Co-Counsel

McCarthy Tétrault Co-Counsel:

Litigation Volume 1, Issue 1

March — June 2007

Co-Counsel: Litigation Volume 1, Issue 1

Welcome to the first issue of McCarthy Tétrault Co-Counsel: Litigation.

McCarthy Tétrault has a long and proud tradition of advocacy. Many of the best litigators in Canadian history — venerated names like J.J. Robinette, Eugène Lafleur, Doug Laidlaw, George Finlayson, Ian Binnie and many others — have worked for McCarthy Tétrault or its predecessor firms. We are proud to add to the tradition with this new publication.

This bilingual publication has been created to give our clients a picture of developments in litigation and, most importantly, the implications for their organization. Throughout we’ve highlighted cases that we believe will be of interest to our clients, and we share our insight into the issues and trends we’ve spotted. This edition includes articles in the areas of class actions, e-discovery, alternative dispute resolution, competition law, bankruptcy and restructuring and shareholder disputes.

If you are seeking guidance on the scope and application of the business judgment rule, you will want to read the article by the Honourable James M. Farley, Q.C., who will be contributing a regular column to McCarthy Tétrault Co-Counsel: Litigation outlining his thoughts on important legal issues. As many of you will know, Mr. Farley is a retired judge of the Ontario Superior Court of Justice, where he founded the Commercial List in Toronto and was for over 15 years one of the pre-eminent commercial judges in Canada. We are delighted to be able to share his insights with you.

In another article, we look at the court rulings on the eligible financial contracts, noting the criteria to qualify for the exemption under the CCAA. On the competition law front, we report on international enforcement efforts aimed at individuals and the potentially severe consequences of participating in anti-competitive activity. Another article examines recent electronic discovery rulings and describes the impact on a company’s disclosure obligations. We also review the Québec authorization rules for class actions.

In the area of shareholder disputes, we examine a recent ruling on shareholders suing a director for wrongs to a company. We also examine a case involving the financing of a shareholder’s exercise of a right of first refusal.

If you are considering trading with China, you will want to read the article on Canada’s bilateral investment treaty negotiations with China. It describes the procedural distinctions between Canada’s Model Foreign Investment Protection and Promotion Agreement and China’s existing bilateral investment treaties, including the investor-state dispute settlement mechanism.

Co-Counsel: Litigation Volume 1 Issue 1

Within Canada, there has been some uncertainty in the case law over the enforceability of mandatory arbitration clauses in consumer contracts. We examine the Ontario and Québec legislation, which prohibit or invalidate pre-dispute arbitration clauses that prevent consumers from seeking recourse before the courts.

If your business carries on resource-related activities on lands subject to Aboriginal claims, you will want to review the article on the Haida case and the Crown’s duty to consult Aboriginal communities.

All of the authors listed in the publication, as well as all of their colleagues at McCarthy Tétrault, are happy to answer your questions and discuss the issues raised in these articles.

If you are not a current subscriber to McCarthy Tétrault Co-Counsel: Litigation and would like to receive it in future, simply contact us to have your name added to our list.

Yours truly,

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

Heather J. Ritchie and John S. Gillies, Litigation Group Knowledge Management Lawyers

July 2007

Co-Counsel: Litigation Volume 1 Issue 1

Table of Contents

Class Actions ....................................................................................... 1 Rethinking the Reforms: Québec’s Class Action Authorization Rules .......................................1

e-Discovery ........................................................................................ 3 Discovery of Electronic Documents: Disclosure Obligations ..................................................3

Bankruptcy & Restructuring .................................................................... 5 Drafting Eligible Financial Contracts .............................................................................5

Competition Law .................................................................................. 7 International Competition Law Agencies Turn up the Heat on Officers and Employees .................7

Shareholder Disputes ............................................................................ 9 Financing the Exercise of Rights of First Refusal ...............................................................9 Shareholders Still Cannot Sue for Wrongs to the Company ................................................. 10

Alternative Dispute Resolution ...............................................................12 Arbitration Clauses, Consumer Contracts and Class Proceedings: The Canadian Approach ........... 12

Trade Law .........................................................................................14 Canada’s BIT Negotiations with China ......................................................................... 14

Aboriginal Law ...................................................................................16 The Haida Case and the Duty to Consult and Accommodate Aboriginal Peoples ........................ 16

Farley's Reflections .............................................................................18 Some Observations on the Business Judgment Rule ......................................................... 18

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Class Actions Rethinking the Reforms: Québec’s Class Action Authorization Rules

Québec: A Distinct Society and Legal Tradition

With its Civil Code and continental origins, Québec has always occupied a unique place in Canada’s legal landscape. Its institutions, traditions and culture, although enriched by Anglo-American influences, have traditionally set it apart from those of the common-law provinces. It is perhaps not surprising that this difference also extends to the procedural setting and, more specifically, to the area of group litigation. Interestingly, in 1979 Québec became the first Canadian province to adopt the class action.

