lcc vol2 issue2 e - mccarthy · volume 2, issue 2 july — october 2008. co-counsel: litigation...

Co-Counsel

McCarthy Tétrault Co-Counsel:

Litigation Volume 2, Issue 2

July — October 2008

Co-Counsel: Litigation Volume 2, Issue 2

Welcome to Volume 2, Issue 2 of McCarthy Tétrault Co-Counsel: Litigation.

This edition highlights the diversity of our expertise and practice.

The first topic to emerge is flexibility in judicial decisions. This is seen in an article discussing the use of the Companies’ Creditors Arrangement Act to resolve the asset-backed commercial paper (ABCP) crisis. In this case, the court was willing to interpret the remedial legislation broadly and allow a restructuring to occur. Another case in which the judiciary showed flexibility was R. v. Inco, in which charges against a firm client were dismissed. The court was willing to look not at the total quantity of nickel that was discharged, but rather at the bioavailable nickel in discharge.

Another topic covered in this edition is jurisdiction. In a case comment on Hocking v. Haziza, we discuss whether multi-jurisdictional class actions are still possible. Jurisdiction is also addressed in the case comment on ARAM Systems Ltd. v. NovAtel Inc. This is the first case in which a Canadian superior court decided on issues of inventorship and derivation of the subject matter contained in a US patent and foreign patent applications, based primarily on US law.

A third topic to emerge is employee relations. In a case comment on Correia v. Canac Kitchens, we discuss a lawsuit that resulted from an employee’s dismissal and treatment after an investigation revealed criminal activities — that were later found to have been perpetrated by an employee with a similar name. The other employment article is a comment on a case against Hydro-Québec. Here, the Supreme Court of Canada set a limit on an employer’s duty to accommodate to the standard of undue hardship to the employer.

There are also two articles pertaining to students: their rights and responsibilities. The article discussing R v. A.M. highlights a win for the Canadian Civil Liberties Association (CCLA), which we represented at the Supreme Court of Canada. The win upholds students’ constitutional right against unreasonable searches. In the article discussing Mulligan v. Laurentian University, in which we represented the defendants, the Ontario Court of Appeal is quoted as stating that not only are universities entitled to deference in deciding which students to admit, but that students who sue them can be subject to an award of costs.

This issue also contains an article on Holland v. Saskatchewan, which demonstrates that the mechanism available to Canadian citizens to encourage our government to respect the Constitution and to comply with the decisions of our courts is to sue for negligence.

Co-Counsel: Litigation, Volume 2, Issue 2

The final theme in this edition is the liability of directors of companies. The amendments to British Columbia securities legislation that recently came into effect are the subject of an article explaining that, as is already the case in other provinces, investors can sue directors and officers, amongst others, for misrepresentation — regardless of reliance. Also on the topic of liability, our esteemed columnist Jim Farley asks the question, “Could Pinocchio ever be a director?”

We strive to write about topics that will be helpful to you and that will illustrate our awareness of our clients’ varied, and shared, needs. We appreciate your feedback and look forward to answering your questions. If you are currently not a subscriber to this publication, and would like to be added to the list, please contact us.

Yours truly,

Geoff R. Hall (Toronto, Editor-in-Chief) Shaun Emery Finn (Montréal), Kara L. Smyth (Calgary), Miranda Lam (Vancouver)

Marie Maron Knowledge Management Lawyer, Litigation Group

November 2008

http://www.mccarthy.ca/lawyer_detail.aspx?id=1641





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Table of Contents

Administrative Law ............................................................................... 1

Universities Entitled to Deference — and their Costs ..........................................................1

Bankruptcy and Insolvency...................................................................... 3

Creativity in the Courts: Use of the CCAA to Address Asset-Backed Commercial Paper Crisis ..........3

Class Action......................................................................................... 5

Going…Going…Gone? — Hocking v. Haziza and the Fate of National Class Actions ........................5

Constitutional Law ................................................................................ 7

Dog Days of Personal Privacy: R. v. A.M..........................................................................7

Employment Litigation ........................................................................... 9

Supreme Court of Canada sets Limit on Employer’s Duty to Accommodate................................9

Environmental Law ..............................................................................13

R. v. Inco: Metal Speciation is an Important Factor in Determining Whether Water Quality may be Impaired ................................................................................................... 13

IP Litigation........................................................................................15

ARAM Systems Ltd. v. NovAtel Inc.: “Location, Location, Location”: A Claim of Inventorship to a US Patent ......................................................................... 15

Securities ..........................................................................................17

Secondary Market Civil Liability comes to British Columbia................................................. 17


Torts ................................................................................................21

A Case of Mistaken Identity: Correia v. Canac Kitchens ..................................................... 21 “Now Let Him Enforce It”: The Supreme Court of Canada Confirms a Citizen's Ability to Enforce Judicial Decrees Against the State — Holland v. Saskatchewan .................................. 23

Farley's Reflections ..............................................................................26

Could Pinocchio Ever be a Director? ............................................................................ 26


Administrative Law Universities Entitled to Deference — and their Costs

On June 30, 2008, the Ontario Court of Appeal released its decision in Mulligan v. Laurentian University [2008], ONCA 523 (CanLII). This decision will be of interest to universities and other education institutions for at least two reasons:

1. Courts should defer to decisions made by universities to admit — or decline — admission to prospective students.

2. Students who choose to sue their educational institution cannot rely on their student status to avoid liability for costs if they are unsuccessful.

The applicants, Bryce Mulligan, Mat Hunter and Patrick Wu, were in their final year of the Bachelor of Science program at Laurentian University, and had applied to the university’s Master of Science in Biology program. Earlier that year, the university’s Biology Department had instituted a new policy — the Guaranteed Minimum Stipend — which guaranteed that all Master of Science in Biology students would receive a minimum level of funding throughout the course of their studies. Some of this funding would need to come from peer-reviewed external sources, such as scholarships or bursaries. Students who did not have this funding would need to obtain their thesis supervisor’s research grants. The applicants were unable to obtain such funding, so their applications for admission were not accepted.

The applicants commenced a judicial review application in 2007 alleging bias in the admissions process and challenging the legitimacy of the Guaranteed Minimum Stipend policy itself. Their application was dismissed by the Divisional Court following oral argument. The appeal, which was heard on June 23, 2008, was subsequently dismissed. The court upheld the finding that the decision to admit or decline admission is a discretionary decision that goes to the “core of a university’s function” and reiterated the longstanding principle that “courts should be reluctant to interfere in the core academic functions of universities.”

Interestingly, the court also had the opportunity to apply the recently released Supreme Court decision in Dunsmuir v. New Brunswick [2008], SCC 9 (CanLII), which recast the standards of review in judicial review applications. In this case, the reasonableness standard — rather than correctness — clearly applied, as the applicants were challenging the exercise of the university’s discretion. The court found that the university’s decision to decline admission to the applicants was reasonable.

