When the Ontario Court of Appeal speaks, it sets important policy for the securities industry.  On February 3, 2014, the industry was told that class actions claiming damages for secondary market misrepresentations are rendered easier to commence and continue.

In Greene v. Canadian Imperial Bank of Commerce, a rarely assembled five‑member Court Bench overturned the Court’s earlier decision in Sharma v. Timminco and decided three other cases dealing with the same or similar issues.  As discussed more fully below, Court reversed its previous interpretation of the limitation period contained in the Securities Act (Ontario), confirmed that the barrier presented by the merits test contained in the statutory leave requirement for the commencement of an action is a low bar and that common law negligent misrepresentations claims may be suitable for certification even if reliance cannot be dealt with as a common issue.

The Court of Appeal’s Reasons for Decision deal with technical issues, some of which are discussed below but are founded upon the following principles:

  • securities class actions claiming damages for misrepresentation in the secondary market under Section 138.3 of Part XXIII.1 of the Securities Act (Ontario) were the result of remedial legislation having the twin goals of (i) facilitating and enhancing access to justice for investors; and (ii) deterring corporate misconduct and negligence;
  • while the legislation also has a mechanism to inhibit meritless securities actions based on “strike suits”, the protections under the legislation, namely:  (i) court approved settlements; and (ii) a screening mechanism through requiring leave, these mechanisms are to be invoked and adjudged only if it can be shown in the leave application that it is “plain and obvious …” that the action will not succeed;
  • the test for leave to commence a securities class action under section 138.8 of theSecurities Act was “a relatively low threshold” and a “preliminary low‑level merits based leave test”;
  • having regard to the legislative history of the amendment contained in section 138 of theSecurities Act, it would be “… unfair to the parties and to the Court to expect the motion judge to engage in a finely calibrated weighing process …” when the court is considering a leave application.  The Court went on to approve the following statement “… it seems to me that I should simply ask myself whether, having considered all of the evidence adduced by the parties and having regard to the limitations of the process, the plaintiff’s case is so weak or has been so successfully rebutted by the defendant, that it has no reasonable possibility of success”.
  • the test applied by the Supreme Court of Canada in granting certification under section 5(1)(a) of the Class Proceedings  Act (whether a pleading discloses a cause of action), being the plain and obvious test is the same test to be applied to any leave application;
  • the Court of Appeal loosened the grip of the requirement of “reliance” in negligent misrepresentation claims. The court based its decision on section 138.13 of theSecurities Act which provides as follows:  “The right of action for damages and the defences to an action under s.138.3 are in addition to, and without deregation from, any other rights or defences the plaintiff or defendant may have in an action brought otherwise than under this Part.”  Based on this section, the Court of Appeal permitted certification of issues that would otherwise have been uncertifiable if they “advance the litigation” and further noted that the trial judge may order “individual trials” to determine the issues of reliance and damages in accordance with section 25 of the Class Proceedings Act.

The exact issue which the Court of Appeal decided in indicating a liberalization of class proceedings claiming misrepresentation in the secondary market for securities involves a contest between a three‑year limitation period within which “leave to proceed” must be obtained under section 138.8(1) of the Securities Act and section 28 of the Class Proceedings Act which suspends the operation of any limitation period in favour of a class member on the commencement of the class proceeding.  In resolving the conflict, the Court of Appeal overruled the earlier decision to the contrary in Sharma v.Timminco.  That case had said that a claim was statute-barred if leave to commence the Securities Act under section 138.3 of the Securities Act had not been commenced within the three-year limitation period.  The case said that section 28 of the Class Proceedings Act did not suspend the running of that limitation period.

Although rare, the Court reiterated its earlier articulated position in Polowin v. Dominion of Canada General Insurance Co. that the Court of Appeal could overrule its own previous decision by weighing the “… advantages and disadvantages of correcting the error in a previous decision.  This approach focuses on the nature of the error, and the effect and future impact of either correcting it or maintaining it.  In so doing, this approach not only takes into account the effect and impact on the parties and future litigants, but also on integrity and administration of our justice system.”  The Court went on to decide that where a representative plaintiff in a class proceeding pleads a statutory claim under section 138.3, the plaintiff is “making the claim” and “invoking the legal right”.  As a result, section 28 of the Class Proceedings Act suspends the operation of the three‑year limitation period within which leave to commence an action must be brought if the pleading sets out facts giving rise to a cause of action for damages for misrepresentation under section 138.3 of the Securities Act and pleads the intent to seek leave to commence the action.

While the Court of Appeal has liberalized the operation of limitation periods, there still remains solid defences to certification of securities class action claims.