Authorization

In Québec, a class action must be ‘authorized’ by the Superior Court. The petitioner must file a motion that states the facts of the case, specifies the legal basis of the proceedings and describes the group that he or she wishes to represent. The court does not evaluate the merits of the would-be class action, only concludes whether or not it is legally viable.

Recent Reforms

In 2003, the National Assembly implemented significant changes to the class action regime. Motions for authorization no longer have to be supported by an affidavit and may only be contested orally. Evidence can be filed, but only at the judge’s discretion.

These changes were ostensibly designed to diminish the administrative costs generated by lengthy pre-authorization proceedings. Among the problematic aspects of these reforms, they failed to recognize the importance of the authorization hearing, which will often determine whether or not the parties decide to settle the litigation out of court.

Early Case Law (2003–2005)

In the years immediately following these amendments, courts adopted a liberal approach. Not only was authorization easier to secure, but also judges were reluctant to allow defence counsel to conduct examinations, file affidavits or adduce limited documentary evidence. The authorization hearing is not a trial on the merits, judgment after judgment reiterated, and should not be subject to the same procedural rules.

This liberal jurisprudence reached its apogee in Pharmascience Inc. v. Option consommateur, in which the Court of Appeal stressed the screening function of the hearing on authorization: it is a filter that allows the motions judge to weed out cases that are frivolous or unfounded. Courts do not evaluate the merits of the proposed class action, they simply determine whether the facts alleged are logically related to the legal conclusions.

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Contemporary Case Law (2006 to present)

Québec judges are now, however, increasingly invoking their discretionary powers to allow the submission of relevant evidence and the examination of petitioners. Judges are also more prepared to dismiss these motions.

This tougher, more pragmatic stance was evidenced by the Court of Appeal in Bouchard v. Agropur Coopérative. The court held that industry-wide class actions — that is, proceedings that target systemic commercial practices — cannot be authorized unless the petitioner has a cause of action against each of the named defendants.

McCarthy Tétrault Notes:

Although Québec’s rules on authorization differ from those in the common-law provinces, recent case law suggests that these differences should not be overstated. While the procedural reforms in Québec place less of an onus on plaintiffs, the basic architecture of the class action regime remains similar to that of most other North American jurisdictions.

Furthermore, the judicial interpretation of core legislative provisions suggests that Québec courts require a comparable level of legal and intellectual rigour from petitioners.

While some observers have speculated Québec may become Canada’s ‘class action haven,’ that possibility has never materialized and seems particularly unlikely under the current circumstances.

A more detailed discussion of the Québec authorization rules will be available in the second edition of the McCarthy Tétrault publication, Defending Class Actions in Canada, to be released later this year.

Contact: Shaun Finn in Montréal at sfinn@mccarthy.ca or F. Paul Morrison in Toronto at pmorriso@mccarthy.ca or Dana M. Peebles in Toronto at dpeebles@mccarthy.ca or Thomas H. Ferguson, Q.C. in Calgary at tferguso@mccarthy.ca or Elaine J. Adair in Vancouver at eadair@mccarthy.ca

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e-Discovery Discovery of Electronic Documents: Disclosure Obligations

While facilitating the easy transmission and storage of information, electronic communications also raise significant challenges in a litigation context, specifically for the discovery of electronic documents.

Among those challenges is the sheer mass of materials that these communications potentially represent. When electronic documents, most notably e-mails, become the subject of discovery, litigants and their counsel may be faced with a morass of data and materials to be sorted for relevance and privilege.

The recent Ontario Superior Court decision in Air Canada v. Westjet Airlines Ltd. illustrates the scope of this challenge. In that case, Air Canada sought an order confirming that, by disclosing 75,000 electronic documents to Westjet, it did not waive privilege over any confidential materials inadvertently included in the disclosure, arguing that a complete review would be laborious, time-consuming and expensive.

The judge denied the order sought by Air Canada and observed that the Guidelines for the Discovery of Electronic Documents in Ontario (Ontario Guidelines) expressly contemplate a detailed review for relevance and privilege after completion of the electronic search and before disclosure to the opposing party.

The fact that such a review might be “costly and laborious,” as alleged by Air Canada, did not justify either dispensing with its necessity or shifting the onus of review away from the disclosing party.

Recent case law in the United States has shown that the methods of electronic searching and review may themselves be subject to disclosure, to enable opposing counsel or a court to verify the adequacy of the review.

In the U.S. decision of Peskoff v. Faber, the plaintiff sought further disclosure of e-mails not contained on the disks after disclosure by the defendant of certain electronic documents via computer disks. The defendant maintained that it had completed thorough electronic searches for relevant documents and made complete disclosure. The court ordered the defendant to provide a detailed affidavit accounting for its electronic search process.

The court order is consistent with an emerging practice in the United States requiring litigants to disclose keywords and other details of their electronic search-and-review methods during the discovery process.

McCarthy Tétrault Notes:

Planning data management and review methods carefully, and ensuring that specific searches are thoroughly documented when they are carried out, should now form part of every company’s

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best practices when dealing with electronic materials relevant to litigation.

