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January 2010 Commercial Litigation Update

An update on significant commercial litigation decisions released recently in Ontario.

Norwich orders: Recent Ontario developments in the extraordinary remedy of pre-action discovery

Two recent Ontario decisions, GEA Group AG v. Ventura Group Co. and York University v. Bell Canada Enterprises and Rogers Communications Inc. have clarified the circumstances under which courts should grant the extraordinary equitable remedy of pre-action discovery, commonly known as a Norwichorder. 
At issue in GEA Group was the availability of a Norwichorder compelling the disclosure of documents related to the transfer of interests in a corporation, which GEA alleged had been fraudulently conveyed in an attempt to render theappellant, FNG, judgment proof. The lower court found pre-action discovery was necessary for GEA to plead its case and granted the order. 
On appeal, FNG successfully had the Norwich order set aside on the basis that such an order was not necessary and that GEA was perfectly capable of pleading its case against FNG and any other alleged wrongdoers without first examining FNG and its documents. In setting aside the Norwich Order, the Court of Appeal observed that pre-action discovery is “…an intrusive and extraordinary remedy that must be exercised with caution. It is therefore incumbent on the applicant for a Norwich order to demonstrate that the discovery sought is required to permit a prospective action to proceed.”
Soon after the decision in GEA, the Ontario Superior Court considered whether to grant a Norwich order in a case of internet defamation. In York University v. Bell Canada and Rogers, York successfully compelled two Internet service providers to disclose information it needed to identify the anonymous author(s) of emails impugning the integrity of its President – information that it needed to sue those authors for defamation.   
When viewed together, the decisions in GEA and York University not only provide instruction as to when Norwichorders can be issued, but they also demonstrate the circumstances in which such orders may be useful. In particular, Norwich orders may end up becoming much more common as victims of defamatory emails or internet postings seek to pursue authors who would otherwise remain anonymous. Additional analysis. (JD)

Investment industry practices relevant to enforcement of oral contract, Court of Appeal rules

In its recent decision in UBS Securities Canada v. Sands Brothers,the Ontario Court of Appeal cited investment industry customs and practices in finding and enforcing an agreement for the purchase of shares – despite the fact that no formal written agreement was ever signed. 
In this case, UBS sought to increase its holdings in Bourse de Montréal, the company that operated the Montreal Stock Exchange, and contacted Sands Brothers about buying its Bourse shares. During a telephone conversation, Sands Canada accepted UBS’s offer to purchase its Bourse shares and asked UBS to “draw up the papers.” There were several telephone calls and emails referring to the deal but no written agreement was ever signed. 
Several days later, after Bourse announced that it would be listing its shares publically (which significantly increased their value), Sands Canada denied any binding agreement and refused to deliver the shares. UBS sued for the Bourse shares and won specific performance at trial. 
A unanimous Court of Appeal panel upheld the trial decision. In doing so, it found that the trial judge quite properly relied upon uncontradicted evidence that it is customary in the securities industry to orally conclude deals for the purchase and sale of shares. Most significantly, the appeal panel endorsed the use of securities industry practices to identify the “essential terms” of the agreement to sell the Bourse shares to UBS. The Court of Appeal observed that without the ability to quickly complete deals through verbal discussions, the securities industry cannot operate effectively – as a delay of hours, or even minutes, in completing a purchase and sale of securities can mean a difference of millions of dollars to the buyer or seller. Additional analysis. (CF)

Business judgment rule does not trump unanimous shareholders’ agreement

Directors of a corporation cannot invoke the business judgment rule to justify decisions that violate a unanimous shareholders’ agreement, the Ontario Divisional Court held recently.
In 2005, Bruno Barbieri and Peter, John, and David Herwynen bought Platinum Wood Finishing Inc. The Herwynen brothers acquired a 70% interest through their holding company, and Mr. Barbieri acquired a 30% interest, also through a holding company. The Herwynen brothers insisted that Mr. Barbieri pay a premium for his 30% interest, which they justified on the basis that their sawmill, Herwynen Sawmill, would continue to be Platinum’s biggest customer. Mr. Barbieri agreed, but on condition that a unanimous shareholders’ agreement would specify, among other things, that he would be President of Platinum at an annual salary of $100,000, and that certain decisions, including changes to his pay, required the agreement of all shareholders.
In March 2008, Barbieri took ill with leukemia and spent two and a half months in hospital. While he was in hospital, Barbieri’s pay was cut off and, when he got out of hospital, Barbieri was fired and effectively removed as a director.
Barbieri sought an oppression remedy under the Ontario Business Corporations Act requiring the Herwynen brothers to buy his shares in Platinum, and directing a trial on the issue of damages for his wrongful dismissal from employment with Platinum. In September 2008, Mr. Justice Newbould of the Ontario Superior Court of Justice ordered the Herwynen brothers and the other respondents to buy Mr. Barbieri’s shares and directed a trial on the issue of damages. The Herwynen brothers appealed to the Ontario Divisional Court and, on March 30, 2009, their appeal was dismissed.  
One of the main issues on appeal was whether the business judgment applied to exempt from the court’s scrutiny the decisions the Herwynen brothers made in good faith as directors of the company. In rejecting this argument, Justice Wilson held that the business judgment rule does not apply where the shareholders have agreed upon a particular issue in a unanimous shareholders’ agreement. She noted that the shareholders had expressly provided that Mr. Barbieri was to manage the company and be paid $100,000, and that this agreement was central to Mr. Barbieri agreeing to take a vulnerable, minority shareholder position. Wilson J. also rejected the Herwynen brothers’ assertions that they had acted in the best interests of Platinum in removing Mr. Barbieri.
The Divisional Court upheld the finding below that the Herwynen brothers had engaged in oppressive conduct and upheld the remedy that was granted – an order that all of the respondents, that is, the Herwynen brothers, their holding company, and Herwynen Sawmill, were jointly and severally liable to buy out Barbieri’s Platinum shares. This remedy is an interesting one, as it obliges a company not party to the unanimous shareholder’s agreement, Herwynen Sawmill, to buy out Barbieri. While neither the Divisional Court nor the court below articulated the precise rationale for the extension of liability to Herwynen Sawmill, the basis for its liability appears to be analogous to a constructive trust based upon the benefit enjoyed by Herwynen Sawmill as a result of the respondents’ breaches. Additional analysis. (MO)

