Conflicting decisions emerging in Ontario case law on the proper role of reliance in the certification of class actions for claims of common law misrepresentation will require resolution by the appellate court. In McKenna v. Gammon Gold Inc., Justice Strathy departed from Justice van Rensburg’s decision in Silver v. Imax Corp., finding that common law misrepresentation cases require proof of reliance and that such claims are not, generally speaking, amenable to class actions since reliance needs to be established by each individual member of the proposed class (making certification of the class inappropriate and not the preferable procedure). Despite Justice van Rensburg’s approach that plaintiffs should be given the opportunity to demonstrate at trial why individual reliance is not necessary, Justice Strathy’s recent decision is more consistent with existing authority. McKenna v. Gammon Gold Inc. also sheds light on the certification of class actions involving non-resident plaintiffs.

Overview of McKenna v. Gammon Gold Inc.

The representative plaintiff, Ed McKenna (“McKenna”), alleged that the value of the defendant, Gammon Gold Inc. (“Gammon”), a TSX and AMEX traded mining company, was inflated as a result of the defendants’ misrepresentations in Gammon’s prospectus and other public filings. McKenna claimed that when the true state of affairs was disclosed, the share price declined and investors lost money. McKenna sought to represent a class of plaintiffs who purchased Gammon shares both via the prospectus and in the secondary market during the class period of October 10, 2006, the date of Gammon’s press release which allegedly contained the misrepresentations, to August 10, 2007, the date on which allegedly false disclosures were corrected (the “Class Period”). The other defendants were Gammon’s senior officers and/or directors and the underwriters of the prospectus offering.

Justice Strathy granted class certification for primary-market purchasers in respect of only two of the plaintiff’s causes action: the statutory cause of action under s. 130 of the Ontario Securities Act, (against all of the defendants in respect of the alleged false representations in the prospectus) and the additional claim of unjust enrichment against the underwriters. Justice Strathy adjourned the motion for certification of the conspiracy claim pending the delivery of particulars of the special damages allegedly sustained and refused to certify the class for the secondary market claims of misrepresentation.

Negligent Misrepresentation Claim

The enactment of s. 130 and s. 138.3 of the Ontario Securities Act, the statutory primary and secondary market misrepresentation provisions, contain “deemed reliance provisions” that eliminate the need for investors to prove reliance (as required at common law) under the statutory regime. Since a claim under the Ontario Securities Act for misrepresentation is subject to a limitation on liability, however, plaintiffs may seek to advance a claim for negligent misrepresentation at common law to avoid this obstacle.

Reliance, however, in common law claims of misrepresentation in a class action is a “thorny issue.” While McKenna argued that the law regarding the need for reliance was an evolving issue that should be decided at trial, Justice Strathy rejected that position and Justice van Rensburg conclusion in Silver v. Imax Corp. (that a plaintiff is not required to prove direct reliance at the certification stage and that the issue can be left for argument at trial). Justice Strathy ultimately found that proof of reliance was a necessary requirement of negligent misrepresentation claims and found that “the need to prove reliance as a necessary element of negligent misrepresentation, and the inability to establish reliance as a common issue, makes the common law misrepresentation claims, in both the primary and secondary markets, fundamentally unsuitable for certification.”

Non-Resident Plaintiffs

The proposed class in McKenna v. Gammon Gold Corp. had no geographic boundaries and included individuals and institutions, anywhere in the world, who purchased securities of Gammon during the Class Period.

Justice Strathy held that non-residents who made purchases from the underwriters in Canada and through the prospectus were proper members of the class, subject to appropriate safeguards, but also ordered the appointment of a separate representative plaintiff for class members located outside of Ontario who purchased their shares in Canada.

Justice Strathy found it inappropriate, however, to include persons who purchased securities from underwriters or their agents outside of Canada, because that “would not give rise to a reasonable expectation that the acquiror’s rights would be determined by a court in Canada.” Although Justice Strathy declined to certify the secondary-market claim, he found that had he done so, he would have limited the class to those who had acquired their securities on the TSX and therefore could reasonably contemplate that their rights would be determined by the courts of the jurisdiction where the shares were acquired.

The plaintiffs have filed a motion for leave to appeal certain aspects of Justice Strathy’s decision. The outcome of that motion should clarify the proper role of reliance in the certification of class actions for claims of common law misrepresentation and provide direction to plaintiffs contemplating and defendants opposing class certification.