You should also be aware that the metadata underlying electronic documents, and not just the content of documents themselves, may be the subject of disclosure. For example, under the Ontario Guidelines, it is no longer acceptable for a company to simply burn relevant e-mails onto a CD or print hard copies to deliver to counsel to review.

Rather, “As soon as litigation is contemplated or threatened, parties should immediately take reasonable and good faith steps to preserve electronic documents.” Your lawyer may be required to “create litigation copies of potentially relevant active data sources, for example by means of electronic back-up or forensic copying of the documents, so as to preserve potentially relevant metadata.” Indeed, clients may be at risk of court sanctions, including spoliation findings, for failing to adhere to the Ontario Guidelines.

Comparable guidelines and practice directions have either been introduced or are being designed for all Canadian jurisdictions.

Whenever a company needs to search and retrieve electronic documents (because of actual or impending litigation), it is important to ensure that it has the expertise and research tools, or access to service providers with the expertise, tools and knowledge of the company’s

data storage practice to appropriately preserve and identify the relevant documents and metadata.

Contact: Thomas N.T. Sutton in Toronto at tsutton@mccarthy.ca or Warren B. Milman in Vancouver at wmilman@mccarthy.ca or Michael D. Briggs in Calgary at mbriggs@mccarthy.ca or David Gray in Montréal at dgray@mccarthy.ca or Thomas G. Conway in Ottawa at tconway@mccarthy.ca

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Bankruptcy & Restructuring Drafting Eligible Financial Contracts

All businesses know that one key to profitability is risk management. Particularly in such industries as oil and natural gas, eligible financial contracts have emerged as an invaluable tool to hedge the risk associated with volatile foreign currency exchange, interest rates and commodity prices. Indeed, a large business has developed proffering over-the-counter derivatives (or ‘swaps’) and standardized exchange-traded derivatives (or ‘futures’) to do just that.

Given the purpose of the arrangement, both parties must be creditworthy and remain that way for the entire term of the contract in order for derivative and similar contracts to be effective. Therefore, one risk that must also be managed is the potential future insolvency of one or other of the parties.

Although swap and future contracts are often drafted with termination or suspension clauses that deal with insolvency, these contracts may ultimately be reviewed by a court, for example in insolvency proceedings under the Companies’ Creditors Arrangement Act (CCAA). (See the related article on derivatives entitled Mitigating Insolvency Risks in Derivatives Transactions from our publication, McCarthy Tétrault Co-Counsel: Business Law Quarterly.)

The legislative insolvency regime is designed to provide an insolvent corporation with time and the opportunity to reorganize its affairs as a viable entity. Given that objective, the stay protection afforded to insolvent corporations in CCAA proceedings (preventing creditors from pursuing their contractual remedies) is quite broad. Eligible financial contracts, however, are all drafted to provide that, upon the insolvency of one party, the other party can terminate the contract and ‘net out’ the parties’ respective positions. The CCAA exempts eligible financial contracts from the general stay provisions, but the courts will construe narrowly any such contracts to ensure that they are in fact entitled to this special protection.

This approach was confirmed in the recent Alberta case of Re Calpine Canada Energy Limited, where the court discussed the eligible financial contracts exception afforded under the CCAA.

In Calpine, the court affirmed the two-pronged test for the eligible financial contracts exception expounded by the Alberta Court of Appeal in Re Blue Range Resource Corp.: the items identified in the contract must be financial hedges and risk management tools, and the classification must produce a fair result.

The court’s current interpretation of “commodities” for the purpose of the eligible financial contracts exception limits them to

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“interchangeable, and readily identifiable as fungible commodities” capable of being traded as futures or swaps in a volatile market where the trading volume is such that prices are competitive and the contract may be “marked to market” with the value of the commodities determined.

This definition excludes contracts for commercial merchandise and manufactured goods that do not trade on a volatile market and are not completely interchangeable with one another.

The courts have identified some of the ‘hallmarks’ of eligible financial contracts, namely:

• they include offsetting or netting provisions;

• they are not stand-alone supply contracts;

• the supply price is not fixed or predetermined;

• the term of the contract is uncertain and undefined; and

• the volumes to be produced are uncertain and undefined.

McCarthy Tétrault Notes:

Although it is imperative that businesses carefully draft their contracts to fit within the language of the legislative definition and the characteristics espoused by the courts, the final part of the classification test centres on results. Would classifying

the contract as an eligible financial contract produce an unfair result? In other words, what is the potential prejudice or advantage to the respective parties?

Businesses must not only properly draft the contract itself, but also question whether termination of the contract in the insolvency proceedings would prejudice their hedging strategy.

Contact: Launa Poitras in Calgary at lpoitras@mccarthy.ca or Sean F. Collins in Calgary at scollins@mccarthy.ca or Larry B. Robinson, Q.C. in Vancouver at lrobinson@mccarthy.ca or Candace Pallone in Toronto at cpallone@mccarthy.ca or Sylvain A. Vauclair in Montréal at savauclair@mccarthy.ca

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Competition Law International Competition Law Agencies Turn up the Heat on Officers and Employees

The long arm of the law for competition offences is getting longer. Individuals are becoming a focus of international competition enforcement co-operation efforts. Employees residing in countries where anti-competitive conspiracies are not the subject of criminal sanction (such as many European states) may now face arrest, extradition and/or prosecution and penalties in jurisdictions where such conduct is criminally prohibited.

