Canada: Corporate Commercial Litigation - Recent Developments Of Importance

Reprinted with Permission from the 2006 issue of the Canadian Legal Lexpert Directory. (c) Thomson Carswell."

Counsel and their clients must be increasingly aware—and sensitive to—the indisputable fact that litigation is beginning to transcend borders, especially the 49th parallel. This arises for a number of reasons, in particular, recent developments with respect to enforcement of US judgments in Canada, as well as securities litigation. These developments suggest that not only these areas of litigation but all areas of litigation will increasingly be impervious to borders.

In light of the unprecedented volume of cross-border investments and transactions, a growth in litigation has inevitably followed suit. Cross-border litigation is fast becoming a fundamental aspect of comprehensive corporate client service. The Supreme Court of Canada (SCC) has recognized this trend, and—by embracing the near-universal movement towards judicial comity in international private law—it has bolstered the flow of wealth, investment and people across borders. As a result, top-ranked cross-border firms are increasingly turning their attention to disputes arising in comparable jurisdictions.

Gone are the days when a foreign default judgment against a Canadian defendant might not be enforced in Canada unless it was relitigated here on the merits. Now, fading economic, political and legal borders have inspired Canadian courts to reduce judicial redundancy.

In Morguard,¹ the SCC set out the "real and substantial connection" test for inter-provincial jurisdiction for adjudicating and enforcing judgments. This was based on the principles of order and fairness and on the need for a connection to the forum. Soon after, provincial appellate courts began extending the real and substantial connection test to foreign (outside Canada) jurisdictions as well,² an approach endorsed by the SCC in 2003 in Beals.³ According to the Beals/Morguard line of cases, several factors will inform whether jurisdiction exists.⁴ Generally, jurisdiction will exist where a Canadian company significantly participates in an activity, such as a land transaction,⁵ a proceeding or a submission to the courts.⁶ One thing is clear: Jurisdiction no longer depends on attornment, agreement to submit, residence and presence in a foreign jurisdiction.⁷

Provided jurisdiction is established, foreign judgments now carry a presumption of enforceability in Canada subject to three defenses set out in Beals, under which Canadian courts will not entertain relitigation on the merits of the case or on the amount of damages. These defences are (1) tainted by fraud, (2) contrary to public policy or (3) a denial of natural justice—each of which is narrow.

• A fraud defence only arises when new and material facts surface, or if the fraud was undetectable by the foreign court, to the extent that a defendant could not have raised it by exercising reasonable diligence.⁸

• A public policy defence is only available when the foreign judgment is contrary to our view of basic morality and justice. Repugnant foreign laws such as corruption or judicial bias may elicit this defense, but repugnant facts and shockingly high awards alone will not. Canadian courts are sensitive to the fact that allowing this defense equates to impeaching the laws or system upon which the foreign decision was made.⁹

• A natural justice defence is restricted to proceedings that violate Canadian principles of fundamental justice. This defence is slim, particularly for American and other analogous jurisdictions, because foreign processes must only meet Canadian minimum standards for procedural fairness.¹⁰ Procedural fairness is not related to the merits of the case and does not require the amount of the potential award to be specified, the witnesses to be identified or advisement on how to respond to a claim. It may, however, arise where notice was inadequate¹¹ or was not received, or the opportunity to defend was denied.¹²

The SCC has also reserved the right to recognize a new defense if injustice might otherwise result.¹³

In international litigation, Canadian courts assume knowledge of the rules of the jurisdiction in which a party chooses to have a real and substantial connection. Beals is being followed across the country,¹⁴ and both foreign-contested judgments and foreign-default judgments are enforceable in Canada.¹⁵ A recent Ontario decision has also recognized foreign non-monetary orders as enforceable in Ontario.¹⁶

These decisions escalate the importance of contractual clauses that clearly establish the governing jurisdiction intended by the parties. Proactive companies are now looking to legal counsel to help them understand the implications of the jurisdictions in which they operate. The roles and responsibilities of cross-border litigators now include communicating to clients when and how they may need to defend a suit in a foreign jurisdiction in order to protect themselves in Canada as well.

Clients operating in the US and in other jurisdictions require legal teams of both cross-border corporate and litigation experts, who appreciate the complexities of foreign litigation rules and recognize the enforcement implications here. The role of cross-border litigators will also become more important as companies are forced to defend claims on their merits in the foreign jurisdictions where they are brought. Companies ignoring this increased exposure, by failing to defend or address foreign proceedings, do so at their own risk.

Securities litigation is another area experiencing an increasing amount of cross-border actions and regulatory proceedings. These complex matters feature legal issues and prosecutorial and defense strategies requiring cross-border cooperation among litigation counsel.

