Commercial Litigation Update – May 2004

BY KENNETH DEKKER, JENNIFER ROBERTS-LOGAN, MICHAEL OSBORNE AND TANISHA TULLOCH

Canada’s Top Court Highlights the Perils of Ignoring Foreign Actions

Beals v. Saldanha, 2003 SCC 72

Two Ontario residents who were sued on an $8,000.00 (U.S.) Florida land deal are likely regretting their decision to ignore the Florida litigation that ultimately led to a $800,000.00 (U.S.) judgment against them. In a decision released last December, the Supreme Court Canada enforced the surprisingly steep Florida judgment – finding that the Florida court had jurisdiction over the action and that there was no sufficiently compelling reason to refuse enforcement.

In his strongly worded dissent, Mr. Justice Lebel criticised the majority’s decision to enforce the Florida judgment and underlined its serious consequences for Canadians sued abroad:

“ The implication of the position of the majority is that Canadian defendants will from now on be obliged to participate in foreign lawsuits no matter how meritless the claim or how small the amount of damages at issue reasonably appears to be, on pain of potentially devastating consequences from which Canadian courts will be virtually powerless to protect them.”

The saga began with the purchase and sale in the mid-1980’s of an $8,000.00 (U.S.) piece of land in Florida by two Ontario residents, Mr. and Mrs. Saldanha. When the purchasers of that land then sued them, the Saldanhas chose to ignore it because, among other things, they knew the land was worth very little and assumed it was “a minor dispute that would be more expensive to defend than to lose.” Unfortunately for the Saldanhas, the Florida plaintiffs later increased their damages claim and in 1991 a Florida jury ultimately awarded damages of $260,000.00 (U.S.). Despite receiving notice of the default hearing, the damages hearing, and the resulting judgment, the Saldanhas did not appear or pursue any of the avenues available to them in Florida to appeal the judgment. The judgment went unpaid and the plaintiffs sued to enforce it in Ontario. By the time of the 1998 hearing in Ontario to enforce it, the Florida judgment and accrued interest had ballooned to $800,000.00 (U.S.).

The Real and Substantial Connection Test

In writing on behalf of the majority’s decision to enforce the Florida judgment, Mr. Justice Jack Major started from the proposition that the realities of modern international commerce require judgments properly rendered in one jurisdiction to be recognised in another. In a 1990 decision¹, the Supreme Court of Canada found that this proposition, among others, warrant making it easier to enforce judgments between provinces within Canada. In Beals v. Saldanha, the Supreme Court has now made it clear that the same considerations apply internationally and facilitate Canadian courts’ recognition and enforcement of judgments rendered by foreign courts.

The primary consideration in determining whether a foreign judgment should be enforced involves whether the foreign court had a “real and substantial connection” to the subject matter of the action and thereby properly took jurisdiction over it. A number of criteria and connections between the claim and the foreign jurisdiction are relevant to whether a real and substantial connection exists². If such a connection is found, the foreign court’s judgment will almost always be enforced. It does not matter whether or not a Canadian defendant has a physical presence in the foreign jurisdiction – if they conduct business or ship goods into a jurisdiction, they can expect that they will be required to defend any resulting litigation there. Canadians who choose not to defend foreign litigation do so at their peril – as they can expect the consequences of that choice to hit home when the resulting judgment is enforced in Canada.

Limited Defences to Enforcement of a Foreign Judgment

There are few defences to the local enforcement of a judgment rendered within a foreign court’s jurisdiction, namely: (1) fraud; (2) the denial of natural justice; and (3) public policy.

The fraud defence will apply where the Canadian defendant can show that the foreign Court was intentionally misled regarding its ability to render judgment. This would arise where the plaintiff, for example, had lied to the foreign Court regarding whether or not the Canadian defendant was notified of the proceeding. Fraud might also be raised where evidence not available prior to the foreign court’s judgment calls into question its validity. This defence is very narrow and does not give a Canadian defendant the right to re-litigate the issues in the foreign action by raising evidence and issues that they could and should have put before the foreign court in the first instance.

