Should Canadian courts enforce a foreign class action judgment involving Canadian defendants? The Ontario Superior Court of Justice answered this question with an unequivocal "yes" in King v. Drabinsky. As long as a real and substantial connection exists between the action and the forum in which it is heard — and there is an absence of fraud and no infringement of natural justice — decisions rendered outside of a province deserve "comity" (inter-jurisdictional courtesy).
The Ontario Superior Court was asked to enforce a judgment of the US District Court. Drabinsky and Gottlieb, the defendants, were the senior officers and directors of Livent, a company incorporated in Ontario but registered with the Securities and Exchange Commission and listed on the NASDAQ. In December 1997, Livent filed a registration statement for the distribution of senior unsecured notes. The documents contained financial information that was restated in November 1998, leading to a complete collapse in share value. subsequently, class proceedings were brought in New York on behalf of all note purchasers.
The plaintiffs asserted claims of misrepresentation against the defendants under the US Securities Act of 1933. According to the legislation, the defendants were entitled to a due diligence defence if they could establish that, after reasonable investigation, they had grounds to believe that information in the registration statement was true.
The New York court granted a motion for summary judgment because (i) the defendants had directed the preparation of the financial statements (thus excluding the due diligence defence), and (ii) the defendants had relied mainly on their lack of involvement. The appeal before the Second Circuit Court of Appeals was dismissed for the same reasons, and enforcement of the judgment was sought before the Ontario courts.
The Court’s Analysis
The court referenced the leading case on the enforcement of foreign judgments, Beals v. Saldanha, in which the Supreme Court of Canada held that the yardstick for assessing jurisdiction is the "real and substantial connection" test. In other words, a judge must question whether a real and substantial connection exists between the forum and either the subject matter of the litigation or the parties themselves. In King, the defendants had acknowledged a connection between the class action and the New York court. Beals also confirmed that defences available to a Canadian defendant that bar the enforcement of a foreign judgment are natural justice, fraud and public policy.
The court went on to state that a fraud defence can only be invoked to deny enforcement of a foreign judgment if new material evidence comes to light that was not previously discoverable. The court found that no such evidence had been adduced.
As stated in Beals, the natural justice defence safeguards procedural rights and fair ethical rules during the conduct of a trial and does not relate to the merits of the case. The defendants claimed that American jurisprudence had adopted a different approach to protection against self-incrimination than had Canadian law, thereby undermining their intrinsic rights. The court rejected this argument, reminding the defendants that in an earlier case, the Ontario Court of Appeal had stated that these differences did not constitute an infringement of natural justice.
The court found in the fact of conduct causing loss to investors, a strong public policy element in favour of enforcing the US judgment. The defendants also pleaded as a further defence that they were denied the right to a meaningful opportunity to be heard. They argued that they were not able to defend themselves because of bail conditions imposed on them in parallel Canadian criminal proceedings and the fraudulent testimony of several witnesses. The court concluded that the physical presence of the respondents was not necessary to ensure a full defence and that the due diligence defence in securities law enforcement proceedings would not have been available to the defendants, in any event, since they had relied blindly on the actions of other individuals.
McCarthy Tétrault Notes:
Canadian companies listed on a US stock exchange may expose themselves to class proceedings. If such an action is successful, the judgment will be recognized and enforced in Canada if (i) a real and substantial connection exists between the action and the jurisdiction in question, (ii) no new material evidence is discovered, and (iii) the trial judge paid due regard to basic procedural rights and ethical rules.