The Litigator

THE LITIGATOR

Commentary on Law Affecting Business

The Litigator
AGM :: Affleck Greene McMurtry LLP

THE LITIGATOR

Affleck Greene McMurtry LLP
365 Bay Street, Suite 200  ·  Toronto, Canada
416 360 2800  ·  info@agmlawyers.com  ·  www.thelitigator.ca

October 2010 Commercial Litigation Update

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

Insurance companies hit with $455.7 million class action judgment

On October 1, 2010, Ontario Superior Court Justice J. N. Morissette granted a $455.7 million judgment in Jeffrey and Rudd v. London Life, a complex class action brought against two insurance companies regarding their use of surplus earnings held in an account for the benefit of holders of London Life insurance policies (the “PAR Account”). 

The transaction at issue stemmed from the 1997 take-over of London Life by Great-West Life. The purchase was partially financed with $220 million taken from the PAR Account and loaned by London Life to Great-West Life as a form of “vendor take-back” loan. While Great-West repaid those funds relatively quickly, they never found their way back into the PAR Account. An action was brought on behalf of insurance policy holders for losses suffered from the removal of these funds from the PAR Account – a transaction that was alleged, among other things, to contravene sections of the Insurance Companies Act governing the handling of surplus funds.

Justice Morissette disagreed with the insurers’ attempt to defend the action on the basis that policy holders would eventually benefit from the efficiencies inherent in the purchase of London Life by Great-West. Instead, Justice Morissette found that “In essence, $220 million of PAR surplus was converted to cash, which was used to purchase an ‘asset’ that could not be sold or marketed or liquidated.” In addition to the return of the $220 million, Justice Morissette awarded $172.7 million for the loss of investment returns on those funds and grossed up the damages for taxes by $63 million, leading to the judgment of $455.7 million. Great-West has already announced its intention to appeal. (KD)

Court of Appeal comes to the fork in the road – and takes it

Two recent decisions follow conflicting lines of authority on unlawful interference with economic relations

In two decisions issued ten days apart, the Ontario Court of Appeal came down on both sides of the issue of what counts as “unlawful” for purposes of the tort of unlawful interference with economic relations. The tort of unlawful interference with economic relations is made out where the defendant (i) intentionally (ii) causes injury to the plaintiff (iii) through unlawful means.

Until recently, Canadian courts generally adhered to a broad view of what qualifies as “unlawful”. Under this broad view, unlawful act includes any act prohibited by law or statute, as an act that one is not at liberty to commit. In the U.K., however, the House of Lords in 1997 adopted a narrower view where only conduct that is actionable by the third party at whom it is directed can constitute the “unlawful” act giving rise to the tort of unlawful interference.

This decision has resulted in two competing lines of jurisprudence in Ontario. In a decision issued on October 24, 2010, a panel of the Ontario Court of Appeal came down firmly on the side of the narrow view espoused by the House of Lords. The court in Alleslev-Krofchak v. Valcom Limited held that that only conduct that is directed at a third party and is actionable by that party will support the tort of unlawful interference. In that case, Valcom Ltd. and two of its employees who defamed a consultant and then breached a contract with another company in order to force the removal of the consultant from a government contract were found liable for defamation, unlawful interference with economic relations, and inducing breach of contract, and ordered to pay $600,000 in damages.

However, ten days later, a different Court of Appeal panel issued a decision in Barber v. Molson Sport & Entertainment Inc. that maintained the broad view that “unlawful” refers to activities that the defendant was “not at liberty to commit.” In that case, Molson sold an exclusive right to supply bottled water to a concert to two different parties. Molson breached its contract with the first party when it sold the same rights to the second party. The first party, meanwhile, had sold the water rights to the plaintiff. As Molson’s conduct likely would have been actionable by the first party, the result of this case is consistent with the Valcom case. The court’s reasoning, however, is not consistent.* (MO)

Alberta appeal court overturns unprecedented damages award to dismissed investment advisor

Investment dealers across the country undoubtedly breathed a sigh of relief this past August when the Alberta Court of Appeal released its decision in Merrill Lynch Canada Inc. v. Soost and decisively overturned a trial judge’s award of $1.6 million to a wrongfully dismissed investment advisor for the loss of his book of business.