On May 2, 2007, for example, eight executives from the United Kingdom, France, Italy and Japan were arrested in the United States and charged for their role in an alleged conspiracy to rig bids, fix prices and allocate markets for U.S. sales of marine hose used to transport oil.

Also in May 2007, the U.S. Department of Justice notified four British executives and former executives of British Airways that they are wanted for interviews in the U.S. in connection with their role in an alleged conspiracy to fix fuel surcharges. That request may be a precursor to extradition proceedings. In both instances, the alleged conduct may or may not be criminal in the individuals’ home jurisdiction.

In most common-law jurisdictions, a presumption exists that personal criminal jurisdiction lies only over a person who is

physically present in the jurisdiction. For non-resident individuals, the two most common avenues to establish jurisdiction are:

• by physical presence (as with the eight executives recently arrested in the U.S.); or

• through extradition, a process governed by treaty.

Arrests of foreign nationals while physically present in the jurisdiction can be facilitated through international co-operation and border watch lists. Extradition treaties normally require that both the country seeking extradition and the country of residence of the alleged offender provide for criminal sanction for the alleged conduct. The most notable competition law extradition case involves Ian Norris, a British executive of a multinational company implicated in an international cartel involving carbon products that allegedly operated during the late 1980s and throughout the 1990s.

Norris is the first foreign national indicted under U.S. antitrust laws ever to be ordered extradited to the U.S. by the U.K. government. Norris appealed the extradition order on the grounds that price fixing was not a criminal offence in the U.K. until 2002, two years after the period of the alleged cartel had ended. The government has argued that the conduct alleged, while not a criminal competition offence at the time, did constitute conspiracy to defraud under U.K. criminal law.

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A decision on Norris’s final route of appeal is expected soon. If his extradition is upheld, it could open the doors for extradition of executives in other jurisdictions where anti-competitive conspiracy is not yet a criminal offence, provided the same conduct could found a charge under another penal statute in the home jurisdiction.

McCarthy Tétrault Notes:

In Canada, price fixing is a criminal offence as long as it would, if implemented, be likely to unduly lessen competition in a market. Corporate executives have been convicted, paid fines and have occasionally gone to jail for their role in Competition Act offences.

Canada has an extradition treaty with the U.S., so Canadian executives who are alleged to have participated in price fixing affecting the U.S. face the prospect of extradition. While that has not happened yet, the current environment suggests that it is only a matter of time before extradition of a Canadian executive is sought.

Although penalties against corporations for anti-competitive conduct are also becoming more severe, the parallel focus on individuals is meant to send a message that company executives must not direct, participate in or condone criminal anti-competitive conduct.

Enforcement authorities want to counter the perception that fines for anti-competitive conduct are a corporate ‘cost of doing business.’ Through international enforcement efforts aimed at individuals, competition law authorities are sending the message that individuals will personally feel the potentially severe consequences of participating in anti-competitive activity.

Contact: Donald B. Houston in Toronto at dhouston@mccarthy.ca or Randal T. Hughes in Toronto at rhughes@mccarthy.ca or Jeanne Pratt in Toronto at jpratt@mccarthy.ca or Yves Bériault in Montréal at yberiault@mccarthy.ca or Madeleine Renaud in Montréal at mrenaud@mccarthy.ca

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Shareholder Disputes Financing the Exercise of Rights of First Refusal

Most shareholders agreements allow shareholders to sell their shares, subject to certain rights granted to the other parties to the agreement. The recent Alberta case Zust Bachmeier International Air Cargo, Inc. v. Klapatiuk tested the limits of the right to sell in the context of the change of control of a closely-held, private company in Alberta. The case also highlights the fine line between improperly avoiding rights of first refusal and working assiduously to respect and not trigger them.

In this case, all of the shareholders of the company were party to a unanimous shareholders agreement (USA). The USA contained a right of first refusal (ROFR) stating that, if a shareholder desired to sell “all or any of his shares pursuant to a bona fide cash offer,” the remaining shareholders were entitled to buy those shares subject to the cash offer on the same terms. The USA also contained a buy/sell provision granting the usual ‘shotgun’ rights.

One group of shareholders, the McNally Group, wanted to sell its shares. The Richardson Group, which was not a shareholder, entered into an agreement with the McNally Group to acquire its shares. Zust, a shareholder and party to the USA, decided to exercise its rights

under the ROFR to acquire its proportionate share of the McNally Group’s shares. The Richardson Group entered into an agreement with another shareholder, Klapatiuk, to fund his purchase of his proportionate share of the McNally Group’s shares.