The denial of natural justice defence relates solely to whether the procedure used by the foreign Court was fair and unbiased, and whether the defendant had an opportunity to be heard. The substantive merits of the foreign judgment and whether a Canadian court would come to a similar conclusion are irrelevant. In the case of Mr. and Mrs. Saldanha, it did not matter that the Florida judgment was significantly higher than would have been awarded by a Canadian court. It did not matter to the majority in the Supreme Court that the Saldanhas were not notified that the Florida plaintiffs had substantially increased the amount of their claim until they received a copy of the Florida judgment³. All that mattered was that the Saldanhas were given notice of the Florida proceeding and an opportunity to participate and they chose not to do so. The Supreme Court found that the Florida court provided a fair and unbiased hearing. While the resulting judgment was very high, the procedure used in arriving at that result was not unfair. Accordingly, the Saldanhas could not establish that they were denied natural justice.

The public policy defence is cited to refuse to enforce foreign judgments when they are rendered on the basis of laws that are “contrary to the fundamental morality of the Canadian legal system.” For example, a judgment rendered on the basis of a racially discriminatory law would likely not be enforced in Canada. This exception focuses on the laws at issue and not the result in a case decided under those laws. In the case of the Saldanhas, the laws upon which the judgment was based were not repugnant and it did not therefore matter that the resulting judgment was different or much higher than any Canadian court would award.

Conclusion

In summary, Beals v. Saldanha presents a cautionary tale for all Canadian residents who carry on abroad business or other activities that carry the potential for litigation. Canadians should be aware that, should they be sued in foreign jurisdictions, they should use their best efforts to determine whether the foreign jurisdiction has a connection to the litigation before deciding whether or not to defend it. Further, the onus is on Canadian defendants, once they learn of a foreign action against them, to keep apprised of developments within that action and ascertain the extent of their exposure in the foreign action. Canada’s highest court has made it clear that Canadians sued abroad cannot choose to ignore foreign litigation against them and then expect to hide behind Canada’s borders from any judgment that might result. One will do so at their peril! (K.D.)

¹See Morguard Investments Limited v. De Savoye, [1993] S.C.R. 1077

²In Beals v. Saldanha the parties conceded that the Florida court had a real and substantial connection to the litigation. Accordingly, the S.C.C.’s decision provides little guidance on the criteria it would have applied.

³It should be noted that 3 of the 9 S.C.C. judges would have denied enforcement for this reason – that the Saldanhas were unaware of the size of the amended damage claim or of the severe consequences of failing to defend it. As Binnie J. wrote in dissent, “[T]he appellants’ inactivity in the face of their mushrooming legal problem is explained by the fact that they were kept in the dark about the true nature and extent of their jeopardy.”

ADDENDUM– The recognition of foreign judgments in class proceedings

Parsons v. McDonald’s Restaurants of Canada Ltd. et al., [2004] O.J. No. 83 (SCJ)

Shortly after the release of the decision in Beals v. Saldanha, its directions were considered and applied to the recognition of foreign judgments in class proceedings by Mr. Justice Cullity of the Ontario Superior Court of Justice. In Parsons v. McDonald’s Restaurants of Canada, McDonald’s sought to dismiss two Ontario class actions brought against them on behalf of all McDonald’s customers in Canada in relation to the manner in which McDonald’s had conducted its promotional games and contests between 1995 and 2001.

McDonald’s sought to dismiss the Ontario class actions because a class action that included the Canadian class members had already been brought, certified and settled in Illinois. An Illinois court had issued a decision approving the settlement of that class action that, McDonald’s argued, was enforceable and binding on all class members, including those in Canada. As a result, McDonald’s argued, the Ontario class actions should be dismissed because they sought to re-litigate issues that had already been determined by another court.

In deciding whether to dismiss the Canadian class actions, Cullity J. began by finding that the Illinois court had jurisdiction over the subject matter of the class action based on the real and substantial connection test. This was not the end of the inquiry, however, on whether the decision in the Illinois class action should be recognised and enforced.

