The latest from the Ontario Court of Appeal on the interplay between statutory limitation periods and the tolling effect of s. 28 of the Class Proceedings Act, 1992 was delivered in February 2012 in the case of Sharma v. Timminco Ltd. This decision effectively put the last nail in the coffin for class action plaintiffs looking to s. 28 as a lifeline to extend the time for commencing proceedings after the time for an individual to commence an action had expired.

The decision provides good guidance to class counsel regarding the diligence with which they must pursue potential claims, and it delivers much needed certainty to corporations regarding the duration of their potential exposure to a class proceeding.

In Sharma, the plaintiff commenced a proposed securities class action in May 2009, with respect to alleged public misrepresentations that took place between March 17 and Nov. 11, 2008. The plaintiff asserted common law claims in negligence and negligent misrepresentation. In addition, the claim stated that the plaintiff would be seeking an order granting leave to assert the statutory claim for misrepresentation provided under s. 138.3 of Part XXIII.1 of the Ontario Securities Act.

This section of the Securities Act came into force Dec. 31, 2005, and is meant to overcome the challenges of pursuing a class action for negligent or fraudulent misrepresentation by a public issuer. At common law, the plaintiff must establish reliance as one of the constituent elements of a misrepresentation claim. This has proven difficult to establish on a common basis, depending on the nature of the claims alleged. Recognizing the difficulties that plaintiffs in class actions were facing to certify a common issue arising from issuer misrepresentations, the legislature enacted s. 138.3 OSA. This section includes a deemed reliance provision:

“Where a responsible issuer . . . releases a document that contains a misrepresentation, a person or company who acquires or disposes of the issuer’s security during the period between the time when the document was released and the time when the misrepresentation contained in the document was publicly corrected has, without regard to whether the person or company relied on the misrepresentation, a right of action for damages against,

(a) the responsible issuer . . .”

Prior to the Court of Appeal’s decision in Sharma, typically class counsel would commence the class action and include a clause asserting the plaintiff’s intent to seek an order granting leave to assert the s. 138.3 claim. A commonly held view was that the inclusion of this language in the statement of claim would be sufficient to meet conditions for commencing a claim within the three-year limitation period set by s. 138.14 of the act, and/or that a pleading that the plaintiff was going to pursue the s. 138.3 claim would trigger the suspension of limitations periods established by s. 28 of the Class Proceedings Act.

Section 28 of the CPA suspends the running of limitation periods applicable to the causes of action asserted in a class proceeding, and sets out the circumstances under which the limitation may resume:

“28. (1) Subject to subsection (2), any limitation period applicable to a cause of action asserted in a class proceeding is suspended in favour of a class member on the commencement of the class proceeding and resumes running against the class member when,

(a) the member opts out of the class proceeding;

(b) an amendment that has the effect of excluding the member from the class is made to the certification order;

(c) a decertification order is made under section 10;

(d) the class proceeding is dismissed without an adjudication on the merits;

(e) the class proceeding is abandoned or discontinued with the approval of the court; or

(f) the class proceeding is settled with the approval of the court, unless the settlement provides otherwise.

(2) Where there is a right of appeal in respect of an event described in clauses (1) (a) to (f), the limitation period resumes running as soon as the time for appeal has expired without an appeal being commenced or as soon as any appeal has been finally disposed of.”

Having asserted in the statement of claim that the plaintiff intended to seek leave to commence the s. 138.3 Securities Act claim, it was thought that the claim was, in fact, adequately commenced to meet the three-year s. 138.14 limitation period, and, in any event, the tolling effect of s. 28 of the CPA would stop the time from continuing to run. The plaintiff could then proceed in the ordinary course to proceed to certification and have the s. 138.3 leave motion heard at the same time. For example, in both Silver v. Imax Corp. and Dobbie v. Arctic Glacier Income Fund, class counsel brought the certification and s. 138.3 leave motions contemporaneously.

The Court of Appeal’s decision in Sharma has brought an end to that notion. In Sharma, the appeal court interpreted the relevant provisions of the OSA to mean that no action is “commenced” under s. 138.3 until leave is granted under s. 138.8.

Section 138.8 states:

“No action may be commenced under section 138.3 without leave of the court granted upon motion with notice to each defendant. The court shall grant leave only where it is satisfied that,

(a) the action is being brought in good faith; and

(b) there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.”

Until leave is granted, the three-year limitation period continues to run. Issuing a statement of claim in which the intent to seek leave is asserted does not “commence” the s. 138.3 claim to trigger the tolling effect of s. 28 of the CPA. There is no s. 138.3 claim commenced until the court, in fact, grants leave. The Court of Appeal drew the distinction between “asserting,” i.e. making allegations, in a statement of claim, and “commencing” the action in which the allegations are asserted.

