Top 10 commercial decisions of 2021

In 2021, Canadian courts were busy in the commercial field, and BLG played an active role in many of the top decisions. Our experienced commercial litigators are well-positioned to help you understand the impact these decisions could have on your business in 2022. The top 10 commercial litigation decisions we’ve outlined below are:

• Corporate/Securities – Technical or holistic focus?
  • Dual class share-structures: Rogers
  • M&A in the pandemic: Cineplex
• Class Actions – Greater scrutiny of claims
  • Materiality in securities class actions: Wong
  • Limits of price-fixing claims: Jensen
  • Cyber-attacks: Del Giudice
• Contracts – Moving away from bright-line rules
  • Duty of good faith: Wastech
  • Interpretation of releases: Corner Brook
• Civil Procedure – Limiting some remedies
  • Sealing orders: Sherman Estate
  • Limitation periods: Grant Thornton LLP
• Constitutional – Recognizing federal powers
  • Climate change: Greenhouse Gas Pollution Pricing Act

Dual-Class share structures: Rogers v. Rogers Communications Inc.

Rogers v. Rogers Communications Inc. demonstrates that British Columbia courts will give effect to a consent resolution executed by a holder or holders of sufficient voting shares to replace directors of a public company, even if doing so would seem inconsistent with current corporate governance trends and concepts of shareholder democracy.

What you need to know

• Rogers Communications Inc. (RCI) is a public telecommunications and media company with a dual-class share structure comprised of Class A voting shares and Class B non-voting shares. RCI’s Class A and B shares are traded on the Toronto Stock Exchange (TSX) and its Class B shares are traded on the New York Stock Exchange.
• On November 5, 2021, the Supreme Court of British Columbia upheld the validity of a written shareholder consent resolution (the Consent Resolution) to remove and replace five independent directors of RCI in the absence of a shareholder meeting.
• The court adopted a largely black-letter analysis, approaching the wording of the articles of incorporation and the British Columbia Business Corporations Act as a whole in their grammatical and ordinary sense harmoniously with the scheme and objects of the Act and the intention of the legislature.

Background

The Rogers Control Trust (the RCT) is the controlling shareholder of RCI and, either directly or through private Rogers family companies controlled by the RCT, beneficially owns 97.5 per cent of the issued and outstanding Class A voting shares. Pursuant to the governing documents of the RCT, Edward Rogers, as the Control Trust Chair, is able to direct the voting of the RCT’s Class A voting shares at his discretion, unless the RCT advisory committee acts to constrain or replace him with a two-thirds vote by the members of the RCT advisory committee.

In October 2021, a fundamental disagreement arose between the board of directors of RCI (the Board) and Edward Rogers, the chair of the Board, over the potential termination of RCI’s CEO, Joe Natale. As a result of this disagreement, on October 21, 2021, Edward Rogers was removed as chair by the Board – the composition of which included Mr. Rogers’ mother, Loretta Rogers, and his sisters, Martha Rogers and Melinda Rogers-Hixon. The next day, Edward Rogers sought to unilaterally remove and replace five independent directors of the Board via the Consent Resolution, using the voting power afforded to him as the Control Trust chair. RCI took the position that the Consent Resolution was invalid and the composition of the Board remained unchanged. Edward Rogers then filed a petition with the court seeking a declaration that the Consent Resolution was valid and effective.

Supreme Court of British Columbia decision

In determining the validity and effectiveness of the Consent Resolution, the court considered the provisions of both the articles of RCI (the Articles) and the Business Corporations Act (British Columbia) (the Act). The court adopted a largely black-letter analysis, approaching the wording of the Articles and Act as a whole in their grammatical and ordinary sense harmoniously with the scheme and objects of the Act and the intention of the legislature. The ordinary meaning of the words was a dominant consideration. In particular, the court placed considerable emphasis on a unique provision of the Act, s. 180, which does not appear in other federal or provincial corporate statutes. Section 180 of the Act deems a consent resolution:

“(a) to be a proceeding at a meeting of … shareholders, and

 (b) to be as valid and effective as if it had been passed at a meeting of shareholders that satisfies all the requirements of this Act and the regulations, and all the requirements of the memorandum and articles of the company, relating to meetings of shareholders.”

Applying these principles, the court concluded that both the Articles and the Act expressly permitted the removal and replacement of directors by the Consent Resolution, since it was:

• consented to in writing by shareholders holding at least two-thirds of the Class A shares that carried the right to vote; and
• properly submitted to all Class A shareholders carrying the right to vote. Therefore, the court concluded that the five independent directors were validly removed and replaced, despite the lack of a formal shareholder meeting.

The court reached its decision, notwithstanding considerable evidence introduced by RCI that “surrounding circumstances” required the court to resolve any minor ambiguities in the Articles and the Act in favour of minority shareholder protection – in this case, requiring a shareholders’ meeting. Such evidence included:

• a personal and confidential “Memorandum of Wishes” (MOW) to the RTC advisory committee, executed in September 2008 by RCI’s founder, the late Ted Rogers, which “somewhat presciently” in the words of the court, contemplated a potential situation where the majority of the Board is in conflict with the interests of the Rogers family, as represented by the Control Trust chair. In those circumstances, the MOW stated that it was Ted Rogers’ expectation that the Control Trust chair would run the “public gauntlet” of calling a shareholder meeting to replace the RCI directors who were opposed;
• expert opinion that the process under the Consent Resolution did not conform to “best corporate practices,” due to a lack of transparency and accountability and the failure to disclose corporate information which otherwise would be provided in connection with a shareholders’ meeting;
• RCI’s many public statements proclaiming its commitment and adherence to “good” or “sound” corporate governance, including reference to its nominating committee (a standing committee of the Board) whose mandate is to identify candidates to serve on the Board who may be “either elected by shareholders at a meeting or appointed by the Board”;
• RCI’s many public statements referring to its directors as being “elected” and that its board includes “independent directors”;
• RCI’s adoption of a “majority voting” policy, in accordance with TSX requirements; 
• the absence of any explicit public statement by RCI that its controlling shareholder is able to remove and replace directors by a Consent Resolution and without convening a shareholder meeting;
• expert opinion that the use of the Consent Resolution was “unique and unparalleled” in relation to the governance of other large Canadian public companies; and
• RTC having never previously exercised its right to vote by way of a Consent Resolution.

In reaching its decision, the court determined that evidence related to the “surrounding circumstances” was not helpful to the fundamental issue before it, as much of this evidence post-dated the making of RCI’s Articles in 2004. The court stressed that evidence respecting “surrounding circumstances” must never be allowed to change or overrule the plain meaning of the words being judicially interpreted.   

Takeaways

The Supreme Court of British Columbia’s decision in Rogers v. Rogers Communications Inc. provides a valuable lesson for investors in public companies with dual-class or similar share ownership structures. Notwithstanding an issuer’s public statements committing to good corporate governance, British Columbia courts are likely to interpret the rights associated with classes of voting (or multiple-voting) shares on a black-letter basis, even if it would seemingly go against current corporate governance trends and concepts of shareholder democracy (or, indeed, even the explicit wishes of the founder who established the dual-class share structure in the first place). Ultimately, the holder or holders of voting control will be able to unilaterally determine the make-up of the board.

The decision also re-affirms that British Columbia and the Act remain the most controlling shareholder-friendly jurisdiction and corporate legislation for dual-class and similar ownership structures in Canada.

It is important to note that the use of written Consent Resolutions to remove and replace directors in the absence of a shareholders’ meeting is, in practice, limited to closely controlled private corporations or public companies with dual-class or similar share structures where voting control is not widely held. Obtaining written consent resolutions from a super-majority of shareholders in a widely-held public enterprise is generally impractical, as a logistical matter. The ability to rely upon consent resolutions may also be different in jurisdictions other than British Columbia, where the governing corporate statutes do not have the unique provisions of the Act concerning the validity and effectiveness of consent resolutions. 