McCarthy Tétrault Notes:

The final part of the court’s decision should give potential student litigants pause before trying to bring internal university disputes before the courts. The court upheld the Divisional Court’s costs award and awarded Laurentian University its costs of the appeal. As the

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court noted, “The fact that the appellants are students does not insulate them from the cost consequences of their decision to litigate.”

McCarthy Tétrault lawyers Thomas Sutton and Jeffrey Feiner acted on behalf of Laurentian University at both the Divisional Court and Court of Appeal.

Contact: Thomas N.T. Sutton in Toronto at [email protected] or Jeffrey E. Feiner in Toronto at [email protected]




Bankruptcy and Insolvency Creativity in the Courts: Use of the CCAA to Address Asset-Backed Commercial Paper Crisis

The Ontario Court of Appeal has approved a creative use of the Companies’ Creditors Arrangement Act (CCAA) designed to unfreeze the $32-billion Canadian market for asset-backed commercial paper (ABCP).

As has been widely publicized, the Canadian ABCP market froze in August 2007 as a result of concerns in world credit markets arising from the US subprime mortgage crisis. After the market froze, a Pan-Canadian Investors Committee was formed to attempt to restructure it.

The Committee engaged in extensive negotiations over many months on behalf of the investors to obtain concessions and support of financial institutions for a restructuring plan. That support could only be secured in exchange for full releases from all investor claims for ABCP market participants, such as dealers who sold the ABCP to investors. However, unanimous agreement on such a restructuring, including the critical releases, by all holders of ABCP — who numbered in the thousands — was not feasible. As a result, in March 2008 the Committee instituted CCAA proceedings to provide a mechanism for the Committee to put a proposed restructuring to a vote of ABCP holders.

The CCAA requires approval of a restructuring both by affected creditors and by the supervising court. Creditors vote on a plan of arrangement. They must approve the plan by a majority in number representing two-thirds of the value of the affected debt. The court must then find the plan to be legal and must conclude that it is “fair and reasonable” to affected parties. If both creditors and the court approve, then all affected creditors are bound by the plan, even those who voted against it.

The plan of arrangement proposed by the Committee would exchange frozen ABCP for longer-term notes, and would also address a number of problems that had led to the market freezing. The releases required by participating financial institutions, although key to the deal, were a contentious element of the plan. Some note holders complained that participants in the ABCP market should not be released from claims against them arising from their role in creating ABCP and distributing it to investors.

The plan received overwhelming support from ABCP holders: approximately 96 per cent by number and by value voted in favour. However, court approval was opposed by a small group of ABCP holders. They argued that the CCAA does not authorize a CCAA plan to include releases of third parties who are not under CCAA protection. They also argued that the proposed release provision was not fair and reasonable.


Despite the objections, the Ontario Superior Court of Justice approved the plan on June 5, 2008. On August 18, 2008, the Ontario Court of Appeal affirmed the approval order in a unanimous decision authored by Justice Robert Blair, who has extensive experience in CCAA proceedings.

Justice Blair emphasized the flexible and remedial nature of the CCAA, and held that it should be interpreted with this nature in mind. He concluded that a CCAA plan may include third-party releases if the releases are reasonably connected to the proposed restructuring. In this case, he found this requirement had been met, because the parties who would be released by the plan were making significant contributions to the plan and were not willing to make those contributions unless provided with a release in return. Justice Blair also upheld the finding of the Superior Court that the release provisions of the plan are fair and reasonable in the context of this restructuring.

On September 19, 2008, the Supreme Court of Canada dismissed an application for leave to appeal.


The ABCP case is an excellent example of creative use of the CCAA to address what would otherwise be an intractable problem. It is also an excellent example of the willingness of the courts to interpret the CCAA broadly and flexibly to facilitate restructurings and avoid value-destroying meltdowns.

McCarthy Tétrault LLP had a number of retainers in the ABCP matter (with the different lawyer teams screened from each other). In the appeal to the Ontario Court of Appeal which is the subject of this article, Kevin McElcheran, Malcolm Mercer, Geoff R. Hall and Heather Meredith acted as litigation counsel for five Canadian banks who will provide the margin funding facility for the restructured notes (Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Bank of Nova and The Toronto-Dominion Bank).

Contact: Kevin P. McElcheran in Toronto at [email protected] or Mason Poplaw in Montréal at [email protected] or Philippe H. Bélanger in Montréal at [email protected] or Geoff R. Hall in Toronto at [email protected]






Class Action Going…Going…Gone? — Hocking v. Haziza and the Fate of National Class Actions

Are multi-jurisdictional class actions still possible? Perhaps not, if one considers the reasoning of the majority in Hocking v. Haziza [2008], QCCA 800 (CanLII), a Québec Court of Appeal decision that pours cold water on one of the hottest issues to consume the class action debate.

The Facts

Robert Hocking filed a motion for certification of a class action against HSBC Bank before the Ontario Superior Court of Justice. He was seeking to act on behalf of all Canadian customers of HSBC who had made an early pay-out of their mortgage and incurred penalties as a result. Almost concurrently, David Haziza, a Québec resident, filed a similar motion for certification before the Québec Superior Court, but limited the proposed class to Québec residents only.

Shortly thereafter, Hocking and HSBC entered into a settlement agreement. Despite the Québec petitioner’s objections, Justice Macdonald certified the proceedings and approved the settlement.

Superior Court of Québec Judgment

Justice Roy of the Québec Court dismissed HSBC’s motion for recognition of the Ontario orders. She concluded that the Ontario Court

had no jurisdiction over class members residing in Québec, because, among other things, there was no real and substantial connection between the individual claims of each of the class members and the jurisdiction where the class action had been filed.

Québec Court of Appeal

In her reasons for upholding the Québec Court’s decision, Justice Bich explained that a province has no business defining the legal rights and liabilities of residents of another province, and that the territorial limits on the scope of provincial legislative authority prevent the application of the law of a province to matters that are not sufficiently connected to it. Yet since this argument was never raised in the first instance, Bich J.A. did not base her decision on these constitutional considerations (and was not joined by Baudouin J.A.).

Instead, writing for the majority, she stated that Québec courts must first determine whether the requirements of Article 3168 C.C.Q. for personal actions of a patrimonial nature are fulfilled. Second, it is necessary to establish a “substantial connection between the dispute and the foreign authority that is seized of the case” (Article 3164 C.C.Q.). Third, the court can assess the appropriateness of the foreign court’s decision to exercise jurisdiction by examining how well that decision harmonizes with the general provisions of Québec’s rules on international law, including the doctrine of inappropriate forum

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(Article 3135 C.C.Q.). Bich J.A. added that the fundamental principles of order and fairness must also be considered when determining the jurisdiction of a foreign court. She concluded that the Ontario judgment failed to meet the above requirements, and was rendered in violation of the essential rules that govern civil proceedings since the court had not considered the interests of non-residents. Moreover, she stated that the minimal requirements of adequate notice had not been respected.