The Richardson Group also agreed that, once the ROFR exercise was finished, they would again seek Zust’s consent to purchase shares from Klapatiuk. If Zust refused, Klapatiuk would trigger the shotgun (with the Richardson Group providing the funds if Klapatiuk had to buy) and then negotiate the sale of shares to the Richardson Group once Klapatiuk had full ownership of the company. Before the shotgun was used, Zust sued alleging conspiracy and interference with the exercise of Zust’s ROFR rights. Zust also alleged that the scheme triggered a further ROFR.

The action was dismissed in its entirety. The key element in this decision was the absence of any agreement between the Richardson Group and Klapatiuk for the purchase of shares. In short, no bona fide cash offer existed between them to purchase the company’s shares. All the Richardson Group had negotiated was an agreement with the McNally Group, which triggered the ROFR process between Zust and Klapatiuk, and a loan agreement with Klapatiuk. Klapatiuk was under no enforceable obligation to sell shares to the Richardson Group.

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McCarthy Tétrault Notes:

A number of points arise from this decision to help guide similar transactions in the future.

• In the absence of any provision in a USA or other similar agreement, parties to a USA are free to get funding from anyone in order to exercise their rights under the USA, including ROFRs, provided the loan terms do not offend the USA or other agreement.

• The lender can intend and indeed desire to subsequently acquire, and the borrower can intend to sell, shares to be purchased with the loaned funds. However, the lender must not already have negotiated the terms and price of the subsequent purchase from the borrower/shareholder. While the point was not decided in this case, it may also be that the subsequent purchase agreement could be finalized provided it was subject to conditions precedent that ensure the other shareholders’ rights pursuant to the USA are preserved.

• Setting out to intentionally avoid triggering a ROFR may be permissible. The plan created, however, must not result in a new entity having joint ownership of the company with a pre-existing entity against that pre-existing entity’s will. Further, the plan, and conduct of the selling shareholder, must not render the rights of the other shareholders meaningless, as doing

so may expose the acquiror to a claim for specific performance of the affected rights.

Michael D. Briggs of our Calgary office acted for the Richardson Group in this matter.

Contact: Michael D. Briggs in Calgary at mbriggs@mccarthy.ca or Robert W. Cooper in Vancouver at rcooper@mccarthy.ca or Thomas N.T. Sutton in Toronto at tsutton@mccarthy.ca or Mason Poplaw in Montréal at mpoplaw@mccarthy.ca

Shareholders Still Cannot Sue for Wrongs to the Company

The 1843 decision Foss v. Harbottle held that shareholders cannot sue for a wrong done to the company. Some recent English case law, however, has suggested that where a company suffers a loss for which it cannot sue, shareholders are not prohibited from suing for the loss as reflected in the diminution in the value of their shareholdings. Until now, the implications of those cases in Canada have been unclear.

In its decision in Robak Industries v. Gardner, the Court of Appeal for British Columbia recently affirmed the rule in Foss v. Harbottle.

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The shareholders of Getty Copper Incorporated sued one of its directors and his associates, alleging assorted misconduct in the control and management of the company. The shareholders stated that this misconduct had caused them to suffer various losses, including devaluation of their shares in the company.

Prior to trial, the director and his associates successfully applied to strike several of the shareholders’ claims on the basis that the claims disclosed no reasonable cause of action.

The plaintiffs appealed. They suggested that the ‘refinement’ to the rule in Foss v. Harbottle, seen in the English case law, was justified given that the purpose of the rule was only to prevent a company and its shareholders from recovering the same loss twice.

The Court of Appeal rejected the plaintiffs’ proposed gloss on the rule and dismissed their appeal. In a unanimous decision, the court stated that the purpose of the rule was not merely to prevent “double recovery” of the same loss, but also to prevent recovery by one or some shareholders of a loss suffered by the company at the expense of other shareholders and creditors of the company. On this basis, the court held that a wrong to a company is only actionable by a shareholder if it is also an independent wrong to the shareholder giving rise to an independent loss by the shareholder.

McCarthy Tétrault Notes:

The Court of Appeal’s refusal to depart from the rule that a shareholder may not sue for a wrong done to the company

is significant in light of recent rulings elsewhere. It seems to confirm that courts in Canada, unlike in many other jurisdictions, will respect the principle that a company has an identity distinct from that of its shareholders, and continue generally to refuse to pierce the corporate veil.

The Court of Appeal’s decision also creates, in many cases, an easy exit for a party sued by an aggrieved company’s shareholders. The decision is strong authority for the proposition that such shareholders cannot sue unless they can identify both a wrong and a loss suffered independently by them. Neither a wrong to the company nor a loss merely reflective of a loss suffered by the company (such as a diminution in the value of the company’s shares) will suffice.

Contact: Michael A. Feder in Vancouver at mfeder@mccarthy.ca or Warren B. Milman in Vancouver at wmilman@mccarthy.ca or Louis M. Brousseau in Montréal at lbrousseau@mccarthy.ca or Sean S. Smyth in Calgary at ssmyth@mccarthy.ca or R. Paul Steep in Toronto at psteep@mccarthy.ca

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Alternative Dispute Resolution Arbitration Clauses, Consumer Contracts and Class Proceedings: The Canadian Approach

The limited Canadian case law dealing with the enforceability of mandatory arbitration clauses in consumer contracts has been inconsistent, with courts in Ontario, British Columbia and Québec reaching somewhat different conclusions. For potential litigants, these decisions created a state of uncertainty regarding what recourses could be available if a dispute arises from a consumer contract that contains an arbitration clause. One of the chief recourses is a class proceeding.