Overall, investors should approach and price their investment in companies with dual-class or similar share ownership structures with full awareness that governance and the process for electing directors under such structures are fundamentally different than in most public companies in which voting shares are widely held. The decision in Rogers v. Rogers Communications Inc.serves as a reminder that independent directors and senior officers of these issuers effectively serve at the discretion of the controlling shareholder.

M&A in the pandemic: Cineplex v. Cineworld

In Cineplex v. Cineworld, the Ontario Superior Court awarded Cineplex $1.24 billion in damages after the U.K. company Cineworld walked away from an agreement to purchase Cineplex valued at over $2 billion. The case concerns the most significant deal to fail since the start of the pandemic, and adds to the recent case law on the interpretation of material adverse effect (MAE) clauses in Canada.

What you need to know

• The U.K. purchaser, Cineworld, refused to close a public M&A transaction involving a Canadian target in the context of the pandemic.
• The court found that, once the pandemic hit, Cineworld wanted a way out of the transaction even though it had none. Notably, Cineworld had not negotiated for a break fee. It hoped that the seller, Cineplex, would default on its covenants. When it appeared Cineplex was not going to default on its covenants, Cineworld withdrew its application for regulatory approval and alleged defaults. However, the court found that Cineplex did not default, that Cineworld repudiated the agreement and therefore owed damages.
• This case illustrates the importance of negotiations around MAE and break free provisions in agreements, and that courts will look at the evidence holistically when considering failed transactions, including all of the deal teams' correspondence.
• The court followed the interpretation of MAE clauses that it adopted in Fairstone Financial Holdings Inc. v. Duo Bank of Canada (Fairstone). The interpretation of an MAE as being an unknown threat to the overall earnings potential of the business, of durational significance, is consistent with the Delaware Court of Chancery’s decision in AB Stable VIII LLC v. MAPS Hotels and Reports One LLC.

Background

Cineplex, Canada’s largest movie theatre operator, and Cineworld, the U.K.-based second-largest movie theatre operator in the world, entered into an Arrangement Agreement in December 2019 that would see Cineworld acquire all the shares of Cineplex for $34/share. This represented a premium of 42 per cent on the trading price of Cineplex shares at the time. The transaction was valued at approximately $2.8 billion (all values in CAD).

The Arrangement Agreement contemplated that the transaction would proceed by way of a statutory plan of arrangement, and would close no later than June 30, 2020. Prior to closing, the parties were required to obtain a number of approvals, including pursuant to the Investment Canada Act (ICA). The ICA process requires foreign investors seeking to acquire control of a Canadian business to seek a discretionary determination of “net benefit” from the Minister of Industry, Science and Economic Development where certain thresholds are exceeded. The process is notable because only the foreign buyer (Cineworld) had legal standing and control over its application for approval under the ICA.

As the COVID-19 pandemic began to intensify in March 2020, Cineworld had doubts about the transaction and considered other options. On June 12, 2020, Cineworld notified Cineplex that it was terminating the Arrangement Agreement because Cineplex had breached its covenants in the Arrangement Agreement, and that Cineworld was withdrawing its application for ICA approval.

Cineplex sued for breach of contract. The trial was heard from September through November 2021, and the court issued its decision on December 14, 2021.

The contractual provisions

As in the Fairstone case, the court considered two significant provisions in the Arrangement Agreement:

• The “Operating Covenant”, which required Cineplex to operate its business in the “Ordinary Course and in accordance with Laws” between signing the Arrangement Agreement and closing, and to “use commercially reasonable efforts to maintain and preserve its and its Subsidiaries business organization, assets, properties, employees, goodwill and business relationships with customers, suppliers, partners and other Persons with which the Company or any of its Subsidiaries has material business relations.”
• The MAE clause, which provided that Cineworld could refuse to close if a MAE occurred, except if the MAE was caused by “any earthquake, flood or other natural disaster or outbreaks of illness or other acts of God”.

The court focused its analysis on the Operating Covenant, since Cineworld argued that it had not breached the Arrangement Agreement by terminating it, because Cineplex had breached the Operating Covenant.

Cineplex operated in the ordinary course

The Court found that Cineplex had not breached the Operating Covenant by taking steps responding to the pandemic, and rejected Cineworld’s argument that the Operating Covenant required Cineplex to operate its business exactly as it had prior to the pandemic. The court based this finding on two principles of contractual interpretation:

The words of the Operating Covenant should be interpreted as a whole, specifically that the requirement to operate in the “ordinary course” in accordance with the law had to be interpreted with the requirement to use efforts to maintain the business. Cineplex did not breach the first requirement when it closed its theatres in response to government orders. The second requirement gave Cineplex flexibility to respond to this, and required Cineplex to manage its cash flow and negotiate with its suppliers and landlords. The court found that none of the actions Cineplex took to respond to the pandemic to be so drastic, or to alter its business in such a material way, that they were beyond the ordinary course.

The words of the Operating Covenant should be interpreted consistently with the rest of the Arrangement Agreement, and consistent with its commercial context. Since the MAE clause clearly allocated systemic risks to Cineworld, it would be inconsistent with the MAE clause to interpret the Operating Covenant as precluding Cineplex from responding to systemic risks.

Cineplex’s damages were the lost synergies

The court found that the appropriate measure of damages was the standard contractual measure of damages – to put the non-breaching party in the position it would have been had the contract been carried out. In this case, the court found this was the value of the synergies that Cineplex would have gained from the transaction had it closed. Though the ultimate benefit would have accrued to Cineworld had the transaction closed (because Cineworld would be the sole shareholder of Cineplex), Cineplex would have remained the operating company and the synergies would have accrued to it. On Cineplex’s expert’s evidence, based on a report Cineworld commissioned prior to entering into the deal, this amounted to $1.24 billion (including interest).

The court rejected Cineplex’s claim that the damages should be the amount Cineplex’s shareholders would have received from the transaction, which its expert calculated at $1.32 billion. The court held that the shareholders were not a party to the Arrangement Agreement or the action, and Cineplex was not their agent. The relevant damages were those Cineplex suffered.

The court rejected three of Cineworld’s arguments to reduce damages. First, the court rejected a deduction for any debt that Cineworld might have assigned to Cineplex after closing. The court found that Cineworld’s evidence on this point was unclear and insufficient to lead to a discount.

Second, the court rejected any discount to reflect the uncertainty of Cineworld obtaining ICA approval, though it had withdrawn its application for that approval. The court found that by June 2020, Cineworld was “very close” to obtaining approval and the government was working closely and cooperatively with Cineworld, including in respect of undertakings that would reflect the economic and operational uncertainties the pandemic caused.

Finally, the court rejected Cineworld’s argument that Cineplex should not be awarded damages because it could have sought specific performance (that is, to force Cineworld to close the transaction). The court found that because Cineworld withdrew its ICA application, it was impossible to force it to close the transaction.

Takeaways

The requirement to operate in the “ordinary course” in accordance with the law has to be interpreted in accordance with the requirement to use commercially reasonable efforts to maintain the business. In this case, the court interpreted the requirement that Cineplex operate its business in the “ordinary course” between signing the deal (pre-pandemic) and closing (during the pandemic), allowing Cineplex to respond to the pandemic so long as it did not take any steps to materially alter its business in doing so. This was consistent with the overall risk allocation in the arrangement agreement, which allocated systemic risk to Cineworld.

The court awarded Cineplex damages in the amount of the synergies that Cineplex could have anticipated to have received from the deal.

