Why I Became A Law Clerk

by Nicole Burch

When I grow up I want to be … a lawyer, doctor, dentist, nurse, police officer, firefighter … the typical list of professions that adults suggest to young children. You don’t usually hear a little kid say they want to be a law clerk or paralegal. 

At the end of high school, I had initially thought I wanted to be a nurse, and as I took an advanced biology course in night school and worked during the day as a personal support worker taking care of the elderly in their homes I soon learned that seeing people suffer was too much for my emotions to take.

As I further navigated the search for post-secondary education as a young, single mom of a 6-month-old daughter the title “Law Clerk” caught my eye. In all honesty, I wanted to take the Social Worker course as I love working on a personal level with people but I was deterred by some advice given to me that being a law clerk would be a more lucrative career. This sounded like a better financial future to be able to provide a secure life for my daughter.

As I progressed through the Law Clerk course it was obvious from my professor’s perspective that Corporate Law was where law clerks were most in-demand and paid the best. The only issue, I lived in the suburbs and a Corporate Law Clerk job would mean working in the city and that was a good 1.5-hour commute each way. 

After graduation, I was determined to start my career and headed to Toronto to hand out resumes. My 22-year-old self was in awe as I entered my first skyscraper and headed up the elevator, ears popping along the way, to the reception of a law firm on the 54th floor. With shiny marble floors, high ceilings, floor-to-ceiling windows, and an impressive view of the city, I felt instantly that I wanted to be part of this world!

I was quickly hired at this law firm as a corporate legal assistant and soon learned that becoming a law clerk right out of school wasn’t common. Most graduates would enter into law firms as entry-level legal assistants. Regardless, I was so excited to get my foot in the door and earn a salary! One step closer to my career goals and more importantly, one more obstacle conquered in taking good care of my daughter.

Takeaways for someone looking at getting into this profession:

• Get your foot in the door, you might not be a law clerk right out of college and a legal assistant position can give you the start you need. You will gain a lot of experience in this capacity.
• Experienced law clerks are in high demand. Leveraging your knowledge as a legal assistant will give you the experience you need to move into this position.
• Don’t be afraid of the challenges that stand in your way. I was worried about the commute but was able to handle it for all my years of working. Also, the environment is becoming more work-life balanced, you can see a balance between working from home and office life as our new standard.
• Be excited about your new life adventure! Good luck!

* Content provided with permission from the author.

Damages for Lost Opportunity Cannot be Awarded in a Failed Real Estate Transaction

by Daniel Waldman | Pallett Valo LLP

A recent decision from the Ontario Superior Court of Justice has confirmed that damages for lost opportunity will not be awarded when a real estate deal goes wrong. 

In Akelius Canada Inc. v. 2436196 Ontario Inc., 2020 ONSC 6182, Justice Morgan held that when a real estate deal falls apart due to a seller’s default, damages are to be determined at the closing date and a claim for the future appreciation of the property is therefore not available.

In Akelius, two sophisticated real estate investors entered into an Agreement of Purchase and Sale (“APS”) in 2015 for seven residential apartment buildings in Toronto.  The plaintiff buyer was a Canadian subsidiary of a large international investment corporation with holdings across Europe, the United States, and Canada. Over the course of the transaction, the purchase price was negotiated to a final price of $225,400,000.

After the APS was executed and prior to closing, the buyer discovered that there were several mortgages encumbering the title of some of the properties with total outstanding amounts of over $48 million.  The existence of the mortgages constituted a breach of the APS and the buyer therefore objected after discovering them.

The defendant sellers failed to remove the mortgages.  However, in an attempt to salvage the transaction, the sellers proposed to revise the APS to exclude the encumbered properties from the sale or alternatively, they proposed that the buyer could assume the mortgages with a price abatement.

The buyer refused the sellers propositions, sued for breach of contract, and brought a motion for summary judgment.  The sellers eventually sold the properties in 2018 for about $50 million more than the purchase price in the APS.  In its damages claim, the buyer sought $50 million, reflecting the appreciation reaped by the sellers, as well as about $770,000 in sunk costs that it incurred as a result of the failed transaction.

Justice Morgan had little difficulty finding that the sellers breached the APS.  The buyer was ready, willing, and able to close the transaction and the sellers were unable to convey good title on the closing date as a result of the mortgages.

As such, the primary issue for determination was the appropriate measure of damages.  Justice Morgan noted that the basic principle is that damages should put the injured party back in the position it would have been in if the contract had not been breached. There is some flexibility to this approach; courts have stated that the date of assessment should be determined by what is fair on the facts of the case.

However, it has also been well established that damages for lost speculation profits is not an available remedy in a real estate transaction.  The damages must make up what the purchaser lost in value on the closing date, not what a property speculator standing in the purchaser’s shoes would have lost.

It was also noted that it did not matter in this case that the buyer was an “income investor” rather than a true property speculator. Damages were therefore measured at the date of closing, which precluded any claims for lost appreciation profits.

While the case law provided a complete answer to the lost profit claim, the court in Akelius went on to discuss mitigation, because the parties had spent much of their time fighting over that issue. The court held that the buyer had either failed to mitigate its damages or, more likely, fully mitigated its damages. The buyer refused to produce records of its transactions after January 2016, and Justice Morgan accordingly drew an adverse inference that the funds saved on this transaction were spent on other comparable investments.

As a result, it was held that the buyer was only entitled to damages for the amount of sunk costs thrown away on the transaction. Damages for lost opportunity were not awarded.  Because both parties had mixed success, no costs were awarded to either side. 

This decision affirms the courts’ reluctance to consider claims for lost profits from capital appreciation, even where a buyer is unfairly deprived of a lucrative opportunity.  Real estate investors should be mindful of this before they opt to sue for damages.

Any article or other information or content expressed or made available in this Section is that of the respective author(s) and not of the OBA.

* Content provided with permission from the author. 

A Homebuyer is Permitted to Rescind an Agreement of Purchase and Sale after being Misled about the Size of the Property

by Daniel Waldman | Pallett Valo LLP

A recent case involving a real estate transaction gone awry confirmed an often-used but seldom successful remedy; namely, that a written contract can be voided based on a prior oral representation.  In Issa v. Wilson, 2020 ONCA 756, the Ontario Court of Appeal affirmed that a buyer can get out of an Agreement of Purchase and Sale when they were induced into entering the contract by misleading information.

In Issa, a young, first-time homebuyer retained the services of a real estate agent to assist him in purchasing a home to live in with his family. The agent informed the buyer that the size of the home was over 2,000 square feet. In obtaining this information, the agent relied on a representation made by the vendor of the property, as well as the Multiple Listing Service (“MLS”) listing of the home from 12 years earlier. However, the agent did not carry  out any measurements to verify the square footage of the home.

The buyer was given the opportunity to visit the property and inspect it to verify these representations before executing the purchase agreement.  The buyer met with the vendor of the property during his visit and was again informed that the home was about 2,000 square feet. Relying on the information provided by the agent and vendor, the buyer executed an Agreement of Purchase and Sale and provided a deposit.

Before the transaction closed, the buyer obtained an appraisal of the property, which indicated that the home was only 1,450 square feet and not 2,000 or more, as represented to him by the agent and vendor. The buyer decided not to complete the purchase of the home and commenced an action against the real estate agent and vendor seeking a declaration that the Agreement of Purchase and Sale was null and void and  a return of his deposit.

The trial judge ruled in favour of the buyer.  The court considered his young age, inexperience in measuring property and the fact that he was a first-time homebuyer, in holding that his inspection of the property did not override his expectation that the home was 2,000 square feet or more as was represented to him  by the real estate agent and vendor.

The defendants appealed the decision, arguing that the trial judge erred by not accepting the proposition that a homebuyer’s reliance on a misrepresentation regarding the size of a property is displaced once the buyer performs an inspection of the property.  The Court of Appeal disagreed with this submission, stating that this was not absolute law. Although it has been applied in some situations, the court noted that it is a case-specific exercise because its strict application would be unfair in many circumstances.

The court explained that a contract may be rescinded on the basis of misrepresentation where the defendant has made a false statement that was material and induced the plaintiff to enter into the contract.  In this case, it was held that the misrepresentation regarding the size of the property was material to the buyer’s decision to purchase it.  In reaching this conclusion, the court emphasized the following factors:

1. The agent and vendor made explicit statements in the MLS listing and directly to the buyer regarding the square footage. Also, at trial, the agent admitted that he was negligent in making these statements, and the vendor admitted that he informed the buyer that the property was about 2,000 square feet.
2. The discrepancy between the size of the property as represented and the actual size was substantial.
3. The buyer’s reliance on the agent and vendor’s representations regarding the size of the home was supported by the fact that he was ready to close the purchase until his discovery of the actual size of the home. With this new information, he immediately communicated that he was not prepared to complete the purchase.
4. The buyer was young and inexperienced in real estate transactions.

When it comes to contracts, the general rule remains that written agreements are to be viewed as ironclad.  As such, parties to a contract can seldom escape their obligations by alleging reliance on prior representations.  This is especially true for contracts akin to Agreements of Purchase and Sale, which contain clauses that state that the subject document forms the entire agreement between the parties and neither side can rely on prior agreements or representations, either oral or written.  Homebuyers should therefore take all necessary steps to perform their due diligence before they commit to an Agreement of Purchase and Sale.

However, Issa demonstrates that, in certain circumstances, the court will carve out exceptions to this general rule, especially where a vulnerable and inexperienced party can prove that they were misled and taken advantage of.

Any article or other information or content expressed or made available in this Section is that of the respective author(s) and not of the OBA.

* Content provided with permission from the author. 

'Why’d Ya Do It'? The Supreme Court of Canada Explains the Duty to Exercise Contractual Discretion in Good Faith

by W. Brad Hanna, FCIArb., Mitch Koczerginski, Paola Ramirez, Stephen Brown-Okruhlik | McMillan LLP

The Supreme Court of Canada (“SCC”) recently released its long awaited decision in Wastech Services Ltd v Greater Vancouver Sewerage and Drainage District (“Wastech”).[1]

The decision is the first time the SCC has provided guidance on the scope of the duty to exercise discretionary contractual powers in good faith.  Significantly, Wastech:

• Confirms that the duty to exercise discretionary contractual powers in good faith, like the duty of honest contractual performance, applies to all contracts and cannot be excluded by the parties;
• Clarifies that the duty is breached where a party exercises a contractual power “unreasonably”, meaning in a manner not connected to the underlying purposes for which the discretion is granted;
• Mandates that when ascertaining whether an exercise of discretion is unreasonable, and therefore a breach of the duty, the court must interpret the contract (the “first source of justice between the parties”) as a whole.  The content of the duty is guided by the intentions of the parties as expressed in their agreement.  Where discretion is exercised in a manner that falls “outside the compass set by contractual purpose”, it is unreasonable and constitutes a breach of the duty.  Conversely, where discretion is exercised in a manner consistent with the purposes for which it is granted, it is reasonable and does not breach that duty.  In other words, the measure of fairness is what is reasonable according to the parties’ contract, and not what a court may regard as fair, moral or reasonable in the abstract;
• Recognizes that the fact that a party’s exercise of discretion causes its counterparty to lose some, or even all, of the anticipated benefit under the contract, is not the standard for determining a breach of the duty.  While this can be relevant to show that discretion was exercised unreasonably, it is not a necessary precondition to finding a breach of the duty; and
• Confirms that the common law recognizes that competition between parties regularly involves each of them taking steps to promote their interests at the expense of the other, and that, far from prohibiting such conduct, the law seeks to encourage and protect it.  This leaves room for the aggressive pursuit of self-interest and prevents the law of good faith from veering into judicial moralism or “palm tree justice”.  The role of the courts must only be to ensure parties exercise contractual discretionary powers in ways that are connected to the purpose(s) for which such powers are granted.[2]

Applying these principles, the SCC concluded that the defendant in Wastech did not exercise the discretionary power at issue unreasonably, and therefore, no breach of the duty to do so in good faith occurred.

Background: Uncertainty Regarding the Exercise of Contractual Discretion Following Bhasin

The duty to exercise contractual discretion in good faith is well-established in Canadian common law. In Bhasin v Hrynew (“Bhasin”), the SCC recognized ‘good faith’ as a general organizing principle of contract law that requires a party to a contract to have “appropriate regard to the legitimate interests of the contracting partner.”[3] This principle requires parties, at minimum, to perform their contractual duties, and exercise their contractual rights, “honestly, reasonably, and not capriciously or arbitrarily.”[4] The general organizing principle is manifest in specific doctrines of good faith, including the duty to exercise contractual discretion in good faith.

In Bhasin, the SCC explained that “appropriate regard” will vary depending on the context of the contractual relationship. It did not set out, however, a standard for the exercise of contractual discretion. This left uncertainty as to whether the duty of good faith could limit a party’s freedom to exercise its discretion in its own commercial interest where doing so would deprive the other party of an anticipated benefit under their agreement or cause them a loss. This issue came squarely before the SCC in Wastech.