This uncertainty was addressed by the Supreme Court of Canada on Friday, July 13, 2007 which was an unlucky day for the plaintiffs in two Québec class actions: Dell Computer Corp. v. Union des consommateurs, and Rogers Wireless Inc. v. Muroff. It may also turn out to have been a red letter day for some class action defendants in Canada.

On that day, the Supreme Court of Canada held that Québec courts must stay a class action if the plaintiff’s claim is subject to an arbitration clause that is included in an agreement. The court affirmed that, in general, arbitration clauses cannot be circumvented by bringing an action in the form of a class action.

While the judgment was based on Québec law, the principles adopted by the Supreme Court of

Canada should be equally applicable to class actions in all provinces with class action legislation as well as to class actions in the Federal Court. In each of these jurisdictions, there is legislation that, with very limited exceptions, requires a court to grant a stay of an action if the claim is subject to an arbitration clause and the defendant promptly requests that the action be stayed in favour of arbitration.

There are a number of non-Québec decisions that were rendered before the Supreme Court of Canada’s decisions in Dell and Rogers in which courts held in effect that a class action trumped an arbitration clause. On the basis of Dell and Rogers, these cases now appear to have been wrongly decided.

However, it is important to note that before Dell and Rogers were decided, two provinces — Ontario and Québec — opted to settle the arbitration clause — class action issue through legislation. Both prohibit or invalidate pre-dispute arbitration clauses that prevent consumers from seeking recourse before the ordinary courts.

In Québec, the legislature adopted Bill 48, which effectively reverses both the Court of Appeal and the Supreme Court of Canada in Dell on the issue of pre-dispute arbitration clauses. The bill, which amended Québec’s Consumer Protection Act, came into force on December 14, 2006. As a result of the amendments, no pre-dispute arbitration

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clause agreed to after that date will be upheld if it prohibits a class action or otherwise waives or restricts the consumer’s right to go to court. Since these provisions were adopted after the commencement of the class action claims in Dell and Rogers, the court held that the legislative provisions did not apply in those cases.

Similarly, the Ontario legislature amended that province’s Consumer Protection Act to invalidate pre-dispute arbitration clauses that preclude consumers from pursuing remedies before the courts. The new provisions also specifically overrule contractual provisions, entered into after the amendments were passed, if they prevent consumers from starting or participating in a class action. These rules came into force in July 2005.

In other jurisdictions, an arbitration clause, even in a consumer contract, should enable a class action defendant to have a class action stayed if it is brought in violation of an arbitration clause.

McCarthy Tétrault Notes:

For merchants, knowing that contractual disputes will follow a uniform arbitration process has many advantages, such as reduced jurisdictional uncertainties, reduced litigation costs, and resolution of disagreements through an impartial adjudicator instead of in the media. The Dell and Rogers cases have brought significant certainty to this area.

The result of the Ontario and Québec legislation is to deny those advantages,

in most circumstances, to sellers who enter into contracts with consumers in those two jurisdictions. In Québec, some industries are exempted from these rules — notably those in the insurance, gas and electricity, funeral, tradable securities and real estate sectors. These industries are instead regulated by sector-specific rules. In addition, the legislation in both jurisdictions expressly permits the parties to pursue arbitration if the agreement to do so is concluded after the dispute arises.

Businesses that sell or otherwise make goods or services available to customers in Ontario and Québec should review their standard customer agreements to ensure they are not relying on the ability to oust courts in favour of arbitration when a customer dispute arises.

Contact: Charles S. Morgan in Montréal at cmorgan@mccarthy.ca or Cappone D'Angelo in Vancouver at cdangelo@mccarthy.ca or John P. Brown in Toronto at jbrown@mccarthy.ca or Wendy Gross in Toronto at wgross@mccarthy.ca or Catherine M. Samuel in Calgary at csamuel@mccarthy.ca

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Trade Law Canada’s BIT Negotiations with China

Canada is currently in the later stages of negotiating a bilateral investment treaty (BIT) with China, which is expected to be completed in 2007. Canada is negotiating on the basis of its 2004 Model Foreign Investment Protection and Promotion Agreement (FIPA). The Model FIPA and Canada’s 23 current BITs are generally more detailed and contain more substantive obligations than the approximately 100 Chinese BITs currently in existence, and also have a broader investor-state dispute settlement mechanism.

Given the divergence between Canada’s and China’s BITs, the negotiations address several key issues. Some of those key issues are noted below.

Administrative review process — A recent Chinese BIT provides that an investor can proceed to investor-state arbitration only after first submitting a claim to an administrative review process and then waiting three months for a resolution. The majority of Canadian BITs provide for a direct recourse to investor-state arbitration.