Justice Chamberland, writing for the minority, declared that a restrictive interpretation of Article. 3164 C.C.Q. is contrary to the principles of comity and suggests a lack of confidence in other provincial judicial authorities. He also pointed out that adhering to the majority’s view would render national class actions virtually impossible. More recently, in Brito v. Pfizer Canada [2008], QCCS 2231 (CanLII), Justice Grenier of the Québec Superior Court clearly repudiated Bich J.A.’s constitutional position.


The fate of multi-jurisdictional class actions thus remains uncertain. Although the Court of Appeal recognized that they were theoretically possible in Lépine v. Canada Post and Cybersurf, it refused to recognize or enforce the Ontario judgment at issue in that case because the notice provided to Québec class members was deemed inequitable. Bich J.A.’s reasoning goes even further by suggesting that the class action legislation of one province cannot bind members residing in another

province unless a strenuous connection exists between each of those members and the judicial forum chosen by the class representative. Although this approach has been called into question by Chamberland J.A. and Grenier J., it has struck a serious blow to the feasibility of national class actions that purport to include Québec class members.

Please note that a version of this article will also be published in the Class Action Defence Quarterly.

Contact: David I.W. Hamer in Toronto at [email protected] or Donald Bisson in Montréal at [email protected] or Warren B. Milman in Vancouver at [email protected] or Sean S. Smyth in Calgary at [email protected] or Shaun Emery Finn in Montréal at [email protected]

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Constitutional Law Dog Days of Personal Privacy: R. v. A.M.

Is the Charter violated when police officers use “drug dogs” to sniff students’ backpacks in schools? On 22 May 2007, McCarthy Tétrault lawyers argued before the Supreme Court of Canada in R. v. A.M. [2008], SCC 19 (CanLII), and in companion case R. v. Kang-Brown [2008], SCC 18 (CanLII), that such police activity violates students’ Section 8 Charter rights, which guarantees the right to be free from unreasonable search and seizure.

In 2004, the Canadian Civil Liberties Association (CCLA) retained McCarthy Tétrault to represent the CCLA at the Ontario Court of Appeal hearing in R. v. A.M. In that case, the Ontario Provincial Police had entered a high school, detained all students in the school for almost two hours, and brought in drug dogs to search the school, as well as the students’ belongings.

The CCLA argued that while students might have some diminished expectations of privacy in a school setting, this police action not only violated their rights against unreasonable search and seizure, but also their rights not to be arbitrarily detained. The Court of Appeal agreed.

The Crown appealed the decision to the Supreme Court of Canada (SCC).

The SCC upheld the Court of Appeal decision, holding that it was necessary to “strike an appropriate balance between the state’s need to search … against the invasion of privacy that the search entails.” The SCC held that the use of drug-sniffing police dogs may be permissible in some circumstances, but that it was an impermissible violation of students’ rights to use the dogs without any reasonable and individualized suspicion.


This ruling has important privacy implications. The SCC agreed with the CCLA that students have constitutionally protected rights. The SCC likened students’ backpacks to briefcases and purses, noting that:

No doubt ordinary businessmen and businesswomen riding on public transit or going up and down on elevators in office towers would be outraged at any suggestion that the contents of their briefcases could randomly be inspected by the police without reasonable suspicion of illegality.

Both the Ontario Court of Appeal and the SCC quoted the CCLA submissions that a “student’s backpack is in effect a portable bedroom and study rolled into one.”


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McCarthy Tétrault lawyers Jonathan Lisus, Christopher Wayland, Alexi Wood and Sarah Corman represented the Canadian Civil Liberties Association at the Supreme Court of Canada.

Contact: Jonathan C. Lisus in Toronto at [email protected] or Christopher A. Wayland in Toronto at [email protected] or Alexi N. Wood in Toronto at [email protected] or Sarah Corman in Toronto at [email protected]






Employment Litigation Supreme Court of Canada sets Limit on Employer’s Duty to Accommodate

There is a limit to an employer’s duty to accommodate its disabled employees, the Supreme Court effectively confirmed on July 17th in Hydro Québec v. Syndicat des employé-e-s de techniques professionnelles et de bureau d’Hydro-Québec, section locale 2000 (SCFP-FTQ) [2008], SCC 43 (CanLII).

In this case, the Supreme Court overturned a decision of the Québec Court of Appeal, clarifying the following points for employers:

1) The employer is not required to prove that the employee will be totally unable to perform his or her work in the foreseeable future or that it is impossible to accommodate the employee’s characteristics to establish that its duty to accommodate has been met.

2) An employer faced with a case of excessive absenteeism can take the entire situation into consideration, including the disabled employee’s record and all of the efforts already made in assessing its duty to accommodate.

Factual Context

The plaintiff, a unionized Hydro Québec employee, suffered from a number of physical and mental conditions that caused her to miss work on a regular basis. In fact, the record

showed that she had missed 960 days of work over the last seven and a half years.

The employer had made several unsuccessful attempts to adjust the employee’s working conditions so that she would be able to perform her work.

At the time of her dismissal on July 19, 2001, she had been off work for over five months, and her treating physician had recommended that she remain off work for an indefinite period. In addition, the company’s psychiatrist was of the opinion that the employee would not be able to return to work on a regular and continuous basis without continuing to have a significant attendance problem.

The arbitrator dismissed her grievance on the grounds that he did not believe she would be capable of performing regular and consistent work in the foreseeable future and that the solutions proposed by the union constituted undue hardship.

The Superior Court dismissed the union’s application for judicial review. However, the Court of Appeal allowed the appeal and reversed the arbitrator’s decision.

The Decision of the Court of Appeal

The Court of Appeal concluded that Hydro-Québec had failed to prove that it had made every effort to accommodate the employee. The Court noted that this case had to be distinguished from other cases where it is



obvious that the employee will be totally unable to perform any kind of work in the reasonably foreseeable future.

According to the Court of Appeal, even though the expert evidence showed a very poor prognosis, it also indicated that a return to work might be possible with drastic changes to the employee’s working conditions, and the employer had the duty to explore these options.

The Court of Appeal also concluded that Hydro-Québec had not been able to prove that, given the result of its psychiatric assessment of the employee, it was impossible to accommodate the employee’s characteristics. The Court of Appeal also emphasized the size of the company, which, in the Court’s opinion, made it easier for the company to create a position and schedule tailored to the disabled employee.

Finally, the Court of Appeal set out the following principle, which has since been invoked time and time again by unions and employees seeking to extend the employer’s duty to accommodate:

“The burden on the employer in defence of a [bona fide occupational requirement] is heavy […] The duty to accommodate requires the employer to be proactive and innovative, that is to say, it must make concrete efforts to accommodate or it must demonstrate that its attempts have been in vain and that any other solution, which must be identified, would impose an undue hardship.”

The Supreme Court Decision

The Supreme Court disagreed with the reasoning applied by the Court of Appeal on two grounds; the first relating to the standard for proving undue hardship, and the second dealing with the appropriate time for assessing whether the duty to accommodate has been met.