Cullity J. observed that the unique features of class actions warrant more scrutiny of foreign decisions, given that they often purport to bind all members of a particular class of plaintiffs unless those persons opt out of the action. Paramount is the question of notice to the potential class members. The failure to take adequate steps to notify Canadian class members is key to whether enforcement in Canada should be refused due to a denial of natural justice.

In the result, Cullity J. found that adequate steps had not been taken in Canada to notify potential Canadian class members, through the media or otherwise. He characterized the notice to potential Canadian class members as “wall to wall legalese” and found that the dissemination of notice in Canada “was so woefully inadequate that the decision should be held to offend the rules of natural justice.” Accordingly, Cullity J. refused to dismiss one of the two Ontario class actions.

Cullity J. did, however, stay the second of the two Ontario class actions. This was because its representative plaintiff had received actual notice of the Illinois class action and had actually appeared before the Illinois court. Accordingly, it was found to be an abuse of process for that person to be a part of a class proceeding seeking to re-litigate the same issues as those raised before the court in Illinois.

The decision in Parsons v. McDonald’s is likely of interest to both plaintiffs’ counsel and members of the Canadian public as it leaves the door open to class actions against large international corporations being conducted entirely abroad and then enforced in Canada – provided adequate steps are taken to notify potential class members in Canada. Until now, multiple class proceedings have normally been brought concurrently in several jurisdictions, including Canada. Recent decisions making it easier to recognise foreign judgments may in some cases remove the necessity of bringing separate Canadian class actions against international defendants. (K.D.)

New Limitations Act for Ontario

The reforms introduced in the Ontario Limitations Act, 2002 (the “Act”), which came into force on January 1, 2004, represent an attempt to standardize the law of limitation periods within the province of Ontario. The Act repeals and replaces limitation periods provided in other statutes applicable to claims also addressed under the Act unless the statute is specifically listed in the Schedule to the Act or incorporated by reference.

As a result, a wide variety of limitation periods found under Ontario statutes are replaced with a two-year basic limitation period requiring actions to be brought within two years after the date that a claim is or ought reasonably to have been “discovered.” In addition, the new Act imposes a fifteen-year ultimate period running from the date that the act or omission on which the claim is based took place. Well known limitation periods which have been repealed and replaced with the two-year basic period include the six-year limitation period generally applicable to tort and contract claims, the six-month period in section 7 of the Public Authorities Protection Act (claims against public authorities) and the 3-month period in section 44 of the Municipal Act, 2001 (claim for failing to maintain a road). Among the limitation periods preserved in the Schedule to the Act are the provisions of the Assignments and Preferences Act, Ontario Business Corporations Act, Construction Lien Act, Securities Act and the Personal Property Security Act.

The key provisions of the Act include:

Two-year limitation

Section 4 requires all proceedings to be commenced within two years from the date the claim is discovered. This two-year limitation period does not apply to claims to which the Real Property Limitations Act applies, appeals, proceedings under the Judicial Review Procedure Act, and proceedings under the Provincial Offences Act.

Discoverability

Section 5 provides that a claim is discovered on the earlier of:

1. the day when the claimant first knew of the essential elements of the claim (injury, loss or damage; caused by an act or omission; that the act or omission was that of the defendant; and that a proceeding would be an appropriate means to seek to remedy it); and
2. the day when a reasonable person with the abilities and in the circumstances of the claimant first ought to have known of the essential elements of the claim.

   Fifteen-Year Ultimate Limitation Period

Section 15 provides that even where the two-year limitation period in respect of a claim has not expired (claim not yet discovered), a proceeding may not be commenced after fifteen years from the “day on which the act or omission on which the claim is based took place.” However, there are exceptions to this ultimate limitation period where the claimant is a minor, is incapable of commencing a proceeding due to a physical, mental, or psychological condition and not represented by a litigation guardian or where there has been wilful concealment of essential elements of the claim by the defendant.