The Facts in Wastech

The Plaintiff, Wastech Services Ltd. (“Wastech”), provides waste transportation and disposal services to the Greater Vancouver Sewerage and Drainage District (referred to in the decision as “Metro”) under a 20-year long-term agreement the parties entered into in 1996. The agreement is complex and resulted from lengthy negotiations.[5] Among other things, it gives Metro the “absolute discretion” to direct waste to any of three disposal sites.  Metro paid Wastech different rates depending on the disposal site to which Metro directed waste be hauled (and how far away the site was located).

Wastech’s compensation under the agreement was tied to a “target operating ratio” that was based on historical performance (the “Target OR”). Wastech’s ability to achieve the Target OR depended in part on the allocation of waste between the three disposal sites, one of which attracted a higher rate due to its greater distance from Vancouver. During their negotiations, the parties considered the possibility that Metro would reallocate waste to the more cost-efficient sites. They understood that such reallocation would likely preclude Wastech from achieving its Target OR but declined to include express protections for Wastech in such event.[6]

For the 2011 year, Metro directed Wastech to reallocate a portion of waste from a disposal site located further away (and more lucrative for Wastech) to the two sites that were closer, resulting in Wastech recording an operating profit that was well short of its target. Wastech commenced an arbitration against Metro for breach of contract. It alleged, among other things, that Metro breached its duty to exercise its contractual discretion in good faith by reallocating the waste between sites in a manner that precluded it from achieving its Target OR, and sought damages of approximately $2.9 million.[7]

The Arbitrator’s Decision

In arbitration, Wastech conceded that the agreement provided Metro the “absolute discretion” to allocate waste among the three disposal sites. It claimed, however, that Metro’s decision constituted a breach of contract in two respects. First, Wastech argued that the contract contained an implied term providing for a retroactive rate adjustment if the Target OR was not achievable because of Metro’s waste allocation. Second, Wastech argued that the duty of good faith prohibited Metro from exercising its discretion in a manner that precluded Wastech from achieving the Target OR.[8]

The arbitrator dismissed Wastech’s implied term argument, finding that the parties had turned their minds to the possibility that Metro would reduce the waste flows to the more expensive site during their negotiations but decided not to include any provision to address that risk. Regarding Wastech’s second argument, the arbitrator accepted that Metro had no malign purpose in making its reallocation decision and held that the basis for its conduct was in furtherance of its own honest and reasonable business objectives. However, the arbitrator concluded that Metro’s behavior lacked “appropriate regard” for Wastech’s legitimate contractual interests and was, in effect, “dishonest”.[9]

The arbitrator interpreted the duty of good faith in Bhasin to prevent Metro from exercising its contractual discretion in a manner that is “wholly at odds with the legitimate contractual expectations” of Wastech. Accordingly, the arbitrator found that Metro failed to consider Wastech’s expectation that Metro would not exercise its discretion in a way that would prevent Wastech from achieving the Target OR.

The Lower Courts Set Aside the Arbitrator’s Decision

Metro appealed the arbitrator’s decision to the British Columbia Supreme Court (“BCSC”) on the basis that the arbitrator misapplied the organizing principle of good faith set out in Bhasin. The BCSC allowed the appeal, holding that the duty of good faith does not impose an obligation to have “appropriate regard” for the interests of the other contracting party unless specifically agreed to by the parties.[10] By restricting Metro’s discretionary contractual power, the arbitrator effectively ignored a contractual provision reached between two sophisticated parties who chose to exclude a term that might have provided Wastech with additional protection.[11]

Wastech then unsuccessfully appealed to the British Columbia Court of Appeal (“BCCA”). The BCCA agreed with the BCSC’s ruling but substituted its own findings regarding the arbitrator’s decision. Among other things, the BCCA held that a breach of the duty of good faith requires some subjective element of dishonesty, untruthfulness, improper motive or “bad faith”.[12] Wastech then appealed to the SCC.

The SCC Dismissed Wastech’s Appeal

A six-justice majority of the SCC dismissed Wastech’s appeal, with a three-justice minority concurring in the result. In doing so, they set out important guidance as to how the duty of good faith affects contractual discretionary powers. Significantly, both the majority and minority held that the duty of good faith is offended where a discretionary power is exercised in a manner that is unconnected to the purpose(s) for which it was granted in the relevant agreement.

The Majority Decision

As a preliminary point, the majority noted that Metro had not breached its duty of honest contractual performance (a separate legal doctrine within the organizing principle of ‘good faith’). The majority generally agreed with the BCCA that a breach of the duty of good faith must include some subjective element of dishonesty. Metro had not, however, lied or otherwise knowingly misled Wastech about its discretionary power to allocate waste between the different sites.[13]

The SCC also disagreed with Wastech’s argument that Metro breached the duty of good faith by unreasonably exercising its discretion to reallocate waste between disposal sites in a manner that substantially nullified Wastech’s ability to make a profit.

The majority held that “substantial nullification” of a contractual benefit or advantage is not the appropriate standard for assessing whether a party has breached its duty to exercise discretionary powers in good faith.[14] The majority went on to note that the fact that a party’s exercise of discretion may cause its counterparty to lose some or even all of its anticipated benefit under the agreement is not dispositive of whether that power was exercised in good faith (though it may be relevant to that question).[15]

Instead, a party must show that an exercise of discretion is unreasonable in the sense that it is outside the bargain struck between the parties. In other words, for a party to exercise its discretionary power in good faith, it must do so consistently with the purpose(s) for which the discretion was granted.[16] Where the exercise of discretion “stands outside the compass set by contractual purpose”, it will be unreasonable and a breach of the duty of good faith.[17]

Determining the reasonableness of a party’s exercise of contractual discretion is an interpretive exercise. Sometimes, the text of the discretionary provision will make its purpose clear.[18] In other circumstances, the purpose can only be understood by reading the clause in the context of the contract as a whole.  The majority cited approvingly from an English authority for the proposition that courts “must construe the ambit” of a discretionary power where it is entirely general: they must “form a broad view of the purposes of the venture to which the contract gives effect”.[19] This appears to mean that courts should look to the overall purpose of the parties’ agreement rather than just the purpose of the discretionary provision.

Importantly, the legal test does not involve examining whether an exercise of discretion was “morally opportune or wise”.[20]

The majority noted that, as a general guide, clauses that restrict the exercise of a discretionary power on the basis of objective criteria (such as operative fitness, structural completion, mechanical utility or marketability) will give rise to a smaller range of reasonable discretionary outcomes than clauses that do not (such as matters involving taste, sensibility, personal compatibility or subjective judgment).[21]

The majority found that Metro’s reallocation of waste was consistent with the purposes for the discretionary power in the agreement. Reviewing the agreement as a whole (including the recitals, which described the intentions of the parties as including: to incentivize each other to “maximize efficiency and minimize costs” and to provide for the “maximization of the municipal solid waste disposal capacity [at the disposal site that was further away from Vancouver])”, the majority concluded that the purposes underlying Metro’s discretion were clear: to give it the flexibility required to structure the disposal of waste in an efficient and cost effective manner.[22]

The majority also noted that Metro’s discretion exists alongside a contractual framework to adjust payments towards the goal of a negotiated level of profitability – which contradicts Wastech’s argument that the parties intended the discretion to be exercised in a way that provided Wastech with a certain level of profit.  Moreover, the contract did not guarantee Wastech would achieve the Target OR in any given year and the complex adjustment mechanism contained therein, which only applied where its actual operating revenue for a given year deviates from the Target OR, demonstrates the parties understood the Target OR would not be achieved in some years.[23]

Based on the above, the majority concluded that the purposes of the discretion was to give Metro leeway, based on its judgment as to what was best for itself, to adjust the allocation of waste among the three sites as required to ensure efficiency of the operation.  Significantly, the SCC confirmed that the duty does not require Metro to subordinate its interests to those of Wastech. Metro will have complied with the duty of good faith as long as it exercised the discretion in a manner consistent with the purposes in the agreement. While Metro’s choice was disadvantageous to Wastech, it was within the range permitted by the purposes of the clause.  Because Metro exercised its discretion within the range of conduct contemplated by the purposes for the clause, the court concluded it acted reasonably and did not breach the duty of good faith.[24]

The Minority Decision

The three concurring justices agreed with the majority that the purpose of a discretionary power is the proper focus of the good faith analysis, and that Wastech’s appeal should be dismissed. They departed from the majority on a few issues, including the scope of the reviewing court’s interpretative exercise in identifying the purpose of a discretionary power.[25] Importantly, they held that a discretionary power should only be limited by its purpose “where the purpose of a discretionary power arises from the terms of the contract, construed objectively, having regard to the factual matrix”. In other words, they would prefer a narrower focus on the text and context of the agreement to determine the purpose of the discretion. They would reject the majority’ view that a court must “form a broad view of the purposes of the venture to which the contract gives effect”.[26] The minority were steadfast in their view that the purpose for a discretionary power must always be defined by the parties’ intentions, “as revealed by the contract”.[27] The parties have the freedom to immunize themselves from review by the courts by careful drafting that establishes a standard for exercising discretion. Where parties have granted unfettered discretion, there is no obligation on the discretion-exercising party to subvert its interest in favour of the other party.

Key Takeaways

• Parties must exercise contractual discretionary powers in good faith. This duty, like the duty of honest contractual performance, is not an implied term but rather a general doctrine of law that applies to all contracts.  Parties cannot contract out of this duty by, for example, using the term “absolute and sole discretion” or words to that effect.
• The duty to exercise discretionary powers in good faith is breached where the exercise of discretion is “unreasonable”, in that it is unconnected to the purpose(s) for which the discretion was granted.  In this regard, Wastech provides some much needed clarity and certainty as to when the duty may be found to have been breached, and when it will not.
• What is “reasonable” is highly context-specific and depends primarily on the intention of the parties as disclosed by the language of their contract, not general notions of fairness or morality. The court will examine the contract as a whole to ascertain the purpose(s) for which discretion is granted, and thereby delineate the boundaries for assessing whether such discretion was exercised in a reasonable manner.  As the SCC put it: “Good faith does not eliminate the discretion-exercising party’s power of choice. Rather, it simply limits the range of legitimate ways in which a discretionary power may be exercised in light of the relevant purposes”.[28]
• An exercise of discretion will be regarded as unreasonable (and therefore, contrary to the duty of good faith) if it is arbitrary or capricious, made for purposes extraneous or collateral to the contract, or where it is unconnected to the purpose(s) for which the contract granted the discretion (where it can be said to stand “outside the compass set” by the contract).
• By contrast, an exercise of discretion will be regarded as reasonable (and therefore consistent with the duty of good faith) where it is consonant with the purpose(s) for which such discretion was granted.   Such an exercise of discretion will not violate the duty simply because it is motivated by self-interest, causes loss to the other party or is against the other party’s commercial interests.
• Moreover, whether a party’s exercise of discretion substantially nullifies or eviscerates an anticipated benefit of its counterparty is not the standard for determining whether the duty is breached.  While this may be relevant to whether a party acted unreasonably, it alone is not a precondition to finding a breach of the duty.
• The duty does not require parties to provide their counterparties with benefits not contemplated by the contract, and cannot be used as a tool to rewrite contracts.  Further, it does not require parties to put their counterparties’ interests before their own, or require them to act as a fiduciary.  The loyalty required by the duty is loyalty to the bargain, (meaning the contractual purpose(s) for which the discretion is granted), not loyalty to one’s contractual counterparty.[29]
• Generally, the range of reasonable outcomes will be relatively smaller where the discretionary power at issue is susceptible to objective measurement. By contrast, where the discretion at issue is not readily susceptible to objective measurement, the range of reasonable outcomes will be relatively larger.[30]
• Although parties cannot contract out of the duty to exercise discretionary powers in good faith, they can to a large extent immunize the exercise of such powers from court review through careful drafting.  Parties are accordingly advised to set out, in clear and express contractual terms, the circumstances in which discretion is to be exercised, the purpose(s) for which discretion is to be exercised and the breadth of such discretion.  This may be accomplished in the discretion-granting clause itself, or elsewhere in the agreement such as the recitals.  Recital clauses may be used, as they were in Wastech, as evidence of the parties’ intentions regarding both the purpose(s) of the contractual arrangement as a whole as well as those relating to specific discretion-granting provisions.

