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Ontario’s top court affirms denial of leave to amend claim in secondary market misrepresentation class action

Osgood Hall, 2012 by George Socka, Toronto

Osgoode Hall Courthouse, Toronto
photo © by George Socka, Toronto

The requirement for leave of the court in order to proceed with secondary market claims under Part XXIII.1 of the Securities Act continues to evolve and be the subject of extensive judicial commentary almost ten years after it came into force. In facilitating class actions by purchasers of securities on the secondary market, Part XXIII.1 was the product of significant consultation and compromise as it sought to allow for such actions while limiting the type of meritless litigation against issuers and market participants that came to be known in the United States as “strike suits.” Coupled with a strict three-year limitation period, damages caps, and other limitations on secondary market actions, the requirement to obtain leave to proceed with a misrepresentation claim under Part XXIII.1, s.138.8(1), serves a significant gatekeeper role for securities class actions.

Most recently, in a brought by investors against Group and its officers and directors,[1] the Court of Appeal for Ontario had occasion to consider the not infrequent situation in which plaintiffs in a misrepresentation action seek to amend their statement of claim to plead additional misrepresentations and other supporting facts after the action is commenced. In this case, the plaintiffs had already made two sets of amendments before obtaining leave to proceed under s.138.8(1) and they sought to leave to amend their Third Fresh as Amended Statement of Claim to make additional allegations of bribery, embezzlement, and other illegal conduct on the part of the defendants. The question in this case was whether, having already obtained leave to proceed with an earlier version of their claim, the plaintiffs were required to bring a further motion for leave under s.138.8(1) to plead these additional allegations.

In the Superior Court below, Justice Perell rejected the plaintiffs’ argument that the spirit and intent of Part XXIII.1 requires that amendments be granted after the leave test has been met unless the proposed pleading fundamentally alters the action for which leave was granted. Rather, Justice Perell observed that “obtaining leave cannot be used as a procedural bait-and-switch tactic or a procedural bait-and-pile-on tactic” in which leave to proceed with one type of misrepresentation claim is then used to advance others that have not themselves been subjected to the leave test under s.138.8(1). Fresh leave is required for any new misrepresentation allegations which must themselves be supported by evidence sufficient to meet the test for leave.

The Court of Appeal agreed, finding that it would “frustrate the objective of the leave requirement” to permit a plaintiff that has met the leave test “to significantly expand the scope of the action to include discrete, untested allegations of misrepresentation that are without merit.” While not all amendments will necessarily require a fresh leave application, the Court of Appeal accepted Justice Perell’s characterization of the amendments as discrete misrepresentation claims that “go too far to be allowed without being tested by a fresh leave application.”

In upholding the majority of the conclusions reached by Justice Perell on the amendments sought, the Court of Appeal showed deference to Justice Perell, given his role in deciding the initial leave motion and in case managing every aspect of the action.

Unfortunately for the plaintiffs, both levels of court found that the amendments sought were, in any event, statute-barred under the three-year limitation period prescribed by Part XXIII.1, s.138.14(1) and that the plaintiffs were therefore too late in trying to advance them. The only exception to all of this, was that the Court of Appeal did overturn Justice Perell and permit the plaintiffs to make a single amendment  to plead a misrepresentation by omission based upon the failure of SNC Lavalin to disclose alleged payments and other criminal activity connected to one of its projects in Bangladesh – but only to the extent that this amendment could be tied directly to a claim for which leave had already been granted.

 

[1] Drywall Acoustic Lathing and Insulation Local 675 v. SNC-Lavalin Group Inc., 2015 ONCA 718 – http://www.ontariocourts.ca/decisions/2015/2015ONCA0718.htm

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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