Materiality: Wong v. Pretium Resources

In the Ontario Superior Court of Justice decision of Wong v. Pretium Resources, 2021 ONSC 54, Justice Belobaba dismissed the plaintiff’s claim, finding that there had been no misrepresentation under the secondary market liability provisions of Part XXIII.I of the Ontario Securities Act. The merits decision is the first of its kind and serves as a reminder that even after succeeding on a motion for leave to proceed on a “reasonable possibility” standard, the “balance of probabilities” hurdle is more demanding and where the decision could be challenged.

What you need to know

• The plaintiff, David Wong, brought a claim on behalf of himself and other similarly situated shareholders for losses allegedly sustained when they purchased shares in the defendant mining company, Pretium Resources Inc. (Pretium).
• The essence of the plaintiff’s claim was that the share price of Pretium plummeted due to the company’s failure to disclose the negative opinions of one of its mining consultants regarding the validity of mineral resources in the mine, amounting to an omission of a material fact. The plaintiff argued that this omission was actionable as a misrepresentation under Part XXIII.I of the Ontario Securities Act (OSA).
• Pretium’s position was that the defendant acted in the proper manner throughout the relevant time. The Pretium team decided there was no obligation to disclose the consultant’s concerns because they were premature and unreliable, based only on sample data, and being unreliable, were not material. As it turned out, after more accurate and reliable mill testing, the validity of mineral resources was confirmed.

Background

In 2017, the plaintiff sought leave under s. 138.8 of OSA to commence an action under s. 138.3 of the OSA for secondary market misrepresentations. Justice Belobaba granted leave based on the “reasonable possibility” test, that is, that the plaintiff had established a reasonable possibility of success at trial. The core of Justice Belobaba’s conclusion was by any objective measure, reasonable investors would have considered it material that two respected mining consultancies retained by Pretium fundamentally disagreed as to whether there were valid mineral resources in the mine at issue.

The action was subsequently certified on consent as a class proceeding.

In December 2020, the parties brought cross-motions for summary judgment on the certified common issues. The two most important common issues were:

• whether Pretium released core documents between July 23 and October 9, 2013 that contained misrepresentations; and
• whether the defendants were relieved of liability under the reasonable investigation defence.

Pretium adduced additional evidence

Both parties along with Justice Belobaba agreed the certified common issues could be decided by way of summary judgment. The majority of the evidence was documentary in nature, and while there were affidavits and cross-examination transcripts, there were no credibility issues. Justice Belobaba found that there were no genuine issues requiring a trial.

In support of their motion, Pretium filed new affidavits from the individuals who were the senior Pretium executives at the relevant time as well as experienced geologists or geological engineers. The affiants restated and credibly expanded on what was said at the leave motion. This evidence was reinforced by additional evidence filed by three independent witnesses, who were involved in sampling the mines at issue.

The plaintiff led evidence from mining expert who was well credentialed, but who had no involvement in the relevant events. Justice Belobaba found that much of the evidence was less than compelling and should be given little weight.

Interestingly, the plaintiff did not provide an affidavit in support of the motion. The transcript from the plaintiff’s examination revealed that he was not aware of any of the impugned documents containing the alleged misrepresentations; he did not rely on them and did not know he had a cause of action until he met with class counsel.

Summary judgment motions

The defendants’ additional evidence on the summary judgment motion was sufficient to persuade the court that the class action must be dismissed.

Justice Belobaba was obliged to consider all of the evidence using the “balance of probabilities” standard. His Honour found on a preponderance of the evidence that the consultant’s “so-called concerns or opinions were not only unsolicited but inexpert, premature and unreliable.” Fundamentally, His Honour held: “[t]he key determinant is my finding on a balance of probabilities that there was no omission of any material fact – that the defendants were not obliged to disclose information that they reasonably and objectively believed was premature, unreliable and incorrect, indeed ‘dead wrong’.”

In any event, the defendants had satisfied the “reasonable investigation” defence under s. 138.4(6) of the OSA, which provides that a person or company is not liable under s. 138.3 if that person or company shows:

• It conducted or caused to be conducted a reasonable investigation before the alleged misrepresentation was released; and
• At the time of the alleged misrepresentation’s release, it had no reasonable grounds to believe that the document that was released to the public contained the misrepresentation.

The additional evidence introduced by the defendants confirmed that they had conducted a reasonable investigation into the reliability of the consultant’s concerns, and added an important objective dimension to Pretium’s subjective perspective of why the consultant’s data was “inherently unreliable”.

Takeaways

Justice Belobaba’s decision sets an important precedent as it highlights the gap between what is required for a plaintiff to obtain leave to proceed and actual success on the merits on a balance of probabilities. As Justice Belobaba said, the leave motion is merely a “speed bump, [and] is not the Matterhorn.”

The court’s guidance on secondary market misrepresentations and what a court will consider to be a material fact when determining whether a misrepresentation has occurred is also a welcome addition to this area of law.

Finally, the decision serves as a stark reminder to class counsel that they should “put their best foot forward” on summary judgment motions, particularly when it comes to affidavit evidence. In this case, Justice Belobaba found that the plaintiff’s evidence to be lacking and that actual evidence from the consultant’s principals “may have resulted in a more balanced assessment of its expertise in mineral resource estimation… [h]owever, class counsel chose not to file such evidence and relied almost exclusively on one expert’s report, whose contribution to the issues in play was of minimal value at best.”

Limits of price-fixing claims: Jensen v. Samsung Electronics Co. Ltd.

The Federal Court dismissed the plaintiffs’ class certification motion in Jensen v. Samsung Electronics Co. Ltd., which alleged a conspiracy to restrict the supply of dynamic random access memory (DRAM) chips. This is the first decision by the Federal Court refusing to certify a competition class action.

BLG (Subrata Bhattacharjee, Caitlin Sainsbury, Pierre N. Gemson and Graham Splawski) acted for the Samsung defendants.

What you need to know

• The claim alleged that three of the world’s largest manufacturers of dynamic random access memory (DRAM) chips conspired to limit the supply, and thereby artificially increase the price, of DRAM. The claim alleged that the defendants entered into this conspiracy in secret meetings and through public statements made in earnings calls and at industry conferences.
• The Federal Court dismissed the certification motion because the claim did not disclose a reasonable cause of action for conspiracy under section 45 or 46 of the Competition Act. The court found that the plaintiffs did not plead any material facts that would lead the Court to conclude the defendants entered into a conspiracy, and confirmed that parallel conduct without an actual agreement between the alleged conspirators does not violate the Competition Act.
• The Federal Court also dismissed the certification motion because there was no evidence that the proposed common issues related to the alleged conspiracy actually existed as issues. In this regard the court adopted the “two-step” test for the common issues branch of the certification test, which requires the plaintiff to show “some basis in fact” that the proposed common issues actually exist, and also that they can be determined on a class-wide basis with common evidence.
• This is one of the first competition class actions to be heard in the Federal Court, and is the second not to be certified. It is also one of the first competition class actions in Canada not to be certified, along with the parallel Québec DRAM case Hazan c. Micron Technology inc.

Background

In this proposed class action, the plaintiffs alleged a global conspiracy between the three largest manufacturers of DRAM chips – Samsung, Micron and SK hynix, and certain of their subsidiaries – to artificially restrict the supply of DRAM supply, thereby increasing the price of DRAM chips, between June 1, 2016 and February 1, 2018 (the Class Period). DRAM is a type of semiconductor memory chip used in most computer products that allows information to be electronically stored and rapidly retrieved.

The plaintiffs alleged that the defendants agreed, both in private and through public statements, to not increase their capacity to manufacture DRAM chips despite the fact that the demand existed for the increased supply that such capacity increases would allow them to produce. The plaintiffs alleged that this amounted to a conspiracy to artificially suppress the price of DRAM, which is a contravention of the criminal price fixing provision in section 45 of the Competition Act. The plaintiffs further alleged that this conspiracy caused the price of DRAM to be artificially inflated, and that this overcharge was incorporated in the sale prices for products that incorporated DRAM (that is, that the overcharge was “passed on” to purchasers of these products). The plaintiffs therefore claimed for these damages pursuant to section 36 of the Competition Act.

