Key Takeaways From 2022 Appellate Decisions

• Law Firm: Aird & Berlis LLP
• Subject Matter: Litigation, Mediation & Arbitration, Arbitration & Dispute Resolution, Class Actions, Trials & Appeals & Compensation
• Author: Ms Anisha Bhardwaj and Steve J. Tenai
• Published date: 17 March 2023

This year's edition of our annual summary of key appellate decisions from the past year addresses a broad range of topics of interest.

Assessing Proximity in Whether a Bank Owes a Duty of Care for Economic Losses

McDonald v. Toronto-Dominion Bank, 2022 ONCA 788 arises from the second largest Ponzi scheme in history perpetrated by the principal of Stanford International Bank ("SIB"). TD acted as SIB's primary U.S. dollar correspondent bank responsible for receiving funds and disbursing funds to purchasers of SIB's certificates of deposit. TD's services were critical to SIB's operations.

SIB's Joint Liquidators sued TD for the billions of dollars lost alleging that TD was negligent in its provision of service. The trial judge dismissed the claim, finding insufficient proximity to impose a duty of care on TD to SIB's customers. The Court of Appeal dismissed the Liquidators' appeal.

At the proximity stage of the duty of care analysis, the overarching question is whether the parties are in such a close and direct relationship that it would be just and fair having regard to that relationship to impose a duty of care in law. In cases involving pure economic loss arising from negligent performance of services, two factors are determinative in the proximity analysis: the defendant's undertaking and the plaintiff's reliance.

The Liquidators submitted that, conducted properly, a full proximity analysis confirms that there was a relationship of proximity between TD and SIB because TD undertook to provide correspondent bank services and SIB had the right to rely on TD to do so with reasonable care. The Court of Appeal found it "simply not believable" that SIB detrimentally relied on TD to effectively protect SIB from itself. The Court of Appeal held that monitoring SIB's internal operations so as to protect SIB from internal abuse fell outside the scope of the proximate relationship and therefore outside TD's duty of care. It agreed to provide correspondent banking services; it did not assume the role of a regulator, auditor or insurer.

Whether a relationship fits within an established or analogous category goes beyond the identity of the parties. It also requires considering the scope of activity. Merely because particular factors will support a finding of proximity and recognition of a duty within one aspect of a relationship does not mean a duty will apply to all aspects of that relationship and for all purposes and to compensate for all forms of loss. Accordingly, the Court of Appeal held that to find a relationship of proximity, a more particularized approach is required, and the mere fact that proximity has been recognized as existing in a bank-customer relationship for one purpose is insufficient to conclude that proximity exists between the same parties for all purposes.

The Court rejected that there exists an all-encompassing category of proximity between banks and their customers in relation to "banking services." To accept such a broad category would be to ignore that banks undertake an extremely broad range of different activities for very different purposes. In other words, to define the relationship of proximity as simply that of a "bank-customer" relationship ignores the reality that banks and their customers are not engaged in a one-size-fits-all relationship.

Relative to prior cases finding banks to owe duties to their customers in carrying out activities, the Court of Appeal agreed with the trial judge that none went so far as to establish that a bank has a proximate relationship with a client that extends to monitoring the client for the purpose of detecting internal fraud. It distinguished cases that suggest that a bank may be liable to a customer where the bank fails to question suspicious banking transactions, as there was no allegation against TD that there were any suspicious banking transactions and the trial judge found that there was no reason to suspect fraud.

Regulatory 'Best Interest' Obligation Does Not Mean Fiduciary Duty

In Boal v. International Capital Management Inc., 2022 ONSC 1280, the majority of the Ontario Divisional Court upheld the dismissal of a certification motion brought against the plaintiff's investment advisors and mutual fund dealer for allegedly breaching their fiduciary duty. The plaintiff's allegation was premised on the advisors' failure to disclose a commission they received on an investment recommended to the plaintiff. The plaintiff's claim hinged on whether investment advisors could have an "ad hoc" fiduciary relationship with the putative class members based on their professional duties under the rules and obligations outlined in the Mutual Fund Dealers Association rules and by-laws and the Financial Planners Council Code of Ethics, including the obligation to exercise business judgment in the "best interest of the client" in respect of any conflict of interest that may arise.