“Without leave having been granted, a s. 138.3 cause of action cannot be enforced. It cannot be invoked as a legal right. Section 138.14 says as much. Thus giving the suspension provision in s. 28(1) of the CPA its ordinary meaning, the s. 138.3 cause of action cannot be said to be asserted in the [plaintiff’s] class proceeding since no leave has been granted. . . . without leave being granted, the cause of action cannot be said to be asserted in a class proceeding.”

The result of Sharma is that all securities class actions that seek to rely on the s. 138.3 deemed reliance provisions for secondary market purchasers will have to be pursued on a fast track. The plaintiff only has three years from the date of the corrective disclosure to gather a sufficient record to meet the evidentiary burden of s. 138.8(b), and to obtain the order granting leave of the court to commence the s. 138.3 claim. (Before leave is granted, the court must be satisfied that “there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff,” according to Imax.)

Since the claim is not commenced until that court order is made, there will be significant time pressures on class counsel. They will have to schedule the leave motion allowing sufficient time for a reserved decision, which means pursuing the motion and disclosure expeditiously.

It remains to be seen whether this will result in lowering the evidentiary burden on plaintiffs for the leave motion because of the limited time they will have to independently investigate the claim and marshall the relevant evidence on the merits, or whether class counsel will become more aggressive in seeking early discovery from the defendants through cross-examination.

In my view, there should be no need for the plaintiff to undertake a substantial pre-discovery to prepare for the leave motion. This is contrary to the intent of the legislation, and would place undue burdens on the parties before the claim is even out of the box.

ustice Paul Perell cracked open a hornets’ nest last July when he delivered a decision from the Ontario Superior Court ordering a group of corporate defendants to file their defence in a proposed class action, even though the case hadn’t yet been certified.

The judge’s order in Pennyfeather v. Timminco Ltd. — a shareholder lawsuit — ignited a wave of commentary among class action practitioners, bloggers, and Twitterers. “This decision represents a marked departure from the prevailing procedure in class actions,” said an article co-written by Bennett Jones LLP defence litigator Robert Staley. Mary Jane Stitt, a partner at Blake Cassels & Graydon LLP, was more blunt. Defendants, she told the Globe and Mail, are now “being asked to fight the battle before you even know whether you’ll have to go to war.”

Although Perell’s ruling actually reflects the wording of Ontario’s class action statute, it undercuts a 15-year, unwritten custom in which defendants typically wait until a case is certified before filing their defence. Perhaps the noisy reaction to it was less aimed at the decision itself, and more an expression of years of built-up frustration among the defence bar — a sense that the certification game is becoming increasingly stacked against them, and that courts are offering advice, re-interpreting conventions, and otherwise ushering plaintiffs through the certification gates.

Perhaps Perell’s ruling was simply the last straw. “There’s been a real surge in the common-law provinces in a liberalization in the courts’ approach to certification,” says Adrian Lang, a class action litigator with Stikeman Elliott LLP. “I’d like to think as a defendant that we will start to see a bit of retrenching. . . . We certainly can’t get more liberal than we are right now.”

Certification may be simply a procedural matter, but the stakes are high for both sides. Corporate defendants say a certified class action creates lousy optics: an impression in the public’s mind that the company has committed a wrong, even though the merits of the claim have yet to be judged. For plaintiffs, certification can be a tool to apply pressure against a defendant to settle before the case goes to trial.

Lang and her colleagues in the defence bar say in the early years, Canadian courts outside Quebec took a more cautious approach to certifying cases, following the introduction of class action legislation in Ontario and British Columbia in the 1990s. Individual preliminary motions were routinely accepted from defendants in advance of

certification. And statements of defence were commonly withheld with the courts’ approval until after certification, a custom that emerged from Ontario (now Chief) Justice Warren Winkler’s 1996 decision in Mangan v. Inco Ltd. that judges had wide discretion to allow such delays by defendants.

Laila Brabander, assistant vice president and specialty claims manager for Chubb Insurance Co. of Canada, who manages litigation against corporate defendants insured by Chubb, says there’s been a “noticeable change” in the courts’ approach in recent years. “There’s no question that the pendulum has swung, and recent decisions likely suggest that certification is easier,” she says.

In 2005, for example, in the national residential schools class action Baxter v. Canada, Winkler again influenced the system by ruling that certification motions should be heard promptly, and should not be delayed by other motions. That led to an increasing reluctance by other judges to entertain a series of technical challenges by defendants.

Elsewhere there have been examples of judges helping plaintiff lawyers draft more sustainable pleadings, as Perell did before he certified the overtime labour class action McCracken v. Canadian National Railway Co. in 2010.

There are also cases — as in Smith v. Inco, recently overturned by the Ontario Court of Appeal — of judges actively rewriting common issues during a trial. “There’s a perception that the practice of some judges assisting plaintiffs in improving their pleadings is unfair to defendants,” says Sonia Bjorkquist, a class action litigator at Osler Hoskin & Harcourt LLP. “I wonder about whether it’s tipping the balance in favour of plaintiffs.”