[1] 2021 SCC 7. The Wastech case is the second of two SCC decisions in 2021 revisiting the duty of good faith in contracts that that was recognized in Bhasin v Hrynew. The SCC heard the Wastech case together a companion case, C.M. Callow Inc. v. Tammy Zollinger et. al (“Callow”), which addressed the duty of honest contractual performance.  Our commentary on the Callow case is available here.
[2] The Wastech decision also presented the SCC with the opportunity to consider the standard of review applicable to appeals of commercial arbitration awards.  The majority, however, declined to do so, noting that the parties did not make submissions on that point and, in any event, the outcome of this appeal did not turn on whether the standard is reasonableness or correctness.
[3] Bhasin, 2014 SCC 71 at para 65.
[4] Ibid at paras 63-64.
[5] Greater Vancouver Sewerage and Drainage District v. Wastech Services Ltd., 2018 BCSC 605 at para 8.
[6] Wastech, supra note 1 at para 14; 2018 BCSC 608 at para 19.
[7] Wastech, supra note 1 at para 18.
[8] Ibid at para 20.
[9] Ibid at para 24.
[10] Greater Vancouver Sewerage and Drainage District v. Wastech Services Ltd., 2018 BCSC 605 at para 56.
[11] Wastech, supra note 1 at para 33.
[12] Ibid at para 40.
[13] Ibid at para 56.
[14] Ibid at para 82.
[15] Ibid at paras 83-84.
[16] Wastech, supra note 1 at para 69.
[17] Ibid, at para 71.
[18] Ibid, at para 72.
[19] Ibid, at para 72, citing P. Sales “Use of Powers for Proper Purposes in Private Law”, (2020), 136 LQR 384 at p. 393.
[20] Ibid, at para 73.
[21] Wastech, supra note at para 77.
[22] Ibid, at paras 97-98.
[23] Ibid, at paras 99 and 103.
[24] Wastech, supra note 1 at paras 104-106.
[25] The concurring minority’s reasons also addressed the appropriate standard of review on appeal from an arbitrator’s decision, the usefulness of comparisons with notions of good faith under Quebec Civil Code and the majority’s reference to the duty of honest performance, which are not discussed in this bulletin.
[26] Wastech, supra note 1 at paras 72 and 132.
[27] Ibid, at para 133 [emphasis added].
[28] Wastech, supra note 1at para 75.
[29] Ibid, at para 107.
[30] Ibid, at para 77.

by Brad Hanna, Mitch Koczerginski, Paola Ramirez and Stephen Brown-Okruhlik

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 2021

* Content provided with permission from McMillan LLP. 

First Time Home Buyer: What You Need to Know About Land Transfer Tax

by Michael Ng

The costs associated with purchasing a home can be daunting for homebuyers, and there are a plethora of costs that need to be considered. One such cost is land transfer tax – a tax that is payable to the provincial government whenever property is purchased in the province of Ontario (LTT). If you are purchasing property in Toronto, there is additional land transfer tax payable to the City, called the Municipal Land Transfer Tax (MLTT).

In both cases, the amount of land transfer tax varies depending on the purchase price of the property. Potential homebuyers can use simple land transfer tax calculators provided online to determine how much land transfer tax may be payable.

First-time homebuyer refund

However, if this is your first time purchasing property, you may be eligible for the first-time homebuyer refund. The following will need to apply:

1. You need to be at least 18 years old.
2. You must occupy the property as your principal residence within 9 months of the closing date.
3. You cannot have owned residential property anywhere in the world – not just in Canada.
4. You must be a Canadian citizen or permanent resident of Canada.

If the above applies to you, then you may qualify for the first-time homebuyer refund and would be eligible for a maximum refund of $4,000 for LTT and $4,475 for MLTT for a total refund of $8,475. The refund would be applied to reduce the total tax payable at the time of registration of the transfer.

Purchasing with a friend or partner

When purchasing a property with another individual who is not a first-time homebuyer, then the refund would be reduced accordingly to the interest acquired by the individual who qualifies for the refund. For example, if you are purchasing property with your friend who is not a first-time homebuyer, then only 50% of the refund would be applicable (only one out of two individuals purchasing the property is a first-time homebuyer).

For married couples, the rebate is an all-or-nothing approach. If your spouse has previously owned a home, that property must have been sold prior to your marriage for the qualifying spouse to claim his or her interest and partner’s interest of the land transfer tax refund (100%). If the spouse sold the property after the marriage date or continues to own that property, then no refund is available to either spouse (0%).

Mills & Mills LLP is happy to assist with any further inquiries you might have regarding land transfer tax and the first-time home buyer refund.

At Mills & Mills LLP, our lawyers regularly help clients with a wide range of legal matters including business law, family law, real estate law, estate law, employment law, health law, and tax law. For over 130 years, we have earned a reputation amongst our peers and clients for quality of service and breadth of knowledge. Contact us online or at (416) 863-0125.

* Content provided with permission from the author.

"Terminating “Just Cuz” or for Just Cause? Recent Decisions Maintain a High Threshold for Just Cause Terminations"

by Sheena L. Owens, Maja Blanchette | Stikeman Elliott LLP

Courts are increasingly reluctant to find that employers have just cause to terminate their employees: Underhill v. Shell Canada Limited, 2020 ABQB 341; Mack v. Universal Dental Laboratories Ltd, 2020 ABQB 738; Baker v. Weyerhaeuser Company Ltd., 2020 ABQB 808; and Nagy v. William L. Rutherford (B.C.) Limited 2021 BCCA 62.

For many employers, 2020 was a difficult year. On top of the challenges that COVID-19 presented, employers have had to grapple with several unfavourable employment law decisions. The Alberta Court of Queen’s Bench has continued this trend in three recent decisions that all favoured employees and found that the employers did not have just cause to terminate the employees’ employment. Additionally, the British Columbia Court of Appeal overturned a finding of after-acquired just cause for dismissal and remitted the matter back to the trial court. Each of these cases is discussed in greater detail below, following a review of the general principles of just cause terminations.

General Principles of Just Cause Terminations

Absent an enforceable termination provision in an employment agreement, employers have an implied contractual obligation to provide indefinite term employees with reasonable notice of termination unless there is just cause for termination of their employment. This obligation can be significant and in some cases as much as 24 months, and in exceptional cases more than 24 months. If working notice cannot be provided, then the employer must pay the employee the compensation the employee would have earned had the employee worked through the notice period. Therefore, establishing just cause, when it is appropriate to do so, can result in significant savings.

Generally, just cause is serious misconduct that is inconsistent with the fulfillment of the conditions of employment or that causes a breakdown in the employment relationship. Employers can sometimes successfully terminate an employee for just cause if the employee has been guilty of habitual neglect of duty; gross incompetence; conduct incompatible with the employee’s duties; conduct that is prejudicial to the employer’s business; or willful disobedience.

Each case is fact specific. Some prior findings of just cause include theft, dishonesty, serious breaches of workplace policies, violence or harassment in the workplace, unexcused absences from the workplace, insubordination, criminal conduct, serious conflicts of interest, and prolonged and documented performance issues.

In order to uphold just cause, the employer must prove that the conduct of which the employer complains actually occurred and that the conduct warrants dismissal.

Employers must ensure that the disciplinary response is proportional to the employee’s conduct and must also consider the context of the employment relationship including: the length of service of the employee, the employee’s age, the employee’s role and responsibilities, the type of business the employer operates, the level of trust placed in the employee, any harm to the employer’s business, the employer’s policies and practices, and whether there are any mitigating factors that suggest less discipline should be imposed.

It is tempting for employers to adopt an “I know it when I see it approach” to just cause terminations. However, as these recent cases show, care must be taken when considering terminating an employee for just cause.

Underhill v. Shell Canada Limited

Shell dismissed Underhill for just cause following an investigation into her behaviour. In particular, Shell alleged that Underhill was involved in at least six instances of serious misconduct which fell into three broad categories: (i) failing to identify a conflict of interest and protect third party confidential information; (ii) breach of confidence; and (iii) complete disregard for Shell’s termination and investigation procedures. Underhill was Shell’s Vice President, Commercial Strategy and Business Development, Heavy Oil. Underhill met with her department and advised them that Shell was planning layoffs and employment restructuring. A few weeks later, Underhill also had a private meeting with a subordinate and informed her of Shell’s plan to terminate her. At this meeting, the subordinate announced she was preparing her own proposal for a project in which Shell was involved.

Shell alleged that Underhill failed to recognize that her subordinate might be involved in a conflict of interest and may reveal third-party confidential information through the proposal submission. The Court concluded that while in retrospect, Underhill "probably should have asked more questions", the Court was not satisfied that Underhill demonstrated the "serious lack of understanding of conflicts" that Shell alleged. The Court noted that Underhill warned the subordinate to "be careful what you are doing because you could potentially find yourself in a situation of conflict" and sought advice from Shell’s legal advisor on the issue.

Shell also alleged Underhill could not be trusted to keep confidences, citing four instances of such misconduct. First, during a monthly meeting, Underhill informed staff that "further layoffs were possible and there was some restructuring planned for the fall". Second, Underhill described the President of Shell as "all talk and no action" to a subordinate. Third, Underhill disclosed to the subordinate that Shell was planning to terminate the subordinate and that the President of Shell "fully endorsed" that decision. Fourth, Underhill breached the investigation process by discussing the subject matter of the investigation with the subordinate when she knew it was confidential and still ongoing.

The Court concluded that these breaches of confidence were not serious in all of the circumstances. It found that although Underhill made some mistakes, she was not being disloyal or acting in bad faith. Further, the breaches of confidence were not so serious as to give rise to a breakdown of the employment relationship. In the Court's view, Underhill was a loyal and dedicated employee for more than 17 years, had no prior disciplinary history, Shell had not suffered any significant deleterious consequences from Underhill’s actions, and there were lesser forms of discipline available to Shell to address the misconduct.

Baker v. Weyerhaeuser Company Ltd.

Weyerhaeuser alleged that Baker, an employee with 14 years of service, was terminated for just cause due to safety violations and other misconduct. Baker alleged that Weyerhaeuser had manufactured a reason to terminate him.

Baker was a supervisor of safety quality production repairs. He had no prior disciplinary history or poor performance reviews until after he got a new supervisor. The new supervisor issued a written warning letter to Baker citing his poor performance and noting that the shift Baker supervised was not achieving the same level of output as Weyerhaeuser’s other shift. After the warning letter, matters between Baker and his supervisor worsened. In particular, the supervisor made further allegations of poor performance and alleged that Baker failed to properly deal with a small fire and failed to report it or, alternatively, falsified a report about the fire.

The Court concluded that Baker’s supervisor had looked for reasons to terminate Baker and relied on his personal bias against Baker and did not take into account Baker’s whole record of employment. The Court noted that there were grounds for discipline as a result of the fire, in particular, failing to report the fire and improperly filling out a safety document. However, the Court held the main reason for Baker’s termination was his supervisor's personal feelings towards Baker. The Court also noted that the investigation was not proper and thorough, and that Weyerhaeuser should have more fully investigated the supervisor’s allegations.

Mack v. Universal Dental Laboratories Ltd.

Universal alleged that Mack, who was also a shareholder and director of Universal, had engaged in misconduct constituting just cause including: failure to work with diligence, working only a minimal and nominal amount of time at the office, being continually disruptive in the office, using vulgar and abusive language in violation of Universal’s policy, providing poor client service, using his work computer to access pornography, showing pornography to other employees, and failing to attend continuing education.

The Court found that Universal proved the alleged misconduct. However, the Court also found that Universal had condoned the misconduct. In particular, Universal failed to issue any written warnings to Mack and did not follow its own performance management process as outlined in its employee policy manual.

The Court also concluded that although Mack engaged in misconduct, termination for just cause was not warranted. Universal should have attempted to use less serious sanctions to address Mack’s misconduct prior to his dismissal such as: formal written warnings, the disciplinary process in the employee manual, and addressing Mack’s deficiencies at regular management meetings. 

Nagy v. William L. Rutherford (B.C.) Limited

As discussed in our previous blog, the British Columbia Supreme Court had found that the employer established after-acquired just cause because an employee sent a single disparaging email to his girlfriend, who was also a co-worker. However, the British Columbia Court of Appeal overturned this finding and remitted the matter back to the trial court. The Court of Appeal held the trial judge erred in finding that there was after-acquired just cause when there was insufficient evidence to conclude that the disparaging email was discovered after the employee was dismissed and in failing to consider the law regarding condonation and the adequacy of the employer's warnings prior to the dismissal. While the Court of Appeal did not determine whether or not the employee was wrongfully dismissed, it emphasized that after-acquired just cause hinges on the employer discovering the employee's wrongdoing after the employee's termination and that issues of condonation and prior warnings need to be properly considered in such cases.

