Test for obtaining leave to pursue statutory cause of action
Appeal court's decision


An essential feature of any claim for common law misrepresentation is actual reliance on the misrepresentation - an inherently individual issue. For this reason, in large part, shareholder class actions based on negligent misrepresentation have met with little success in Canada. However, Canadian lawmakers have recently enacted legislation that provides a statutory claim for secondary market misrepresentation, without the need to prove actual reliance. In order to prevent a flood of unmeritorious claims, the new statutory provisions include a 'gatekeeper' mechanism which requires potential plaintiffs to seek leave from the court before commencing an action.

In December 2009 Silver v IMAX Corporation(1) became the first decision in Canada to consider and grant leave under the new statutory regime (Part 23.1 of the Ontario Securities Act). In companion reasons,(2) the motions court judge also certified a class proceeding for the statutory cause of action, as well as for the common law claims of negligent and fraudulent misrepresentation - the latter despite the historical difficulties on this point.(3)

In early 2011 IMAX Corporation sought leave to appeal, arguing among other things that the court had set the gatekeeper threshold under the new statutory cause of action at too low a level. The court, while acknowledging that many of the issues raised by IMAX were important, complex and controversial, refused to grant leave to appeal.(4)


IMAX is a publicly traded company engaged in the sale and leasing of large-format two-dimensional and three-dimensional theatre systems. In February 2006 IMAX issued a press release confirming that it expected to meet or exceed its 2005 earnings-per-share guidance, and announcing that during the fourth quarter of 2005, it had completed a record 14 theatre installations. In March 2005 it filed its 2005 annual financial statements.

On August 9 2006 IMAX issued a press release announcing, among other things, that it was responding to an inquiry from the Securities and Exchange Commission regarding its timing of revenue recognition, including the recognition of revenue during the fourth quarter of 2005 in connection with 10 theatres whose installations had not been finalised. The next day, IMAX's share price dropped by more than 40%. In 2007 IMAX restated its 2005 financial statements, acknowledging that it had erred in recognising revenue for theatre systems that had yet to be completed, and had failed to comply with generally accepted accounting principles.

Test for obtaining leave to pursue statutory cause of action

In order to bring a secondary market liability claim under Section 138.3 of the Ontario Securities Act, the plaintiffs in IMAX were required first to obtain leave of the court under Section 138.8. Before granting leave, the court needed to be satisfied that the action was being brought in good faith and that the plaintiffs had a reasonable possibility of success at trial.

In her decision granting leave, the motions court judge stated, with regard to the first element of the test, that in order to meet the good-faith requirement, the plaintiffs had only to establish that:

"they are bringing their action in the honest belief that they have an arguable claim, and for reasons that are consistent with the purpose of the statutory cause of action and not for an oblique or collateral purpose."(5)

With respect to the second element of the test, the court held that this required a consideration of whether there was evidence which, if believed, would support the plaintiffs' action.(6) Although there must be more than a de minimis possibility of success at trial,(7) the threshold that the plaintiff must meet is relatively low.(8)

Ultimately, the motions court judge determined that the plaintiffs had satisfied the above requirements, as the misrepresentation pleaded was supported by the evidence of IMAX's restated financial statements. In opposing the motion for leave, IMAX made the strategic decision to assert and rely on the statutory due diligence defences made available to it under Section 138.4 of the act. However, in contrast to the relatively low threshold applied to the plaintiffs' motion for leave, the motions court judge held that in order for a defendant to assert such a defence successfully, it must satisfy the court that "the evidence in support of such a defence at the preliminary merits stage will foreclose the plaintiffs' reasonable possibility of success at trial".(9) Based on the facts as she found them, the motions court judge held that IMAX had not advanced sufficient evidence to clear this high hurdle and to defeat the plaintiffs' motion for leave.

Appeal court's decision

On its motion for leave to appeal the initial decision, IMAX argued that the motions court judge had set too low a threshold for leave under Section 138.8, as the legislature intended to implement a more substantial 'gatekeeper' role for the courts. IMAX also argued that the motions court judge had erred in reversing the onus in respect of the affirmative due diligence defences asserted by defendants.

With respect to IMAX's argument on the matter of leave, the appeal judge held that although the formulation of the test for leave under Section 138.8 was a matter of general importance, IMAX had shown no good reason to doubt the correctness of the lower court's decision.(10) In the result, the exceptionally low threshold that the motions court judge formulated remains the law in Ontario.

Turning to IMAX's argument regarding the reversal of the onus for affirmative defences, the appeal court judge again found that there was no reason to doubt the correctness of the determination that the onus lies with the defendants to make out their affirmative defences, "whatever the precise formulation of the onus, standard of proof, and test to be applied in respect to affirmative defences".(11) As such, and unlike the threshold that a plaintiff must meet, the threshold that a defendant in Ontario must meet to forestall a statutory claim through the assertion of an affirmative defence at the leave stage has been set at a high level.


The appeal judge's decision to deny leave to appeal did not directly affirm the motion court judge's findings regarding either the test for leave under Section 138.8 of the act or the burden to be met by defendants in asserting an affirmative defence. The appeal judge emphasised that the motion court judge's decision was only the first word on the statutory test for leave, and would certainly not be the last. However, until a lower court endorses a conflicting approach to the statutory test for leave, the test as described by the motions court judge remains the law in Ontario. Defendants that are considering whether to assert a statutory due diligence defence at the leave stage should be mindful of the test set in IMAX. The relatively low barrier reflected in this decision should give defendants significant pause in considering whether they wish to incur the time, expense and risk inherent in filing affidavit material (and thus subjecting themselves to cross-examinations) in response to a leave motion.(12) Some may argue that these risks and costs will rarely be justified.

For further information on this topic please contact Michael D Schafler or Mark G Evans at Fraser Milner Casgrain LLP by telephone (+1 416 863 4511), fax (+1 416 863 4592) or email ([email protected] or [email protected]).


(1) [2009] OJ. No 5573 (IMAX leave).

(2) [2009] OJ No 5585.

(3) This update does not focus on the certification issue.

(4) [2011] OJ No 656 (IMAX appeal).

(5) IMAX leave, supra endnote 2 at para 308.

(6) Ibid at para 320.

(7) Ibid at para 324.

(8) Ibid at para 25.

(9) Ibid at para 333.

(10) IMAX appeal, supra endnote 4 at paras 19-26.

(11) Ibid at paras. 33-35.

(12) Section 138.8(2) of the act requires defendants that seek to oppose a motion for leave to file an affidavit setting out the material facts on which they intend to rely.

Michael Beeforth, associate, assisted in the preparation of this update.