The Test for Leave under Part XXIII.1: Ambiguity Remains

by Bennett Jones LLP

Ontario's statutory regime for secondary market liability came into effect in 2006 as a result of amendments to the Securities Act (Ontario) (OSA), which created a statutory cause of action for deficient market disclosure. Part XXIII.1 of the OSA creates a statutory cause of action against reporting issuers, their officers and directors, and related parties for misrepresentations made in secondary market disclosures. However, before such a claim can be brought, the plaintiffs must obtain leave of the court. The statutory test for leave is that: (1) the action must be brought in good faith, and (2) the plaintiffs must have a reasonable possibility of success at trial. In essence, the legislature granted the courts a gatekeeper function to control litigation and to ensure that only claims with some merit proceed.

Early Cases in Ontario

The initial decisions in Ontario that have considered the test under this cause of action have set a notably low standard for plaintiffs to obtain leave. These decisions suggest that courts have assumed a limited gatekeeper role on leave applications, which may be at odds with the original legislative intent. However, other Canadian jurisdictions considering similar causes of action under their securities legislation have set a higher standard. And the recent Ontario decision of Justice Belobaba in Dugal v Manulife Financial, 2013 ONSC 4083, expresses the opinion that Ontario should have a higher standard consistent with these other jurisdictions. However, without Ontario appellate review, the low standard remains in Ontario.

The first Ontario decision to consider the leave test was Silver v IMAX, [2009] O.J. No. 5573 and [2009] O.J. No. 5585 (Sup. Ct. J.) in which Justice van Rensburg set a low threshold for granting leave. For the first part of the leave test (the good faith requirement), Justice van Rensburg stated that the plaintiffs must establish "that they are bringing their action in the honest belief that they have an arguable claim, and for reasons that are consistent with the purpose of the statutory cause of action and not for an oblique or collateral purpose." For the second part of the test (reasonable possibility of success), Justice van Rensburg determined that a reasonable possibility of success means a "mere" or de minimus possibility based on a consideration of the evidence. Justice Tausendfreund in Dobbie et al. v Arctic Glacier Income Fund, 2011 ONSC 25, provided further guidance on the leave test. With respect to the second part of the test, Justice Tausendfreund stated that "[t]he applicable standard is more than a mere possibility of success, but is a lower threshold than a probability." This maintained the low threshold for leave established in Silver v IMAX. In fact, the minimal evidence in the Dobbie case that was found to satisfy the leave test arguably lowered the bar for leave further than that established in Silver v IMAX.

Subsequent cases in Ontario have generally followed suit. Even in Gould v Western Coal Corporation, 2012 ONSC 5184, the one Ontario case in which leave was not granted, the court held that the leave test is low: the plaintiff need only establish more than a mere possibility of success at trial.

Decisions in British Columbia and Quebec

Other Canadian provinces have legislated similar causes of action, and a leave decision pursuant to analogous legislation was issued for the first time in 2011. Justice Harris of the British Columbia Supreme Court provided some guidance on the leave test in Round v MacDonald, Dettwiler and Associates Ltd, 2011 BCSC 1416. He found that while the leave test does not require a plaintiff to demonstrate that it is more likely than not that he or she will succeed at trial, it is intended to do more than just screen out clearly frivolous, scandalous or vexatious actions; the court must analyze the evidence to make an assessment on the merits and to decide whether the reasonable possibility test is satisfied. The statements of Justice Harris are at odds with the very low test that was set in Ontario.

In Theratechnologies Inc. v 121851 Canada Inc., a recent decision of the Quebec Court of Appeal, the Court of Appeal considered both the Ontario and British Columbia case law on the issue. The Court concluded that the requirement on the plaintiff is more onerous than the simple requirement to demonstrate "colour of right" (which would be the onus for establishing certification in Quebec), but is less onerous than the balance of probabilities; there must be real and sufficient evidence to demonstrate the reasonable possibility of the plaintiff's success. The threshold established by the Quebec Court of Appeal appears to be more consistent with the higher standard established in British Columbia.

Recent Decision of the Ontario Court

On July 25, 2013, Justice Belobaba of the Ontario Superior Court released his decision in Dugal v Manulife Financial. The plaintiffs were seeking damages on the basis that the defendants misrepresented the adequacy of Manulife's risk management practices and failed to disclose the enormity of the company's exposure to equity market risk. Justice Belobaba granted the plaintiffs leave to bring the statutory cause of action. The requirement that the action be brought in good faith was easily satisfied. With respect to the second requirement (a reasonable possibility of success), Justice Belobaba considered existing Ontario case law as well as the potential legislative intent behind the provision, which suggests a higher standard for leave to be obtained.

While Justice Belobaba determined that he did not need to decide which threshold to adopt, as he found that on the facts before him the plaintiffs met both the lower standard and the higher one, he did state that, for his part, he would interpret the provision to have a higher standard for leave, consistent with the test established in British Columbia by Justice Harris.

Although demonstrating a preference for the higher standard, Justice Belobaba noted that the Supreme Court of Canada's decision in R. v Imperial Tobacco Canada, 2011 SCC 42, found that under a motion to strike, the plaintiff need only show a reasonable prospect of success at trial. Justice Belobaba questioned whether the similar use of language may suggest that the "reasonable prospect of success" branch of the statutory leave test might resemble the test that was to be applied on motions to strike pleadings, which would be a lower threshold than that preferred by Justice Belobaba.

Whether the similar language used by the Supreme Court in a case involving a motion to strike can be determinative of the appropriate threshold to be applied under the statutory leave test is likely to be the subject of future litigation in which, unlike Manulife, the threshold to be applied is determinative of whether leave is granted. A motion to strike assumes that the claims of the plaintiff as alleged are true. The question is then whether, on those assumed facts, there is a reasonable possibility of success since no evidence is presented to the court. It is well established that obtaining leave for the statutory cause of action under the OSA is an evidence based test. While there may be uncertainty as to the extent of evidence required, the test is still considered on an evidentiary foundation. In a motion to strike, as was being considered by the Supreme Court, no evidence is admissible. Therefore, future defence counsel will have arguments that the two tests should not be equated and that the language used by the Supreme Court of Canada is not determinative of the issue.

Going Forward

Based on the decisions in British Columbia and Quebec, and the recognition by Justice Belobaba that a higher standard is consistent with the legislative purpose behind the provision, there is a greater chance that the low threshold initially adopted in Ontario may be found to be incorrect. However, the existing jurisprudence in Ontario still establishes a low threshold for obtaining leave. It is clear that appellate guidance in Ontario is necessary. When such guidance will be provided remains to be seen.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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