Key Takeaways for Employers

These cases illustrate that just cause terminations should be used sparingly and reserved for serious and egregious conduct. Employers who are contemplating terminating an employee for just cause should:

• maintain documentation of all incidents of misconduct or other potential grounds for termination, performance issues, warnings, and prior discipline as these will likely be crucial pieces of evidence to support a termination for just cause;
 
• ensure that they do not condone poor behaviour or performance;
 
• where appropriate, enter into a performance management plan with employees to set clear expectations, a timeline for their completion, and the consequences for failing to meet them, including the potential that the employee will be terminated for just cause if they fail to do so;
 
• ensure that the manner of dismissal is done in a professional manner. Mistreating an employee at the time of termination can trigger additional punitive and aggravated damages on top of severance costs. Some things to avoid include attacking the employee’s reputation, conducting a public termination, misrepresenting the reasons for termination, alleging just cause as a negotiating tactic, and spreading rumours or false information regarding the employee, especially to potential employers;
 
• maintain up-to-date policies and ensure that employees have access to them, have appropriate training, acknowledge that they have read and will abide by them, and that the employer consistently enforces the policies;
 
• consider the employee’s length of service, position, duties, and other contextual factors when deciding to terminate for just cause to ensure that it is a proportional response;
 
• consider if an investigation into the alleged misconduct is warranted and, if so, ensure that a qualified, neutral, and unbiased investigator is assigned to conduct the investigation;
 
• consider if there are suitable alternatives to terminating for just cause such as a warning letter, suspension, negative performance reviews, change in duties, performance improvement plan, revocation of privileges, counselling, coaching, or retraining; and
 
• if the decision is made to terminate for just cause, prepare a written termination letter that clearly outlines the basis for the termination.

Each termination is unique. Prior to deciding to terminate an employee, employers are encouraged to consult with experienced legal counsel to help mitigate their exposure to claims.

• This article was first published on Stikeman Elliott LLP’s Knowledge Hub and originally appeared at stikeman.com.  All rights reserved.
• DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.
  
  * Content provided with permission from Stikeman Elliott LLP. 

The importance of predictability in take-over bid regulation: OSC reasons in Re ESW Capital, LLCThe importance of predictability in take-over bid regulation: OSC reasons in Re ESW Capital, LLC

by Andrew Gray, Janet Holmes Karrin, Powys-Lybbe | Torys LLP

On February 23, the Ontario Securities Commission (OSC) released reasons for its September 2020 decision in Re ESW Capital, LLC. The OSC had denied ESW’s request for an exemption from the minimum tender requirement¹ in National Instrument 62-104 Take-over Bids and Issuer Bids (NI 62-104) in connection with ESW’s proposed take-over bid for the subordinate voting shares (shares) of Optiva Inc. ESW had sought this relief so that its bid could proceed despite the opposition of two significant Optiva shareholders.

This marks the first time that Canadian securities regulators have considered a request for an exemption from this requirement, which was introduced in 2016. The OSC’s decision not to grant the requested relief emphasizes its commitment to the 2016 amendments’ recalibration of bid dynamics to facilitate collective shareholder action and to predictability in take-over bid regulation.

What you need to know

• The decision emphasizes that the protection of shareholder choice is one of the core purposes of the take-over bid regime along with predictability for the participants in a proposed bid.
• The OSC is unlikely to intervene to undermine significant shareholders’ veto power, even if it makes it impossible for a take-over bid to proceed, unless there are exceptional circumstances or clear evidence of abusive or improper conduct that undermines “minority shareholder choice”.
• Given the importance of predictability, obtaining exemptive relief from bid regime provisions like the minimum tender condition likely will be difficult. However, problematic conduct by one or more significant shareholders (e.g., attempts to interfere with the target board’s consideration of options), or misaligned interests between significant shareholders and minority shareholders, might justify granting such relief.

Background

ESW, Maple Rock Capital Partners and EdgePoint Investment Group were control-block shareholders of Optiva (holding approximately 28%, 22.4% and 18.1%, respectively, of the shares). They disagreed about Optiva’s strategic direction and governance. Their dispute led to a proxy contest launched by Maple Rock, litigation commenced by ESW regarding a debenture financing and preferred share issuance—and a proposed, unsolicited take-over bid by ESW for Optiva. In July 2020, ESW announced its intention to make an all-cash offer to acquire the shares that it did not already own for $60 per share conditional upon, among other things, receiving an exemption from the minimum tender requirement. ESW’s offer price represented a 122% premium to the 20-day volume-weighted average price and 92% premium to the 10-day closing high. Maple Rock and EdgePoint announced that they would not tender to the proposed offer and so, without exemptive relief, ESW’s bid would not succeed on the terms that ESW had proposed—and Optiva’s shareholders would have no choice to make with respect to the bid.

After a hearing held on September 10 and 11, 2020 to consider ESW’s request for exemptive relief, the OSC issued an order on September 14 dismissing ESW’s application, with reasons to follow.

Reasons for decision

The OSC grounded its analysis in the observation that when the CSA adopted the 2016 amendments to the bid regime, it had recognized “the potential for enhanced leverage for control block holders as a consequence of the minimum tender requirement” and determined that this could be addressed through exemptive relief. It would be left to the provincial regulators, on a case-by-case basis, to determine how to reconcile the interests of control block holders on the one hand, and on the other, the interests of bidders and target shareholders within a bid framework that is organized around protecting shareholder choice.

In deciding whether it would be in the public interest to grant the requested relief in this case, the OSC considered nine factors “through the lens of the underlying objectives of and principles of take-over bid regulation”, including:

• the nature and circumstances of the bid;
• the pre-existing control dynamics of the target and any changes to such dynamics;
• the conduct of the bidder, the target, the target’s board and the control block holders;
• whether the control block holders had any special or differing interests or stake in the outcome of the bid; and
• the impact on the shareholders of granting or denying the requested relief.

The OSC noted that Optiva’s control block shareholder dynamics pre-dated the proposed offer and that it would have been apparent to Optiva’s minority shareholders that a potential take-over bid would require the support of at least two of the control block holders. The OSC also emphasized that “[a]ll shareholders, including significant or control block shareholders, are entitled to decide in their own interests whether and at what price they are willing to exit.” In the circumstances, control block shareholders such as Maple Rock or EdgePoint were not obliged to facilitate a take-over bid, and absent evidence of abuse, it would be an extraordinary intervention to subordinate their interests to those of other target shareholders.

The OSC also concluded that there was no basis to infer that either Maple Rock or EdgePoint had engaged in any conduct to misuse its control block position to unfairly impede the proposed bid or that either shareholder had otherwise controlled or influenced, or attempted to control or influence, Optiva’s board or its special committee.

Finally, the OSC concluded that the risk of the requested relief resulting in unfair pressure on the minority shareholders to tender to the proposed bid outweighed the risk that denying the requested relief would deny shareholder choice to participate in the proposed bid. This is because granting the requested relief could result in ESW holding a blocking position of slightly less than 50%, a potential outcome that might pressure the other shareholders to tender to ESW’s bid in order to avoid remaining in a company with further reduced liquidity.

_________________________

¹ Section 2.29(1)(c) of NI 62-104 prohibits an offeror from taking up securities under a bid unless more than 50% of the outstanding securities subject to the bid, excluding securities beneficially owned, or over which control or direction is exercised, by the offeror or anyone acting jointly or in concert with the offeror, have been deposited to the bid and not withdrawn.

* Content provided with permission from Torys LLP. 

Continuing to refine Canada’s “file wrapper estoppel”

by Karen Townsend, Tasha De Freitas | Torys LLP

File wrapper estoppel, a well-known doctrine under U.S. patent law, is based on the general principle that an applicant cannot make representations to the patent office to avoid refusal of a patent application, and then during litigation of the patent, assert that the patent covers features of the invention conceded during prosecution. Historically, representations made to the Canadian Intellectual Property Office (CIPO) during a patent’s prosecution have been inadmissible for the purpose of construing the claims in litigation. However, in December 2018, the Patent Act (the Act)¹ was amended to allow courts to consider written communications to the CIPO during prosecution to rebut a representation made by a patentee about the construction of a claim. In the latest update from our IP team, we provide updates on the continuing refinement of Canada’s version of “file wrapper estoppel”.

What you need to know

• No bright line yet between admissible and inadmissible statements made during prosecution. It remains unclear when statements made during the prosecution of a patent are admissible as evidence during litigation. Therefore, it is very important that caution be exercised when communicating with the CIPO during prosecution.
• Comments in foreign patents may be admissible. General statements made to the CIPO about related, foreign patents during prosecution of a Canadian patent should typically not be readily admissible during litigation. However, until there is further clarity, patent applicants should be mindful of their written comments to the CIPO regarding foreign applications and patents.
• Only statements made by patentees are admissible. In contrast to representations made by the patentee during litigation of a patent, representations made by a licensee or any other person claiming under the patentee in an action or proceeding in respect of the patent, cannot be used as a basis to admit into evidence statements made by the patentee during prosecution.
• Co-ordination between patentee and licensee during prosecution is key. All interested parties should carefully consider what written communications should be made to the CIPO during prosecution and during post-grant procedures, such as disclaimers, re-examinations and reissues in order to optimally plan for litigation, should it arise.

The Canadian version of “file wrapper estoppel”

As previously discussed in our bulletins in 2020 and 2019, Canadian courts have historically held that statements made in the prosecution history of a patent are inadmissible in subsequent patent litigation. Prior to the December 2018 amendments to theAct, courts had expressed some concern that one could never look at the file prosecution history to interpret a claim²,³. Section 53.1 of theAct, introduced in 2018, provides a statutory exception to this common law prohibition. It permits “written communications” between the patentee and the CIPO during prosecution of the patent to be relied on in litigation to rebut representations made by the patentee during the action or proceeding about construction of a claim in the patent. Courts have begun to establish the boundaries of this exception, as shown in Bauer Hockey Ltd. v Sport Maska Inc⁴. when the Federal Court held that as long as the issue is one of claims construction, section 53.1 applies and the prosecution history is admissible. The decisions in CanMar Foods Ltd. v. TA Foods Ltd. (CanMar)⁵ and Allergan Inc. v. Sandoz Canada Inc. et al. (Allergan)⁶, discussed below, continue to refine the limits of “file wrapper estoppel” in Canada.

CanMar: Caution when referencing foreign file wrappers

In CanMar, CanMar Foods Ltd. appealed a decision of the Federal Court granting a motion for summary judgement to TA Foods and dismissing CanMar’s patent infringement action against it. In concluding that TA Foods had not infringed CanMar’s patent, the Federal Court relied in part on statements made by CanMar in the prosecution history of the corresponding U.S. patent to determine that certain elements of the claims were essential for infringement. Although section 53.1 of the Act does not address foreign prosecution histories, the motions judge held that the U.S. prosecution history was admissible because it had been specifically referred to in the Canadian prosecution; CanMar appealed. One of the issues considered in the appeal was whether statements made during prosecution of the corresponding US patent were admissible as evidence under section 53.1 of the Act. Although it dismissed the appeal, the Federal Court of Appeal found that the Federal Court judge’s recourse to the U.S. file prosecution history was inappropriate based on the specific circumstances of the matter.

In its decision, the Federal Court of Appeal cautioned against readily admitting foreign prosecution history into evidence. It noted that the language of section 53.1 of the Act is specific to communications with the CIPO, and that it would go against the principles of statutory interpretation to try to go beyond its original intent. Specifically, the Court warned that “[opening] the door to allowing foreign patent prosecution history into the analysis might lead to overly contentious and expensive litigation”, and that because of differences between the patent processes, including differences in the language of the patent claims admitting foreign prosecution evidence can lead to potential issues of translation and interpretation of the claims⁷. However, the Court stopped short of an absolute bar on the admission of foreign file prosecution histories, recognizing that there may be situations in which a patentee’s statements during prosecution may create a sufficient nexus between the foreign prosecution and the Canadian patent under section 53.1 of the Act.

The Court found that nothing in CanMar’s patent’s prosecution file specifically identified what “written communication” from the U.S. prosecution history was incorporated by the patentee into the Canadian patent file history and where that written communication could be found. The only reference to a foreign “written communication” in the file history was the patentee’s note in an office action response that some of the claims were being amended to “correspond substantially” to those of “a related US application”⁸. Based on the facts of the case, the Court held that the Federal Court judge should not have considered the U.S. prosecution history.

Allergan: Whose representations can trigger Canada’s “file wrapper estoppel”?

In Allergan, Sandoz Canada Inc. sought approval to market a generic alternative to the drug RAPAFLO^® used in the treatment of benign prostatic hyperplasia. Sandoz alleged that its product would not infringe Canadian Patent No. 2,507,002. The patent is owned by Kissei Pharmaceutical Co., Ltd., but licensed to Allergan Inc. who is authorized to market RAPAFLO^® in accordance with a series of Notices of Compliance (NOCs) issued by Health Canada. Since Sandoz’s regulatory submissions relied on Allergan’s NOCs, Sandoz served Allergan with a Notice of Allegation under the Patent Medicines (Notice of Compliance) Regulations⁹. In response, Allergan brought an action in the Federal Court seeking a declaration that the making, construction, using or selling of Sandoz’s generic would infringe the Kissei Patent. Notably, Kissei Pharmaceutical Co., Ltd. (Kissei) did not participate during the trial and merely denied that any of the Kissei Patent claims are invalid and relied on Allergan’s submissions in this regard in the proceeding.