The plaintiffs therefore proposed to certify a class action on behalf of all purchasers of products containing DRAM in Canada during the class period.

Justice Gascon of the Federal Court heard the certification motion over four days in October, 2020. In reasons for decision issued on November 5, 2021, he dismissed the plaintiffs’ certification motion, holding that the plaintiffs failed to disclose a reasonable cause of action, and therefore did not satisfy Rule 334.16(1)(a) of the Federal Courts Rules, and that the plaintiffs failed to show some basis in fact that the conspiracy allegations raised common issues, and therefore did not satisfy Rule 334.16(1)(c). Though it was not necessary given these two holdings were each dispositive of the motion, Justice Gascon also held that the plaintiffs had not identified a methodology to show that the class suffered harm, and that a class action was not the preferable procedure.

The plaintiffs did not sufficiently plead a conspiracy

Justice Gascon held that the plaintiffs did not plead a reasonable cause of action under section 45 of the Competition Act because they did not plead any material facts that could support the defendants having made an illegal agreement to suppress the supply of DRAM. He held that the pleadings of an agreement, which paraphrased the language of section 45, were not pleadings of material fact. Rather, the only pleadings related to direct communications between the defendants were vague allegations of meetings at industry events, that the plaintiffs did not plead the defendants attended.

Justice Gascon also held that the plaintiffs’ allegations related to the defendants’ public statements could not support a claim of conspiracy. The plaintiffs pointed to quotes from public statements made by the defendants’ executives at industry conferences on conference calls as confirming the conspiracy, but when read in their full context, Justice Gascon found that the pleading “troublingly” misrepresented the actual meaning of these statements.

At its highest, Justice Gascon found that the plaintiffs had pleaded that the defendants had consciously acted in parallel, which Justice Gascon confirmed does not constitute a breach of section 45 of the Competition Act. He therefore found that the plaintiffs had not pleaded a reasonable cause of action. He further found that there was no suggestion that the plaintiffs could do so, so he denied the plaintiffs leave to amend their claim.

No evidence for conspiracy common issues

Justice Gascon further found that the plaintiffs had not shown some basis in fact that the alleged common issues existed. He adopted the “two step” test, first articulated in the Ontario jurisprudence, that requires that the plaintiff show some basis in fact that the proposed common issues actually exist, and that they are common to the class.

Justice Gascon categorically rejected all of the plaintiffs’ evidence related to their allegations of conspiracy. Notably, he rejected as insufficient: (i) evidence of newspaper articles suggesting the Chinese antitrust regulator was investigating undefined issues with DRAM; (ii) evidence of prior conduct, specifically a previous conspiracy related to DRAM pricing; (iii) the pleadings in a U.S. claim concerning similar issues; and (iv) the plaintiffs’ expert reports, which explicitly did not opine on the issue and in any case were not fact evidence. Justice Gascon put significant weight on the fact that there was no evidence of any Canadian, U.S. or European regulator investigating the allegations, and that there were no guilty pleas or other regulatory admissions.

No methodology to determine the class suffered loss

Finally, though it was not necessary to determine the motion in light of his other holdings, Justice Gascon held that the plaintiffs had not provided a methodology that could determine whether the class members had suffered any loss as a result of the alleged conspiracy. Because the methodology could not account for the difference between the effects of legal parallel conduct and an illegal conspiracy, it could not satisfy the requirements to show harm to be a common issue.

Takeaways

This is the first class certification motion in an action alleging a breach of section 45 of the Competition Act the Federal Court has decided, and it shows the Federal Court will not wave through certification motions in competition class actions and that plaintiffs cannot assume the threshold for success is low. In Jensen, the Federal Court closely examined the allegations made by the plaintiffs and concluded, among other things, that: (i) the pleadings did not disclose a reasonable cause of action, and (ii) there was no basis in fact for conspiracy-related proposed common issues (adopting the Ontario “two-step” test for some basis in fact).

Cyber attacks: Del Giudice v. Thompson

The Ontario Superior Court of Justice dismissed another class action in which the plaintiff used “intrusion upon seclusion” to claim damages for a cyber attack.

Justice Perell’s decision in Del Giudice v. Thompson (Thompson) reinforces recent findings in similar cases where the intrusion upon seclusion tort was not upheld and organizations were not found vicariously liable for their employees. Thompson also shows how important carefully drafted contract and privacy policy terms can be to an organization’s cyber risk management.

What you need to know

A former employee stole credit card application data from a bank’s cloud service provider. The plaintiff sued the bank, the service provider, and the former employee (among others), and sought certification.

The court dismissed the intrusion upon seclusion claim, as well as the vicarious liability claim. The court relied on the bank’s credit application forms, privacy policy, and cardholder and credit agreements.

This case demonstrates how careful attention to contractual terms, notifications, privacy policies and other “contractual” documentation can help limit privacy violation claims, including those following a cyber attack.

Background

Organizations and their insurers have been carefully watching plaintiff counsel’s use of the intrusion upon seclusion tort, especially its application to data loss claims and resulting class actions, since the Court of Appeal for Ontario recognized the tort in 2012. While plaintiff counsel can rely on many causes of action when seeking a remedy for the consequences of data loss, intrusion upon seclusion was a novel way to attempt to obtain a sizeable award for moral damages when there was no compensable injury.

Almost immediately after the tort was recognized, plaintiff counsel began using it to claim that organizations intentionally or recklessly “intruded” upon the privacy of affected individuals when personal information was compromised by those outside the organization. In cases involving a malicious insider, plaintiff counsel began to allege that organizations were vicariously liable for the insider’s intentional intrusion.

Fast forward to early 2021, when the Divisional Court issued a significant favorable decision for Ontario organizations and insurers in Owsianik v. Equifax Canada Co (Owsianik). This decision held that custodians of personal data cannot be liable for intrusion upon seclusion when third parties steal or access that data. The Divisional Court’s majority decision was brief and focused on the lack of wrongful intent held by organizations who fall victim to attack. The decision did not address the issue of vicarious liability.

The Thompson case: Attack and data theft by a former insider

Thompson is about the theft of credit card application data by a former employee of a bank’s cloud service provider. The former employee, who faces criminal charges in the United States, is alleged to have used the understanding she developed while working for the service provider to exploit system misconfigurations and perpetrate her attack.
The plaintiff sued the bank, the service provider and the former employee (among others) and sought certification. She pleaded 19 causes of action, including intrusion upon seclusion and vicarious liability. She alleged that the bank:

• collected application information for one purpose and retained and used it for other purposes;
• continued to retain the information despite increasing security risks (including risks arising from its outsourcing to a service provider in the United States);
• failed to warn of the increasing security risks; and
• lost the information in breach of various duties.

The Thompson decision on intrusion upon seclusion and vicarious liability

The court struck the claim in Thompson without leave to amend because the claim did not set out a reasonable cause of action.

In disposing of the intrusion upon seclusion claim, the court adopted and reinforced the key finding from Owsianik: “A failure to prevent an intrusion, even a reckless failure to prevent, is not an intrusion.” It also stated that recklessness should take its meaning from established criminal and civil law jurisprudence — jurisprudence that defines recklessness as conceptually distinct from negligence and involving a state of mind exhibiting conscious indifference to risk.

The court went further. While the Owsianik panel found that the organizational loss of data was “highly offensive,” Justice Perell did not. He said:

As pleaded against them, [the bank’s and the service provider’s] conduct amounts to making mistakes in safeguarding not particularly sensitive information that largely consists of information to identify the applicant for a credit card and to provide means to contact them. [The defendants’] conduct, which might be wrongful and expose them to some other cause of action, is not offensive in the requisite legal sense that would constitute the tort of intrusion on seclusion.