An examination of the causes underlying the proliferation of cross-border securities litigation helps explain the types of legal issues and the approaches of the courts, regulators and securities litigation counsel that have developed. A number of these causes have been laid at the feet of corporations. First, both Canadian and US corporations have sought access to capital markets on both sides of the border. Second, both Canadian and US corporations have listed their securities on both Canadian and US exchanges. Third, both Canadian and US corporations have attempted to take advantage of favourable corporate structures, tax breaks and other features available on the other side of the border.¹⁷

However, there are some equally relevant causes that can be attributed to sources other than corporations. First, the recent overhauls of corporate governance and market surveillance legislation and practices that started with the Sarbanes-Oxley Act of 2002¹⁸ have significantly expanded the scope for regulating and scrutinizing corporate conduct. Second, there has developed an increasing degree of cooperation among securities regulators on both sides of the border¹⁹ and a corresponding recognition of this cooperation by the courts.²⁰ Third, the increasing availability of class-action procedures in Canadian jurisdictions has led to class-action claims in respect of the same securities being instituted in both countries, often in multiple jurisdictions in both countries, and often by teams of plaintiff counsel comprising Canadian and US firms.²¹ Fourth, plaintiffs are increasingly seeking to take advantage of favourable laws and procedures on both sides of the border.²²

Exacerbating these is a jurisprudential trend increasingly tolerating cross-border securities litigation. This starts with the virtually trite judicial acceptance by Canadian and US courts that jurisdiction will attach wherever securities are issued and traded, and wherever securityholders reside and purchase their securities, as opposed to simply where the corporation is domiciled. This seems especially true in class actions where competing classes, overlapping or not, are frequently asserted.

As a result, two broad practical trends have emerged for securities litigation counsel. The first is an increased need for cooperation with their cross-border counterparts, to ensure that comprehensive and timely advice and management are provided to clients for cross-border securities litigation issues. The second is a corresponding increased need to identify and assess cross-border issues, to ensure that the cross-border counsel team can comprehensively address such issues for all relevant jurisdictions. The following summarizes some of the more prevalent cross-border issues that arise in securities litigation:

• Liability standards. While it is beyond the scope of this article to conduct a comparative review of the securities laws of Canadian and US jurisdictions, two examples serve to highlight the importance of addressing the differing standards of liability. First, in the US, securities class-action claims are generally founded on the Securities Exchange Act of 1934,²³ which involves a scienter component. In Canadian jurisdictions, securities class-action claims are not restricted to such a basis and can be asserted on common-law causes of action for breach of contract or tort, quasi-tort and fiduciary duties, although certain of these causes of action still require a knowledge component. Second, as noted above, Canadian corporate statutes generally contain broad oppression protections in favour of corporation stakeholders. This type of relief is generally not available in the US.

• Evidentiary issues. A notable example that is receiving much judicial and academic commentary²⁴ is the question of how the differing protections against self-incrimination in Canada and the US are to be coordinated and accommodated in cross-border matters. In Canada, Section 13 of the Canadian Charter of Rights and Freedoms generally provides "use immunity" and "derivative use immunity" protecting a witness in a proceeding from having evidence given in the first proceeding, or evidence derived from evidence given in the first proceeding, used against him or her in a subsequent proceeding, and similar provisions are contained in the federal and provincial Evidence Acts.²⁵ However, in the US, witnesses have the benefit of asserting the Fifth Amendment privilege against self-incrimination. An issue arises as a result of these inconsistent treatments, in particular respecting the use that can be made of Canadian testimony in US proceedings.

• Privilege, confidentiality and privacy. While privilege and confidentiality are similar concepts on both sides of the border, there are cross-border differences in the substantive nature and extent, and in the procedural assertion and preservation of both. Further, there are differences in the privacy rights and in the competing freedom-of-information rights on each side of the border. Privilege, confidentiality and privacy issues regularly arise in securities matters and have serious cross-border implications. Among other things, generally a waiver of privilege in one jurisdiction in respect of one proceeding will waive privilege for all proceedings in all jurisdictions. Therefore, these issues must be carefully assessed on a cross-border basis in the face of any securities litigation or regulatory proceedings with cross-border potential.

• Document retention. In the post-Enron era, document retention has a significance previously unforeseen on either side of the border. The standard of awareness and the enforcement of record retention requirements in the US are stricter than in Canada. For example, in Zubulake v. UBS Warburg,²⁶ the court not only affirmed that a party must take reasonable steps to suspend its routine document retention by putting a "litigation hold" in place when a party reasonably anticipates litigation, but went on to hold that counsel (including both in-house and outside litigation counsel) have a positive ongoing duty to ensure that the client issues, communicates and enforces the litigation hold throughout the life of the litigation. In cross-border situations, it is imperative that the more stringent US litigation hold standards are satisfied from the outset.

