Supreme Court of Canada refuses to hear global auditor class action certification appeal
- Appeals and Judicial Review
- Class Actions
- Conflicts of Law and Enforcement of Foreign Judgments
- Securities Litigation
On June 8, 2017, the Supreme Court of Canada denied leave to appeal from a decision of the Ontario Court of Appeal in Excalibur Special Opportunities LP v. Schwartz Levitsky Feldman LLP that certified an Ontario class action against a Canadian auditor involved in an American private placement of shares and warrants issued primarily to American investors. In refusing to hear a further appeal, despite a strongly worded dissent from Justice Robert Blair, Canada’s highest court has declined to opine on a decision that arguably sets a high water mark for when Ontario courts will take jurisdiction over a class action that has minimal contacts with Ontario and purports to bind mainly foreign plaintiffs.
The Excalibur action stemmed from a private placement of shares and warrants in a Chinese corporation called Southern China Livestock that were marketed and sold by the company’s American owners to persons who qualified as accredited investors under the U.S. Securities Act of 1993. Almost $7.6 million was raised from 57 investors – all but one of whom resided outside Ontario. Less than two years later, amidst allegations of a lack of financial controls over its all cash business, Southern China Livestock ceased operating and the investors lost everything. A Canadian accounting firm, Schwartz Levitsky Feldman (“SLF”), had provided a clean audit opinion regarding the company as part of the private placement and was sued for alleged negligence and misrepresentations in its audit report by the one Ontario-based investor, Excalibur, on behalf of a proposed global class comprised of all worldwide investors.
On the initial certification motion, Superior Court Justice Paul Perell denied certification on two grounds. Firstly, when considering the suitability of the proposed class under s.5(1) of the Class Proceedings Act, 1992, he found that Ontario did not have a sufficiently real and substantial connection to the underlying facts and class members in the proposed class action for the Ontario courts to properly take jurisdiction over the proceeding. In his view, this lack of connection to Ontario raised an issue of fairness to foreign class members who would not reasonably have expected to have their rights in relation to this American offering determined in by an Ontario court. Secondly, Justice Perell found that a class action was not the preferable procedure for the action and not necessary to do justice to the parties, largely due to the fact that the total $3 million value of the ten largest plaintiffs’ claims made it economical for those plaintiffs to proceed together in a normal action. Justice Perell found that a joinder of claims should be the default procedure for such actions and that the plaintiff had not shown that a class action was necessary to do justice to the parties.
The initial appeal to the Divisional Court was dismissed (with a strong dissent from Justice Sachs), but on a further appeal the Court of Appeal for Ontario overturned Justice Perell’s decision and certified the class action. In doing so, the Court of Appeal observed that Justice Perell had “focused incorrectly on the private placement transaction in the U.S., instead of SLF’s preparation of the audit report in Ontario.” The majority observed that it was for the plaintiffs to plead their case as they saw fit and the claim focused entirely on an audit report that was prepared in Toronto by an Ontario-based defendant –connections that were sufficient to found jurisdiction in Ontario. The Court of Appeal also disagreed with Justice Perell’s view that a joinder of multiple claims is the default position or that a class proceeding must be shown to be necessary to do justice in a case in order to be the preferable procedure. It was observed that 31 of the 57 investors had claims worth less than $100,000 that would be difficult uneconomical to litigate as stand-alone claims. There was also no evidence to show “that the proposed class members are a cohesive group who would or could agree on a form of joint retainer and an allocation of the costs of the litigation.” In summary, it was found that a class action on behalf of a global class of investors in Ontario was preferable, the orders below were set aside, and the action was certified.
In a strongly-worded dissent, the Justice Blair would have upheld the decision below to deny certification of the action. In his view, there was no question that the courts of Ontario could take jurisdiction over the claim against Ontario-based SLF. For him, the only question was whether an Ontario court should take jurisdiction or, alternatively, exercise restraint and decline it. In this case, Justice Blair observed that underlying the proposed class action was an “almost entirely foreign-related factual matrix” and he found that Justice Perell’s determination that he should exercise judicial restraint and decline jurisdiction was both well-founded and entitled to deference. Justice Blair also deferred to Justice Perell’s preferable procedure analysis and, finding that the correct principles were applied, would have upheld it.
Excalibur v. Schwartz Levitsky Feldman raises important and fundamental issues regarding whether and when Ontario (and Canadian) courts can and should take jurisdiction over class actions that originate primarily beyond Canada’s borders and will impact mostly foreign class members. Four of the seven Ontario judges that heard the motions and appeals leading up to the application for leave to appeal to the Supreme Court of Canada disagreed with the majority decision in the Ontario Court of Appeal. It is unfortunate that Canada’s highest court declined to hear a further appeal and provide national guidance on the important and divisive issues raised by this decision.