Silver v IMAX – the action continues 

publication 

March 2011

Class Action Bulletin

A judge of the Superior Court of Ontario has recently denied permission for IMAX Corporation to appeal two prior rulings which gave the green light to a securities class action.1

background

Just over a year ago, there was a lot of attention generated by the IMAX case because it was the first case in Ontario to address the statutory provision for secondary market liability. In a prior article summarizing that case,2 the writer noted that there were two significant aspects to the decision:

  • the court's interpretation of the "relatively low" threshold under Section 138.8 of the Ontario Securities Act for leave to commence a claim based on secondary market liability; and
  • the court's ruling with respect to the common law tort of misrepresentation. In particular, the motions judge had concluded that, notwithstanding the absence of a pleading that individual class members relied on the alleged misrepresentations, the claim for common law misrepresentation could nonetheless be certified as a common issue. This was surprising because, traditionally, in order to succeed on a claim for misrepresentation, a plaintiff must prove detrimental reliance on the representation. This in turn becomes logistically problematic when dealing with a class of numerous plaintiffs because that necessitates an examination of each individual plaintiff's reliance.

secondary market liability

In denying leave to appeal with respect to the cause of action under Section 138.8, Justice Corbett noted that, since IMAX was the first decision under the statutory provision, there were no other "conflicting decisions" which was one of the criteria for granting leave. With respect to the other main criterion for granting leave, Justice Corbett concluded that there was no reason to doubt the correctness of the motion judge's decision.

This aspect of his decision was not surprising since the motion judge had carefully reviewed a massive amount of evidence and, based on the test under Section 138.8, she concluded that there was reasonable possibility that the plaintiffs would succeed at trial. In order for Justice Corbett to find a reason to doubt the correctness of the motion judge's decision, he would have been required to conclude that the plaintiffs had no possibility of success at trial.

common law misrepresentation

The surprising part of Justice Corbett's decision was his denial of leave to appeal the motion judge' s ruling on the issue of common law misrepresentation. Not only did he believe that there was no reason to doubt the correctness of the motion judge's ruling, but he held that there was no conflicting decision on the point.

In fact, there was a decision in 2010 which denied certification of a securities class action based on common law misrepresentation. The case of McKenna v Gammon Gold Inc3 dealt with alleged misrepresentations in Gammon's prospectus, as well as numerous alleged misrepresentations concerning the business and affairs of Gammon over a ten-month period. Although the motions judge in the Gammon case certified the class with respect to the prospectus misrepresentation, he refused to certify with respect to the other misrepresentations because, in his view, the claim gave rise to individual inquiries as to reliance:

There is no basis on which reliance could be resolved as a common issue. The need to determine the issue individually would give rise to a multitude of questions in each case concerning the representations communicated to a particular investor, the experience and sophistication of the investor, other information or recommendations made to the investor and whether there was a causal connection between the misrepresentation(s) and the acquisition of the security. The inability to determine the defendants' liability without individual inquiries as to reliance makes the proceeding unsuitable for certification in relation to the negligent misrepresentation claim.4

Leave to appeal in the Gammon case was denied by Justice Sachs. In her decision, interestingly, Justice Sachs distinguished the motion judge's ruling in IMAX on the basis that it did not involve numerous different misrepresentations, whereas the Gammon case involved multiple misrepresentations relating to a variety of complaints.

Likewise, Justice Corbett in the IMAX case distinguished the Gammon case on the basis that the Gammon case involved numerous statements in different contexts whereas, in his view, the subject matter of the IMAX case was confined and class reliance could be inferred.

conclusion

From a legal standpoint, the result is intriguing because it signifies an evolution in the law of misrepresentation; namely, in certain circumstances (where the number of statements is limited), reliance may be inferred by the court and need not be proven as a fact.

From a practical standpoint, however, the result is troubling, particularly in the class action context. Even if the number of statements or representations in issue is limited, there will be a large number of plaintiffs in the class, and the defendant should be permitted to prove that any particular class member either did not receive or read a given statement, or rely upon it. By necessity, the exercise becomes an individual examination as to reliance, which in turn renders the issue unsuitable for being a common issue. That is precisely why the statutory claim for secondary market liability was enacted.

not the final word

It is doubtful that the IMAX decision represents the final word on the issue. Justice Corbett correctly identified that the relationship between common law and statutory claims of misrepresentation is important and merits appellate consideration. He predicted that the Court of Appeal will be able to give full consideration to these issues if and when the IMAX case is appealed after a trial.

by Joseph D'Angelo

1  Silver v Imax, 2011 ONSC 1035.
2  "Class Action: Implications of Silver v IMAX" (Joseph D'Angelo, 26 April 2010).
3  McKenna v Gammon Gold Inc, 2010 ONSC 1591.
4  Ibid at para 161.

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2011