No contracting out

Section 22 provides that a limitation period established under the Act will apply despite any agreement to vary or exclude it. While this provision will not affect agreements entered into prior to January 1, 2004, thereafter parties are prevented from modifying the mandated periods to suit their commercial realties and all such agreements are invalid.

Where a limitation period will not run

As noted with respect to the fifteen-year ultimate limitation period, time will not run while the claimant is a minor, is incapable because of a physical, mental, or psychological condition and not represented by a litigation guardian or where there has been wilful concealment of essential elements of the claim by the defendant. In addition, the limitation period will not run where the parties agree to attempt dispute resolution with an independent third party. Time will again start to run where the resolution process is terminated or a party terminates or withdraws from the agreement. (Sections 6, 7, 10, 11)

Transition Provisions

Set out in Section 24, these provisions determine whether a limitation period prescribed in the previous Limitations Act or the current Act will apply to a claim. As an example of one provision, the limitation period under the previous Limitations Act will apply to a claim arising from an act which occurred and was discovered before January 1, 2004, for which no action was commenced prior to January 1, 2004, and for which the former limitation period has not yet expired. If however, the claim in the above example is not discovered until after January 1, 2004, then the two-year period under the new Act will apply. (T.T.)

Surety Alert – performance bond
not limited to physical construction costs

Whitby Landmark Development Inc. v. Mollenhauer Construction Limited (2004), 67 O.R. (3d) 628 (C.A.)

A performance bond may respond to collateral obligations of the contractor under a construction contract. In this case, the Court of Appeal found that the contractor’s obligation to pass cost savings to the owner could be claimed against the bond since the standard form bond at issue incorporated by reference the underlying construction contract. This is a significant development in the law in the area since surety practice has presumed that a performance bond would only respond to an obligation relating to the physical completion of the construction project.
Ultimately the Court of Appeal concluded that since the owner had failed to note the contractor in default as required by the contract and failed to notify the surety of the default, it could not call on the performance bond. This too is an important warning to the construction industry to strictly comply with contractual terms before claiming on a bond. (J.R.-L.)

Arbitrary exclusions, unmanageable class,
lead to refusal to certify tobacco class action

Caputo v. Imperial Tobacco Ltd. [2004] O.J. No. 299 (S.C.J.)

In February, Ontario Superior Court Justice Winkler declined to certify a proposed class action of living smokers and former smokers, and families of dead smokers, numbering approximately 15 million people. This decision continues the current trend of raising the bar on certification of class actions.

No acceptable class definition existed, Winkler J. found. All of the numerous alternative class definitions proposed contained arbitrary exclusions – a fatal defect. The proposed class was really an amalgam of class proceedings, making it impossible to describe a single class sharing substantial common issues.

Among the common issues the plaintiffs proposed was whether members of the class are entitled to a global assessment of damages. However, causation and damages for personal injury requires individual, not common, proof. The plaintiffs’ proposal that the common issues trial judge would determine whether the damages issues really were common was not acceptable; common issues must be identified at the certification stage.

The class action would not be “fair, efficient and manageable”, given that it involved a class of several million people and individual fact patterns spanning over 50 years. Thus a class action was not the “preferable procedure.” The plaintiffs also failed to propose a workable litigation plan that dealt with the massive undertaking that such a large class would involve. (M.O.)

Damages for breach of contract
should be based on the least onerous mode of performance
 

Hamilton v. Open Window Bakery Ltd. 2004 SCC 9

Canada’s top court has affirmed the decision of the Ontario Court of Appeal to reduce the damages awarded to a plaintiff for the wrongful repudiation of a contract. In this case, the plaintiff, Hamilton, entered into a contract to be the exclusive agent for the marketing and sale of the Open Window’s baked goods in Japan for a 36-month term. The contract contained a clause allowing Open Window to terminate the contract at any time upon three months’ notice.
At trial, it was found that Open Window had wrongfully repudiated the contract and the trial judge awarded Hamilton damages amounting to all of the payments that would have been made for the 36-month term, minus a 25 per cent deduction to account for the possibility that Open Window would have exercised its right to terminate the contract at an earlier date. This calculation was based on the trial judge’s determination of how Open Window would likely have performed its obligations under the contract.

