In Boal v International Capital Management Inc.(“Boal”), the Ontario Court of Appeal (the “Court”) considered the pleading requirements for certification of a breach of fiduciary duty cause of action. In holding that it was not plain and obvious that the claim had no chance of success, the Court affirmed that ad hoc fiduciary relationships are amenable to certification despite inherent individualistic issues in play and provided examples of potential features of commonality in these circumstances.

Background

The plaintiff was a client of two mutual fund salespersons/financial planners and the corporate entity through which they operated (collectively, the “Defendants”).

The corporate defendant was a member of the Mutual Fund Dealers Association of Canada (the “MFDA”), and the financial planners were “Approved Persons” under the MFDA rules. The MFDA rules imposed fiduciary-like obligations on the financial planners, including, among other things, to deal fairly, honestly, and in good faith with their clients, and to address conflicts of interest in the best interests of the clients.

The Defendants presented the plaintiff with an opportunity to invest in promissory notes in Invoice Payment Systems Corp. (“IPS”). The Defendants and their immediate family members owned 75% of the IPS shares, but did not disclose this information to the plaintiff before recommending the investment in the notes.

The plaintiff purchased an IPS note for over $100,000, and ultimately commenced a class action for the investment losses relating to the investment in the IPS note. The plaintiff claimed, among other things, that the Defendants breached their fiduciary duties.

The certification judge at the Superior Court of Justice held that the plaintiff failed to make out a cause of action for breach of fiduciary duty on a class-wide basis, and therefore, did not satisfy the common issues and preferable procedure prongs of the certification test. The plaintiff’s other claims relied on the existence of a breach of fiduciary duty and therefore also failed.

The majority at the Divisional Court upheld the decision of the certification judge, finding that the pleadings did not set out sufficient facts that would establish the indicia for ad hoc fiduciary relationships set out in Hodgkinson v Simms, [1994] 3 S.C.R. 377 (“Hodgkinson”), namely that (i) the alleged fiduciary has scope for the exercise of some discretion; (ii) the alleged fiduciary can unilaterally exercise that discretion so as to affect the beneficiary’s legal interest; (iii) the alleged beneficiary is peculiarly vulnerable to the alleged fiduciary; and (iv) the alleged fiduciary has accepted responsibility to act in the best interests of the alleged beneficiary and in accordance with a duty of loyalty.

The Divisional Court held that the pleadings relied solely on the MFDA rules, which were insufficient to establish a fiduciary duty, and dismissed the appeal. In dissent, Justice Sachs found that the claim did include additional facts aside from the breach of the MFDA rules, which supported a breach of fiduciary duty. Accordingly, Justice Sachs would have sent the matter back to the Superior Court for redetermination.

The plaintiff appealed the decision of the Divisional Court to the Court of Appeal.

The Decision of the Court of Appeal

The Court found that the claim provided the basis for a cause of action for breach of fiduciary duty.

Agreeing with Justice Sachs that the certification judge had made an error in principle by failing to consider all of the facts pled aside from the breach of MFDA rules, the Court remitted the action to the Superior Court for a fresh determination.

Relying on Hodgkinson and Hunt v TD Securities, 2003 CanLII 3649 (ONCA), the Court affirmed the that five relevant factors in establishing an ad hoc fiduciary are: (i) vulnerability; (ii) trust; (iii) reliance; (iv) discretion; and (v) governance of professional rules or codes of conduct. The Court held that the plaintiff’s pleading, read as a whole, characterized the relationship with the Defendants as “one of vulnerability, trust, and reliance”.

The Court’s holding that it was not plain and obvious a breach of fiduciary duty claim would fail was based on a number of facts, including the following:

• the Defendants prepared and monitored financial plans and recommendations for and in the best interests of each proposed class member.
• the Defendants controlled all information concerning the IPS notes, including what to reveal to proposed class members, which rendered them vulnerable.
• the relationships between the class and the Defendants appeared to be long standing, in that the Defendants selected whom to invite to purchase IPS notes from a roster of clients.
• the Defendants exercised discretion in selecting whom to invite to invest in IPS and it was the Defendants who brought the opportunity to proposed class members.
• this was not an isolated breach, but rather numerous breaches of industry standards and professional rules from which the Defendants profited greatly.
• there was a knowledge imbalance between the class and the Defendants, and the class member’s knowledge that the Defendants were bound by professional rules created reasonable expectations and created an environment in which they were vulnerable.

Key Takeaways

As the Court has sent the plaintiff’s claim back to the Superior Court, it remains to be determined whether the plaintiff’s claim is suitable for resolution on a class-wide basis and satisfies the certification criteria beyond the cause of action criterion.

Boal reinforces how the bar to satisfying the reasonable cause of action criterion is a low one and highlights how regulatory standards may be considered when assessing whether financial advisors owe a fiduciary duty to their clients.

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