The Ontario Court of Appeal recently released its decision in Bayens v Kinross Gold Corporation,1 which provides important guidance on class actions for secondary market misrepresentation. The decision addresses the test under section 138.8 of the Ontario Securities Act for leave to proceed on statutory misrepresentation claims, as well as the certification of common law misrepresentation claims under the Class Proceedings Act, 1992 (the CPA).

Important takeaways of the decision include:

  • The standard for granting leave to proceed under subsection 138.8(1) of the Securities Act is the same as the standard for certification of a class proceeding, namely that there must be a reasonable possibility of success at trial. Importantly, however, the evidentiary record against which this standard is applied is different at the leave motion, on which the court may consider affidavit and cross-examination evidence, than it is at the certification stage, where the facts pleaded are assumed to be true.
  • On a motion for leave, scrutiny of expert evidence to determine its reliability is appropriate and necessary in cases where the asserted claim depends on such evidence.
  • Only claims that have been properly pleaded may be considered for certification on a motion for leave.
  • Determination of the merits of statutory misrepresentation claims has no place in the analysis of certification criteria with respect to common law misrepresentation claims, although the denial of leave for the statutory claims is a relevant factor in the preferable procedure segment of the certification analysis.

Facts

The appellants were the representative plaintiffs in a class proceeding against Kinross Gold Corporation and four of its current or former directors. The appellants had purchased shares in Kinross between February 2011 and January 2012, and claimed damages of $4 billion for alleged common law and statutory misrepresentations in relation to mines owned by Kinross.

Kinross overstated the mines’ goodwill value, the appellants argued, by failing to issue a goodwill impairment charge on one of the mines (the Goodwill Impairment Claim), and also wrongly represented that its planned expansion of that mine was on schedule when the schedule was unrealistic (the Expansion Claim). The appellants brought a motion for an order granting them leave to proceed with the statutory action under subsection 138.8(1) of the Securities Act, as well as an order certifying the action as a class proceeding under the CPA.

The motion judge, Justice Perell of the Ontario Superior Court, dismissed the leave and certification motions. With respect to the leave motion, he ruled there was no reasonable possibility that the Goodwill Impairment Claim would succeed at trial because of fatal flaws in the expert accounting evidence relied on by the appellants to support their claim. Justice Perell refused to consider the Expansion Claim because it was not pleaded by the appellants. Finally, Justice Perell refused to certify the common law misrepresentation claims under the CPA because, having denied leave to proceed for the statutory claims, he held it “necessarily followed” that the certification criteria would not be satisfied by either the statutory or the common law claims.

The test on a leave motion

On appeal, the first issue was whether the appellants met the second branch of test for granting leave under subsection 138.8(1), namely whether they had demonstrated a “reasonable possibility” that the action will be resolved at trial in their favour.

The Court of Appeal clarified that, consistent with its decision in Green v Canadian Imperial Bank of Commerce,2 the leave test under subsection 138.8(1) is the same as the test for certification under subsection 5(1)(a) of the CPA, as the same words—“reasonable prospect,” “reasonable chance” or “reasonable possibility” of success—are used to describe the standard.

However, the results of applying that test may be different because the evidentiary contexts in which the tests are applied are different. On a motion for leave, each side may file affidavit evidence and cross-examine on it, whereas on a certification motion, there is no evidentiary record; instead, the facts as pleaded in the statement of claim are to be taken as true.

The Court of Appeal held that, considering all the evidence, the motion judge had appreciated the key features of the test for leave and applied it correctly.

The appellants made two other main arguments that were also rejected by the court. Specifically, that the motion judge:

  • improperly undertook a trial-like weighing of technical evidence, including expert evidence, that was appropriate only for a trial or a summary judgment motion. The Court of Appeal clarified that scrutiny of expert evidence is “both required to determine its reliability and commonplace where the asserted claim depends…on expert evidence”; and
  • erred in assuming that all the relevant information about Kinross’s drilling program was before the court on the leave motion, given that discoveries and documentary production had not yet taken place. The Court of Appeal held otherwise, determining that the motion judge only had to consider whether the appellants’ action had reasonable possibility of success in light of the evidentiary record as filed, without regard to potential future evidence.

Pleading claims

The Court of Appeal rejected the appellants’ argument that the motion judge erred by, and was being overly technical in, failing to consider the Expansion Claim because the appellants failed to plead the claim. The appellants advanced the claim for the first time in their factum on the leave motion, even though the material facts for asserting the claim were available to them well before the motion.

The Court of Appeal emphasized that fundamental fairness and the efficacy of the litigation process demand that a civil action be decided within the boundaries of the pleadings. The decision confirms that this principle applies equally to leave motions in statutory secondary market class actions.

Consequently, the Court of Appeal upheld the motion judge’s denial of leave for the appellants on the statutory misrepresentation claims.

Certification ruling

The appellants also appealed the motion judge’s decision to deny certification for the common law misrepresentation claims on the basis that, because of the overlapping evidentiary issues, the plaintiffs should automatically be denied leave to proceed with the common law claims once the court had denied leave on the statutory claim.

On this point, the Court of Appeal agreed with the appellants’ argument that the outcome of a leave motion under subsection 138.8(1) is irrelevant to the question of whether an associated common law action should be certified. Instead, all that is required to succeed at the certification stage is that the plaintiff show some basis in fact for each of these requirements.

The Court of Appeal was explicit that the “determination of the merits of the statutory claims has no place in the analysis of these certification criteria,” although the denial of leave for the statutory claims is a relevant factor in the preferable procedure analysis. It subsequently found the common law claim met a number of the components under the test under subsection 5(1)(a) of the CPA, as: a) a cause of action was disclosed, b) there was an appropriate class definition, c) there was an adequate representative plaintiff and, d) the claims raised common issues.

These findings notwithstanding, the Court of Appeal agreed that the common law claim did not merit proceeding by way of class action, as it would not achieve a fair, efficient and manageable procedure that is preferable to any alternative method of resolving the common issues. This was because, in the case of the common law misrepresentation claims, individualized inquiries and fact-finding will be necessary to prove reliance, causation and damages. These inquiries undercut the goal of judicial economy and could overwhelm the resolution of the common issues.

The Court of Appeal also held that, in circumstances where statutory and common law misrepresentation claims are combined and are based on the same evidentiary record, it is appropriate to consider the outcome of the leave motion for the statutory claims when determining how the “preferability” inquiry would apply to the common law claim.

In this case, the motions judge considered the evidentiary record relied on by the appellants and concluded that the statutory misrepresentation claims had no reasonable possibility of success. This favoured the conclusion that a class action is not the preferable procedure for the common law claims.

For these reasons, the Court of Appeal concluded that the common law misrepresentation claims do not satisfy the preferable procedure certification criterion.