A key battle is currently being waged over when, or if, Canadian courts will take jurisdiction over class actions asserted on behalf of foreign-domiciled class members. The issue is one of substantial importance both to businesses that operate on a multi-jurisdictional basis, as well as to Canadian class counsel and their potential clients. While the corporate community has been justifiably anxious that Canada might become the next "Shangri-La" for class proceedings brought by non-residents and against foreign corporations; recent rulings from the Court of Appeal for Ontario (Canada’s largest province) suggest that the courts are unwilling to have the Ontario judicial system fill the void that was left following the Supreme Court of the United States’ 2010 ruling in Morrison v. National Australia Bank, 561 US 247 (2010). Morrison dramatically changed the litigation landscape in the US by shutting the US borders to "F3" class actions. Particularly, in Morrison SCOTUS ruled that US courts do not have jurisdiction over claims brought by foreign investors who purchased shares of a foreign issuer on a foreign exchange. No longer can investors from outside the US forum shop to pursue a class action against a foreign issuer in an American court, even if there is no class-action regime or other reasonably accessible means of pursuing a complaint of securities fraud in their home jurisdiction. Practically speaking, Morrison meant that enterprising US class counsel would no longer be able to launch actions on their home turf if the target issuer was not carrying on business in the US or listed on an American exchange.
As in any area where the law is still developing, the trend towards certification of international classes, and the more recent trend towards limitations on international classes has been incremental in Canada. But it was only a matter of time before the Canadian jurisprudence would catch up with the American.
Initially, the Canadian jurisdictional debate focused on whether a provincial court could certify a national class. It is now well accepted that the Class Proceedings Acts in most Canadian jurisdictions permit certification of national classes. In Ontario, McCutcheon v. Cash Store Inc., 2006 CanLII 15754 (ON SC) was one of the first cases to seriously grapple with the issue of whether the court should take jurisdiction over class members resident in other provinces when all the material facts that gave rise to the non-resident class member’s cause of action occurred outside Ontario and the class member’s only connection to Ontario consisted of "a commonality of interest with the proposed representative plaintiff and the resident class members over whose claims against the defendants this court has jurisdiction." In other words, should the court take jurisdiction over non-resident class members when their only connection to Ontario was that their claims raised the same common issues as Ontario residents? The answer in McCutcheon, and in most cases to follow was "Yes."
In McCutcheon, Justice Cullity correctly identified that the fundamental issue to be resolved was how the "real and substantial connection" test should be adapted to the unique circumstances of a class proceeding. He concluded that the analysis should center on whether the cause of action asserted on behalf of the non-resident class members has a sufficiently real and substantial connection to the forum to ground jurisdiction over their claims against the defendants. It is now accepted that when an international class is being proposed and opposed by the defense, the court will undertake the "real and substantial connection" analysis established by the Supreme Court of Canada in Club Resorts Ltd. v. Van Breda, [2012] 1 S.C.R. 572, to determine if it should take jurisdiction over the claims of the foreign class members.
For some time, it appeared that Ontario courts were trending towards acceptance of international class actions. After McCutcheon and up until early 2014, the Ontario courts often drew no fundamental distinction between the claims of non-resident Canadian class members and the claims of international class members on certification. So long as the claims asserted on behalf of the class raised common issues with a real and substantial connection to the forum, the courts seemed prepared, in large measure, to take jurisdiction and include the internationally domiciled claimants as part of the class. Whether the ultimate judgment would be enforced in the foreign jurisdictions was not the court’s concern at certification. As Justice Sharpe (as he then was) said in Robertson v. Thomson, 43 O.R. (3d) 161 (SCJ), the possibility that some foreign class member might not opt out and then challenge the binding effect of the class-action judgment in her home jurisdiction is not sufficient grounds for declining jurisdiction over foreign class members.