Oppression does not guarantee relief

Last spring an Ontario court held that in spite of suffering oppressive conduct, a minority corporate stakeholder was not entitled to monetary relief. In Hu v. Sung, Superior Court Justice Brown confronted the question of what to do when a shareholder in a private corporation has wrongfully excluded another from the affairs of the company, but by the time of trial the company has ceased operations, has not turned a profit and there is no evidence the offending shareholder personally benefited from the oppression. In this case, the answer was to do very little.
In his action, Hu sought repayment of his investment in a company formed to operate a combined Second Cup and Great Canadian Bagel store in Aurora. Hu claimed he had been wrongfully excluded from the company’s affairs and that his business partners had sought to unilaterally reduce his holdings in the company. The court agreed, finding that Hu’s exclusion from management and the attempt to reduce his shareholdings were oppressive conduct contrary to s. 248 of the Business Corporations Act. Hu obtained a declaration that he was and remains a director of the company and the holder of 50% of the company’s common shares. However, that was the extent of Hu’s relief. Why?
Because the Company had ceased operations, had no assets at the time of trial and owed significant sums for the arrears of sales taxes, no monetary relief was warranted. It made no sense to order the repurchase of Hu’s shares, nor was it appropriate to order compensation, when Hu had been excluded from an inactive corporation that had little or no value.
This somewhat pyrrhic victory for Hu is a strong reminder that the oppression remedy is not aimed at penalizing wrongdoers. Even in situations of clearly oppressive conduct, some compensable injury is necessary for any damages or other monetary relief to be awarded. Additional analysis. (SI)

Statements to Securities Commission are protected by absolute privilege

In his decision last Fall in Fraleigh v. RBC Dominion Securities, Ontario Superior Court Justice Newbould summarily dismissed an action brought by John Fraleigh against RBC Dominion Securities and one of its employees arising from statements and testimony given before the Ontario Securities Commission. RBC and its employee had passed on information to the OSC regarding unusual trading activity in Fraleigh’s RBC trading accounts – information that was later published in media reports. In dismissing Fraleigh’s action, Justice Newbould found that the claim arose entirely from testimony and other communications to the OSC; communications that are protected by absolute privilege. 
Absolute privilege is a form of immunity for communications incidental to judicial or quasi-judicial proceedings. Long recognized as protecting people who testify in court, absolute privilege has been expanded in recent years to protect persons from being sued for testimony and other information they provide to quasi-judicial regulatory bodies in the course of an investigation or regulatory proceeding.
In the past, courts have cited absolute privilege to dismiss actions brought against individuals who have given allegedly false information and testimony to bodies that regulate accountants, dentists, lawyers and other professionals. Unlike other defences to claims against the makers of false statements, absolute privilege is a complete defence in all circumstances. It applies regardless of whether the maker of a false statement acted with malice and it applies to information and testimony given to a quasi-judicial body before, during and after an actual regulatory proceeding is commenced. Additional analysis. (KD)

An arbitration clause can exclude statutory recourse to the courts

In its recent decision in Jean Estate v. Wires Jolley LLP, the Ontario Court of Appeal enforced an agreement between solicitors and their client to arbitrate any disputes over their contingency fee agreement. This was despite the fact that the governing statute, the Solicitors Act, expressly gives a client the right to ask the courts to decide whether a particular contingency fee arrangement is reasonable.
A unanimous Court of Appeal panel required the parties to arbitrate their fee dispute, stating that “simply because the Solicitors Act refers to a Superior Court judge as having the jurisdiction to protect clients’ rights, this does not mean that a dispute arising between a solicitor and client may not be submitted to arbitration.”
This is the latest in a series of cases that have, wherever possible, required parties to abide by their agreement to arbitrate – even where a statute prescribes the courts as the decision-maker for a particular dispute. It is only where the statute expressly excludes arbitration or arbitration will clearly deprive a party of a significant substantive statutory right that an arbitration agreement will not be enforced. (KD)
Contributors: Kenneth Dekker, Jennifer Dyck, Christian Farahat, Sonny Ingram, and Michael Osborne
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