At trial, Sandoz sought to rely on the prosecution history to support its position on claims construction. However, based on the explicit reference to representations made by the patentee in section 53.1 of the Act, and Parliament’s decision not to explicitly include representations made by anyone claiming under the patentee (such as a licensee), the Court found that representations made by Kissei to the Patent Office could not be relied on to rebut representations made by Allergan, as a licensee, during the litigation. Since the section 53.1 exception was not applicable, the general rule applied and the file prosecution history was not admissible into evidence. That said, the Federal Court did comment that “the file prosecution history in question provides a glaring example of the mischief that is implicitly permitted by the current wording of subsection 53.1(1)”¹⁰.

_________________________

¹ R.S.C., 1985, c. P-4

² Distrimedic Inc. v. Dispill Inc., 2013 FC 1043

³ Pollard Banknote Limited v. BABN Technologies Corp., 2016 FC 883

⁴ 2020 FC 624

⁵ 2021 FCA 7

⁶ 2020 FC 1189

⁷ CanMar at para. 71

⁸ CanMar at para. 75

⁹ SOR/93-133

¹⁰ Allergan, para. 135.

* Content provided with permission from Torys LLP. 

Proof of vaccination: privacy considerations for businesses

by Molly Reynolds, Ronak Shah, Rebecca Wise, Nic Wall, Jake Babad | Torys LLP

Federal, provincial and territorial privacy commissioners have released a joint statement on privacy considerations for the development of vaccine passport frameworks. Talk of “vaccine passports” has recently increased as more Canadians receive their COVID-19 vaccinations. While the Canadian government has signalled a willingness to introduce vaccine passports for international travel, it remains unclear whether a similar system will be implemented domestically, and if so, in which provinces. In this vacuum, businesses are increasingly considering asking both customers and employees for proof of vaccination as part of their health and safety and return to site planning.

What you need to know

• A vaccine passport is a centralized means of proving a person has been vaccinated. It is only one form of proof of vaccination. Vaccine passport systems in the European Union and elsewhere could inform what a Canadian vaccine passport may look like.
• In contrast, business-specific proof of vaccination programs are not centralized, but rather based on collecting data directly from individuals.
• Businesses should consider a wide range of factors in their privacy risk analysis before implementing a proof of vaccination program. These include:
  • whether the program is optional or mandatory;
  • the rationale for the collection of vaccination status information and the availability of alternative health-protective measures;
  • access, discrimination, and human rights concerns; and
  • the means of proof and validation.
• In such dynamic circumstances, businesses should be prepared to revisit their risk analysis as the factual and regulatory landscape changes.

Primer on vaccine passports

Proof of vaccination vs. vaccine passports

A vaccine passport is a commonly accepted means of proving a person’s vaccination status. An individual can provide proof of vaccination in a number of forms, such as through a signed letter from a doctor, a certificate from a vaccination provider, or personal attestation. However, some countries have implemented, or are considering implementing, vaccine passports: a uniform, commonly accepted means of proving vaccination status, typically in a form set out or managed by a single organizing body. Vaccine passports can come as either a digital or hard copy certificate, though current discussions tend to focus on the former. Vaccine passports can also differ in their scope of application, such as whether they are limited to international travel contexts or are also used to obtain domestic services such as entering a business.

Current vaccine passport systems and proposals

Israel’s Health Ministry has implemented the “Green Pass”, a vaccination certificate that users can share through a personalized QR code in the Ramzor app. A Green Pass is required to enter gyms, hotels, theatres and concerts, but is not required for other activities, including visiting malls and museums.

Vaccine passports can certify other COVID-19-related information too. For example, the European Union is currently developing a “Digital Green Certificate”, which could serve as digital proof of vaccination, a negative test result, or recovery from COVID-19. The Digital Green Certificate would also use a QR code stored on a mobile device, but citizens would also be able to request a paper copy. Member states including France and Denmark have begun testing apps that would integrate with the Digital Green Certificate. If approved, such apps would likely allow vaccinated users to travel without having to quarantine upon arrival in a new EU country.

Non-state actors are also developing vaccine passport apps. While the U.S. government intends to implement paper-only “report cards” showing proof of vaccination, New York State is already using the Excelsior app, developed by IBM, to confirm vaccination status for attendees at sporting events. The International Air Transport Association has also developed an app that allows passengers to share test results and vaccination details required for international travel.

Vaccine passports in Canada: What we (don’t) know

Canada’s Health Minister recently said that the federal government embraces the concept of vaccine passports and will be developing a form of certification to enable vaccinated Canadians to travel internationally. It would be unsurprising if such a system was designed to be aligned with the EU’s Digital Green Certificate. At the very least, the Canadian system would be designed to certify one or more of the Digital Green Certificate data fields (proof of vaccination, a negative test result, or recovery from COVID-19).

The federal government has also signaled that it has no intention to develop or impose a vaccine passport for domestic use. This leaves open at least two possible alternatives: one or more domestic vaccine passports developed by the provinces, or provincial adoption of the federal vaccine passport for domestic purposes. News reports have indicated that Ontario is considering some form of digital certification, though few details are currently available.

On May 19, 2021, the federal, provincial and territorial privacy commissioners released a joint statement on privacy considerations for the development vaccine passport frameworks for both governments and businesses (Commissioner Joint Statement). The Commissioner Joint Statement is indicative of privacy regulators’ heightened awareness of the privacy impacts of vaccine passports and the collection of proof of vaccination information.

Collecting proof of vaccination: Privacy considerations for businesses

In the current absence of national vaccine passports in Canada and the U.S., businesses are considering their own programs for collecting proof of vaccination information from employees and customers. Vaccination status and similar COVID-19-related information will typically be considered sensitive personal information and therefore engage a number of privacy law requirements.

As a preliminary matter, businesses should determine whether their proposed program to collect proof of vaccination information will apply to employees, customers, or both. This determination impacts what privacy, employment, or other legislation applies to the program. For example, collecting vaccination information from employees may engage employment and human rights laws, but may not engage privacy legislation in certain jurisdictions. Even where businesses are not required to comply with statutory privacy law in the employment context, they should ensure their proof of vaccination programs conform with the broadly established privacy principles and guidelines outlined by privacy regulators. This will enable businesses to meet privacy requirements under the common law, and to mitigate against reputational and employee morale concerns.

Under the Canadian Personal Information Protection and Electronic Documents Act (PIPEDA) and equivalent provincial legislation, a business that requests personal information must show 1) that the requested disclosure serves a bona fide business interest (i.e., is necessary), and 2) that the loss of privacy is proportionate to the benefit gained. Vaccines’ effectiveness at preventing symptoms and preventing transmission to others will be important to the rationale underlying both necessity and proportionality. The evidence of vaccine effectiveness at preventing COVID-19 symptoms is well established. On prevention of transmission, the Commissioner Joint Statement says: “So far we have not been presented with evidence of vaccine effectiveness to prevent transmission, although members of the scientific community have indicated that this may be forthcoming”.

The primary factors to consider in assessing and implementing a proof of vaccination program as they relate to Canadian privacy law requirements are set out below.

Optional vs. mandatory

Whether a proof of vaccination program is optional or mandatory is one of the most significant factors to consider. Privacy legislation generally only permits businesses to require individuals to consent to the collection, use or disclosure of personal information where the information is necessary to fulfill the business’ explicit and legitimate purposes. A mandatory program would therefore represent higher risk where a business cannot demonstrate why the information is necessary.

Employees

Employers subject to privacy legislation intending to require employees to share proof of, or report on, their COVID-19 vaccination status—particularly as a precondition to returning to a place of work—will need to be able to show why this requirement is necessary and proportionate. Accordingly, employers first need to seriously consider whether they want to require employees to receive the vaccine or to just disclose their vaccination status. Requiring proof that an employee has received the vaccine is less controversial from a privacy perspective than mandating vaccinations.

Having said that, requiring an employee to disclose their vaccination status as part of a returning to work program still raises privacy concerns, which must be balanced against an employer’s health and safety obligations. In such circumstances, employers will need to establish how the collection and use of the data (vaccination status) is fair, necessary and relevant for a specific purpose. An employer’s reason for recording its employees’ vaccination status must be clear and compelling. If the employer is not able to establish a specified purpose for the collection and use of the information, and is recording it on a “just in case” basis, or if the employer can achieve its goal without collecting this information (e.g., via social distancing and masking), it is unlikely that an employer will be able to justify collecting the vaccination status information in the first place. The Commissioner Joint Statement notes that while currently unconfirmed, evidence that vaccinated individuals are significantly less likely to transmit the disease to others may be forthcoming. Accordingly, it is currently unconfirmed that ensuring employees are vaccinated (or receiving information about their vaccination status) will materially increase the health and safety of the workplace.

In contrast, scenarios where employers provide employees with a meaningful choice of whether to share this information (e.g., voluntary self-reporting of vaccination status) are likely to attract less privacy regulatory risk. Optional employee disclosure could still provide employers with meaningful insight into the employer’s risk profile and their ability to meet customer needs.

Whether an employer requires an employee to be vaccinated, requires an employee to disclose their vaccination status, or provides employees with the option of disclosing their vaccination status, employers must still be alive to their obligations under human rights laws, as discussed in further detail below.

Customers

Canadian authorities have given divergent answers on whether businesses can require proof of vaccination as a condition of entry. Manitoba Health Minister Heather Stefanson has stated that businesses “should not be requesting proof of immunization for any purpose”, while Ontario Health Minister Christine Elliott has acknowledged that providing proof of vaccination will likely be an important part of safely reopening spaces where social distancing is impossible or undesirable.

Requiring proof of vaccination from customers is likely lower risk than doing so for employees (assuming privacy legislation is equally applicable) because the consequences of refusal are, on balance, less significant for customers. Many businesses also offer goods and services through online or no-contact channels as alternatives, which reduces the risk that such a requirement is truly a condition of service. That said, businesses will still need to demonstrate why the measure is necessary and proportionate to the degree it is mandatory. Certain industries, such as live entertainment, may have a clearer purpose for requiring proof of vaccination than other industries.

An optional program for customers will still be significantly lower risk than a mandatory one. An optional program, could (subject to public health guidance) provide an individual with alternative ways to limit their risk of contracting or transmitting the virus if they do not wish to share their vaccine status information.

Businesses implementing a proof of vaccination requirement must be cognizant of their obligations under human rights laws.

Access, discrimination and human rights concerns

Before implementing a proof of vaccination program, businesses should consider the potential impact on marginalized groups that experience more difficulty accessing the vaccine, as well as those who cannot or decide not to get vaccinated on the basis of a prohibited ground of discrimination (e.g., an allergy or a religious objection to vaccination).

To the extent that the proof of vaccination program will result in differential treatment of unvaccinated employees, employers will need to consider how to accommodate employees who cannot or decide not to be vaccinated on the basis of their protected characteristics. Similarly, employers should be alive to the fact that treating unvaccinated employees differently (e.g., not allowing unvaccinated employees to return to corporate facilities) can have the effect of “outing” individuals who cannot, or decide not, to be vaccinated. This can result in workplace bullying or ostracization, potentially on the basis of a prohibited ground of discrimination.

Human rights legislation also affords individuals protection from discrimination in the area of goods, services and facilities. Accordingly, if a proof of vaccination program will result in differential treatment of unvaccinated customers, businesses will need to consider how to accommodate customers who cannot or choose not to be vaccinated on the basis of a prohibited ground of discrimination.

Collecting or using personal information to further unfair, unethical or discriminatory treatment contrary to human rights laws is also one of the “no-go zones” identified by the Office of the Privacy Commissioner of Canada that would presumptively violate PIPEDA. The European Data Protection Supervisor recently identified such a risk with requiring proof of vaccination. In Israel, where the Green Pass system is already in effect, critics are concerned about a two-tiered system where only those who are vaccinated can access certain services.

Means of proof and validation

Businesses should consider the means by which they will allow individuals to provide evidence of vaccination—at least until federal and provincial governments have set a common standard. Here, there is a tension between the accuracy and reliability of the information being collected and the potential intrusiveness of the collection itself. Certain methods of proof, such as self-reporting and certificates vulnerable to forgeries, will be less reliable but may reduce privacy compliance risk. Businesses will have to weigh the risks of receiving inaccurate information against the invasiveness of more reliable methods.