The Standard for Proving Undue Hardship

The Supreme Court held that the employer is not required to prove that it is impossible to integrate an employee who does not meet its attendance standards, but only that doing so would result in undue hardship. What constitutes undue hardship can take as many forms as there are circumstances.

Therefore, the Supreme Court denounced the approach taken by the Court of Appeal, which would effectively have required the employer to prove the employee’s total unfitness for work to discharge its burden, stating:

“[t]he purpose of the duty to accommodate is to ensure that persons who are otherwise fit to work are not unfairly excluded where working conditions can be adjusted without undue hardship.”

According to the Supreme Court, the test applied by the Court of Appeal was therefore misstated because the duty to accommodate could not have the effect of completely altering the essence of the employment contract.


As such, the test is not whether it is impossible for the employer to accommodate the employee’s characteristics. Moreover, the employer is not required to change working conditions in a fundamental way, but rather to adjust the employee’s existing working conditions or duties, provided that this can be done without causing the employer undue hardship.

In all cases, if, despite the measures taken by the employer, the employee remains unable to perform his or her fundamental duties in the reasonably foreseeable future, the employer will have established undue hardship and will be justified in terminating employment.

In other words:

“[19] […]The employer’s duty to accommodate ends where the employee is no longer able to fulfill the basic obligations associated with the employment relationship in the foreseeable future.”

Time of Accommodation

According to the Supreme Court, the Court of Appeal also erred when it held that the duty to accommodate had to be assessed at the point where the decision to terminate is made.

Following its decision in McGill University Health Centre (Montreal General Hospital) v. Syndicat des employés de l’Hôpital général de Montréal [2007], SCC 4 (CanLII), the Supreme Court opted for a global evaluation of the duty to accommodate that takes into consideration the entire duration of the employee’s absence.

Furthermore, it rejected the “compartmentalized approach” taken by the Court of Appeal, especially given that, in this case, the employer had implemented a number of measures to accommodate the employee, which ultimately proved unsuccessful. All of these measures had to be taken into consideration.

The Supreme Court therefore allowed Hydro Québec’s appeal, therefore restoring the arbitrator’s initial decision.

Important Effects of the Decision for Employers

Clarifying the Employer’s Burden to Prove Undue Hardship

With respect to the employer’s burden to prove undue hardship, the following principles can be drawn from the Supreme Court’s decision:

1. The employer is not required to prove that it is impossible to accommodate the employee’s characteristics, or that the employee will be totally unable to perform his or her work in the foreseeable future;

2. A measure that would require the employer to modify working conditions in a fundamental way constitutes undue hardship;

3. A measure that would completely alter the essence of the employment contract (i.e., the employee’s obligation to perform work) constitutes undue hardship;



4. When, despite the measures taken by the employer, the employee remains unable to resume his or her work in the reasonably foreseeable future, the employer will be justified in terminating employment.

Taking into Consideration the Entire Situation

In practice, this means that all prior unsuccessful attempts to accommodate the employee may serve to demonstrate that the employee will not be able to return to work in the reasonably foreseeable future, even if the employer did not know the nature of the employee’s illness at the time.

Moreover, this principle allows the employer to assess the employee’s attendance file globally, and it is not required to start its accommodation efforts over with each specific condition diagnosed over time.

This article was previously published as an e-Alert on our website.

Contact: Rachel Ravary in Montréal at [email protected] or Martine Bélanger in Montréal at [email protected]

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Environmental Law R. v. Inco: Metal Speciation is an Important Factor in Determining Whether Water Quality may be Impaired

On July 23, 2008, the Ontario Court of Justice released its reasons in R. v. Inco Limited (Court file no. Sudbury, 96-615) [2008], ONCJ 332 (CanLII), a case which involved charges under Section 30 of the Ontario Water Resources Act (OWRA) related to an untreated mine effluent (to a creek) and the failure to immediately report the discharge. The court dismissed both charges against Inco. In the course of doing so, the court provided guidance on the test to be applied in determining whether an effluent containing metals is capable of impairing the quality of waters to which it is discharged. The court accepted Inco’s argument that it is necessary to look at the amount of bioavailable nickel in the discharge, rather than the total quantity of nickel, to determine whether the discharge is capable of impairing water quality. The decision provides important guidance concerning the water quality standards that metals must meet in order to not violate Section 30 of the OWRA.

Section 30 of the OWRA prohibits the discharge of any material into any waters or in any place that may impair the quality of the waters:

30. (1) Every person that discharges or causes or permits the discharge of any material of any kind into or in any waters or on any shore or bank thereof or into or

in any place that may impair the quality of the water of any waters is guilty of an offence.

The accepted test for determining whether water quality has been or may be impaired for the purpose of Section 30(1) of the OWRA was described by the Ontario Court of Appeal in an earlier proceeding in this same case. The Court of Appeal accepted a zero tolerance principle for inherently toxic substances, but found that for materials that are not inherently toxic, the other circumstances of the discharge must be considered. For example, the discharge of an inherently toxic material, such as polychlorinated biphenyls (PCBs), constitutes an offence under Section 30(1) regardless of the amount and circumstances of the discharge. However, the discharge of a material that is not inherently toxic, such as sand or silt, requires that the quantity and circumstances of the discharge be considered in order to determine if water quality has been impaired.

In this case, the court agreed that nickel is not an inherently toxic substance and that it is therefore necessary to look at the circumstances of the discharge in question to determine if the discharge may have impaired the quality of water. While sampling revealed elevated levels of total nickel in the effluent, Inco took the position that only a small portion of the total nickel would have been present in a harmful form (i.e., as bioavailable nickel). The Crown argued that total nickel was the

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critical factor and that, in this case, the total nickel concentration in the effluent was much higher than the Provincial Water Quality Objectives for nickel, indicating that water quality may have been impaired.

Following the presentation of large amounts of scientific evidence by both parties, the court accepted Inco’s position that the key factor was the concentration of bioavailable nickel — and that the evidence showed that, in this case, the amount of bioavailable nickel was not sufficient to cause impairment. The prosecution’s evidence was based on total nickel concentration, as opposed to the nickel that was bioavailable, and was therefore not indicative of whether water quality was impaired.

The court also accepted Inco’s position that the Provincial Water Quality Objectives for nickel, which the prosecution was using to demonstrate impairment of water quality, were developed on the basis of exposure to bioavailable nickel, not total nickel. As such, the court concluded that “There is good reason to question the usefulness, the significance and the fairness of testing total metal concentration in samples when the Provincial Water Quality Objectives or any other objectives that set concentration limits are based on bioavailable metal.”

In this case, comparing total nickel concentrations to the Provincial Water Quality Objectives, which are based on bioavailable nickel, was not informative of water quality impairment.