In dismissing the plaintiff’s vicarious liability claim, it was of no consequence to the court that the former employee was alleged to have used the knowledge she gained while working for the service provider to perpetrate her attack. It said it would be “absurd and unfair” to impose liability on a defendant for the actions of a former employee.

The court quoted the bank's credit application terms, privacy policy, and cardholder and credit card agreement in detail and used the terms to invalidate numerous causes of action, including intrusion upon seclusion. It then struck the action without leave to amend based on a finding that the plaintiff's entire case theory, which focused on data misuse, "imploded" based on the contract terms.

Takeaways

Cyber attacks are inevitable, and even the best-defended organizations can expect to suffer cyber attacks and data loss. The degree to which organizations and insurers are exposed to third-party civil liability will be influenced heavily by whether the law provides a remedy on a strict basis and without proof of negligence and compensable loss. The law in Ontario has taken a noticeable turn with the Owsianik and Thompson decisions because they limit the degree of exposure. It remains to be seen how the Court of Appeal for Ontario will treat these types of cyber attack claims, however.

Thompson also illustrates the importance of contractual terms. Data misuse claims, in particular, will put the focus on notifications, privacy policies and other "contractual" documentation that define the scope of an organization's authorized use of data. Thompson shows how careful attention to these documents will help limit all kinds of privacy violation claims, including claims that follow a cyber attack.

Contact your BLG privacy lawyer or any member of BLG's Cybersecurity, Privacy & Data Protection team to ensure that your contract and privacy policy terms will strengthen your case in the event of a data or privacy dispute.

Duty of good faith: Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District

In its decision in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District (Wastech), the Supreme Court of Canada recognized that parties need to exercise contractual discretion in good faith. This means making decisions that are reasonable in light of the bargain the parties made.

What you need to know

• The court held that the organizing principle of good faith requires that, where a contract gives a party the ability to make a discretionary decision, the party must exercise that discretion reasonably in light of the bargain the parties made.
• The court held that the duty to exercise discretion reasonably is imposed externally on the contractual relationship, and therefore the parties cannot contract out of it.
• This means that parties cannot contract for absolute, completely unfettered discretion.
• The court heard this case at the same time as CM Callow Inc. v. Zollinger (CM Callow), which considered the duty of honest performance. Together, the decisions add breadth and depth to the Canadian law of good faith in contracts.
• The concurring reasons also considered the standard of review of an arbitrator’s decision.

Background

This case concerns a trash collection contract between Wastech and the Greater Vancouver Sewerage and Drainage District ("Metro Vancouver") to collect solid waste and transport it to three landfills – two closer to Vancouver and one farther away. Wastech received premium pay for the waste it had to transport to the farther landfill, but Metro Vancouver had absolute discretion under the contract to determine what percentage of the waste collected would go to which landfill.

The contract was heavily negotiated, and in various clauses contemplated the impact on Wastech’s profit margins. However, one clause gave Metro Vancouver sole discretion to allocate the waste as between the three landfills. The clause did not limit the discretion, nor did it guarantee any profit for Wastech.

Duty of good faith and contractual discretion

The Supreme Court held that a duty to exercise contractual discretion in good faith is well established at common law. In the court’s language from Bhasin v. Hrynew (Bhasin), this requires parties to exercise contractual discretion reasonably. The key holding, which is a new development in the law, is that exercising discretion reasonably means exercising discretion in a manner consistent with the purposes for which it was granted in the contract. However, the court was clear that this does not create a fiduciary-like duty, and the party with the discretion need not place the other party’s interest before its own.

In other words, an exercise of discretion will not be reasonable when it is exercised in a way that is not consistent with the purpose for which the discretion was granted. This requires a highly context-specific analysis, whose outcome ultimately depends on a process of contractual interpretation to determine the parties’ intention. However, the court indicated that the range of reasonable outcomes generally would be smaller if the issue subject to the discretion is capable of objective measurement, and larger if it is not.

In the Wastech case, the court considered the commercial structure of the parties’ bargain to determine the scope of reasonableness. With respect to the specific discretion at issue – how to allocate waste disposal between landfills – the court found that the intention behind giving Metro Vancouver discretion was to give the city flexibility to allocate waste efficiently and minimize operating costs. Though this reduced Wastech’s profit margin, the court found that the parties did not intend Metro Vancouver’s discretion to be constrained by this consideration. This was evident from the fact that the contract took into account the effect on Wastech’s profit margin in other contexts, but not when the city was deciding how to allocate waste between sites.

The majority of the court held that the duty to exercise discretion reasonably is a general doctrine of contract law, and is not an implied term of any particular contract. The implication is, therefore, that parties cannot contract out of this duty.

Finally, the court rejected the notion that an exercise of discretion will be unreasonable only if the exercise of discretion “substantially nullifies” the benefit of the contract for the other party. On the other hand, the fact that a party’s exercise of discretion causes a party to lose some or even all of its anticipated benefit – as happened in this case – is not dispositive in itself, as long as the exercise of discretion is within the bounds contemplated in the contract.

Takeaways

Arguably, more so than in CM Callow, in Wastech the Supreme Court expanded the organizing principle of good faith in contracts by holding that a party cannot exercise contractual discretion in a complete and unfettered manner. However, the principle retains some predictability because this aspect of good faith is rooted in the contract, such that parties have a concrete and accessible standard by which to judge their actions.

The history of the Supreme Court’s development of the doctrine of good faith in contracts suggests that the law may develop toward a point where parties owe to all co-contracting parties good faith obligations similar to those they currently owe only to more closely related parties. The first areas in which the court found duties of good faith to exist were the close relationships that exist in the employment and franchise contexts. Then, in Bhasin, the court established good faith as a general organizing principle in contract law. Recently in CM Callo and Wastech, the court applied this organizing principle to import certain aspects of good faith from close relationships to all contracts – duties to act honestly and exercise discretion reasonably. Based on this trend, the duty of good faith in contracts may continue to expand.

Interpretation of releases: Corner Brook (City) v. Bailey

In Corner Brook (City) v. Bailey, the Supreme Court of Canada unanimously held that there are no special rules of contractual interpretation that apply only to releases. Instead, a release is a contact and the interpretation of a release is governed by the general principles of contractual interpretation.

What you need to know

• A release will be interpreted based on the general contract principles set out in Sattva Capital Corp. v. Creston Moly Corp. (Sattva).
• There is no special interpretive principle that applies to releases. The old “Blackmore Rule” no longer applies.
• A release can cover an unknown claim with sufficient language but does not need to particularize the exact claims or claim fields that fall within its scope.
• A court may be persuaded to interpret a release narrowly, not because of a special rule, but because the broad wording of a release may conflict with the circumstances.

Background

Mrs. Bailey was driving her husband’s car when she struck Mr. Temple, who was performing roadwork as an employee of the City of Corner Brook (the City). The Baileys sued the City for damage to their vehicle and Mrs. Bailey’s injuries (the Bailey Action). The Baileys ultimately settled the Bailey Action, discontinued their claim, and signed a full and final release (the Release).

Before the Bailey Action settled, Mr. Temple sued Mrs. Bailey for his injuries (the Temple Action). Almost five years after the Baileys signed the Release, Mrs. Bailey commenced a third party claim against the City in the Temple Action.

The court was asked to determine if the Release barred the third party claim.

Supreme Court of Canada decision

The Supreme Court of Canada held that a release ought to be interpreted according to general contractual law principles, as outlined in Sattva. As set out in Sattva, when interpreting a contract, the court must give “the words used [in a contract] their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract.”