Businesses should also consider ways to limit the information they collect and retain. For example, the Saskatchewan Privacy Commissioner has noted that the least privacy intrusive approach to validate employee vaccination status is to request to view a vaccination status without retaining any of the information. A slightly more intrusive approach is to maintain an employee list of who has shown a vaccination certificate, reducing the need to continually ask to view the certificate. Practically, many employees may be willing to voluntarily disclose their vaccination status if it is simply a “yes” or “no” response, without the requirement to provide proof of receiving the vaccination.

The means of validation (i.e., collecting and assessing the proof of vaccination) should also be done privately to the extent it is practicable.

Other proper privacy practices

Businesses should keep in mind that a number of other privacy law requirements and best practices apply equally to vaccination status as they would any other type of sensitive personal information. As such, businesses should ensure they are implementing proper privacy protocols, including:

• documenting a defined purpose and authority for the collection and use of this information. This can be done by undertaking a privacy impact assessment;
• obtaining meaningful consent to collect the information, and being transparent about the rationale for collecting the information, how the information will be handled, and whether there could be any negative consequences if individuals decline to share this information;
• avoiding the over-collection of information, such as unnecessary data fields;
• limiting access to the information to those who require it;
• ensuring the information is only disclosed or otherwise used for the reasons it was collected;
• ensuring the information is properly protected against unauthorized access;
• retaining the information only for as long as required (if at all) and securely deleting the information afterwards; and
• considering whether employee vaccination status (and/or proof thereof) information is necessary for maintaining a safe work environment—and if an employee declines to share their status, whether that individual’s privacy choice can be accommodated through alternative means.

Importance of a dynamic analysis

As the situation on vaccinations and vaccine passports will continue to evolve, so too will businesses’ risk analyses. Guidance from privacy regulators, health officials and other government bodies—not to mention legislation explicitly authorizing or requiring collection of proof of vaccination—will impact the factors discussed above. Emerging evidence on the efficacy of vaccines with respect to emerging variants of concern and transmissibility will also impact a business’ risk analysis. Businesses should therefore be prepared to revisit their previous analyses as new information becomes available.

* Content provided with permission from Torys LLP. 

Crypto Asset Trading Platforms – Canada is Open for Business for those who Play by the Rules

by Alix d'Anglejan-Chatillon, Ramandeep K. Grewal | Stikeman Elliott LLP

The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) published new guidance this week providing greater clarity on when securities and derivatives legislation applies to crypto-asset trading platforms (CTPs). Joint Canadian Securities Administrators/Investment Industry Regulatory Organization of Canada Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements (the Notice) does not introduce new rules for CTPs but provides a path to transition into the Canadian regulatory framework for both domestic Canadian CTPs and for global CTPs that admit Canadian-resident users to trade crypto assets.

The guidance applies to CTPs that facilitate trading of crypto assets that are securities (Security Tokens), and to CTPs that facilitate trading in crypto assets that are not securities (such as Bitcoin), but which the CSA view as instruments or contracts that are subject to Canadian securities and/or derivatives regulation due to their trading processes and structures (Crypto Contracts).

Time to Check in

The release issued by the CSA in connection with the Notice directs Canadian and global CTPs that allow access to Canadian-resident users to contact the CSA now to discuss the registration process and applicable requirements, or face possible enforcement action. In a separate release (the Ontario Release), CTPs with Ontario users are specifically directed to contact staff of the Ontario Securities Commission by April 19, 2021 to bring their operations into compliance.

Transition Period

Importantly, the stated intention of the CSA is to strike a balance between flexibility that fosters innovation and their regulatory mandate to promote investor protection and fair and efficient capital markets. As such, while the guidance clarifies when regulation will apply and the steps that various types of CTPs will need to take, the roadmap includes an "interim approach" (including a transition period and time-limited exemptions) to allow CTPs to operate in certain circumstances as they ramp up to fully integrate into the Canadian regulatory structure.

The Notice also clarifies that:

• Canadian regulation will apply to the extent a CTP has users in one or more Canadian provinces – no greater nexus is required.
 
• Regulation may entail registration as a dealer, compliance with marketplace requirements, or both, based on existing frameworks that apply to the securities industry.
 
• The CSA may entertain bespoke exemptions to the existing frameworks, and in certain circumstances, allow for a two-year “interim period” approach before full compliance will be required.

The Notice does not introduce any new rules but clarifies how existing requirements of securities legislation may be tailored through terms and conditions and discretionary exemptive relief. The requirements will depend on how a CTP operates and what activities it undertakes, generally bifurcated into whether the CTP operates as a Dealer Platform or a Marketplace Platform, although certain CTPs may be regulated as both.

This approach is generally consistent with CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets published in early 2020. Much of the guidance is also the result of the consultation process started in 2019 with the publication of Joint CSA/IIROC Consultation Paper 21-402 Proposed Framework for Crypto Asset Trading Platforms.

Dealer Platforms

The Notice states that a CTP may be considered a Dealer Platform where:

• it only facilitates the primary distribution of Security Tokens; and
 
• it is the counterparty to each trade and client orders do not otherwise interact with one another on the CTP.

Dealer Platforms may also be engaged in other activities or perform other functions that marketplaces typically do not undertake, including onboarding retail clients, acting as agent for clients for trades in Security Tokens or Crypto Contracts, and offering custody of assets, either directly or through a third-party provider.

The appropriate category of dealer registration will depend on the nature of the platform’s activities.

• Platforms that offer margin or leverage must register as investment dealers and become members of IIROC (the relevant Canadian SRO).
 
• Platforms that only facilitate distributions or the trading of Security Tokens in reliance on prospectus exemptions and do not offer margin or leverage may consider registration as exempt market dealers, or in some circumstances, restricted dealers.
 
• Platforms that trade Crypto Contracts and trade or solicit trades for retail investors that are individuals will generally be expected to be registered as investment dealers and obtain IIROC However, they will be able to access an “interim period” process by seeking restricted dealer registration (provided they do not offer leverage or margin trading) while they ramp up to full investment dealer compliance.
  • The interim period is generally expected to be two years.
   
  • CTPs operating in New Brunswick, Nova Scotia, Ontario or Québec must submit applications for investment dealer registration and IIROC membership during the interim period.
   
  • The securities regulators in Alberta, British Columbia, Manitoba and Saskatchewan will consider other regulatory approaches during the interim period, as warranted, and CTPs operating in these jurisdictions are expected to either start the process for investment dealer registration and IIROC membership during the interim period or take other steps during the interim period, in consultation with their principal regulator, to transition to an acceptable long-term regulatory framework. The specificities of this type of alternative framework are not mapped out.

The Notice reminds market participants that Dealer Platforms that are in the business of trading Crypto Contracts that are derivatives with Québec-resident users will be required to register as derivatives dealers under the Québec Derivatives Act (QDA), again with time-limited relief from the IIROC membership requirement. Dealer Platforms that also create and market derivatives must be qualified by the Autorité des marchés financiers (AMF) before derivatives are offered to the public.

The Notice further sets out areas where the CSA may consider flexibility in the application of existing regulatory requirements to Dealer Platforms seeking registration. Platforms are therefore encouraged to reach out to discuss their business models, the appropriate registration category and how requirements may be tailored.

Marketplace Platforms

A CTP is considered a Marketplace Platform if it:

• constitutes, maintains or provides a market or facility for bringing together multiple buyers and sellers or parties to trade in Security Tokens and/or Crypto Contracts;
 
• brings together orders of Security Tokens and/or Crypto Contracts of multiple buyers and sellers or parties of the contracts; and
 
• uses established, non-discretionary methods under which orders for Security Tokens and/or Crypto Contracts interact with each other and the buyers and sellers or parties entering the orders agree to the terms of a trade.

CTPs that are marketplaces will be expected to operate in a similar manner to alternative trading systems (ATS) and be subject to similar marketplace rules, including National Instrument 21-101 Marketplace Operation, National Instrument 23-101 Trading Rules  and National Instrument 23-103 Electronic Trading and Direct Electronic Access to Marketplaces. In addition, trading activity on a Marketplace Platform may be subject to market integrity requirements. However, the CSA anticipate tailoring these requirements to accommodate the novel aspects of CTPs. The Notice also outlines certain core market integrity requirements considered relevant to trading on Marketplace Platforms, and areas where flexibility in the application of existing regulatory requirements may be provided.

Where a Marketplace Platform performs dealer functions, it would also be subject to the appropriate dealer requirements and, depending on the circumstances and the CTP’s business model, these dealer activities may have to be conducted through a separate entity or business unit which would need to meet the applicable regulatory requirements or be separated through ethical walls.

Finally, a Marketplace Platform that trades Security Tokens and regulates issuers of those securities, or if it regulates and disciplines its trading participants other than by merely denying them access to the platform, may be carrying on business as an exchange and would be expected to seek recognition or, if appropriate, an exemption from recognition as an exchange.

A Marketplace Platform that does not offer leverage or margin and that is not an exchange may seek registration as an exempt market dealer or restricted dealer, as appropriate, for a limited period of time. Similar to the “interim period” concept described above (also generally expected to be two years), Marketplace Platforms operating in New Brunswick, Nova Scotia, Ontario and Québec are expected to start the registration or exemption process during the interim period. Securities regulators in Alberta, British Columbia, Manitoba and Saskatchewan will consider other regulatory approaches and may allow for other steps to be taken during the interim period to transition to an acceptable long-term regulatory framework.

Application process and other considerations

The Notice also provides information relating to the expected application process, additional considerations in the context of clearing and settlement and prospectus exemptions and trade reporting. The CSA also caution that as the industry is still developing and a wide variety of CTP models are emerging, the regulatory treatment of one CTP may differ from another.

Existing Canadian registered firms introducing crypto asset products and/or services are reminded to report changes in their business activities to their principal regulator and, in the case of investment dealers, to IIROC. The proposed changes to activities may be subject to review to assess, among other requirements, whether there is adequate investor protection.

The CSA signal their openness to engage in continued dialogue with CTPs and stakeholders on specific compliance issues and provide additional flexibility to address emerging technology and operational models. The CSA also remind CTPs operating from outside Canada that have Canadian clients that they are expected to contact the CSA to discuss the registration process and comply with Canadian securities legislation. CSA members may take new enforcement actions or continue existing actions against CTPs that do not comply with Canadian securities legislation. The Ontario Release states that “[p]latforms must contact OSC staff by April 19, 2021, to discuss how to bring their operations as a dealer or marketplace into compliance. If a platform currently trading in derivatives or securities in Ontario does not do so by this date, steps will be taken to enforce applicable requirements under securities law. Platforms located outside of Ontario that allow Ontarians access are regarded as operating in Ontario for the purpose of securities regulation”. CTPs with users in other Canadian jurisdictions should consider engaging with other Canadian regulators as part of this process.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

* Content provided with permission from Stikeman Elliott LLP. 

Are More Women in Canadian Boardrooms? Sixth Annual CSA Review Now Supplemented by First Ever Reporting Under CBCA Amendments

by Ramandeep K. Grewal, Laura Levine | Stikeman Elliott LLP

The Canadian Securities Administrators’ (the CSA) updated data on women in corporate leadership shows that women’s representation has increased over the last six years. Data published by Innovation, Science and Economic Development Canada (ISED Canada) confirms that while progress has been made with respect to female representation, there remains a gap in corporate leadership for members of other diverse groups.

• The representation of women on boards and in executive officer roles continues to increase with 79% of issuers having at least one woman on their board (49% in 2015) and 65% of issuers having at least one woman in an executive officer position (60% in 2015).
 
• Larger reporting issuers generally have more diverse boards and leadership teams than smaller and venture issuers. In particular, larger issuers have greater female representation at the board level, with 31% of board seats occupied by women for issuers with over $10 billion market capitalization (as compared to 20% of board seats being held by women overall).
 
• The first year of broader diversity data with respect to visible minorities, indigenous persons and persons with disabilities shows that Canadian public companies are generally lacking diversity outside of gender diversity.
 
• More than half of the issuers reviewed by the CSA (54%) have adopted a written policy relating to the representation of women on their board, with 26% of the issuers adopting targets for the representation of women on their board and 4% adopting targets for representation in executive officer positions. Only 32% of issuers reviewed by ISED Canada had adopted a written policy with respect to the representation of women on boards.

On March 10, 2021, the Canadian Securities Administrators (CSA) published CSA Multilateral Staff Notice 58-312 Report on Sixth Staff Review of Disclosure Regarding Women on Boards and in Executive Officer Positions (the Staff Notice) summarizing results from their review of the disclosure of 610 TSX-listed issuers with year-ends between December 31, 2019 and March 31, 2020 (the TSX Issuers). The results in the Staff Notice represent the sixth annual review conducted by the CSA of public disclosure regarding women on boards and in executive officer positions, as required by National Instrument 58-101 Disclosure of Corporate Governance Practices and Form 58-101F1 Corporate Governance Disclosure (together, 58-101).

