The Court of Appeal for Ontario's recent decision in Kaynes v. BP p.l.c., 2021 ONCA 36 ("Kaynes") provides guidance on when a claim for fraudulent misrepresentation is discoverable in a securities class action and when a claim can be dismissed as statute-barred on a Rule 21 motion. The decision is the last in a series of attempts made by the plaintiff to commence a class proceeding against British Petroleum ("BP") in Ontario, following the April 2010 explosion of the BP oil rig Deepwater Horizon in the Gulf of Mexico.

Background

The plaintiff Kaynes was a resident of Alberta who on or before August 2008 purchased BP shares on the New York Stock Exchange. Kaynes alleged that BP made numerous misrepresentations in its securities filings about its operational safety and its ability to respond to an oil disaster, which had artificially inflated BP's stock price. In the wake of the Deepwater Horizon explosion, Kaynes alleged that BP made several revisions to its disclosure documents correcting the misrepresentations it had made over the previous years, which caused BP's share price to plummet.

In November 2012, Kaynes filed a statement of claim in Ontario alleging the statutory cause of action for secondary market misrepresentation provided for in s.138.3 of Ontario's Securities Act (the "Act") and common law negligent misrepresentation (this allegation was withdrawn in August 2013). BP challenged Ontario's jurisdiction over this matter, alleging that there was no real and substantial connection between Ontario and the claims of Canadian residents who purchased their shares on foreign exchanges. BP's jurisdictional challenge was initially dismissed, but the Court of Appeal for Ontario allowed BP's appeal on the basis of forum non conveniens and permitted the proposed class action to proceed only on behalf of those plaintiffs who had purchased BP shares on the Toronto Stock Exchange. The claim of Canadians who purchased their shares on foreign exchanges was stayed.

After bringing a successful motion to lift the stay of his Canadian proceedings in Ontario, in June 2017, Kaynes delivered an amended statement of claim. This amended claim advanced statutory misrepresentation claims solely on the basis of the Act. It added new misrepresentation claims, and added for the first time, allegations that BP knew that its misrepresentations were false when it made them. BP succeeded in challenging the timeliness of many of the misrepresentation claims, which were held to be statute-barred as the three-year limitation period under the Act had lapsed. This decision had the effect of significantly reducing the scope of the proposed class period (from 1,080 days to 55 days).

In September 2019, Kaynes delivered another amended statement of claim that for the first time expressly advanced a cause of action for fraudulent misrepresentation.

Decision of the Motion Judge

BP brought a motion under Rule 21.01(1)(a)1 of the Ontario Rules of Civil Procedure for an order declaring that Kaynes' fraudulent misrepresentation claims were statute-barred pursuant to the Ontario Limitations Act, 2002. Kaynes resisted the motion on two bases: (i) that it was not plain and obvious that his claim was statute-barred; and (ii) a limitations issue cannot be determined on a Rule 21 motion when discoverability is in issue.

The motion judge granted BP's motion and dismissed the action, holding that all common law misrepresentation claims, whether negligent or fraudulent, were discovered when BP made corrective disclosures between March and June 2010. The limitation period for this cause of action expired in June of 2012, and therefore, the fraudulent misrepresentation claims advanced by Kaynes in 2019 were out of time. Alternatively, the motion judge concluded that Kaynes would have discovered BP's fraudulent intent by 2010 from the existence of U.S. litigation against BP, which advanced claims based on scienter (an intent to deceive, manipulate or defraud) - that is, BP had fraudulently misrepresented its securities to secondary market purchasers.2

While the motion judge acknowledged that a court should only rule on a limitation issue before a statement of defence is filed in the rarest of circumstances, the motion judge was satisfied this was such a case as it was "plain and obvious" that no additional facts could be asserted that would alter the conclusion that the limitation period had expired.

Kaynes appealed the motion judge's decision.  

Decision of the Court of Appeal for Ontario

The Court of Appeal held that the motion judge erred in his discovery analysis and particularly in his finding that the claim for fraudulent misrepresentation was discovered when BP admitted to making the misrepresentations, rather than when BP admitted to knowingly making the misrepresentations.

The timing of "discoverability"

Under the Limitations Act, 2002, a "claim" is discovered when the person with the claim first knew or ought to have known "that the injury, loss or damage was caused by or contributed to by an act or omission" (among certain other criteria). As a claim necessarily involves a legal remedy, the act or omission that must be discovered is one that will give rise to a legal remedy, i.e., a cause of action. Therefore, the Court reasoned, in the case of a fraudulent misrepresentation the act or omission that must have been discovered is a misrepresentation "made with knowledge that the representation was false, an absence of belief in its truth or recklessness as to its truth". To define "discovery" of such a claim in a way that omitted this "knowledge" requirement would make no sense, as it would require a person to commence a fraudulent misrepresentation action without the legal basis for doing so, in order to preserve the limitation period.

The Court's holding

Ultimately, the Court held that Kaynes had not discovered the fraudulent misrepresentation claim in 2010 as the motion judge found, but found that Kaynes was still out of time on the basis that, the plaintiff's pleadings conceded that July 2015 was the last date BP's fraudulent conduct could have been discovered. As this July 2015 date was not in dispute, the Court held it is plain and obvious that Kaynes' 2019 fraudulent misrepresentation claim was out of time and statute barred. 

The Court further held that the motion judge erred in relying on pleadings from the U.S. proceedings to establish discoverability of fraudulent circumstances. While the scienter pleading means that the plaintiff alleges knowing falsehoods, the Court noted that a pleading on its face is not determinative of the knowledge issue and a factual inquiry was required.

The Court agreed with the motion judge that the limitations issue could be determined on a Rule 21 motion. While Rule 21.01(1)(a) refers to the determination of a question of law, the Court held that where the facts regarding discovery of a claim are undisputed so that the determination is "plain and obvious", then whether the action is statute-barred is considered a question of law that can be determined on a Rule 21 motion.

Key Take-Aways

Kaynes makes it clear that a limitation period for fraudulent misrepresentation commences when a claimant is able to discover that a misrepresentation was made "with knowledge that the representation was false, an absence of belief in its truth or recklessness as to its truth"; and that a Rule 21 motion may be an effective way to dismiss statute-barred claims provided the facts regarding discovery of the claim are undisputed.

From a practical perspective, this case is a good reminder about the importance of observing limitation periods in securities class actions and how defendants can rely on limitation period defenses to substantially limit plaintiffs' claims.

Footnotes

1 Rule 21.01(1)(a) provides that "A party may move before a judge, for the determination, before trial, of a question of law raised by a pleading in an action where the determination of the question may dispose of all or part of the action, substantially shorten the trial or result in a substantial saving of costs."

2 In the U.S., investors rely on SEC Rule 10b-5, 17 C.F.R. s. 240. 10b-5 under s.10(b) of the Securities Exchange Act of 1934, to bring actions for misrepresentation in continuous disclosure. A plaintiff in the U.S. must plead and prove scienter, namely an intent to deceive, manipulate or defraud.

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