Fork in the road — In contrast with Canada’s Model FIPA, many other BITs require that the investor choose at the outset between domestic proceedings and international arbitration. Once domestic proceedings have commenced, the investor is precluded from bringing a claim under the BIT.

Standing — Canada’s Model FIPA permits investors to bring a claim on their own behalf and/or on behalf of an enterprise they own or control for damages resulting from a violation of the BIT. China’s existing BITs, on the other hand, contain a more general provision regarding dispute settlement and an investor’s right to bring a damages claim.

Place of arbitration — Many BITs permit the investor to choose the applicable arbitration rules, which generally leave the determination of the place of arbitration to the administrative tribunal unless the parties have already agreed upon the place of arbitration.

Canada has signed but not yet ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), of which China is a member. Arbitral awards issued under the ICSID Convention are binding on the parties, and appeal rights to the ICSID Secretary-General are only permitted on very limited grounds. Non-ICSID awards, by contrast, may be challenged in the national courts of the situs of arbitration in accordance with the arbitration law applicable in that jurisdiction.

Enforceability of awards — Under Canada’s Model FIPA, the parties have an obligation to provide for the enforcement of awards in their territory. To ensure that the New York Convention can be invoked to enforce UNCITRAL or ICSID Additional Facility awards, Canada’s BITs usually stipulate that the consent

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in writing requirement is met and that a claim under the BIT is deemed to arise out of a commercial relationship or transaction. Generally, China does not include such specific provisions for enforceability of awards.

Transparency — Canada’s Model FIPA, in contrast with most other BITs, contains several transparency provisions that permit public access to documents, open hearings and publication of the award.

Governing law — Canada’s Model FIPA includes a provision that indicates that an arbitral tribunal will decide the dispute in accordance with the BIT and applicable rules of international law. Some BITs do not contain any such provisions.

McCarthy Tétrault Notes:

Canadian investors should consider the impact of the absence or variation of these various terms (and others) when contemplating trade with China.

Given the size of the Chinese market and significant investment opportunities for Canadians, the negotiation of the Canada–China BIT is of particular importance to Canadian investors. It is also significant because it is part of the first series of BITs to be negotiated based on Canada’s Model FIPA.

See the more detailed discussion of these issues in the article on our website written by John W. Boscariol and Orlando E. Silva.

Contact: John W. Boscariol in Toronto at jboscari@mccarthy.ca or Orlando E. Silva in Toronto at osilva@mccarthy.ca or Alastair McNish in Toronto at amcnish@mccarthy.ca or Simon V. Potter in Montréal at spotter@mccarthy.ca or Brenda C. Swick in Ottawa and Montréal at bswick@mccarthy.ca

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Aboriginal Law The Haida Case and the Duty to Consult and Accommodate Aboriginal Peoples

In November 2004, the Supreme Court of Canada confirmed, in Haida Nation v. British Columbia (Minister of Forests), that the Crown (but not third parties) has a duty to consult and accommodate Aboriginal communities even before their Aboriginal rights have been formally established, whether by treaty or by court decision.

Although this duty does not give Aboriginal communities a right of veto, it entails taking into account the potential interests of Aboriginal communities in any exploitation of lands that the community claims, even during the period when the parties are attempting to resolve these claims.

The duty to consult arises only when governments have knowledge of the potential existence of an Aboriginal right or title, and when they are contemplating conduct that might adversely affect it. Further, the scope of this duty will vary in each case depending on the strength of the claim and the seriousness of the potential prejudicial effects alleged.

A number of actions relating to this duty have been brought in certain Canadian jurisdictions, in particular British Columbia. Courts in Québec have also examined this question, mostly within the context of actions brought by the

Pessamit (formerly Betsiamites) First Nation.1 From the Québec decisions handed down since Haida, it is possible to discern some guiding principles.

1. The Aboriginal communities must set forth in a detailed manner the facts on which they base their allegation of the Crown’s duty to consult. For example, simply stating an Aboriginal land claim or, in a more general way, claiming a series of Aboriginal rights, is insufficient. Proof must be adduced in a sufficiently precise manner, both from a substantive and a geographic point of view, as to the traditional activities and interests that have been claimed and that would be imperilled by the governmental decisions in question.

2. The governments and other affected third parties must have the opportunity to present to the court all necessary evidence in support of their actions and decisions.

3. The Aboriginal communities must participate in good faith in the Crown’s efforts to consult and avoid taking unreasonable positions. That is, they must participate actively in the necessary dialogue with the various levels of government, setting out as clearly and as quickly as possible their concerns and demands.

1 Kruger Inc. v. Betsiamites First Nation; Pessamit First Nation v. Québec (Attorney-General)

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McCarthy Tétrault Notes:

Although the duty to consult is one imposed on governments, businesses operating on the lands that are subject to Aboriginal claims have an interest in developing good relations with the Aboriginal communities concerned, as well as in ensuring that the Crown acts in an honourable manner. As is now the case with environmental obligations, any business that carries on resource-related activities on lands subject to Aboriginal claims needs to pay particular attention to Aboriginal issues.

