The Ontario Court of Appeal recently confirmed the importance of defence evidence when opposing leave to bring statutory misrepresentation claims under Part XXIII.1 of the Securities Act. In Mask v. Silvercorp Metals Inc., Chief Justice Strathy rejected the plaintiff’s argument that leave should be granted as a matter of course if the plaintiff establishes a plausible analysis of the legislation and “some credible evidence.” Rather, the Chief Justice held that the “reasonable possibility of success” test requires weighing all of the evidence – including that of the defendant.
The Court of Appeal affirmed the motions judge’s denial of leave and costs award of $500,000 against the plaintiff. Silvercorp confirms that, given the merits-based analysis under Part XXIII.1, significant costs awards raise fewer access to justice concerns as compared to typical class actions.
Like many Part XXIII.1 claims, the genesis of Silvercorp is found in the decline in a share price. The plaintiff alleged that Silvercorp had misrepresented the quality and quantity of its mineral resources and reserves in relation to a Chinese mining project. He sought leave under s. 138.8 of the Securities Act to bring claims for statutory misrepresentation, and he sought class certification.
The motions judge found no reasonable possibility of the statutory claims succeeding and denied leave. Silvercorp’s defence evidence completely undermined the plaintiff’s case, which was premised on putative discrepancies between Silvercorp’s public disclosures and a new technical report prepared by an independent consulting firm at the request of the B.C. Securities Commission. The principal geologist behind the new technical report testified that there was, in fact, no material discrepancy between the figures in that report and Silvercorp’s public disclosure.
The motions judge had earlier denied the plaintiff’s attempted “fishing expedition” for evidence. See our post of August 21, 2014 addressing this earlier decision denying the production requests.
Court Of Appeal Decision
The plaintiff argued on appeal that the motions judge misapplied the leave test and that leave should be granted as long as he establishes a plausible analysis of the legislation and some credible evidence. This formulation of the test tracks the Court of Appeal’s decision in Goldsmith v. National Bank of Canada, which established a two-part test for granting leave under Part XXIII.1:
- The plaintiff must offer “a plausible interpretation of the applicable legislative provisions.”
- The plaintiff must offer “credible evidence sufficient to convince the court that there is a reasonable possibility that the action will be resolved at trial in the claimant’s favour.”
The plaintiff in Silvercorp went further, arguing that once the plausible interpretation and credible evidence are found, the motions judge must stop and grant leave. The Court of Appeal disagreed:
“I do not accept the appellant’s submission that scrutiny of the evidence on a leave application should be so limited. In my view, the “reasonable possibility” requirement of the leave test requires scrutiny of the merits of the action based on all the evidence proffered by the parties. Far from undermining the objective of the legislation, such scrutiny of the entire body of evidence is necessary to give effect to the purpose of the screening mechanism.”
The court must weigh the evidence of both sides – including any defence evidence opposing the plaintiff’s case – before determining whether the claim has a reasonable possibility of success. As Chief Justice Strathy held, such a “reasoned consideration of the evidence” is required to fulfil the legislative intention that the Part XXIII.1 leave test be a “robust deterrent screening mechanism.”
Chief Justice Strathy affirmed the motions judge’s conclusion that “that the foundation [of the plaintiff’s case] had been demolished by the defendant’s evidence and had not been repaired by the plaintiff’s.” Viewed in light of the defence evidence, the plaintiff’s evidence was “wanting.”
This “significant merits-based analysis” also led the Court of Appeal to dismiss the plaintiff’s appeal from the motion judge’s cost award of $500,000. Chief Justice Strathy found no error in the motions judge’s conclusion that the significance of the merits analysis on leave motions under Part XXIII.1 lessened the access to justice concerns that typically prevail on certification motions.
Importance Of Defence Evidence
Silvercorp underscores the importance of a full-throated defence at the leave stage in secondary market misrepresentation cases under Part XXIII.1. Although the “reasonable possibility of success” test is a “relatively low merits-based threshold,” it is applied robustly and with a view to the full body of evidence before the court. And as Silvercorp demonstrates, defence evidence unpacking the flaws in the plaintiff’s case could well be decisive in opposing the leave application.
The dismissal of the costs appeal underscores the potential for a significant costs award to offset the costs of the successful defendant in advancing its full-throated defence. Where the defendant engages successfully on the merits under Part XXIII.1, the courts may be more open than in typical class proceedings to indemnifying the defendant for the costs of defending the plaintiff’s motions.