The court’s decision reflects a growing international practice that rejects the “total metal” analysis and instead looks at the amount of metal that is dissolved and bioavailable, and therefore capable of affecting organisms. Companies are often faced with the difficult task of determining whether a particular discharge has or may contravene Section 30 of the OWRA. In the case of discharges containing metals, this decision provides important guidance by concluding that “distinguishing between metal speciation is essential to a proper assessment of impairment of water quality.”

Doug Hamilton was counsel for the accused, Inco Limited, in the above-described case.

Contact: Douglas R. Thomson in Toronto at [email protected] or Douglas Hamilton in Toronto at [email protected] or Joanna Rosengarten in Toronto at [email protected]





IP Litigation ARAM Systems Ltd. v. NovAtel Inc.: “Location, Location, Location”: A Claim of Inventorship to a US Patent

When a lawyer receives an allegation claiming inventorship of the subject matter of his or her client’s Canadian patent, that lawyer assumes a claim will be filed in the Federal Court. When a lawyer receives an allegation claiming inventorship of the subject matter of his or her client’s US patent, that lawyer assumes a claim will be made in the US Patent Office, and thus retains US patent counsel. Neither of these assumptions held true in the case of ARAM Systems Ltd. (ARAM) v. NovAtel Inc. (NovAtel) [2008], ABQB 441, a decision of Alberta’s superior court, the Court of Queen’s Bench. Accordingly, they may not be true in future patent litigation.

In ARAM v. NovAtel, ARAM claimed that its employee was the inventor or co-inventor of the subject matter contained in NovAtel’s US patent and pending Canadian and European patent applications. ARAM further claimed that NovAtel was in breach of a non-disclosure agreement and duties of confidence. The Alberta Court seized jurisdiction over the parties, and, after hearing four months of testimony from lay-witnesses, technology experts and foreign law experts, denied all of ARAM’s claims. The case is intriguing from a number of perspectives.

For those involved in the oil and gas industry, the subject invention is revolutionary. The inventor is NovAtel’s Chief Technology Officer

and “GPS guru,” Patrick Fenton, one of the most recognized people in the global position system (GPS) area. The plaintiff was essentially alleging Mr. Fenton had “acquired” the invention from an ARAM employee. These allegations were dismissed in their entirety.

The patent and pending applications disclose a unique method for the acquisition of seismic data in harsh environments using precise GPS in the exploration for hydrocarbons. The process provides for precise positioning (within centimetres) of seismic geophones using GPS receivers in canopied or harsh environments (which may block a clear view of the sky, a requirement for GPS accuracy). This specialized application of GPS provides positioning accuracy as required in the industry and is different from more ordinary uses of this technology (such as the GPS receivers used in cars, which are accurate within metres rather than centimetres). The invention will likely revolutionize the industry as it will virtually eliminate the need for seismic survey, the most expensive aspect of exploration.

What was also unique in this instance is that the court proceeded on the basis that the proper law with respect to ARAM’s derivation claim (the allegation the invention had been derived from ARAM) was US patent law. This required extensive evidence on the US law of derivation from a number of experts, which in NovAtel’s case included a former Chief Judge of the US Patent Court.


As with all inventorship disputes and derivation claims, the case turned on the credibility of the witnesses. In this instance, Justice A.D. MacLeod made several findings of non-credibility against ARAM’s alleged inventor-employee and some of the corroborating witnesses. These findings were a clear vindication for NovAtel and Patrick Fenton.

From a jurisprudence perspective, the decision is novel in that it was the first time a Canadian superior court has decided issues of inventorship and derivation of the subject matter contained in a US patent and foreign patent applications, based primarily on US law.

“Just how did this action end up in the Alberta Queen’s Bench?”, most observers ask. The short answer is that both parties were resident in Alberta; the alleged misfeasance occurred in Alberta; and, most importantly, the parties had entered into a non-disclosure agreement that contained a standard choice of jurisdiction clause, the choice being Alberta. These standard choices of Canadian jurisdiction clauses are not uncommon in the industry, or unreasonable.

Derivation proceedings in the United States (whether in the court system or in the US Patent Office) can be an expensive and time-consuming process. The standard of proof can also be very high and the evidentiary requirements quite onerous. For Canadian parties, the provincial superior courts might be seen as a possible option. However, it should be noted that in this instance US law on derivation, including the standard of proof, was strictly applied to ARAM.


We would expect that most parties filing under the US patent system (a common first step for Canadian inventors) would want to have derivation claims decided by the proper tribunal with the appropriate expertise. As the US patent system is a first-to-invent jurisdiction (as opposed to most countries, which have a first-to-file process), derivation claims are not uncommon and the US court system (or the US Patent Office) have a wealth of jurisprudence on this issue.

It is not our intention to discuss the merits of each jurisdiction in this article. We do, however, encourage those who typically file patent applications in multiple jurisdictions to consider its preferred litigation venue for foreign patent disputes and tailor their non-disclosure agreements accordingly.

McCarthy Tétrault lawyers Timothy St. J. Ellam and Kara L. Smyth acted for NovAtel Inc. in the above proceedings.

Contact: Timothy St. J. Ellam in Calgary at [email protected] or Kara L. Smyth in Calgary at [email protected]




Securities Secondary Market Civil Liability comes to British Columbia

On July 4, 2008, amendments to the British Columbia Securities Act, R.S.B.C. [1996], c. 418 came into force, introducing secondary market civil liability to that province. The amendments also give investors the statutory right to commence legal action against reporting issuers, directors and officers — amongst others — for misrepresentations in documents and public oral statements, regardless of whether reliance had been placed on such misrepresentations. These long-awaited changes represent a significant departure from the legislative reforms proposed in 2004, but they harmonize British Columbia with other provinces’ secondary market civil liability regimes.

The New Regime

The new Part 16.1 of the Act provides that an investor can sue a responsible issuer (defined as a reporting issuer or any other issuer with a real and substantial connection to British Columbia, any securities of which are publicly traded) for misrepresentation or for failure to make timely disclosure if the investor had bought or sold the issuer’s security during the time between the misrepresentation or failure and the time when it was corrected. A plaintiff need not establish that he or she relied upon — or was even aware of — the misrepresentation or failure.

Those who can be held liable include:

• the issuer itself;

• directors;

• any officers who authorized, permitted or acquiesced in the release or statement;

• each influential person (defined as a control person, promoter, insider or investment fund manager if the issuer is an investment fund); and

• experts (where the misrepresentation is contained in an expert report).

Where the misrepresentation is not contained in core documents (e.g., prospectuses, circulars, financial statements and other required filings), a plaintiff must prove that the person who released the document or oral statement knew of, or avoided acquiring knowledge of, the misrepresentation — or that he or she was guilty of gross misconduct in making the release or statement.

The Process

In order to invoke these new statutory causes of action, investors must seek leave from the court, with notice to all defendants. Leave will be granted when the court is satisfied that the action is being brought in good faith and has a reasonable possibility of success. Likewise, an action cannot be discontinued, abandoned or settled without the approval of the court.