ISED Canada has also published the results of its review (the CBCA Review) of the diversity disclosure of 469 distributing corporations (the CBCA Issuers) incorporated under the Canada Business Corporations Act (the CBCA) as required by the new diversity disclosure obligations in the CBCA that became effective on January 1, 2020. Differences between the results in the Staff Notice and the CBCA Review are noticeable as the CBCA diversity disclosure requirements apply to all “distributing corporations” incorporated under the CBCA, which includes venture issuers, and addresses more facets of diversity, namely women, visible minorities, Indigenous persons and persons with disabilities (Designated Groups). The findings of the CBCA Review establish a baseline that will be used to measure progress over the years. In publishing the CBCA Review, the Honourable François-Philippe Champagne asserted: “It is clear that the numbers in this report fall well below what would accurately represent the diversity of Canada. This reflects the reality today that women, racialized persons, those who identify as LGBTQ2 and those living with disabilities (including invisible and episodic disabilities), as well as First Nations, Inuit and Métis peoples, are under-represented…”

Together, the Staff Notice and the CBCA Review provide insight into the composition of corporate leadership for both large and small Canadian public companies, and, as stated in the CBCA Review, evidence a “disparity in the representation of designated groups on boards of directors and among senior management.”

Women on Boards

Both the CSA and the CBCA require that issuers disclose data with respect to the number of women on their boards of directors. According to the Staff Notice, a majority (79%) of TSX Issuers reviewed had at least one woman on their board, which is significantly higher than the 49% of issuers reporting in the CSA’s first annual review published in 2015 (Year 1). Comparatively, the CBCA Review found that only 50% of CBCA Issuers had at least one woman on the board of directors, evidencing that venture issuers generally have fewer women on their boards. Of the TSX Issuers, 20% of board seats were held by women, in comparison to 11% reported in Year 1. This number tended to increase with the size of the issuer and varied by industry. Once again, this number was lower (17%) in the CBCA Review evidencing a different level of representation of women among venture issuers.

In addition, the Staff Notice found that:

• 6% of TSX Issuers had a female chair of their board.
 
• 724 board seats of TSX Issuers were vacated during the year, and 30% (168 of the 561 seats filled) were filled by women, which represents a 3% decrease (vacated board seats filled by women) from last year.
 
• The manufacturing, real estate, and retail industries had the highest percentage of issuers with one or more women on their boards, while the biotechnology, mining and oil & gas industries had the lowest percentage of issuers with one or more women on their boards.

Since Year 1, progress has been made with respect to women on boards:

Women in Executive Officer Positions

Of the TSX Issuers, 5% had a woman chief executive officer (CEO) and 15% had a woman chief financial officer (CFO). 65% of TSX Issuers and 47% of CBCA Issuers had at least one woman in an executive officer position, in comparison to 60% of TSX Issuers in Year 1.

The real estate, retail and utilities industries had the highest percentage of issuers with one or more women in executive officer positions. The mining, oil & gas, and technology industries had the lowest percentage of issuers with one or more women in executive officer positions.

Designated Groups

As noted above, the CBCA requires that distributing corporations not only report on the representation of women but disclosure about Designated Groups is required. The data set out in the CBCA Review shows that the leadership teams of CBCA Issuers are generally lacking broad diversity, particularly when it comes to representation of Indigenous persons and persons with disabilities. 

Indigenous Persons

Persons with Disabilities

Visible Minorities

Targets, Term Limits and Other Mechanisms of Board Renewal

The 58-101 and CBCA diversity disclosure requirements mandate that issuers disclose whether they have adopted targets, terms limits or other mechanisms of board renewal. In the Staff Notice, the CSA found that 26% of TSX Issuers adopted targets for the representation of women on their boards, in comparison to 7% in Year 1. ISED Canada found that only 14% of CBCA Issuers had adopted targets for women on boards. With respect to executive officer positions, only 4% of TSX Issuers (compared to 2% in Year 1) and 5.5% of CBCA Issuers had adopted targets. Almost no CBCA Issuers (generally less than 1%) had adopted targets with respect to the representation of visible minorities, Indigenous persons and persons with disabilities.

Most issuers have not adopted term limits or other mechanisms of board renewal:

• 23% of TSX Issuers adopted some form of director term limits (alone or with other mechanisms of board renewal), in comparison to 19% in Year 1.
 
• 34% of TSX Issuers adopted other mechanisms of board renewal but did not adopt term limits.
 
• 39% of TSX Issuers disclosed that they did not have director term limits nor had they adopted other mechanisms of board renewal.
 
• 16% of CBCA Issuers that disclosed diversity information adopted some form of mechanism for board renewal.

Reasons cited for not adopting term limits or other mechanisms for board renewal included the loss of valuable experienced and knowledgeable directors, a reduction in continuity or experience on the board or a lack of necessity because the corporation regularly assesses board members for effectiveness.

Per the Staff Notice, 54% of TSX Issuers adopted a written policy relating to the representation of women on their board, representing a significant increase from 15% in Year 1. In the CBCA Review, 32% of CBCA Issuers had adopted written policies with respect to the representation of women on their board and 26% had adopted a written policy for representation of other Designated Groups.

Proxy Advisors on Women in Corporate Leadership

In recent updates, proxy advisory firms, including Institutional Shareholder Services (ISS), Glass Lewis (GL) and the Canadian Coalition for Good Governance (CCGG) (together, the Proxy Advisors) have placed heightened emphasis on gender diversity for the upcoming proxy seasons.

Institutional Shareholder Services

Effective for meetings held on or after February 2022, ISS will recommend in respect of companies on the S&P/TSX Composite Index, a withhold vote for the Chair of the Nominating Committee (or committee with nominating responsibilities) where less than 30% of the board of the company is comprised of women, and

• the company has not disclosed a formal written gender diversity policy; or
 
• the company’s formal written gender diversity policy does not include a commitment to achieve at least 30% women on the board over a reasonable timeframe.

With respect to targets, ISS will look for an explicit percentage or numerical target for women’s representation of at least 30% of the board.

As part of its updated rationale for these policy positions, ISS cites the fact that gender diversity has remained a high-profile corporate governance issue in the Canadian market. ISS also states that it has become clear that a higher standard of representation by women is expected on Canadian boards, with S&P/TSX Composite Index constituents playing a vital role in this process as market leaders. According to ISS, the 58-101 disclosure requirement has catalyzed female representation on boards of widely held TSX-listed reporting issuers, with boards lacking policy commitments or having no female directors considered outliers.

While ISS has heightened its expectations with respect to female representation, we note that existing Governance QualityScore factors (GQS Factors) also highlight the importance of female representation. The number of women on the board is a factor scored in all regions and GQS suggests that better long-term financial performance is correlated with increases in the number of women on boards. Full credit of this factor is earned when three or more women are on the board. The percentage of women is another factor that is scored in all regions and maximum credit is received when women hold at least 50% of board seats. For details on ISS’s updated policy please see our blog post on this topic.

Glass Lewis

As previously discussed, in regards to gender diversity, GL will note as a concern an issuer that has less than two female board members and, in 2022, recommend withholding votes from the chair of the nominating committee. For boards with six or less members, GL will only require that a board have one female member. However, GL will take into consideration an issuer’s disclosure of their diversity considerations, targets and timelines and may refrain from a negative recommendation where the issuer has provided sufficient rationale or a plan to address the lack of diversity.

What is interesting about GL’s approach to gender diversity on boards is that, while there is an accommodation for a board comprised of less than six members, it has otherwise adopted an absolute number irrespective of the size of the board. This contrasts with the typical percentage threshold (generally 30%) that has been set by other investor advocacy groups like ISS, the Catalyst Accord 2022 and the 30% Club Investor Group.

Canadian Coalition for Good Governance

CCGG also believes that gender diversity is a critical matter of corporate governance. In achieving gender diversity, boards should adopt a written gender diversity policy. While CCGG does not take any position regarding to the content of a company’s gender diversity policy, CCGG notes that as a matter of best practice, gender diversity policies should incorporate targets.

CCGG also suggests that in setting an appropriate target, boards should consider the research that supports the adoption of at least a 30% target, as “this level constitutes a ’critical mass’ whereby the views of the diverse members of a group are viewed not through a prism of tokenism but carry the same weight as the opinions of other group members.”

Recent Diversity Developments in Corporate Leadership

As evidenced by the recent amendments to the CBCA, over the past year there has been growing legislative and regulatory recognition of the importance of overall diversity in corporate leadership.

Legislative Changes

The lack of representation in Canadian corporate leadership of black, indigenous and people of colour (BIPOC) has expanded the focus from gender parity alone to a more expansive lens of diversity. As previously discussed and noted above, in January 2020, Canadian federal legislation echoed the need to advance diversity in corporate leadership by amending the CBCA to require all distributing corporations (including venture issuers) to report on the representation of Designated Groups on boards of directors and within senior management.

Specifically, the CBCA requires that corporations either disclose information about their diversity policies and targets with regards to, at minimum, the Designated Groups, or explain why they do not have such a policy and targets. These new requirements represent a recognition that board diversity is key to developing vibrant capital markets. To assist CBCA-incorporated issuers address the CBCA disclosure requirements, ISED Canada recently published guidelines intended to encourage more consistent diversity disclosure.  Notably, corporations are encouraged to disclose information in tabular format, separate disclosure with respect to boards and senior management, and specifically indicate timelines for targets. CBCA issuers are also reminded that filing a proxy circular on SEDAR will not satisfy the requirement to send diversity information to Corporations Canada. Rather, CBCA issuers must also submit this information to Corporations Canada either though their Online Filing Centre or by email to IC.corporationscanada.IC@canada.ca. 

In light of the new CBCA disclosure requirements, we reviewed circular disclosure published by issuers in the S&P/TSX 60 Index (the S&P/TSX 60 Study). Our review reveals that among CBCA-incorporated issuers on the S&P/TSX 60 Index:

• 24% of board members and 17.21% of executive officers are identified as women;
 
• 86% of board members and 4.49% of executive officers are identified as visible minorities;
 
• 53% of board members and 0% of executive officers are identified as Indigenous persons (First Nations, Inuit, and Métis); and

0.27% of board members and 0% of executive officers are identified as a person with a disability.

Further, necessary improvement to the current landscape is generally desired as according to a recent study published by McKinsey & Company, boards that are more ethnically and culturally diverse are 43% more likely to earn higher profits. Reporting on the representation of BIPOC is an important step in fostering an environment where companies are encouraged to remain innovative and competitive, both domestically and internationally.

Ontario’s Capital Markets and Modernization Taskforce

Similar to the CBCA amendments, the Ontario’s Capital Markets and Modernization Taskforce (the Taskforce) recommends improvements in corporate board diversity. Although 58-101 includes a “comply or explain” model regarding its representation of women on boards of directors, the Taskforce notes that there had been only a marginal increase in representation since the adoption of these requirements – from 11% in 2015 to 17% in 2019. To improve these efforts, the Taskforce has proposed that TSX-listed companies adopt written policies that “expressly addresses the identification of candidates who self-identify as women, BIPOC, persons with disabilities or LGBTQ+ during the nomination process.” Further, the Taskforce recommends that public issuers set aggregate targets of 50% for women and 30% for BIPOC, persons with disabilities, and LGBTQ+, with implementation to be completed within five and seven years, respectively

If the Taskforce recommendation is adopted, it would mark a significant change to current practice, particularly as our TSX/S&P 60 Study reveals that:

• the average gender diversity target was set at 30% women;
 
• the average percentage of women on boards was 30.36%; and
 
• 34% of boards were comprised of 21% to 30% women.

Notably, the Taskforce’s recommendation that public issuers set aggregate female targets of 50% mirrors the GQS Factors, whereby maximum credit is also earned at the 50% threshold. This symbolizes a recognition of gender equality and that organizational targets cannot plateau once reaching the typical 30% threshold that has been recommended by investor advocacy groups such as ISS, Catalyst Accord 2022, 30% Investor Club and CCGG.

This article was co-authored with the assistance of Ashley Ramnaraine, articling student at law.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

* Content provided with permission from Stikeman Elliott LLP. 

Interim Relief Published for International Dealers and Advisers Under the Ontario Commodity Futures Act

by Kenneth G. Ottenbreit, Alix d'Anglejan-Chatillon | Stikeman Elliott LLP

The Ontario Securities Commission (OSC) recently published two new instruments that codify interim relief for international firms that rely on exemptions to trade or advise on futures and options on futures listed on non-Canadian exchanges for qualified Ontario based institutional investors.