Based upon Robertson and McCutcheon, and the cases that followed, there was good reason to anticipate that Ontario courts would continue to assume jurisdiction over claims brought against foreign issuers (or other foreign defendants), even if the class action was brought solely for the benefit of foreign investors who purchased on a foreign exchange. So long as the plaintiff could meet the Van Breda real and substantial connection test, and identify a sufficient connection between the action and the jurisdiction, it seemed likely that Ontario’s courts would welcome the foreign investors to pursue their claims here. A real and substantial connection could include any number of factors. For example, in Abdula v. Canadian Solar Inc., 2012 ONCA 211, the defendant did not list its securities on any Canadian exchange, but it did carry on business in Ontario. It was found to be a "responsible issuer" under the Ontario Securities Act, and the court took jurisdiction over the proposed class proceeding. However, it remains to be seen whether at certification the court will agree to certify an international class. Based on more recent cases from the Court of Appeal for Ontario, certification may well be denied to the foreign class members.
An earlier prominent case in which the Ontario court readily assumed jurisdiction over the claims of foreign investors was the original certification decision in Silver v. Imax Corporation, 2009 CanLII 72334 (ON SC). Imax traded on both the TSX and the NASDAQ, and the class was originally certified to include investors who bought on either exchange, despite the fact that a parallel class proceeding was being prosecuted in the US. At certification, it was unclear whether the claims of the foreign class members would be governed by Ontario’s legislation or the laws of the United States. And in particular, the issue of whether the Ontario Securities Act statutory cause of action applied to the foreign class members was not directly before the court.
However, at around the same time that Morrison was released there were some early signs of judicial resistance to certification of claims asserted on behalf of foreign investors who purchased shares on a foreign exchange. For example in McKenna v. Gammon Gold Inc., 2010 ONSC 1591 (CanLII), Justice Strathy (as he then was) refused to include in the class those investors who purchased Gammon shares on a foreign stock exchange. He surmised that "The acquisition of those securities in a jurisdiction outside Canada would not give rise to a reasonable expectation that the acquiror’s rights would be determined by a court in Canada." He therefore excluded from the class all investors who purchased Gammon securities on a stock exchange outside of Canada, regardless of their place of residence. Important to the analysis, however, is the fact that the claim that was being asserted on behalf of the investors who purchased on a foreign exchange was for prospectus misrepresentations (and the content of the prospectus would have been subject to the rules and governance of the foreign exchange where the shares were issued, to the knowledge of the investors), and the common law misrepresentation claim was not certified at all.
Since then, and particularly in 2014, judicial reticence seems to be developing towards taking jurisdiction over class members who are not domiciled within Canada. The pendulum is now swinging in the opposite direction away from the "wait and see" approach of Imax. As the cases mature, the Court of Appeal is circumscribing the instances in which it will take jurisdiction over, or certify an international class. The Court has relied heavily on the concept of international "comity" in declining jurisdiction or refusing certification of an international class.
Comity is a "flexible concept" (Van Breda at paras. 74, 112), exercised by the court on a discretionary basis. Hence it is difficult to pin down its parameters. Generally speaking, it includes respecting the right of a foreign state to make and apply laws within its territorial limits, with the expectation of reciprocation by the foreign state in respect of Canadian laws (Tolofson v. Jensen, [1994] 3 S.C.R. 1022, at p. 1047).
In mid-August, 2014 in Kaynes v. BP plc, 2014 ONCA 580 the Court of Appeal ruled that Ontario will not take jurisdiction over the claims of investors who purchase securities on a foreign stock exchange, even if the investor is resident in Ontario, the defendant company is a responsible issuer governed by the Ontario Securities Act, and a statutory cause of action is being asserted against the defendant corporation under that Act. BP did not dispute the court’s jurisdiction over it in respect of those claims asserted against it by the handful of class members who purchased its securities on the TSX before BP delisted from that exchange.
The vast majority of the intended class were not residents of Canada and did not purchase securities on the TSX. While the Court of Appeal concluded that Ontario did have jurisdiction simpliciter over the claims of the foreign exchange investors since the claim alleged the equivalent of a tort committed in Ontario by a "responsible issuer" governed by the Securities Act, it nevertheless declined to take jurisdiction over the claims of the proposed foreign class members under the second, discretionary branch of the Van Breda test — forum non conveniens, i.e. Ontario was not the appropriate forum for the adjudication of the claims.
