Ontario Court Of Appeal Summaries (September 18 – September 22, 2017)

Below are the summaries of this week's civil decisions of the Court of Appeal for Ontario.

The Court released two companion decisions (El-Khodr v. Lackie and Cobb v. Long Estate) relating to the deductibility of collateral benefits, namely Statutory Accident Benefits, from MVA damage awards.. The decisions are lengthy and detailed and go into depth on how amendments to the Insurance Act have impacted the deductibility of collateral benefits. The Court also dealt with the applicable prejudgment interest rate and whether collateral benefits should be deducted when determining whether an offer to settle attracts Rule 49 consequences (yes).

In Rahimi v. SouthGobi Resources Ltd., a secondary market securities class action case, the Court reversed the certification motion judge and certified the claim against the individual officers responsible for the allegedly misleading representations of the corporation.

Finally, there was a family law decision (Whalen-Byrne v. Byrne) that considered the proper calculation of the period of cohabitation for the purposes of determining the duration of spousal support under the SSAGs, and a municipal law summary judgment decision regarding the propriety of how municipal wastewater processing fees were calculated.

Table of Contents:

Civil Decisions

Rahimi v. SouthGobi Resources Ltd., 2017 ONCA 719

Keywords: Securities Law, Secondary Market Misrepresentations, Class Actions, Securities Act, R.S.O. 1990, s. 138.8(1), s. 138.4(6)(a), Defence of Reasonable Investigative Efforts

Nylene Canada Inc. v. Arnprior (Town), 2017 ONCA 726

Keywords: Municipal Law, Municipal Services, Wastewater, Fees, Unjust Enrichment, Negligence, Municipal Act, ss. 394(1)(c) and 450, Summary Judgment

El-Khodr v Lackie, 2017 ONCA 716

Keywords: Insurance Law, Motor Vehicle Accidents, Damages, Collateral Benefits, Statutory Accident Benefits, Deductibility, Double Recovery, Cox and Carter Orders, Insurance Act, RSO 1990 c. I.8, Sections 258.3(8.1) and 267.8, Bannon v. McNeely (1998), 38 O.R. (3d) 659 (C.A.), Gilbert v. South, 2015 ONCA 712, Jang v. Jang (1991), 54 B.C.L.R. (2d) 121 (C.A.) , Gurniak v. Nordquist, 2003 SCC 59, Mikolic v. Tanguay, 2016 ONSC 71, (Div. Ct.), Prejudgment Interest, Courts of Justice Act, R.S.O. 1990, c. C.43, s 127

Cobb v. Long Estate, 2017 ONCA 717

Keywords: Insurance Law, Motor Vehicle Accidents, Damages, Collateral Benefits, Statutory Accident Benefits, Deductibility, Double Recovery, Statutory Interpretation, Costs, Offers to Settle, Rule 49

Whalen-Byrne v. Byrne, 2017 ONCA 729

Keywords: Family Law, Spousal Support, Duration, Length of Cohabitation, Divorce Act, Spousal Support Advisory Guidelines

For Civil Endorsements, click here.

For Capacity and Consent Board Decisions, click here.

For Criminal Decisions, click here

Civil Decisions

Rahimi v. SouthGobi Resources Ltd., 2017 ONCA 719

[Epstein, Hourigan and Paciocco, JJ.A.]

Counsel: Michael G. Robb, Paul Bates and Alex Dimson, for the appellant

John A. Campion, Gavin Tighe, and Stephanie Clark, for the respondents

Keywords: Securities Law, Secondary Market Misrepresentations, Class Actions, Securities Act, R.S.O. 1990, s. 138.8(1), s. 138.4(6)(a), Defence of Reasonable Investigative Efforts

Facts:

Paiman Rahimi is the representative plaintiff in a putative secondary market securities class action against the respondents SouthGobi Resources Ltd. ("SGR"), Terry Krepiakevich, Matthew O'Kane, Andre Deepwell, Pierre Lebel, Gordon Lancaster and Alexander Molyneux (collectively, save for Molyneux, the "Individual Respondents") and Deloitte LLP.

SGR is a coal mining company trading on the Toronto and Hong Kong stock exchanges. Krepiakevich and O'Kane are two of its former CFOs. Deepwell, Lebel and Lancaster are directors and members of SGR's audit committee.

The entirety of SGR's revenue came from the coal-mining operations in Mongolia of its subsidiary SouthGobi Sands LLC ("SGS").