Other lawyers say judges are behaving properly. After all, the purpose of class actions is to extend justice to large groups of people who otherwise might not receive it. Why toss out a proposed lawsuit with the correct germ of an idea, simply because it hasn’t been pleaded correctly by the plaintiff’s counsel? “In the CNR case, the plaintiff lawyers didn’t describe the common issues exactly the way they should have to get certified, so Justice Perell modified them. He was doing his job,” says Kirk Baert, a plaintiffs’ litigator at Koskie Minsky LLP in Toronto. “To me it’s not logical, in a claim of half-a-billion dollars, to say, ‘You lose certification because of the way you worded your claim.’ That’s not the purpose of the justice system, to have a series of trap doors people can fall into. Cases should be decided on their real merit, and sometimes there are pleadings problems.”

The trouble is that judicial re-working of plaintiff pleadings has become so common

that defendants now have trouble knowing what precisely to defend, says Lang. “It makes litigating prior to certification a challenge, because you’re dealing with a constantly moving target.”

Meanwhile in competition class actions, “every province in this country, I would argue, has more recently become overwhelmingly plaintiff-friendly,” says Katherine Kay, a competition law specialist with Stikeman Elliott LLP. The B.C., Quebec, and Ontario courts have since 2009 certified a series of price-fixing cases — including Pro-Sys Consultants Ltd. v. Infineon Technologies AG in the B.C. Court of Appeal — despite difficulties in showing how harm was passed down through a distribution chain to indirect purchasers. Two similar cases in B.C. produced different rulings — Pro-Sys Consultants Ltd. v. Microsoft Corp. and Sun-Rype Products Ltd. v. Archer Daniels Midland Co. — that were granted leave to appeal to the Supreme Court of Canada

on Dec. 1, 2011.

Kay says certification has become almost a foregone conclusion in the competition area, not solely because the courts favour plaintiffs, but because in light of the complexity of these cases — and the conflicting expert evidence — courts are passing the buck to trial judges rather than scrutinizing whether a proposed class action meets the certification test. As a result, a series of “messy” cases, as Kay puts it, with “unbounded and inappropriate” common issues and class definitions, are winding up at trial. “The only time you have to resolve the issue of whether or not it’s an appropriate case to be treated as a class action, the only kick you get at that can is on certification,” she says. “So I would argue it’s an abdication — that’s a strong word, I appreciate that — but it’s an abdication of the court’s responsibility to duck these issues on certification and say, ‘You know what, we’re not up to dealing with them, so lets certify it and leave it to the trial judge.’

“The courts have made a policy decision, I would argue, that class actions are good, and we’re not going to subject them to the kind of scrutiny that we do other cases.”

The access to justice that class actions offer large groups of citizens, defence lawyers say, is likely what’s motivating judges to ease the way for plaintiffs in many certification proceedings. That, and the desire to streamline lengthy, expensive, and drawn-out pretrial procedures, may be the impetus behind Perell’s ruling on the early filing of statements of defence. “I don’t see that as a particularly pro-plaintiff decision,” says Baert. “I’d say it’s intended to make it easier for judges doing these cases to have a grip on what’s in dispute, earlier in the case.”

In his decision, Perell argues that the early delivery of a statement of defence “could be a fresh step that could foreclose any subsequent attack by the defendant for any pleadings’ irregularities.” But defence lawyers warn that Perell’s desire to streamline class actions, if adopted by other courts, could have the opposite effect. Rather than making the pre-certification phase more efficient, it could force defendants to file numerous technical and substantive preliminary motions at the very start of the pre-certification process, before their defence-filing deadline. “We’ll have to see how it unfolds,” says Bjorkquist. “Allowing defendants to attack dubious claims or sloppy pleadings, or over-broad pleadings before engaging in the costly certification process, could actually improve the system. On the other hand it may also threaten access to justice, because requiring defendants to bring a variety of motions will simply delay certification. Think about it — you bring a motion, you lose, you appeal, etc.”

What’s more certain, says Bjorkquist, is that filing an early defence will mean more defence amendments in response to ongoing plaintiff amendments, and therefore higher costs for defendants, as the case proceeds through certification. More importantly, she says: “Is it fair that defendants are forced to plead earlier, and disclose positions or strategy before determining whether the plaintiff has met their burden under the legislation, as to whether the proposed class action should succeed at all?”

Of course it’s fair, says Baert. “In all other types of litigation, no matter how complex, defendants file defences at the beginning, within the time limits and the rules. They manage to do so without the sky falling, or the world coming to an end.” Baert also calls complaints about a plaintiff-friendly trend in the courts “a lot of smoke.”

“I certainly don’t think it’s remotely plausible to argue that judges in this country are bending over backwards to help plaintiffs,” he says. “You only have to look at, where do most judges who handle complex litigation come from — the corporate law side. Is it likely there’s this cadre of extremely liberal judges who are looking to completely open the floodgates of class action litigation by bailing out incompetent plaintiffs counsel? Seems unlikely to me.”