Both the Ontario Court of Appeal and the Supreme Court of Canada agreed that the trial judge’s damages award should be reduced. The Supreme Court found that damages for breach of contract should be based on the minimum performance the plaintiff is entitled to under the contract. Putting it another way, it should be assumed that the defendant would perform the contract in the way that is least burdensome to himself. In this case, Open Window was entitled to terminate the contract on three months’ notice. Accordingly, Hamilton was never guaranteed anything more than three months’ performance of the contract and her damages were limited to what she would have received during that three-month notice period.

Costs consequences of unproven allegations of fraud

On another issue, the Supreme Court in this case affirmed the practice of awarding a higher scale of legal costs against parties who advance unproven allegations of fraud or dishonesty against their adversary. Open Window throughout the proceedings claimed it was justified in ending the contract due to Hamilton’s dishonest conduct. That allegation was not proven at trial.

In restoring the trial judge’s award of solicitor-client costs against Open Window, the Supreme Court stated, “allegations of fraud or dishonesty are serious and potentially very damaging to those accused of deception. When, as here, a party makes such allegations unsuccessfully at trial and with access to information sufficient to conclude that the other party was merely negligent and neither dishonest nor fraudulent…, costs on a solicitor-and-client scale are appropriate.” (K.D.)

Corporate identification doctrine stops corporation from suing its auditor

Hart Building Supplies v. Deloitte & Touche, [2004] B.C.J. No. 49 (BCSC)

A corporation’s negligence action against its auditor was summarily dismissed in a recent B.C. Supreme Court decision based on the corporate identification doctrine. The negligence alleged against the auditor related to its failure to detect the fraud of one of the corporation’s own directors and officers in overstating the corporation’s inventory. In dismissing the action, Justice Baker found that the fraud committed by an officer and director of the corporation was, in law, a fraud committed by the corporation itself. Accordingly, the action was dismissed because the corporation could not sue regarding the consequences of its own wrongful conduct.

The corporate identification doctrine has traditionally been applied to prosecute corporations criminally⁴. It is based upon the idea that a corporation has no independent mind of its own and can only act through persons who are its agents or directing minds. Accordingly, the identity and directing mind are seen to coincide, as long as the actions of the individual are within the scope of the activity assigned to him by the corporation.

It is no defence to a corporation to show that the wrongful actions were unauthorised or even expressly prohibited by the corporation. A corporation will be identified with the criminal or fraudulent acts of persons who are its directing minds within the scope of their authority unless it can show that the wrongful acts were directed solely at the benefit of the directing mind and to the detriment of the corporation. If the wrongful acts were even partially aimed at benefiting the corporation or if they in fact did benefit the corporation, regardless of the individual’s intention, the corporation will be liable.

In this case, it was within the scope of the authority of Hart Building Supplies’ officer and director, Larson, to provide the auditor with information regarding Hart’s assets and financial situation. Larson’s intentions in misstating Hart’s inventory were at least partly aimed at benefiting Hart by keeping its main creditor at bay. Hart benefited from the fraud. It did not matter that Larson made fraudulent misrepresentations to the auditor without the knowledge or authorization of others in charge of Hart’s operations. Larson’s fraud was, at law, a fraud committed by Hart. Hart could not sue its auditor for failing to detect its own fraud. (K.D.)
 

Affleck Greene McMurtry LLP practises in commercial litigation and competition law. Our competition law (antitrust) practice includes representing clients in criminal and civil proceedings before the courts and the Competition Tribunal and advising clients on the competition aspects of proposed or existing business practices.

⁴See Canadian Dredge and Dock v. The Queen, [1985] 1 S.C.R. 662