Under this new regime, all actions must be commenced no later than the earlier of three years after the date of the misrepresentation’s first release (whether oral or document), and six months after the issuance of a news release disclosing that leave has been granted.

A surge of lawsuits commenced by investors whose fortunes have been detrimentally affected by an increasingly volatile market is not expected as a result of the new amendments. While the new legislative regime is designed to enable individual investors to pursue the remedies to which they believe they are entitled, so far the only legal action that has been pursued has been in the form of proposed class actions commenced in those jurisdictions where secondary market civil liability legislative reforms have come into effect.

The first case brought under the Ontario provisions was Silver v. IMAX Corp. The proposed plaintiff’s application for leave and certification as a class action was scheduled to be heard in May 2008, but has been adjourned to December 15, 2008. However, in May 2008, the court issued a ruling granting the prospective plaintiff the right to extensive oral and document discovery of the defendants at the stage of considering leave. A discussion on this recent ruling in IMAX and its implications for reporting issuers and its directors and officers can be found in the current edition of McCarthy Tétrault’s Business Law Quarterly.

The Defences

A defendant will escape liability if it can prove that the plaintiff knew the document or statement contained a misrepresentation when the plaintiff acquired or disposed of the security, or if the defendant can prove that it undertook a reasonable investigation and had no reasonable grounds at the time to believe the document or statement contained a misrepresentation. Lack of knowledge is not a defence for either the issuer or officers of the issuer, who will still face liability if the investor can prove that they deliberately avoided knowledge of the issue.

A person is not liable for a misrepresentation in forward-looking information, so long as the document or statement includes cautionary language identifying the forward-looking information as such. The document or statement should also disclose material factors that could cause results to differ, as well as material assumptions that were considered. Further, the person issuing the release must have a reasonable basis for making the forecasts and projections.

In addition, a person is not liable for failure to make timely disclosure if the material change was disclosed on a confidential basis with the British Columbia Securities Commission on a reasonable basis.

The Damages

The legislation imposes limits on liability. In the case of an issuer or an influential person who is not an individual, liability is



limited to the greater of 5 per cent of its market capitalization and $1 million. For directors, officers, influential persons who are individuals, or persons who make public oral statements, it is the greater of $25,000 and 50 per cent of the aggregate of the compensation received by the individual from the issuer and its affiliates. For experts, liability is limited to the greater of $1 million and the revenue the expert and the affiliates of the expert have earned from the issuer and its affiliates during the 12 months preceding the misrepresentation.

Significantly, these limits do not apply if the defendant knowingly participated in the misrepresentation or failure to disclose.

The Response: Minimizing Liability

In order to minimize exposure to secondary civil market liability, issuers should consider taking the following steps:

1. Ensure that disclosure policies and procedures are in place and that everyone involved in the creation and release of information to the public is aware of — and follows — the policies and procedures. The procedures should capture all material information and ensure its accuracy. The effectiveness of the policies and procedures should be evaluated from time to time based on the experience of those involved.

2. Implement an internal certification process where managers certify (to the CEO or CFO), with respect to their areas

and expertise, that disclosure controls and procedures are in place and that the effectiveness of such controls has been evaluated.

3. Establish definitive personal responsibility for verifying the accuracy and completeness of the various portions of disclosure documents based on subject matter expertise.

4. Assign specific responsibility for reviewing boilerplate language, risk factor disclosure and forward-looking statement disclosure in disclosure documents to a senior officer who has a firm understanding of the true risks of the business taken as a whole. Risk factors and forward-looking statement warnings should be reviewed and updated quarterly, where appropriate.

5. Have a business person with first-hand knowledge of the subject matter draft all material change reports and review any press releases prepared by investor relations persons or internal or external counsel.

6. Appoint one person responsible for keeping informed about developments in case law and securities commission enforcement proceedings affecting disclosure practices, as well as relevant notices, reports and policies/rules issued by the securities regulators. Reviewing the disclosure of competitors will likely be of interest as well, as it will assist in arriving at materiality judgments.


7. Appoint one person responsible for documenting the review process for each filing. One option would be to create a chronology specifying the names of individuals and dates they reviewed draft documents, as well as a record of meetings of the committees involved in the preparation of the document. (Note, however, that this takes company resources and could become an unwieldy process if it is too detailed or covers too many documents.) The other option would be for the person to be actively responsible for maintaining the disclosure policy and ensuring that it is always followed, so that the person could verify that it would have been followed in the case of any particular document — even though he or she potentially had no recollection or notes of the precise actions taken.

8. Have documents reviewed by someone not involved in the preparation. The person would not be responsible for vetting, but rather would identify areas of confusion or ambiguity and ask questions to ensure that those responsible for preparing the document have not overlooked something obvious because of their familiarity with the material.

9. Ensure that with respect to the disclosure of any forward-looking information, there is a reasonable basis for making a forecast or projection, and that it is accompanied by: (i) reasonable cautionary language, (ii) a statement identifying the forward-looking information as such, (iii) details of

any material factors that could cause actual results to differ materially from the forecast or projection, and (iv) a discussion of material factors or assumptions that were considered in drawing a conclusion or making the forecast or projection.

10. Place strict controls on who may make public statements or otherwise act as a spokesperson for the issuer so as to ensure a consistent message. Whenever possible, script public oral statements and review them after delivery to identify and correct any misrepresentations or selective disclosure. Keep records of presentations and oral statements.

11. Review your D&O insurance coverage.

This list, adapted from an earlier article introducing secondary market civil liability in other jurisdictions, is by no means exhaustive. Issuers should consult their legal advisors about implementing policies and procedures that are tailored for their business and take into account the particular circumstances and resources of the issuer.

Contact: Robert W. Cooper in Vancouver at [email protected] or Miranda Lam in Vancouver at [email protected]





Torts A Case of Mistaken Identity: Correia v. Canac Kitchens

The Court of Appeal for Ontario’s recent decision in Correia v. Canac Kitchens [2008], ONCA 506 (CanLII), is a must-read for counsel advising in respect of the investigation and termination of employees involved in criminal activity. The case is a cautionary tale, highlighting the serious legal pitfalls that can arise when criminality is suspected and investigated.

Background

When Canac Kitchens and its parent company suspected theft and drug dealing at one of Canac’s plants, they hired private investigators, including an undercover agent. The police were kept apprised, but were not directly involved. The investigation disclosed that several employees were engaged in criminal activity.

Among the identified wrongdoers was a long-time employee, 62. He was brought into his employer’s human resources office, accused of theft, fired for cause, turned over to the police, and arrested. There was just one problem: he was innocent. He had been confused with another employee.

The plaintiff sued the employer, parent company, security firm, police, and certain individuals for, among other things, negligent investigation, intentional infliction of mental

distress, inducing breach of contract, intentional interference with economic relations, and wrongful dismissal.

The court allowed the “negligent investigation” claim to proceed against the security firm, but not against the employer.

