The Ontario Court of Appeal in Excalibur Special Opportunities LP v. Schwartz Levitsky Feldman LLP 2016 ONCA 916, has overturned two lower decisions, certifying a securities fraud class action against a Canadian auditor in which 98% of the class members were not Canadian. The judgment offers helpful guidance to parties seeking to bring or defend global class actions in Ontario.
The class action is based on allegations of negligence and negligent misrepresentation over an audit report prepared by Schwartz Levitsky Feldman LLP (“SLF”). Excalibur is a Toronto-based fund and was one of 57 “accredited investors” that invested a total of $7.5 million in Southern China Livestock International Inc. (“Southern China”), a Nevada company that owned and operated hog farms in China. One other investor was a Canadian resident, 50 were American and the remaining investors resided in the Cayman Islands, Samoa, Malaysia and the United Kingdom. In 2010, SLF prepared a one-page audit report of Southern China’s financial statements that was appended to a private placement memorandum. The essence of the claim is that in light of the true state of Southern China’s all-cash business, SLF could not have provided a clean audit report in accordance with generally accepted accounting principles, as it had professed to.
The two hurdles that resulted in the initial dismissal of Excalibur’s certification motion were the “identifiable class” and “preferable procedure” criteria of the Ontario Class Proceedings Act. Justice Perell determined that there was no identifiable class because there was no real and substantial connection to Ontario as the majority of the class members were not Canadian and the transactions were governed by American law. Second, he found that joinder was a more appropriate mechanism to resolve the dispute.
Justice Perell’s decision, which was upheld by the Divisional Court, was reversed by a split Court of Appeal. The majority decision, written by Justice MacFarland, drew on Justice Blair’s dissent in the Divisional Court decision and granted an order certifying the class action. The majority emphasized that the elements to consider in the certification of a “global class,” previously set out in Currie v. McDonald’s Restaurants of Canada Ltd., 2005 CanLII 3360 (ON CA), are:
- a) whether the Ontario court has jurisdiction simpliciter over the defendant;
- b) whether the Ontario court can assume jurisdiction over a non-resident class member, which largely depends on whether Ontario has a real and substantial connection with the subject matter of the action and on principles of order, fairness and comity between courts;
- c) whether it would be reasonable for the non-resident class members to expect that their rights would be determined by what to them would be a foreign court; and
- d) whether the non-resident plaintiffs can be accorded procedural fairness, including adequate notice and a meaningful opportunity to opt out.
The majority decision emphasized that an Ontario court should not approach the issue of taking jurisdiction in a restrained manner. Jurisdiction simpliciter was established because three of the four presumptive connecting factors set out in Club Resorts Ltd. v. Van Breda, 2012 SCC 17 were satisfied: the action involved claims relating to audit report that was prepared in Ontario against the defendant auditor that resided and carried on business in Ontario.
Additionally, the majority emphasized that a plaintiff need not establish that a class proceeding is necessary to obtain access to justice, rather than preferable to other methods. Joinder is not the “default” procedure against which the merits of a class proceeding should be assessed, rather the majority emphasized that a court is to look at “all reasonably available means of resolving the class members’ claims.”
Typically, certification of class actions involving foreign class members raise important issues with respect to recognition, enforcement and comity. Other global class actions have recently been certified in Ontario, including in Abdula v Canadian Solar Inc., 2015 ONSC 53 and Airia Brands Inc. v Air Canada, 2015 ONSC 5332. However, the Supreme Court of Canada recently denied leave to appeal from the Court of Appeal’s decision in Kaynes v BP, Plc, 2014 ONCA 580 a securities case in which certification of a global class was denied largely on the basis of the international standard tying jurisdiction to the place where the securities were traded and avoiding a multiplicity of proceedings. Notably, on February 6, 2017, SLF filed for leave to appeal to the Supreme Court of Canada. If leave is granted, there may be an opportunity for the Supreme Court to provide clarity and guidance on these issues.