factual matrix when interpreting a contract. Since that decision, a number of appellate courts have considered whether interpretation of standard form contracts or contracts of adhesion remains a question of law alone or attracts a deferential standard of review.2 The SCC's decision to deny leave in Stewart Estate leaves the standard of review with respect to standard form contracts or contracts of adhesion unclear.

Remedy for Trespass for Removal of Resources

The ABCA unanimously held that the oil and gas leases had terminated, although the members of the panel differed with respect to when the lessors were entitled to a remedy for trespass for removal of resources. The ABCA was unanimous that the so-called "royalty method" provisionally applied by the trial judge was inappropriate. However, as Justice Rowbotham acknowledged at paragraph 196, "the remedies for trespass in the context of removal of a resource range along a continuum based on courts' perceptions of what is just and equitable in the face of the trespassers' conduct" and include:

  1. The so-called "harsh rule": the trespasser is required to disgorge the entirety of the benefit gains from the trespass with little or no allowance for costs incurred in earning that benefit of improvements made to the property. The harsh rule is designed to deter willful trespass, including trespass tainted by fraud or bad faith.
  2. The so-called "royalty method": neither party knew of the trespass and the property owner would have been unable to realize the benefit of the trespasser obtained from the trespass, the trespasser may retain the benefit of the trespass and pay the property owner a reasonable fee for use of the property (e.g., contractually agreed royalties, any bonus associated with negotiating a new lease).
  3. The so-called "mild rule": the trespass is not tainted by fraud or bad faith, and the trespasser is required to disgorge the revenues less certain expenses but with no allowance for profit to the trespasser.

The majority of the ABCA (this time, Rowbotham JA and O'Ferrall JA) held that "mild rule" was appropriate in this case, with Justice McDonald finding the "harsh rule" was appropriate due to the egregious behaviour of the lessees by continuing to produce when they knew that the leases were, at best, questionable, if not dead altogether. Regardless of the ultimate remedy, each approach requires an inquiry into the conduct of the parties.

Overall, what Stewart Estate makes clear is that even with the same findings of fact, the law lacks sufficient clarity for members of the bench to reach the same conclusion with respect to remedy—each of the three approaches was endorsed by different judges in this case. The SCC's decision to deny leave in this case leaves untouched this muddle of remedies.

Alberta Securities Commission's Powers to Compel and Share Evidence are Constitutional: Beaudette v ASC, 2016 ABCA 9

The SCC denied leave to appeal the decision of the Alberta Court of Appeal in Beaudette v Alberta Securities Commission, which determined that sections 7 and 8 of the Charter of Rights and Freedoms were not infringed by those sections of the Alberta Securities Act empowering the Alberta Securities Commission ("ASC") to compel witnesses to provide sworn evidence during investigations and to share information with law enforcement agencies and other authorities in Canada and abroad. (See our previous comment on this case here).

The appellant's objections to the combined effect of section 42 and 46 of the Securities Act were generally that his privilege to avoid self-incrimination was undermined as the ASC might share information obtained through its investigative powers to U.S. authorities to assist in a potential criminal prosecution against him in the U.S. Given his objections, the appellant was refusing to comply with a Summons to Witness issued to him by the ASC.

The ABCA unanimously rejected the appellant's objections for a number of reasons including, among others, that:

  1. The suggestion that information might somehow be unlawfully shared with the U.S. authorities was too speculative to give rise to an infringement;
  2. The investigations conducted by the ASC are not in service of the criminal law but are directed at compliance and regulating conduct with the goal of protecting investors, facilitating capital market efficiency, and ensuring public confidence in the capital markets;
  3. The fact that evidence that might be useful in the U.S. or may become easier for U.S. authorities to locate or acquire because of the operation of a Canadian law does not make the Canadian law per se the author or sponsor of an infringement of s 7 of the Charter; and
  4. The requirement that the ASC comply with the Charter does not entitle Canadian courts to arrogate the jurisdiction to evaluate, let alone to control, the investigative or judicial processes of other friendly foreign rule of law democracies, such as the U.S.

As for the suggestion that the powers of the ASC infringed section 8 of the Charter, the ABCA was quick to reject this argument noting, among other things, that the appellant had a low expectation of privacy, if any, in any knowledge or records he had related to his public trading in the capital markets and that the Securities Act provided reasonable lawful authority for requiring him to product information and documents.

The SCC's decision to deny leave to appeal in this case acknowledges that the mere presence of investigative and informational sharing powers in regulatory legislation is insufficient to give rise to Charter infringements that would entitle individuals to refuse to comply with summonses to provide evidence. Notwithstanding, the Charter implications that might arise in the event information is actually shared in the manner speculated by the appellant in Beaudette remains open for future consideration.

The SCC Monitor (02/08/2016) - A Commentary On Recent Legal Developments By The Canadian Appeals Monitor

Footnotes

1 Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53

2 See e.g., Vallieres v Vozniak, 2014 ABCA 290; MacDonald v Chicago Title Insurance Company of Canada, 2015 ONCA 842; Ledcor Construction Limited v Northbridge Indemnity Insurance Company, 2015 ABCA 121; Precision Plating Ltd v Axa Pacific Insurance Company, 2015 BCCA 277

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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