McCarthy Tétrault is representing Kruger Inc. and other forestry companies in the Pessamit First Nation matters mentioned above.

Contact: Ann Bigué in Montréal at abigue@mccarthy.ca or Simon V. Potter in Montréal at spotter@mccarthy.ca or Marc-André Blanchard in Montréal at mablanchard@mccarthy.ca or Alexandre-Philippe Avard in Montréal at apavard@mccarthy.ca or Thomas F. Isaac in Vancouver at tisaac@mccarthy.ca

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Farley's Reflections Some Observations on the Business Judgment Rule

The Supreme Court of Canada in Peoples Department Store Inc. (Trustee of) v. Wise revisited the question of the business judgment rule in Canada. (This is the rule whereby courts will defer to the directors’ business judgment so long as they brought an appropriate degree of prudence and diligence in reaching a reasonable business decision at the particular time it was made.)

Major and Deschamps JJ. speaking for the court stated:

Canadian Courts, like their counterparts in the United States, the United Kingdom, Australia and New Zealand, have tended to take an approach with respect to the enforcement of the duty of care that respects the fact that directors and officers often have business expertise that courts do not. Many decisions made in the course of business, although ultimately unsuccessful, are reasonable and defensible at the time they are made. Business decisions must sometimes be made, with high stakes and under considerable time pressure, in circumstances in which detailed information is not available. It might be tempting for some to see unsuccessful business decisions as unreasonable or imprudent in light of information that becomes available ex post facto. Because of this risk of hindsight bias,

Canadian courts have developed a rule of deference to business decisions called the “business judgment rule”, adopting the American name for the rule.

In Maple Leaf Foods Inc. v. Schneider Corp., Weiler J.A. stated:

The law as it has evolved in Ontario and Delaware has the common requirements that the court must be satisfied that the directors have acted reasonably and fairly. The court looks to see that the directors made a reasonable decision not a perfect decision. Provided the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board’s determination. As long as the directors have selected one of several reasonable alternatives, deference is accorded to the board’s decision. This formulation of deference to the decision of the board is known as the “business judgment rule”. The fact that alternative transactions were rejected by the directors is irrelevant unless it can be shown that a particular alternative was definitely available and clearly more beneficial to the company than the chosen transaction.

One should, however, pause to consider exactly what is encompassed by the business judgment rule in Canada.

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Foremost, one should keep in mind that this rule appears to have been adopted from the United States where there has been some suggestion that it ought to be restricted to directors. Query therefore whether it should only apply to directors acting in the capacity of a board and not to officers (including persons who are otherwise directors acting qua officers)?

There seems to be a blurring of this dividing line in some of the cases. An example of this would be Kerr v. Danier Leather Inc. (see the firm’s commentary on this decision), where the Ontario Court of Appeal stated, “In other words, the trial judge failed to give any deference to the ‘business judgment’ of senior management …”

Similarly, the same court in Brant Investments Ltd. v. KeepRite Inc. referred to the question of a trial judge substituting “his own business judgment for that of managers, directors, or a committee such as the one involved in assessing this transaction.” See also the loose reference to officers in the Peoples decision.

Secondly, the incantation of the rule does not automatically extend immunity to directors. The board is required to carefully consider the options apparently open to the corporation at the time of the decision being made; the board must then choose one of those options, keeping in mind that that choice will have to stand up to subsequent scrutiny as being a decision that is within the range of reasonableness.

It would seem that this exercise presumes that the board will require that it be provided with

what appear to be the possible alternatives (together with the pros and cons of each choice). The board then would apply its expertise and experience to come to a ‘protected’ decision.

This was recognized in UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc., where the Ontario Court of Appeal favourably commented on the trial judge’s observation that the rule “recognizes the autonomy and integrity of a corporation and the expertise of its directors” since they are “in the advantageous position of investigating and considering first-hand the circumstances that come before it and are in a far better position than a court to understand the affairs of the corporation and to guide its operation.”

Thus a board should ensure that it does conduct a proper investigation and makes certain that it has what appears to be the then-relevant information before it makes a decision, after balancing the various considerations and factors in play.

Lastly, while the business judgment rule provides directors with insulation from liability under their statutory duties of care, one must keep in mind that the oppression remedy (signalled by the Supreme Court in the Peoples decision as being a powerful tool that could have been pursued) is available. Its focus is on result and need not involve any bad faith.

If there is a result that is oppressive to, is unfairly prejudicial to or unfairly disregards the interests of a complainant, a remedy to rectify that result may be granted.

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While a remedy might be fashioned against a director or directors arising out of a board decision even though the board decision met the requirements of the business judgment rule, it would appear more likely that the remedy selected would be one aimed at the corporation itself.

The Honourable James M. Farley, Q.C. in Toronto at jfarley@mccarthy.ca

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

Every effort has been made to ensure the accuracy of this publication, but the comments are necessarily of a general nature, are for information purposes only and do not constitute legal advice in any matter whatsoever. Clients are urged to seek specific advice on matters of concern and not rely solely on the text of this publication.

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