To determine whether an employer and/or a private investigation firm could owe duties of care to an employee, the court began with the Supreme Court’s decision in Hill v. Hamilton-Wentworth Regional Police Services Board [2007], 3 S.C.R. 129 (CanLII), where it was held that the police can owe a duty of care to a suspect. Is the same true of a private security firm or the employer that hired it?

Applying the two-part test in Anns v. Merton London Borough Council [1978], A.C. 728 (H.L.), the court held it was foreseeable that a negligently conducted investigation could harm the employee.

In a previous decision, BMG Canada Inc. v. Antek Madison Plastics Recycling Corp. [2006], O.J. No. 4577 (S.C.J.); November 14, 2006 (Ont. C.A.), the court had held that an employer could not foresee that police would lay charges based only on the employer’s findings. In this case, the employer and security firm had conducted the entire investigation, then “handed a completed case to the police,” so it was potentially foreseeable that the police would lay charges without further verification.

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As well, the court considered that, just as in Hill, the employee had “high interests” at stake, including “his freedom and his reputation,” which supported finding a relationship of proximity and a duty of care.

The court also considered the argument that recognizing a duty of care may discourage employers from reporting criminal activity, but essentially held that this concern does not apply to sophisticated private security firms that otherwise would operate unsupervised. Moreover, unlike in the insurance context, contract law does not provide adequate remedies. The court ruled that the security firm may owe a duty of care to the plaintiff, rejecting the argument that this duty would distort the relationship between employer, employee, and investigator: there is “no incoherence in requiring a private investigator to be careful in its investigation; surely the client would expect nothing less .…”

However, the court found that imposing a duty of care on the employer, which was not in the investigation business, would be inconsistent with existing law that an employer need not have good faith reasons for dismissal.

Although the employer could not be sued for negligent investigation, it was not out of the woods. The court noted that, if the employer “was negligent in its investigation, in the context where it knew the serious consequences of a wrongful charge of criminal conduct against an employee, its conduct may well be found to be outrageous and to meet the requirement for intentional infliction of mental distress.” This claim was allowed to proceed.

The court dismissed the claims for intentional interference with economic relations and inducing breach of contract.

Proceed with Caution

This decision underscores the need for care when investigating employee criminality. When a security firm is engaged, it is now foreseeable that the police may arrest employees based only on the firm’s findings. It is therefore imperative that the firm and employer ensure that the investigation is fair, and, to use the Court of Appeal’s word, “careful.” It may also be wise to involve, from the start, outside counsel with some criminal law expertise.

In situations where the company investigates “in-house” without a security firm, it should make clear to the police in writing that it is not a professional investigator, the investigation was not conducted for the purpose of a criminal prosecution, and it expects the police to conduct their own investigation prior to taking any action.

This article first appeared in the fall 2008 issue of CCCA Magazine, the official publication of the Canadian Corporate Counsel Association.

Contact: Christopher A. Wayland in Toronto at [email protected]



“Now Let Him Enforce It”: The Supreme Court of Canada Confirms a Citizen's Ability to Enforce Judicial Decrees Against the State — Holland v. Saskatchewan

Immediately following the landmark decision of Worcester v. Georgia, 31 U.S. (6 Pet.) 515 [1832], by the United States Supreme Court, then president Andrew Jackson reportedly said, “[Chief Justice] John Marshall has made his decision, now let him enforce it.”1 Such audacity appears to have been based on the general understanding that courts have no effective means of independently enforcing their decisions, but for the expectation of respect for the rule of law and adherence to the Constitution.

In the Supreme Court of Canada (SCC) decision of Holland v. Saskatchewan [2008], SCC 42 (CanLII), the SCC appears to have resolved the challenge faced by Chief Justice Marshall and, indirectly, provided an additional mechanism to Canadian citizens to encourage our government to respect the Constitution and adhere to the decisions of our courts: sue for negligence. More specifically, bring an action claiming that the government agency or body refusing to yield to the mandate of the higher court has negligently failed to implement an adjudicative decree.

1 While the words then-President Jackson actually uttered were, “The decision of the Supreme Court has fell stillborn, and they find that they cannot coerce Georgia to yield to its mandate,” the effect — and the ultimate legal conundrum — are the same: should a government body fail or refuse to abide by the decision or directions of a higher court, what recourse is there to the parties affected?

In Holland, the plaintiff was an elk rancher who represented a group of approximately 200 game farmers who had refused to register in a federal program2 aimed at preventing chronic wasting disease (CWD) in domestic cervids.3 The plaintiff and the class he represented objected to a broadly worded indemnification and release clause found in a new registration form for the program. This indemnification and release clause had not been included in the registration form for the same program operated by a provincial body.4 The plaintiff class had earlier achieved and maintained a “CWD-free” certification level through conformance with the provincial program. The refusal to complete the federal registration form, following the merging of the provincial and federal programs, caused the loss of such CWD-free certification as well as the downgrading of the certification status of the plaintiff class’s herds to the lowest status possible. The result was an obvious and marked reduction of both the market price of their product and their ability to sell such product.

In reply to the downgrading of their herd status, the plaintiff class successfully sought judicial review of the inclusion of the indemnification and release clauses in the registration form. Characterizing such clauses as “broad in the extreme,” Gerein C.J.Q.B. held that the Minister of the Environment had no legislative authority to make acceptance of

2 Under the Canadian Food Inspection Agency. 3 Hoofed mammals of the family Cervidae, which includes deer and elk. 4 Under the Animal Products Act, R.S.S. [1978], c. A-20.2.



these clauses a condition of participation in the CWD program. Unfortunately for the plaintiff class, Justice Gerein declined to order that the plaintiff class’s herd status be restored. He instead opted to leave it to the government to reinstate such status if the plaintiff class’s herds met the program conditions for such renewed status. The government did not appeal, but neither did it take any steps to consider reinstating the farmers’ certification or to compensate them for the revenue lost through the wrongful cancellation of their certification level. In essence, the government challenged the plaintiff class to enforce Justice Gerein’s judgment. In the result, the plaintiff class commenced a class action, claiming damages on the grounds of (i) the tort of misfeasance in public office, (ii) the tort of intimidation, and (iii) the tort of negligence.

In defence of this new action, the government immediately applied to strike out the plaintiff class’s claims. At first instance, Laing C.J. struck the intimidation claim for lack of evidence of any threat, granted leave to amend the statement of claim with regard to the misfeasance claim and denied the motion on the negligence claim. On appeal, the Saskatchewan Court of Appeal allowed the government’s appeal from the ruling on negligence, holding that no action lies against a public authority for negligently acting outside their lawful mandates. The SCC considered the question of whether the Court of Appeal erred in striking out the appellant’s negligence claim in its entirety.


In general, the SCC agreed with the decision of the Saskatchewan Court of Appeal, in that the plaintiff class’s claims for negligently acting outside the law, or breach of statutory duty, cannot succeed. This decision was based on the well-established principle that a mere breach of a statutory duty does not constitute negligence,5 and that to recognize this new instance of negligence would involve a fundamental shift away from the general policy considerations that negate recognition of such liability.