In a split 2-1 ruling, the majority of the Court stated that an ad hoc fiduciary relationship could not be established solely on the basis of professional rules or ethical codes. Instead, the existence of a fiduciary relationship for investment advisors must be assessed in reference to the multitude of factors set out by the Ontario Court of Appeal in Hunt v. TD Securities on a case-by-case basis. Those factors include considering the vulnerability of the client, the degree of trust and confidence between the client and advisor, history of relying on the advisor's advice and the extent to which the advisor has power or discretion over the client's account.

While a factor in considering the nature of the relationship is also the professional rules or codes of conduct in helping a court establish the duties of the advisor and the standards to which the advisor will be held, the majority found that the approach of the dissenting judge incorrectly turned one factor - professional rules and ethics codes - into the sole factor in determining whether a fiduciary duty exists. The majority commented that "the regulatory best interests standard is not an unqualified common law fiduciary standard." It noted that adopting a "one-size-fits-all" duty would cast the net too wide and ignore the multi-factor analysis that is required at common law. The goal of imposing fiduciary duties is to protect particular relationships based on dependency and vulnerability and entailing high trust and confidence. Obligations under professional rules of good faith, care, confidentiality and disclosure apply to a variety of non-fiduciary relationships as well. There are other legal concepts, like tort and unjust enrichment to protect against the conduct alleged, albeit not on a class but an individual basis. Accordingly, the dismissal of the certification motion was upheld.

Are Arbitration Clauses Enforceable Against a Bankruptcy Trustee?

The Supreme Court of Canada in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 ("Peace River Hydro Partners") clarified whether and in what circumstances a contractual agreement to arbitrate should give way to the public interest in an orderly and efficient resolution of a court-ordered receivership under the Bankruptcy and Insolvency Act ("BIA"). The BIA authorizes courts to do what practicality demands in the context of a receivership, and the single proceeding model favours the enforcement of stakeholder rights through a centralized judicial process for an equitable and orderly resolution of insolvency disputes.

Nevertheless, the Supreme Court commented that "courts should generally hold parties to their agreements to arbitrate, even if one of them has become insolvent," as arbitration law and insolvency law both place an emphasis on efficiency and expediency, procedural flexibility and expert decision-making. This presumption may be disregarded, and an arbitration clause held to be inoperative where the clause would "compromise the orderly and efficient resolution of a receivership." Among the non-exhaustive list of factors that may be considered by a court include: (a) the effect of arbitration on the integrity of the insolvency proceedings which are intended to minimize economic prejudice to creditors; (b) the relative prejudice to the parties from the referral of the dispute to arbitration; (c) the urgency of resolving the dispute; and (d) the effect of a stay of the insolvency and bankruptcy proceedings.

In Peace River Hydro Partners, the parties had entered into multiple agreements for the design and construction of a major dam and hydroelectric generating station. Each agreement provided for different arbitration procedures. After Petrowest entered receivership pursuant to the BIA, the Receiver brought a civil claim against Peace River to collect funds allegedly owed to Petrowest for performance of work under the agreements. Peace River responded by applying for a stay of proceeding pursuant to B.C.'s Arbitration Act.

The Supreme Court approached the stay issue using a two-part framework that is implicit in provincial arbitration legislation: (1) whether the applicant seeking a stay has established an "arguable case" that the technical prerequisites to a stay exist¹ and (2) whether statutory exceptions to a mandatory stay of court proceedings apply.

On the first issue, the Court rejected that the Receiver was not a party under the arbitration agreement because it is distinct from the debtor and that a receiver can unilaterally disclaim a debtor's pre-existing arbitration agreement by filing a civil proceeding.

As to the second issue, the Supreme Court cited the Receiver's evidence that: (i) the Receiver would need to participate in and fund at least four different arbitrations involving seven different sets of counterparties; (ii) some of the claims involve entities not subject to any of the arbitration agreements and...