Mr. Soost was a successful investment advisor who had a book of business (the value of the clients’ assets he handled) that was worth more than $150 million and afforded him an annual income of more than $600,000. He was dismissed without notice amidst accusations of regulatory infractions by Merrill Lynch and was out of work for three weeks until he found work with another, smaller and less prominent investment dealer. Less than $10 million of his book followed him to his new dealer. Unable to make a living, he left the business.

At trial, Mr. Soost was awarded a full year’s income of $600,000 as damages for the failure of Merrill Lynch to give him adequate notice of his dismissal, plus an additional $1.6 million for the loss of his clients, or book of business.

Only the $1.6 million damages award was appealed. That award was decisively overturned by a unanimous Court of Appeal. The appeal panel questioned the appropriateness of the term “wrongful dismissal” and affirmed that it is always the right of the employer to dismiss an employee at any time – provided it gives appropriate notice or pays salary in lieu of notice. Here, the loss of Mr. Soost’s clients resulted from his dismissal (something that Merrill Lynch had the right to do) and not from what Merrill Lynch had done wrong (failed to pay him a year’s salary in lieu of notice). Further, this was not a case where Merrill Lynch had committed an independent wrong when it dismissed Mr. Soost; there was an honest belief on the part of Merrill Lynch that there was cause for Soost’s dismissal and there was no unfairness in Merrill Lynch competing to keep Mr. Soost’s customers. The Court of Appeal had little time for the claim by Mr. Soost that his book of business and the in­come stream it generated was an asset that belonged to him. As such, damages for the loss of Mr. Soost’s book of business were not recoverable. (KD)

Judgment granted in Ontario’s first-ever environmental tort class action

In a judgment released last July in Smith v. Inco, the Ontario Superior Court ordered Inco to pay an estimated $36 million to compensate approximately 7,000 homeowners in the Port Colborne area for the loss of property values they suffered as a result of nickel contamination of their land. This was Ontario’s first-ever environmental tort class action trial.

The action stemmed from nickel particle contamination of properties near Port Colborne nickel refinery between 1918 and 1984. In 2000, a report was released by the Ministry of the Environment that revealed the extent of the contamination. This resulted in the commencement of a class action against Inco.

In finding that the homeowners’ loss of property value had been caused by Inco’s operations, Superior Court Justice Henderson accepted that any environmental contamination in a community will negatively affect the property values in the affected area. These properties will be considered riskier investments; potential buyers will have uncertainty over potential health risks and the effect of the contamination on the future value of the property.

In light of these principles, the Court evaluated the value of the class members’ properties both before and after the negative publicity began. Justice Henderson was convinced that all class members’ properties were affected negatively by the publicity, though to varying degrees. Damages were allocated based upon the relative degrees to which property values of the homeowners were affected by the nickel contamination and subsequent negative publicity. Read More (FC)

The International Centre for Settlement of Investment Disputes – Its time has come!

Canada’s ratification of the Convention on the Settlement of Investment Disputes between States and Nationals of other States (the “Convention”) has been a long time coming. Since signing the Convention in 2006 and passing implementing legislation in 2008 that has yet to come into force, Canada has made no further progress towards ensuring that the International Centre for Settlement of Investment Disputes (ICSID) is an enforceable option for Canadian businesses investing abroad.

The Convention is a procedural being. It offers speed, expertise, neutrality and finality of decision making to foreign investors and host countries, but does not provide substantive rights. The substantive rights that ICSID can enforce come from bilateral investment treaties, or Foreign Investment Promotion and Protection Agreements (FIPAs) in Canada. Both NAFTA and Canada’s 26 FIPAs provide the rights that may be pursued through arbitration at ICSID, once Canada ratifies the Convention. Without a FIPA, investors are likely to have to rely on host country legal protections.