• Regulatory and investigative issues. It is a fact that Canadian and US regulatory agencies share information and findings and otherwise coordinate. As a result, some factors to bear in mind include the following:

• Insurance. Frequently, insurance coverage will be available to respond to securities claims at both the corporate and director and officer levels. This needs to be managed from the outset on a cross-border basis to ensure consistency and fullness in reporting losses, assessing and preserving coverage, engaging counsel and pursuing defense costs indemnification. It is imperative that counsel assess these issues from the outset and manage the relationship with all applicable insurers on a cross-border basis, bearing in mind different disclosure requirements, media strategies and privilege and confidentiality concerns that apply in differing jurisdictions.
• Media relations. Generally the role of the media is not an important factor in litigation. However, regulators of public securities markets and corporations whose securities trade on those markets have legal responsibilities and political and commercial mandates to publicly report material developments. Further, in securities litigation claims, plaintiffs and their counsel generally attempt to publicize their claims to solicit coplaintiffs and pressure the corporate target. As a result, in securities litigation, media relations become an important aspect of case management. Media relations need to be addressed at an early stage and should be handled consistently on a cross-border basis.

• Conflicts. A heightened spotlight has been placed on conflicts issues in Canada as a result of two recent decisions of the Supreme Court of Canada, Martin v. Grey²⁷ and R. v. Neil.²⁸ However, conflicts principles in the US, while equally important, are not identical. Furthermore, analysis of conflicts in the securities litigation context (for example, whether one counsel or counsel team can represent all or some or none of the primary corporation and its affiliates and all of their directors and officers) can only be determined on a case-by-case basis and will call into play various factors, including the substantive, evidentiary and insurance issues raised above. These matters must be addressed with a view to cross-border implications.

While these issues are not exhaustive, they indicate the importance of counsel on both sides of the border acting in a coordinated and cooperative manner in the prosecution and defence of securities proceedings. The days of assessing competing Canadian and US cross-border litigation claims on the simple basis of whether or not in a particular case it would be preferable to have trial by judge or jury, or to have recourse or avoid exposure to Canadian or US damage awards, are gone. We have entered an era where cross-border litigation and regulatory securities claims are increasingly becoming the norm, and counsel and clients need to adapt and respond with a coordinated approach.

Such coordination will mean that litigation counsel must be able to simultaneously conduct cases in close collaboration with players in several jurisdictions who are experienced in handling the issues that multijurisdictional litigation necessarily presents. That counsel will be expected to be able to alert the client to those issues in a timely way, and in a way to allow the client to make informed choices that are often fraught with consequences.

Being sued in several places at once immediately raises two key issues for the corporation: (1) which jurisdiction is to be preferred and (2) how can the corporation ensure that its rights (or liability) will be decided in that jurisdiction and not elsewhere. This is not simply a question of forum conveniens but also of practical and strategic consideration of the availability of jury trials, discovery rules, likely size of awards for normal damages and punitive or exemplary damages, the rapidity of the course toward trial, differing legal standards and even the language of the trial.

Even if a conclusive election cannot be made about where to proceed, it is often possible to influence, at least, where to proceed first. For example, it may seem preferable, in some cases, to allow a class action to proceed more quickly to the stage of certification in Ontario than in Quebec, as the criteria for certification appear considerably more lax in Quebec of late. Alternatively, if the class actions appear to be ripe for settlement, a settlement of the Quebec case might produce a precedent favourable for the later settlement of the class action in other jurisdictions.

These choices are difficult and must often be made in short order, in the context of a well-developed overall strategy. That strategy must be well understood and implemented consistently by the corporation’s counsel in the various jurisdictions concerned. It may, for example, be important to the client that nothing be done to attorn to one or a number of those jurisdictions, or to lose procedural defenses there.

Particular defences or statements might seem advantageous, even necessary, in one jurisdiction but work as a disadvantage in another. Worse, these frictions are sometimes unavoidable, and choices must be made in order to confine the disadvantage to the least harmful jurisdiction. The tolling of limitations periods can, depending on the case, be straightforward here but complex there.

Issues such as these, and their interplay with all the others, must be approached logically with a view to the consequences and advantages of each choice. Clients facing litigation of this sort will therefore demand counsel who can function as part of a larger team, perhaps even taking the responsibility of recruiting others into that team who understand the practical importance for the client of each of the myriad of choices available.

Cross-border lawyers and their clients must continue to adapt and stay ahead of the curve to serve their clients facing litigations and disputes that have invariably arisen—and will continue to arise—as the volume of cross-border transactions increases.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.