In this case, the Release stated that Mrs. Bailey gave up her rights against the City in “all actions, suits, causes of action… foreseen or unforeseen… and claims of any kind of nature whatsoever arising out of or relating to the accident.” The SCC held that this language was broad enough to include Mrs. Bailey’s third party claim. The SCC reasoned that if this wording was insufficient to include a claim arising out of the accident, it is hard to imagine what wording would be sufficient, aside from listing every type of claim imaginable (such as third party claims) but there would be no principled reason to particularize the scope of the release in such detail.

When interpreting a release, the ordinary meaning of the words and the surrounding circumstances may often come into tension because: (1) a release is often expressed in the broadest possible words, and (2) a release often accounts for risks that are unknown to the parties at the time of formation. Therefore, the circumstances may indicate the broad wording was not what the parties objectively intended and the emergence of unsuspected claims may question if the release is all-embracing.

In this case, the surrounding circumstances were also consistent with the Release. At the time the Release was signed, the Baileys and the City knew, or ought to have known on an objective basis, that the City employee may have an outstanding claim against Mrs. Bailey, or the City, or both, and that such a claim could put the City and Mrs. Bailey in an adverse position to one another, where it would be to both of their advantages to blame the damages on the other. This supported an interpretation of the Release that included Mrs. Bailey’s third party claim.

Lastly, the SCC noted that both the application judge and the Court of Appeal had considered the pre-contract negotiations in reaching their conclusions. Although neither party argued that there was anything wrong with this approach, the SCC noted that traditionally, evidence of negotiations is inadmissible when interpreting a contract. However, the SCC declined to make a ruling on whether any circumstances exist wherein evidence of negotiations can be admissible.

Takeaways

The previous “Blackmore Rule,” which stated that the general words of a release are limited always to what was specifically contemplated by the parties at the time the release was given, has been overtaken by the general principles of contract law in Sattva.  The Blackmore Rule was useful when contract law was a black-letter law, but today, in light of Sattva, it no longer applies and should no longer be referred to.

When interpreting a release, there may be dissonance between the words of the release and what the parties objectively intended. To resolve this tension, courts may be persuaded to interpret a release more narrowly than other types of contracts, not based on a special rule, but simply because the broad wording of the release can conflict with the circumstances, especially for claims not contemplated at the time of the release.

For clear drafting, a release should clearly state it will cover unknown claims and should be narrowed to a particular timeframe and subject matter.

Sealing orders: Sherman Estate v. Donovan

Civil Litigants across Canada commonly seek sealing orders to protect sensitive commercial and other information. As sealing orders run contrary to the open-courts principle, the courts must balance the beneficial impact of the order in protecting an important interest against the public interest in open courts. The Supreme Court of Canada considered this balance in Sherman Estate v Donovan.

BLG (Ewa Krajewska, Teagan Markin and Mannu Chowdhury) acted for the Income Security Advocacy Centre, one of the interveners on the case.

What you need to know

• Sherman represents an important evolution in the protection of individuals’ privacy in Canada, and will be important wherever sensitive personal information may become part of the public record. For example, LGBTQ+ individuals may be at risk if their sexual orientation or gender identity are disclosed.
• As the possibility of having to disclose sensitive personal information may present a barrier to certain individuals in accessing the courts, Sherman provides a key tool in improving access to justice.

Background

After the passing of Barry and Honey Sherman in December 2017, the trustees of their estates sought sealing orders over the court files related to the probate of the Shermans’ estates. At first instance, the Ontario Superior Court of Justice granted the requested order, finding that the privacy and dignity of those affected, including the beneficiaries of the estates, outweighed the harmful effect of the sealing orders. A journalist appealed the initial grant of the sealing order, and the Ontario Court of Appeal overturned the orders finding, among other things, that “personal concerns cannot, without more, justify an order sealing material that would normally be available to the public under the open court principle.”

Supreme Court of Canada decision

Since 2002, the common law test for sealing orders in civil matters has been the two part test articulated in Sierra Club of Canada v. Canada (Minister of Finance), 2002 SCC 41 (Sierre Club). Under the Sierra Club test, a party seeking a sealing order had to demonstrate:

• an order was necessary to prevent a serious risk to an important interest, including a commercial interest, because alternative measures would not prevent the risk; and
• the positive effects of the order outweighed the negative effects, including the public interest in open court proceedings.

Writing for a unanimous court in Sherman, Justice Kasirer found that the Sierra Club test rests upon three core prerequisites, which must be established in order to obtain a sealing order:

1. court openness poses a serious risk to an important public interest;
2. the order sought is necessary to prevent this serious risk to the identified interest because reasonably alternative measures will not prevent this risk; and
3. as a matter of proportionality, the benefits of the order outweigh its negative effects.

Justice Kasirer noted that this formulation preserves the essence of Sierra Club test. Accordingly, previously decided cases likely remain good law.

More importantly, Justice Kasirer found that, under the first branch of the test, there is a public interest in preserving individuals’ dignity. Where core aspects of individuals’ personal lives, which bear on their dignity, are at risk due to dissemination of sufficiently sensitive information, this may support the granting of a sealing order. Some examples of such sufficiently sensitive information included potentially stigmatizing medical diagnoses, sexual orientation, or potentially stigmatizing work history. However, Justice Kasier noted that such information is not per se grounds for a sealing order; the extent to which the information has already been disseminated in the public domain is relevant to whether the sealing order should be granted.
Underpinning Justice Kasirer’s reasoning is the recognition that dignity, which he articulates as a social concept involving presenting core aspects of oneself in a controlled and considered manner. In other words, there is a public interest in protecting individuals’ rights to decide when, how, and to whom (if at all) information about fundamental aspects of their identities is disclosed. This public interest is sufficiently important that, in some cases, it can tip the balance away from the public interest in open courts, which is constitutionally protected under section 2(b) of the Charter of Rights and Freedoms.

Justice Kasirer also found that the presumption in favour of open courts will not be overcome lightly. Even though certain information, if disclosed, may be disadvantageous, embarrassing, or even distressing, this will not be sufficient to support a sealing order. The trustees in Sherman were ultimately unsuccessful in having the sealing orders reinstated, as the information they sought to protect (names and addresses, identity of the estate administrators, the extent of assets dealt with in the estates, and the identity of beneficiaries) was not near enough to the ‘core of biographical data’ which the public interest in protecting dignity protects, to support a sealing order.

Takeaways

The Supreme Court of Canada recognized that the public interest in protecting individuals’ dignity is sufficiently important that a sealing order preventing disclosure of personal information may be granted. However, Sherman sets the bar for granting a sealing order protecting personal information very high. Only information that “reveals something intimate and personal about the individual, their lifestyle, or experiences,” such as sexual orientation or potentially stigmatizing medical information will likely support the granting of a sealing order.

Limitation periods: Grant Thornton LLP v. New Brunswick

A plaintiff is typically required to commence an action within two years of when they ‘knew or ought to have known’ they had a claim against the other party; failure to do so may result in their claim being dismissed under limitations legislation. In Grant Thornton LLP v. New Brunswick, the Supreme Court of Canada (SCC) clarified when a claim is considered to have been ‘discovered’ in this context.

BLG (Guy J. Pratte, Nadia Effendi and Julien Boudreault) acted for the intervener Chartered Professional Accountants of Canada.

What you need to know

The unanimous SCC decision concluded that a claim is discovered when a plaintiff has knowledge, actual or constructive, of material facts that support a plausible inference of the defendant’s liability.

Constructive knowledge may be established when the plaintiff “ought to have discovered” material facts “by exercising reasonable diligence” and a plausible inference is one which gives rise to a “permissible fact inference” of liability.