What is taking Canada so long?

With 155 signatories, the Convention offers the most comprehension investment dispute settlement option for foreign investment in Canada and Canadian investment abroad. Perhaps Quebec Senator Pierre Claude Nolin has summarized it best when he stated: “The tremendous growth in investment and investor state disputes has made Canada’s failure to ratify ICSID the focus of attention by Canadian business, the Canadian legal community and our trading partners.” Read More (DD)

Court refuses to add to the contractual obligations of the vendor of a business

There is a basic principle that when sophisticated parties enter into a contract, the court will be loathe to imply obligations outside the contract’s terms. In his decision earlier this year in Combined Air v. Flesch, Ontario Superior Court Justice Belobaba reaffirmed that principle when he relied upon the terms of the parties’ contract in dismissing an action by the purchaser against the vendor of a business for breach of restrictive covenants, breach of fiduciary duty and the torts of conversion, misrepresentation and unlawful interference with economic relations. The defendants, Flesch and Searle, had sold their interest in Combined Air Mechanical Services, a company specializing in the sale and service of heating ventilation and air conditioning systems (HVAC), to two companies controlled by the plaintiffs. The parties signed an Acquisition Agreement on the sale that included covenants restricting the defendants from competing with Combined Air for two years after closing of the deal and restricting them from interfering with Combined Air’s relationship with its suppliers for three years.

After the sale, the defendant Flesch went to work for two of Combined Air’s customers and Combined Air accused Flesch of interfering in its relationship with those customers and causing a loss of business. Combined Air sued Flesch for breach of the Acquisition Agreement, as well as for breach of Flesch’s fiduciary duties as a former Combined Air senior employee and for conversion, misrepresentation and unlawful interference with economic relations. Citing a lack of evidence to support these allegations, Justice Belobaba summarily dismissed the action with costs. Among other things, he observed that “This is a case where commercially sophisticated parties… defined in a detailed written agreement the fiduciary’s obligations after his departure from the company. The court should not impose equitable duties beyond the obligations provided for in the Acquisition Agreement.” (BW)

The Hon. David C. Dingwall, P.C., Q.C., ICD.D
Affleck Greene McMurtry LLP

The Hon. David C. Dingwall, P.C., Q.C., ICD.D

The Hon. David Dingwall is a former Counsel of Affleck Greene McMurtry LLP

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Fiona Campbell
Affleck Greene McMurtry LLP

Fiona Campbell

Fiona Campbell is a former associate of Affleck Greene McMurtry LLP

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Kenneth A. Dekker
Affleck Greene McMurtry LLP

Kenneth A. Dekker

Kenneth Dekker, a partner of the firm, is a successful trial and appellate lawyer who is valued by his clients as a resourceful and practical litigation counsel.

Over more than two decades, Ken has litigated noteworthy cases in a range of fields that include class action defence, securities and broker-dealer litigation and regulatory defence, corporate and shareholder disputes (including oppression and winding up cases), defamation, civil fraud litigation, disputes over contracts, injunctions, professional liability litigation, employment litigation and cross-border litigation issues.

Ken has appeared before all levels of courts in Ontario, including the Ontario Court of Justice, the Superior Court of Justice, the Divisional Court and the Court of Appeal for Ontario, as well as before the Supreme Court of Canada. Ken also represents and advises clients in regulatory matters before the Investment Industry Organization of Canada (IIROC), the Mutual Fund Dealers Association of Canada (MFDA) and the Ontario Securities Commission (OSC).

Ken has been recognized for Corporate and Commercial Litigation by Best Lawyers of Canada and has been given the highest available rating of AV, or pre-eminent, by his peers on Martindale-Hubbell.

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W. Michael G. Osborne
Affleck Greene McMurtry LLP

W. Michael G. Osborne

Michael Osborne is a former Partner of Affleck Greene McMurtry LLP

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