SGS agreed to what are known as "bill and hold" contractual arrangements with certain of its customers. These customers ordered coal, which SGS stockpiled for customer pickup at a bonded yard that was under the control and supervision of the Mongolian government. The customers would pay the contract price as soon as the coal was delivered to the yard. Under that arrangement, they were able to avoid rising prices in coal and have greater flexibility in transporting it.

In 2012, a Chinese company attempted to purchase SGR, but the deal was blocked by the Mongolian government, which shut down SGS's coal-mining operation in Mongolia in May 2012. The company produced no coal from then until September 2013. Coal prices in China were falling and, by the middle of 2012, SGS's bill and hold customers had trouble making timely payments, resulting in a growing number of forfeitures of coal and repossessions by SGS.

SGR stopped using bill and hold agreements in mid-2012. It adopted a revenue recognition policy that required delivery of coal to the customer as a prerequisite to recognition. The transfer of title provisions in SGS's bill and hold agreements were amended to take effect in January 2013, and the change in revenue recognition policy was to be implemented on a go-forward basis.

SGR concluded that there was no need in January 2013 to change its earlier financial statements as a result of these subsequent changes in operation. PwC, which reviewed the earlier financials from 2010 to mid-2012, agreed with this position.

SGR issued a formal restatement of its prior financial statements on November 8, 2013.

The press released noted that "as a result of the potentially material effects on the Company's financial statements, the previous financial information provided by the Company in respect of the periods to be covered by the Restated Financials are no longer accurate and should not be relied upon."

Following the November 8 press release, SGR's share price dropped about 18 per cent.

SGR released another press release on November 14, 2013, indicating that there was "a material weakness in the Company's internal controls over the financial reporting." The "material weakness" was explained as a failure to ensure that "all aspects of sales arrangements were considered" in determining the appropriate financial accounting in respect of the bill and hold contracts used. In other words, there was no assurance that the accounting for the bill and hold contracts were IFRS compliant.

Rahimi sought leave under s. 138.8(1) of the Securities Act, R.S.O. 1990, c. S.5 ("SA") to proceed with a misrepresentation claim. SGR and the Individual Respondents took a very unusual position. They relied on the defence of reasonable investigative efforts afforded to them by s. 138.4(6)(a) of the SA. In support of that defence, they submitted that the financial statements during the class period did not need to be restated and that SGR had no material weaknesses in its internal financial reporting controls. In other words, the Individual Respondents' position was that there was no misrepresentation during the class period; rather, any potential misrepresentation was in the Restatement and/or the November 14 Press Release.

The motion judge permitted the claim to proceed as against SGR but not the Individual Respondents, holding that there was no reasonable possibility that the Individual Respondents would not be able to succeed on a defence of reasonable investigation under s. 138.4(6)(a) of the SA.

Rahimi appeals the motion judge's denial of leave as against the Individual Respondents (the "Rahimi Appeal"). SGR brings a separate appeal (the "Corporation Appeal") against the motion judge's ruling granting leave for the claim to proceed against it.

Issues:

(1) Did the motion judge err in denying leave on the claim against the Individual Respondents?

(2) Did the motion judge err in granting leave on the claim against SGR?

Holding: Rahimi Appeal allowed. Corporation Appeal dismissed.

Reasoning:

(1) Yes. The primary error made by the motion judge was treating the leave motion as if it were a trial in which he had to finally resolve significant credibility issues on the record before him. The motion judge failed to give meaningful consideration to gaps in the evidentiary record and the significant credibility issues apparent from that record. In particular, he failed to consider compelling evidence that contradicted the defence narrative offered by SGR and the Individual Respondents on the leave motion.

This was not a case where there was truly uncontroverted evidence adduced by a defendant in support of a reasonable investigation defence. This was a case where there was conflicting evidence emanating from SGR on that key issue for determination. The motion judge erred in accepting the denials asserted by the Individual Respondents without considering the lack of production, the absence of evidence from PWC and Deloitte and the unqualified statements made in the Restatement and the November 14 Press Release. In coming to these unwarranted evidentiary conclusions regarding the credibility of the Individual Respondents as if the leave stage constitutes a mini-trial, the motion judge failed to properly implement the screening mechanism of the leave requirement in s. 138.8 of the SA by foreclosing a misrepresentation claim that has a reasonable possibility of success. The residual credibility problems with the Individual Respondents' central defence, which could only be determined at trial, meant that this was not a case in which the policy objective of the leave requirement of protecting defendants from unmeritorious claims would be advanced by denying leave to Rahimi's claim on the basis of that defence.

Continuous disclosure obligations are not a shell game where investors are left to guess where the truth lies. Investors have a right to know a corporation's true state of affairs. The motion judge failed to consider this policy imperative and rendered a decision with respect to the...