Relying on the concept of international comity, the Court of Appeal declined to take jurisdiction over the plaintiff’s claim or that of any class members who traded on a foreign exchange. It considered the securities laws in the US and the UK, where BP was listed and trading. Not surprisingly, both the US and UK domestic securities legislation assert jurisdiction over issuers listed on their own exchanges. In fact, the US legislation says that it has exclusive authority over securities traded on its exchanges. The plaintiff, Kaynes, bought on a US exchange. Consistent with the conclusion of Justice Strathy in Gammon, the Court of Appeal concluded that "It would surely come as no surprise to purchasers who used foreign exchanges that they should look to the foreign court to litigate their claims." Effectively, the Court of Appeal deferred to the authorities in the US and UK as the appropriate arbiters of whether BP’s conduct adversely affected the value of the securities listed and sold on their own exchanges. The court found that the prevailing international norm was to tie jurisdiction to the place where the securities were traded. BP is in many ways consistent with the ratio in Morrison, although it goes much further, since the Court of Appeal foreclosed the claims of Canadians who bought on a foreign exchange, while Morrison only goes so far as to decline jurisdiction when there is no connection to the forum. Furthermore, in Morrison, Justice Scalia confirmed that the focus of the US Exchange Act is on the regulation of the purchase and sale of securities on American exchanges, including the protection of the parties to those transactions. Hence, the Act only applies to transactions in securities listed on US exchanges, or domestic transactions in other securities. Stopping there, it would follow that as a matter of comity, a Canadian court could reasonably decline jurisdiction over a claim that is at its root a complaint that the investor overpaid for a security purchased on a US exchange as a result of the misrepresentations of the defendant company that was under the regulatory supervision of that exchange.
BP is in many ways consistent with the ratio in , although it goes much further, since the Court of Appeal foreclosed the claims of Canadians who bought on a foreign exchange, while only goes so far as to decline jurisdiction when there is no connection to the forum. Furthermore, in , Justice Scalia confirmed that the focus of the US Exchange Act is on the regulation of the purchase and sale of securities on American exchanges, including the protection of the parties to those transactions. Hence, the Act only applies to transactions in securities listed on US exchanges, or domestic transactions in other securities. Stopping there, it would follow that as a matter of comity, a Canadian court could reasonably decline jurisdiction over a claim that is at its root a complaint that the investor overpaid for a security purchased on a US exchange as a result of the misrepresentations of the defendant company that was under the regulatory supervision of that exchange.
However, the US Exchange Act does not presume to take precedence over or to govern foreign securities exchanges. Morrison recognized that "foreign countries regulate their domestic securities exchanges and securities transactions occurring within their territorial jurisdiction, and the regulation of securities transactions in other countries may differ from those of the US, including establishing what disclosures must be made, what damages are recoverable in what circumstances, and so on." Accordingly, Morrison can be read as supporting a foreign jurisdiction (such as Canada) taking jurisdiction over a claim that alleges a breach of that foreign jurisdiction’s own securities laws, even if the acquisition of the securities was made through an American exchange, if the breach relates not to the US disclosure obligations, but those obligations imposed on the issuer by the foreign regulator.
The BP decision leaves Canadians who purchase securities on a foreign exchange in a difficult situation. The result of the decision is that these investors are now foreclosed from pursuing a statutory misrepresentation claim in Canada against companies that are subject to that Canadian securities legislation. Instead, these investors are left to pursue these claims in a foreign jurisdiction, where the procedural advantage of a class-action may not be available, and there is no certainty regarding the law that the foreign court would apply.
This result seems to be inconsistent with, and undermines the very purpose of the responsible issuer duties imposed, and the statutory rights of action granted under the Securities Act. While comity is an important consideration in determining whether jurisdiction should be taken over a foreign defendant, when the claim asserted on behalf of the class is for a statutory remedy granted under local law with respect to misconduct of the foreign defendant under domestic law, I would argue that the court’s refusal to take jurisdiction placed undue reliance on comity, when its focus should have been on the fact that the claim asserted on behalf of Canadian investors was to enforce a right of action granted to them under Canadian laws and hence, the legislation of foreign jurisdictions should not prevail.