Background

In 2008, the Atcon Group (Atcon) sought loans from the Bank of Nova Scotia. The Province of New Brunswick agreed to provide $50 million in loan guarantees on the condition that Atcon undergo a review by an external auditor (the Accounting Firm). The audit concluded that Atcon’s financial position was fairly presented in its financial statements. The province then executed and delivered $50 million in loan guarantees. Atcon ran out of working capital four months later, and the province paid the loan guarantees on March 18, 2010.

The province retained RSM Richter Inc. (Richter) to prepare a second report on Atcon’s financial position. Richter issued a draft report on February 4, 2011, and a substantially similar final report on November 30, 2012. Both reports concluded that Atcon’s financial position had been materially misstated in its financial statements.

New Brunswick Court of Queen’s Bench decision

The province commenced a negligence claim against the Accounting Firm on June 23, 2014. The Accounting Firm sought summary judgment on the basis that the province had “discovered” the claim more than two years before commencing the action. The judge found that the province “knew or ought to have known that it had prima facie grounds to infer that it had a potential claim” more than two years before commencing its action. The claim was dismissed. The province appealed this decision.

New Brunswick Court of Appeal decision

On appeal, the court reasoned that a claim could only be “discovered” if the plaintiff had knowledge, actual or constructive, of “facts that confer a legally enforceable right”. The court found that the Accounting Firm’s failure to produce its audit-related files prevented the province from determining whether it had a claim in negligence, and by extension, “discovering” its claim. As a result, the New Brunswick Court of Appeal reversed the decision of the lower court, permitting the province to pursue its claim against the Accounting Firm.

Supreme Court of Canada decision

The Accounting Firm appealed the decision to the SCC, which held that the province’s claim was limitation-barred. The SCC reviewed the provincial limitations legislation, which provides that a claim is “discovered” on the day that the claimant first knew, or ought to have reasonably known, that their loss was caused, in full or in part, by an act or omission of the defendant2.

The SCC unanimously held that a claim is “discovered” when the plaintiff has “knowledge, actual or constructive, of the material facts upon which a plausible inference of liability on the defendant’s part can be drawn” (para 42). The SCC provided the following guidance:

• The material facts are generally set out in the applicable limitations statute;
• A plaintiff’s knowledge may be established through direct and circumstantial evidence;
• Constructive knowledge may be imputed if a plaintiff is not reasonably diligent in investigating potential claims; and
• A plausible inference of liability requires more than suspicion or speculation, but less than certainty or perfect knowledge.

The SCC stated this interpretation preserved the common law rule’s equitable balance between: (1) protecting potential claims, and (2) ensuring claims are brought in a timely manner. Despite this, the court emphasized that the common law rule should be viewed as an interpretive tool that can be displaced by clear legislative language.

The SCC used this refined approach to discoverability to conclude that the province had “discovered” its claim when it received the draft report from Richter on February 4, 2011. At that time, the province had knowledge, actual or constructive, of material facts that supported a “plausible inference” of the Accounting Firm’s negligence.

Takeaways

• Applicable limitations periods may begin to run when a plaintiff has more than mere suspicion that a claim exists but less than certain or perfect knowledge.
• In a claim alleging negligence, discovery does not require knowledge that the defendant owed a duty of care or that the defendant’s act or omission breached the applicable standard of care.
• Knowledge or reasonable inference of certain facts may trigger applicable limitations periods even if a claimant does not know the exact nature of the harm it has suffered, or the precise cause of its injury.
• Pre-litigation reviews/investigations by third parties may form a plausible inference of liability on the defendant’s part, even if they do not directly address the defendant’s potential negligence.
• Parties contemplating litigation should seek early legal advice related to limitation periods and deadlines.

The SCC’s decision is likely to have far-reaching impacts, given that the discovery provision in the New Brunswick legislation was modelled after those in Alberta, Saskatchewan, and Ontario. For plaintiffs sitting on causes of action, the SCC’s decision sends a clear warning: act on potential claims.

Climate change: Greenhouse Gas Pollution Pricing Act

The Supreme Court of Canada decided three references out of Saskatchewan, Ontario and Alberta, upholding the constitutionality of the federal Greenhouse Gas Pollution Pricing Act, S.C. 2018, c. 12, s. 186 (the GGPPA). In a 6-3 decision, the Supreme Court held the GGPPA as a valid exercise of the federal government’s power to legislate for the peace, order and good government of Canada (the POGG power).

BLG (Guy Pratte) acted as co-counsel to the Attorney General of Canada before the Supreme Court of Canada.

What you need to know

• The court’s decision represents a major victory for the Government of Canada1, upholding its flagship climate policy and affirming its constitutional authority to establish minimum national standards of carbon pricing. Importantly, this decision provides much needed clarity and finality with respect to federal and provincial jurisdiction over climate policy.
• The Supreme Court’s reasoning, particularly with respect to its application of POGG, may have implications for future energy-related division of powers disputes, including the ongoing constitutional challenge to the federal Impact Assessment Act currently before the Alberta Court of Appeal.

Background

The GGPPA is the cornerstone of the Government of Canada’s climate policy. It is designed to mitigate the effects of climate change by establishing minimum national standards of carbon pricing. Part 1 of the GGPPA establishes a fuel charge that applies to producers, distributors, and importers of various carbon-based fuels, while Part 2 provides for output-based limits on large industrial emitters.2

The GGPPA ensures a minimum national price on greenhouse gas (GHG) emissions by operating as a backstop. Provinces and territories have the flexibility to design their own GHG pricing policies. The GHG pricing mechanisms described in Parts 1 and 2 only apply in provinces or territories that fail to adopt their own GHG pricing mechanisms, or whose mechanisms are determined by the Governor in Council to fall short of the stringency required by the GGPPA.

Court of Appeal decisions

Several provinces challenged Parts 1 and 2 and related schedules of the GGPPA as being an unconstitutional intrusion into provincial jurisdiction. The legislation was upheld by majorities of the Saskatchewan and Ontario Courts of Appeal, but found to be unconstitutional by the Court of Appeal of Alberta.

In total, eight justices at the provincial appellate level sided with the federal government, while seven sided with the challenging provinces. Appeals from all three decisions were argued together on Sept. 23 and 24, 2020. In addition to the Attorneys General of Canada, Alberta, British Columbia, Ontario, Québec, New Brunswick, Manitoba, and Saskatchewan, submissions were made by dozens of other interveners on both sides of the issue.

Supreme Court of Canada decision

The issue, at its core, was whether Parliament had the constitutional authority to enact the GGPPA. Chief Justice Wagner, writing for a majority of six judges, held that the GGPPA is a constitutional exercise of the federal government’s POGG power. This analysis consists of two stages: first, the court must determine what are the purpose and effects (often referred to as the “pith and substance”) of the legislation. Then, the court must classify the matter under one of the heads of power set out in sections 91 and 92 of the Constitution Act, 1876.

a) Pith and Substance of the GGPPA – Minimum National Standards of GHG Price Stringency

Chief Justice Wagner characterized the true subject matter of the GGPPA as “establishing minimum national standards of GHG price stringency to reduce GHG emissions.” In doing so, he rejected broader characterizations put forward by many of the provinces, and by the majorities of the Courts of Appeal for Ontario and Alberta, that the pith and substance is the regulation of GHG emissions.

In his reasons, Chief Justice Wagner emphasized the importance of describing the pith and substance of a challenged statute as precisely as possible. The description, he noted, should capture the law’s essential character in terms that are as precise as the law will allow. Wagner CJC’s review of the language in the GGPPA itself (including the title and the preamble), the legislative history, and the statute’s legal and practical effects, demonstrated that the focus was on national standards of GHG pricing and not just minimum national standards or GHG emission regulations generally.