However, the SCC specifically recognized and carved out the plaintiff class’s claim for what it defined as “negligent failure to implement an adjudicative decree.” This central assertion in this claim, according to the SCC, was the allegation that the Minister of the Environment was under a duty to implement the judicial decree of Gerein C.J.Q.B., thus remedying the wrongful reduction of the plaintiff class’s herd status. The SCC held that this claim “stands on a different footing” from the claim for negligent breach of statute in that it is an “operational” decision and not a “policy” decision:

“… once a decision to act has been made, the government may be liable in negligence for the manner in which it implements that decision.” 6

5 The Queen in Right of Canada v. Saskatchewan Wheat Pool, [1983] 1 S.C.R. 205. 6 In support, the Supreme Court cited the following: Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2; Just v.


As such, the SCC has confirmed that public authorities are expected to implement a judicial decision, and that implementation would be an “operational” act, for which failure may lead to liability in negligence.

Contact: Jean-Pierre Bertrand in Montréal at [email protected] or Herman Van Ommen in Vancouver at [email protected] or Darryl A. Cruz in Toronto at [email protected] or Ryan Pelletier in Calgary at [email protected]

British Columbia [1989], 2 S.C.R. 1228; Laurentide Motels Ltd. v. Beauport (City) [1989], 1 S.C.R. 705, Lewis (Guardian ad litem of) v. British Columbia [1997], 3 S.C.R. 1145.






Farley's Reflections Could Pinocchio Ever be a Director?

The answer is YES — but only provided that he is turned into a real live boy. After all, Geppetto never wanted a puppet; he wanted a son. As I recall the story, Pinocchio experienced some hair-raising dangerous adventures before he matured into a human being — one who could think for himself. Geppetto had the common sense to avoid pulling the strings, and he was rewarded for that wisdom with a child who loved everyone. The parable of the puppet is instructive for those blockheads who have a misguided sense of loyalty.

A recent case by Herman J., Wood v. C.F.N. Precision Inc. [2008], CanLII 19797 (ON S.C.), examined the question of the role of a nominee director. There is absolutely nothing legally wrong with having a corporate structure that allows a particular shareholder the right to nominate, and have elected, one or more directors. Indeed that type of provision may be thought necessary to keep that shareholder generally informed as to what is going on in the corporation (keeping in mind that the arrangement may impose insider-trading liability in certain circumstances and may also have certain “oppression remedy” implications). The communication facility may be a two-way arrangement, as similarly the nominee director may bring to the attention of the rest of the board certain factors that the shareholder feels important. However, what all participants in that scenario must appreciate is

that the directors all owe their fiduciary duty to the corporation and that their objective must be to make that corporation a “better” corporation: see Peoples Department Store Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461.

Callaghan C.J.O.C. in PWA Corp. v. Gemini Group Automatic Distribution Systems Inc. [1993], 8 B.L.R. (2d) 221 (Ont. Gen. Div.) noted at page 265 that:

A director nominated by a particular shareholder of the corporation is not in any sense relieved of his or her fiduciary duties to the corporation. A nominee director is not accorded an attenuated standard of loyalty to the corporation. The director must exercise his or her judgment in the interest of the corporation … and must not subordinate the interest of the corporation to those of the director’s patron.

He went on to cite my observations in 820099 Ontario Ltd. v. Harold E. Ballard Ltd. [1991], 3 B.L.R. (2d) 113 at page 171, that the safe way for directors to avoid the problem of conflict of loyalty and properly exercise their duty of care is to “act in the best interests of the corporation (and have the shareholders derive their benefit from a ‘better’ corporation).” This theme was picked up by the Supreme Court in the Peoples case. In Ballard, I observed the reality of the corporate life of the nominee director who votes against the interests of his appointing shareholder being

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neither happy nor long. However, if a nominee director tries to straddle two horses, he will end up falling off both. A director must ride the corporate horse; if he rides the nominator horse, he will become roadkill.

As discussed in Ballard, it is completely improper for an appointing shareholder to attempt to fetter the discretion of the nominee director by requiring that director to subordinate the interest of the corporation to those of the shareholder. In Boulding v. Assn. of Cinematograph Television and Allied Technicians [1963], 2 A.C. 606, Lord Denning stated at pages 626—7:

…or take a nominee director, that is, a director of a company who is nominated by a large shareholder to represent his interests. There is nothing wrong in it. It is done every day. Nothing wrong, that is, so long as the director is left free to exercise his best judgment in the interest of the company which he serves. But if he is put upon terms that he is bound to act in the affairs of the company in accordance with the directions of his patron, it is beyond doubt unlawful…

I think it a fair observation that any director who allowed his discretion to be so fettered or compromised would not be accorded the protection of the Business Judgment Rule, which I described in the first issue of this publication.

This question of independence is also extremely important when one is structuring the involvement of foreign capital in a

corporation engaged in a sector that is subject to Canadian control content rules. Frequently those transactions will take some reasonable advantage of restricting some of the powers of the directors to supervise the management of the corporation’s business and affairs by reserving those powers to the shareholders by virtue of a unanimous shareholders agreement. But where there is no such requirement for any control with the board, it is conceivable that powers of the directors will be effectively usurped with the result that the shareholders become de facto directors.

A de facto director has all the duties and obligations of a “regular” director. Over and above that, the English courts have established the concept of a “shadow” director — namely someone, possibly a shareholder, who is not elected a director, but who takes on the functional role of being a director. This liability may attach notwithstanding that that person took on a rather limited role (certainly the liability would extend to the aftermath of any decision actually taken or “supervised” by the person) and could conceivably extend beyond that, depending on the circumstances. In Bonotto v. R. [2008], TCC 221 (CanLII) Hershfield J. observed:

… it touches on other related factors that support a finding of the existence of a de facto directorship. One such factor derives from the observation that a controlling shareholder who appoints a puppet director can be found liable as a director.



One would also think that in such circumstances, thereby losing the limited liability protection of incorporation.

Lastly, Pinocchio would qualify as a director because he had learned through experience that honesty is the best policy. Not only does corporate legislation require this of directors, but when Pinocchio became a straight-talker, he had the added advantage that his nose returned to normal size. Mind you, now that I think of it, I suppose Pinocchio will have to wait until he’s 18, the minimum age for directors, before Geppetto elects him as a director of Geppetto Enterprises Inc.

Post Script: At the time of preparing this piece, the Supreme Court of Canada had ruled in favour of BCE against certain disgruntled bondholders but had not yet released reasons. It will be interesting to see what is said about the duties of directors generally.

Contact: The Honourable James M. Farley, Q.C. in Toronto at [email protected]

Please note that all decisions hyperlinked in McCarthy Tétrault Co-Counsel: Litigation are from CanLII (Canada Legal Information Institute: http://www.canlii.org/).


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