In Yip v. HSBC Holdings plc, the Ontario Superior Court of Justice granted the class action defendants $1 million in costs, based in part on Justice Perell's conclusion that the "entrepreneurial" plaintiff ought to have reasonably expected that the defendants would spend that amount in response to an $8 billion lawsuit. The costs decision followed a ruling delivered earlier this year where Justice Perelll held the Ontario courts lacked jurisdiction over HSBC as a foreign issuer that does not do business in Ontario and whose shares do not trade in the province.
In the proposed class action, the plaintiff had asserted a misrepresentation claim under the Ontario Securities Act against HSBC Holdings ("the Bank") and a former employee, as well as a common law negligent misrepresentation claim. As described below, the Bank ultimately brought a successful motion to dismiss and stay the action on jurisdictional grounds.
On the defendants' motion, Justice Perell held that to determine whether HSBC was a "responsible issuer" under the Ontario Securities Act, the essential question was whether it had a connection to Ontario. The Court confirmed that, in certain circumstances, an Ontario court will possess jurisdiction simpliciter over a foreign corporation where a real and substantial connection to Ontario exists, even where the company's shares do not trade in Ontario's secondary market. However, in this case, HSBC did not have a substantial connection to Ontario because it was based in the UK and did not carry on a business in the province.
Notably, while HSBC managed a Canadian subsidiary, the Court held that a parent company does not carry on a business in Ontario simply by virtue of the fact it owns shares of a subsidiary that does operate in the jurisdiction. Moreover, the fact that the alleged misrepresentation would constitute a tort committed in Ontario does not constitute a real and substantial connection. To hold otherwise would effectively amount to universal jurisdiction for claims arising out of commercial activities.
Therefore, lacking the necessary connection to Ontario, HSBC was not a "responsible issuer", and the Court held that it lacked jurisdiction simpliciter. In the alternative, Justice Perell noted that he would have declined to exercise jurisdiction on the grounds that the UK was a more appropriate forum. The preponderance of trading in HSBC securities takes place on the London exchange, the corporation is domiciled in the UK, and most witnesses and evidence were similarly located in that country. In addition, while Ontario possessed a juridical advantage over the UK, due to the acceptance of contingency fees in the former, this was characterized as a weak factor in deciding the appropriate forum. Justice Perell contrasted this with the much stronger factor of comity, which suggested that courts should not intervene in another country's securities regulation without a strong connection to Ontario.
A Reasonable Expectation of Costs Exposure
On the subsequent motion to address the costs to be awarded to the successful defendants, the Bank sought roughly $1 million in costs. Justice Perell applied the factors under Rule 57 of the Rules of Civil Procedure, as well as the caselaw that has developed pertaining to the judicial discretion to award costs in the class proceedings context.
The Court awarded the costs sought by HSBC. Among other things, Perell J. rejected the plaintiff's argument that the Bank had committed more resources than necessary to challenge a jurisdiction motion on a largely uncontested factual record, rendering HSBC's claim for costs excessive. Importantly, the costs sought had to be placed in the context of the Bank's potential exposure, and the corresponding need to mount a vigorous defence. Similarly, plaintiff counsel pursued entrepreneurial litigation with full knowledge of its risks:
There is a make-believe quality to Mr. Yip's lawyers' characterization of Mr. Yip's lawsuit and of HSBC Holdings' defence to it. It is a fantasy to suggest that when Mr. Yip and his entrepreneurial class counsel sued a foreign defendant for $20 billion, later reduced to the not trifling $8.0 billion, that they did not reasonably anticipate that HSBC Holdings would spend $0.0001 billion to defend itself.
The proposed class action was not altruistic litigation; it was entrepreneurial litigation. Mr. Yip and others willingly traded in foreign stock exchanges with no reasonable expectation that Ontario law might follow them overseas but with the knowledge that the foreign stock markets were regulated by foreign regulators. The putative class members have or had remedies available to them in the jurisdictions in which they traded. Putative class counsel's pursuit of access to justice for Canadians was a self-appointed engagement as a regulator in another jurisdiction's regulated stock market. The lawyers knew that their class action would be jurisdictionally challenged.
Plaintiff counsel could not "take cover from their exposure to the risks they knowingly took on" through recourse to the argument that the issues raised on the jurisdiction motion were novel. The "loser pays" principle held sway; "Mr. Yip's lawyers' prime motivation was entrepreneurial and they had no reasonable basis for anticipating that the court would relieve Mr. Yip from any of the myriad purposes of a costs regime in which loser pays." Lastly, the proceeding had involved extensive expert evidence, a number of affidavits and cross-examinations in various cities. No issue was taken by Justice Perell with the extent of evidence proffered, or duration of the cross-examinations.
The decisions in Yip v. HSBC Holdings provide a cautionary example of the limits to the entrepreneurial pursuit of class proceedings. The costs decision rests on an understanding of the economic interests of class counsel as a driver for class actions, as well as the fact that it is typically plaintiff counsel themselves that indemnify the representative plaintiff for an adverse costs award. Where successful class counsel are recognized for their risk-taking in having their contingency fees approved by the Court, it is only symmetrical that they bear the cost when their "bet" on high-stakes litigation goes wrong.