Agreeing with Associated Chief Justice Hoy’s concurrence in the Court of Appeal for Ontario, Chief Justice Wagner also held that it may be permissible to consider the legislative choice of means in determining a statute’s pith and substance. In cases where the legislator’s choice of means is central to the legislative objective, treating the means as irrelevant to the analysis would make it difficult to define the matter of the statute precisely. Rejecting the broader characterizations advanced by the majorities of the Court of Appeal for Ontario and the Court of Appeal of Alberta (and all the provincial attorneys general, except British Columbia), Chief Justice Wagner recognized that a national GHG pricing scheme was not merely the means of achieving GHG emissions reductions, it was the entire matter of the statute.

b) Classification of the GGPPA—the National Concern Branch of POGG

Once the “pith and substance” of the statute has been determined, the second stage of the analysis is to classify the statute under one of the federal or provincial heads of power set out in sections 91 and 92 of the Constitution Act, 1867. The Attorney General of Canada argued that Parliament had the constitutional authority to enact the GGPPA by virtue of its POGG power, specifically the doctrine enabling Parliament to legislate with respect to matters of “national concern.”

A majority of the court confirmed that finding that a matter is one of national concern involves a three-step analysis:

1. The matter is of sufficient concern to the country as a whole to warrant consideration as a possible matter of national concern;
2. The matter was “single, distinct, and indivisible,” in that the specific and identifiable matter is qualitatively different from matters of provincial concern and evidence establishes provincial inability to deal with the matter; and
3. The matter has a scale of impact on provincial jurisdiction that is reconcilable with Constitutional division of powers.

Wagner CJC agreed with the federal government’s position. As a threshold matter, Canada presented sufficient evidence that establishing minimum national standards of GHG price stringency to reduce GHG emissions is of sufficient concern to Canada as a whole. The majority noted that the matter at hand is critical to Canada’s response to climate change and the threat it poses in Canada and around the world. There is a broad consensus among expert international bodies that carbon pricing is integral to reducing GHG emissions.

Wagner CJC went on to find that “minimum national standards of GHG price stringency to reduce GHG emissions” satisfies the singleness, distinctiveness, and indivisibility test. GHGs are specific and precisely identifiable. GHG emissions are predominantly extra provincial and international in both character and implications. The chosen regulatory mechanism – minimum national standards of GHG price stringency, implemented by way of a backstop via the GGPPA – relates to a federal role that was qualitatively distinct from matters of provincial concern.

The GGPPA is tightly focused on its distinct federal role and does not descend into the detailed regulation of GHG pricing. It is different in kind from regulatory mechanisms that do not involve pricing, such as sector-specific initiatives concerning electricity, buildings, transportation, industry, forestry, agriculture and waste. The role of the GGPPA is instead to address national risks posed by insufficient provincial carbon pricing stringency. It does so in a manner distinct from provincial GHG pricing systems – on a distinctly national basis, one that neither represents an aggregate of provincial matters nor duplicates provincial GHG pricing systems.

The majority then turned to whether there was a “provincial inability” to deal with the matter at the core of the GGPPA.

First, it noted that the provinces, acting alone or together, are constitutionally incapable of establishing minimum national standards of GHG price stringency to reduce GHG emissions. While the provinces could co-operate to establish a uniform carbon pricing scheme, they cannot establish a national GHG pricing floor applicable in all provinces and territories at all times.

Second, a failure to include one or more provinces in this scheme would jeopardize its success in the rest of Canada. Emissions reductions that are limited to a few provinces would fail to address climate change if they were offset by increased emissions in other Canadian jurisdictions. The failure of any province to implement a sufficiently stringent GHG pricing mechanism could undermine the efficacy of the entire scheme through the risk of carbon leakage – where businesses with high levels of carbon emissions relocate to jurisdictions with less stringent carbon pricing policies.

Third, a province’s failure to act or co-operate would have grave consequences for extra provincial interests. The majority rejected the notion that because climate change is “an inherently global problem,” each individual province’s GHG emissions cause no “measurable harm” or do not have “tangible impacts on other provinces.” Each province’s emissions are clearly measurable and contribute to climate change.

Finally, the majority held that the scale of impact of the GGPPA on the provinces’ jurisdiction was acceptable. Although the GGPPA had a clear impact on provincial autonomy to regulate GHG pricing from a local perspective, this impact was qualified and limited. The matter was limited only to the narrow scope of pricing of GHG emissions. Furthermore, the provinces were free to design and legislate any GHG pricing system as long as it met the minimum national standards of price stringency. The GGPPA took on a more “supervisory” aspect, designed only to address provincial incapacity. The risk of grave extra provincial and international harm justified this limited impact on provincial jurisdiction.

c) The Levies: Valid regulatory charges

The court was also asked to determine whether the fuel and excess emission charges imposed by the GGPPA were constitutionally valid regulatory charges or unconstitutionally disguised taxes, as was alleged by the Province of Ontario. Wagner CJC found that the levies imposed by the GGPPA had a sufficient nexus with the regulatory scheme to be considered valid regulatory charges. Their purpose was to advance the GGPPA’s regulatory purpose by altering behaviour, and as such, they could not be characterized as taxes.

The dissenting judgments

Three Justices dissented, either in whole or in part, each with separate reasons.

Justice Coté, dissenting in part, agreed with the Chief Justice’s formulation of the national concern branch analysis, and agreed that Parliament has the power to enact legislation establishing minimum national standards of price stringency to reduce GHG emissions. She found, however, that the GGPPA as drafted is unconstitutional, as it vests inordinate discretion in the Governor in Council, with no meaningful limits on Parliament’s executive power. In her view, the GGPPA could not fit within a matter of national concern, because the minimum standards are set by the Executive rather than by the statute. She also held that sections of the GGPPA conferring on the executive the power to amend the GGPPA were unconstitutional as contrary to parliamentary sovereignty, the rule of law, and separation of powers.

Justice Brown, dissenting, found that the GGPPA's subject matter fell squarely within provincial jurisdiction, and therefore could not be supported by the national concern branch of POGG. In his view, the backstop nature of the legislation – premised on the provinces having authority to enact their own GHG pricing mechanisms – was fatal to any assertion that the legislation could be valid under Parliament’s residuary power. He also disagreed with the majority's characterization of the statute’s pith and substance, proposing instead two separate characterizations for Parts 1 and 2 of the GGPPA.

In his dissenting reasons, Justice Rowe agreed with Justice Brown’s analysis and conclusion that the GGPPA is ultra vires Parliament, but wrote separately about the nature of the POGG power. In his view POGG only confers residual authority, namely the authority to legislate in relation only to matters that “would otherwise fall into a jurisdictional vacuum.” As such, it is available only as a power of last resort.

Takeaways

The Supreme Court’s decision marks a major victory for the Government of Canada. It provides clarity and finality with respect to jurisdiction over carbon pricing, as well as regulatory certainty for market participants.

Furthermore, this decision has important implications for energy-related division of powers jurisprudence in Canada. First, it contributes to a growing and important body of recent case law that is etching out provincial and federal jurisdictional boundaries over modern environmental legislation. In recent years, various levels of government have become increasingly motivated to regulate in this area, which has invariably led to disputes, uncertainty and judicial intervention. The Supreme Court’s decision has provided important clarity and regulatory certainty with respect to the regulation of GHG’s emissions, as well as the application of POGG in the environmental context.

Second, the court’s decision may have an impact on ongoing and future division of powers disputes, including the constitutional challenge to the Impact Assessment Act (the IAA Reference), currently before the Alberta Court of Appeal. In particular, and while the subject matter in that case involves the constitutionality of federal environmental assessments under the Impact Assessment Act, parties in that case will be studying closely the Supreme Court’s recent application of POGG. Like the decision in the present case, the IAA Reference will have important ramifications for federal-provincial jurisdiction over environmental assessments.