In fact, BP is arguably inconsistent with the earlier denial of certification in McNaughton Automotive Ltd. v. Co-Operators General Insurance Co., 66 O.R. (3d) 466 (S.C.J.), in which the Court of Appeal denied the plaintiff leave to appeal. McNaughton is the mirror image of BP. There, the plaintiffs brought an action in Ontario and alleged breaches of other provinces’ statutory conditions in their automobile insurance policies. In refusing certification of a national class, the court relied upon the fact that: (1) the contract was made outside of Ontario pursuant to the laws of another jurisdiction that are materially different; (2) the defendant is licensed under and subject to the laws of the other jurisdiction; (3) the alleged breach occurred outside Ontario; (4) the claimants reside outside of Ontario; (5) the events which gave rise to the claim occurred outside Ontario; and (6) the damages were sustained outside Ontario. Accordingly, order and fairness would not be served by assuming jurisdiction over the claims of persons outside Ontario.
Query then, why would the court decline jurisdiction over Canadian class members asserting a statutory cause of action granted to them by Ontario legislation (BP), when it had already found that the appropriate jurisdiction in which to prosecute a claim to enforce a statutory cause of action is the forum in which that statute was enacted? (McNaughton). In Morrison, Justice Scalia confirmed that there is a presumption against the extraterritorial effect of American legislation: "It is a "longstanding principle of American law ‘that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.’ … When a statute gives no clear indication of an extraterritorial application, it has none." Why then the Court of Appeal would consider it to be an issue of comity to defer to the American courts on the issue of whether BP had breached Canadian securities legislation in respect of its communications with Canadians in Canada is not clear. As a matter of comity, it is arguable that the US courts would defer to Canada on the question of whether BP was off-side the Canadian legislation. That issue is of no particular concern to the US legislators or judicial system.
A similar, arguably anomalous, result also arose in the Court of Appeal’s decision in Prince v. ACE Aviation Holdings Inc., 2014 ONCA 285 (CanLII) (leave to appeal to the SCC denied October 23, 2014). In Prince, the plaintiffs alleged that Air Canada had improperly collected US excise taxes from US and Canadian ACE passengers who bought their tickets in Canada. The Court of Appeal stayed the plaintiffs’ claims on the grounds of forum non conveniens, placing particular emphasis on the principle of comity.
It is understandable that in Prince the court wished to defer ruling on the claim, given the precarious position in which Air Canada could find itself if an Ontario court concluded that the application of the US law was overreaching, while it remained bound by its obligations to comply with the US law. Air Canada would also lose the benefit conferred to it under the US law which provides immunity from suit to the tax collecting intermediaries/withholding agents, such as Air Canada. Obviously, if the IRS ruled in favor of the class, this would be a "win" for everyone. However, that result is far from certain.
Stepping away from the sympathy that one might feel for Air Canada, Prince appears to be another case where the court has given undue deference to the foreign jurisdiction given the task put to it by the proposed class proceeding. As the Court of Appeal identified, its task was to "decide whether the collection of the taxes is a violation of the principles governing the conduct of sovereign states, and an extra-territorial application of US law in Canada." The issue (interpretation and application of Canadian law) is not one where comity should result in pushing the complainants into the foreign jurisdiction to litigate their complaint that the foreign jurisdiction is acting contrary to Canadian law.
Whether these recent decisions from the Court of Appeal are the precursors of a trend leading towards a more insular approach to class certification remains to be seen at this early juncture. Leave to appeal to the Supreme Court of Canada has also been sought in BP. Should leave be granted in that case, the appeal will undoubtedly focus on the comity issues relied upon by the Court of Appeal, and in particular whether comity should play any significant role in the jurisdictional analysis when the cause of action asserted in the claim is to enforce laws unique to this country.