Effective April 15, 2021, the OSC issued two interim orders (the Orders) exempting international dealers, advisers and sub-advisers and their representatives from certain registration and options proficiency requirements prescribed under the Commodity Futures Act (Ontario) and OSC Rule 91-502 Trades in Recognized Options (OSC Rule 91-502). The Orders are based on rules proposed by the OSC in December 2020 (as previously discussed) and eliminate the need for international firms to continue to file exemptive relief applications to provide services to Ontario institutional clients with respect to contracts traded on non-Canadian futures exchanges. The conditions in the Orders are consistent with the conditions outlined in Proposed OSC Rule 32-506 (Commodity Futures Act) Exemptions for International Dealers, Advisers and Sub-Advisers and proposed amendments to OSC Rule 91-502 (together, the Proposed Instrument). 

The comment period for the Proposed Instrument closed on March 1, 2021 and the OSC has indicated that the Orders are intended as an interim measure to reduce regulatory burden on international firms that currently rely on routinely granted exemptive relief applications until the Proposed Instrument is approved and implemented. 

The Orders will remain in effect until the earlier of October 15, 2022 and the effective date of Proposed Instrument.

For further information, please see Ontario Instrument 32-507 (Commodity Futures Act) Exemptions for International Dealers, Advisers and Sub-Advisers (Interim Class Order) and Ontario Instrument 91-505 Exemptions from the Options Proficiency Requirement for International Dealers, Advisers and Sub-Advisers (Interim Class Order).

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

* Content provided with permission from Stikeman Elliott LLP. 

The Supreme Court of Canada upholds the constitutionality of federal carbon pricing legislation

by Richard J. King, Jacob A. Sadikman, Dana Saric, Evan Barz, Coleman Brinker, Jesse Baker, Clare Barrowman, Stephan Pacholok, Maeve O'Neill Sanger | Osler, Hoskin & Harcourt LLP

Introduction

On March 25, 2021, the Supreme Court of Canada (the SCC) released its much-anticipated decision, upholding the constitutionality of the Greenhouse Gas Pollution Pricing Act (the Act), the centrepiece of the federal government’s climate change plan, which imposes minimum carbon-pricing standards on the provinces. The majority of judges in the 6-3 split decision emphasized the importance of a national approach to addressing climate change. Three dissenting judges would have found the Act unconstitutional. As Canada’s highest appeal court, the SCC majority’s decision is the final say on the Act’s validity.

This Osler Update discusses the legal and practical implications of the decision on industrial greenhouse gas (GHG) emitters, individual taxpayers and the development of Canada’s low-carbon economy, among others. The decision provides much-needed clarity on the federal government’s ability to impose increasing carbon prices and the value of emission reduction investments going forward. While conclusive on the Act’s general constitutionality, the result of this reference case does not preclude future policy changes or challenges to the Act’s application in particular circumstances. Indeed, the SCC noted that its analysis is necessarily short-term because the “Court is not equipped to predict the future consequential impact of legislation.”

Background: Greenhouse Gas Pollution Pricing Act

The Act implements a carbon pricing regime that is central to the federal government’s plan to meet Canada’s Paris Agreement commitment to reduce GHG emissions to 30% below 2005 levels by 2030.[1] The Act has two main parts: Part 1 imposes a fuel charge on fuel producers and distributers and Part 2 introduces an output-based pricing system (OBPS) for large industrial emitters. These elements impose minimum requirements on provinces and territories that fail to meet the Act’s pricing and emissions reduction benchmarks, either because: they failed to enact carbon pricing laws at all, or their regime falls below federal benchmarks for carbon pricing stringency. Currently, at least one part of the Act applies in New Brunswick, Ontario, Manitoba, Saskatchewan, Alberta, Prince Edward Island, Nunavut and Yukon.[2] The other provincial jurisdictions have implemented their own regimes that meet or exceed the requirements in both parts of the Act.

The SCC’s review arises from appeals of three provincial court decisions. The main legal issue in all three was whether the federal government has the authority to impose the regime established in the Act. In May of 2019, a 3-2 majority at the Saskatchewan Court of Appeal said the Act was a valid use of federal legislative jurisdiction. A 4-1 majority at the Ontario Court of Appeal reached the same conclusion in June of 2019. However, in February of 2020, four of five Alberta Court of Appeal judges found the Act to be unconstitutional on the grounds that it exceeded federal jurisdiction.

At the SCC, Canada and British Columbia argued that the Act is within federal jurisdiction under the national concern branch of the Peace Order and Good Government (POGG) clause of the Constitution Act, 1867.[3] They argued that the Act’s pith and substance (or its true subject matter) is to establish “minimum national standards integral to the nationwide reduction of GHG emissions.” Characterized this way, the Act satisfies the “singleness, distinctiveness and indivisibility” test for a national concern. However, the provinces challenging the Act formulated its function more broadly. Saskatchewan argued the Act’s pith and substance is “supervising the provinces by exercising jurisdiction to regulate GHG emissions.” Ontario said it is “regulation of activities which create [GHGs].” These characterizations suggest the Act steps into the provinces’ preserve of legislative powers under the Constitution.

The Supreme Court of Canada’s decision

A 6-3 majority of the SCC held that the Act is constitutional and that Parliament has jurisdiction to enact it as a matter of national concern under POGG. In coming to its conclusions, the majority favoured a modern approach to federalism, which is cooperative and flexible. The majority’s reasons applied the “double aspect doctrine” to POGG by balancing federal powers under the “national concern doctrine” with enumerated provincial heads of power. The majority considered the importance of preserving provincial autonomy while favouring a flexible view of federalism and the Constitution that supports “modern cooperative federalism.”

The majority noted the Act’s pith and substance is not to mitigate climate change generally via regulating specific GHG emitting activities or limiting industry operations, but to mitigate climate change through a specific and narrow pan-Canadian GHG pricing mechanism. The majority explained that the Act’s legislative intention corresponds with its practical effect by creating a national standard for GHG pricing.

The majority emphasized the backstop nature of the Act, since it only applies where provinces do not have a sufficiently stringent GHG pricing system. This system gives provinces and territories flexibility to design their own context-specific policies, which may include carbon pricing, so long as they meet the minimum national standards.

The majority also noted that the climate crisis is “an existential threat to human life in Canada and around the world” and thus warrants consideration as a matter of national concern. They explained that the provinces, alone or together, are not able to establish minimum national standards and the success of those standards requires national participation. The majority elaborated that a province’s refusal to cooperate could have significant extra-provincial effects. The gravity of the environmental concerns justified the Act’s potential interference with a province’s preferred balance of economic and environmental considerations.

The SCC also held that the fuel and excess emission charges imposed by the Act are sufficiently connected to the regulatory scheme to be considered constitutionally valid regulatory charges that alter behaviour, rather than being characterized as a tax.

Impacts of the decision on Canadians, government and industry

The SCC’s decision will affect individual consumers, industry, the relationships between jurisdictions in Canada, and Canada’s position as a global business competitor. While critics will argue that increased emissions costs will push certain investment outside the country, proponents will emphasize the decision’s positive implications for environmental, social and corporate governance (ESG) initiatives.

Implications for consumers, small business and large industry

The federal government has maintained that the rebate structure associated with the Act, which provides that proceeds generated under the Act are to be distributed to the residents of the province of origin, will negate federal carbon pricing’s negative effects on individual taxpayers. Rebates for individual taxpayers will likely rise in step with increases to Part 1’s federal fuel charge. However, there has been public criticism of the fuel charge’s effectiveness in altering behaviour given that a significant portion of the tax base receives full rebates. These rebates are also criticized for failing to effectively mitigate the fuel charge’s impacts on the hardest-hit lower-income Canadians.

Much has been written about the impact of a steadily increasing fuel charge on Canadian business. The fuel charge is currently $30 per tonne and will rise to $40 on April 1, 2021, and $50 on April 1, 2022. From this point onward, the federal Minister of Environment and Climate Change has announced that the government plans to accelerate these increases to reach $170 per tonne by 2030. Some commentators have indicated that a $170 per tonne carbon price could result in a 1.8% decline in national Gross Domestic Product (GDP) and a net loss of 184,000 jobs.[4]

While the exact breadth and scope of the impact of rising fuel charges on Canadian business remains unclear, the SCC’s decision upholding the Act provides some much-needed certainty to industry. Operators in low-carbon fuels and renewable sectors — including developers in Canada’s growing natural gas, hydrogen, battery storage, wind, solar and biofuels industries — may receive a surge in investment and financing interest based on bolstered financial models for these projects’ revenue streams. This is because fuel charge increases can be expected to result in significant upticks to market prices for carbon offset credits, emission performance credits and similar products, which create viable long-term revenue streams for the producers who generate and sell them. Conversely, large industrial carbon emitters, including those in the fossil fuels extraction and petrochemical processing industries, will need to budget for increasingly higher carbon compliance costs to justify their long-term capital projects’ viability.

Provincial regulatory patchwork remains a possibility

The SCC’s majority decision emphasized that the Act imposes a standardized national pricing floor, while preserving provinces’ flexibility to design their own GHG emissions policies, including on carbon pricing. However, that very flexibility also undermines the standardization of carbon regulation across Canada. Many businesses in Canada operate across provincial boundaries. Upholding the Act does not reduce the need for these businesses to expend internal resources to understand, quantify and ensure compliance with disparate provincial regimes.

For provinces with regimes that currently meet the federal pricing and emissions reduction targets, these regimes will continue to be effective, so long as they amend their provincial legislation over time to meet the increasing federal pricing benchmarks. For instance, Alberta’s TIER prices GHG emissions at $40 per tonne and is set to increase to $50 per tonne. Therefore, large carbon emitters in that province will experience no immediate change to their operations or cost of doing business as a result of the SCC’s decision. However, the minimum federal benchmarks established by the Act do imply that businesses will not be incentivized to transfer operations from one province to another to arbitrage on carbon compliance costs, at least not below the federal threshold.

Canada’s global competitiveness

This decision allows the federal government to continue building on its promise to deliver a unified, long-term Canadian climate change strategy, allowing Canada to join the ranks of other global leaders taking action to address the accelerating threat of climate change. Critics of carbon pricing will argue that the Act’s widespread implementation will drive some businesses out of Canada to less climate-conscious jurisdictions, but to others the Act may also increase Canada’s attractiveness as a climate‑responsible jurisdiction.

ESG factors are gaining momentum as strong drivers of private foreign direct investment and institutional investment, as stakeholders lend their support to more sustainable, less carbon‑intensive opportunities.[5] This decision lends further support to the environmental branch of the growing ESG momentum across a wide variety of industries and sectors. Many global corporations and major asset owners have already announced their own commitments to reducing emissions across their operations, and the federal government’s ability to implement the Act’s carbon pricing regime signals Canada’s intention to take concrete action to address climate change. The SCC’s decision upholding the Act may remove, or detract from, some climate-motivated opposition to investment in Canadian oil sands or pipeline development.

Political headwinds

The current federal government has put its climate change policy at the centre of its bid for re-election. If it fails to win re‑election, the incoming government could revoke or change the Act. For example, the opposition Conservative Party of Canada has said that it is considering other climate-policy alternatives to the Act and its leader has stated that a Conservative government would repeal the Act.

Regardless of the outcome of any potential federal election, the SCC’s decision will affect relations and the balance of power between Ottawa and the provinces on the issue of how to address climate change.

For more information on the federal carbon pricing system, as well as other federal and provincial/territorial initiatives to fight climate change, visit Osler’s Carbon and Greenhouse Gas Legislation webpage.

[1] Environment and Climate Change Canada, United Nations Framework Convention on Climate Change, online: canada.ca/en/environment-climate-change/corporate/international-affairs/partnerships-organizations/united-nations-framework-climate-change.html.

[2] In Alberta, for example, the provincially enacted Technology Innovation and Emissions Reduction Regulation (TIER) imposes industrial emissions intensity restrictions, which currently meet the Act’s requirements, so that Part 2 of the Act does not apply in Alberta. However, Alberta currently does not have its own fuel charge legislation, so Part 1 of the Act applies in that province.

[3] Where the Constitution Act, 1867 does not specify whether a particular area of governance is within the jurisdiction of the federal government or the provinces (as is the case with the environment generally and GHG emissions, in particular), POGG’s national concern branch empowers the federal government to make laws that inherently concern the entire country.

[4] Fraser Institute fraserinstitute.org/sites/default/files/estimated-impacts-of-a-170-dollar-carbon-tax-in-canada.pdf at pgs 4 and 14 (2021).

[5] Robert G. Eccles and Svetlana Klimenko, “The Investor Revolution” (May-June 2019), Harvard Business Review, online: hbr.org/2019/05/the-investor-revolution.

* Content provided with permission from Osler, Hoskin & Harcourt LLP. 

Bankruptcy Court Weighs in on How to Value Bitcoins

by Elizabeth Pillon, Maria Konyukhova, Lee Nicholson, Nicholas Avis | Stikeman Elliott LLP

Cryptocurrency has been recognized as “property” for the purposes of the Bankruptcy and Insolvency Act by the Ontario Superior Court of Justice (Commercial List) in Re Quadriga Fintech Solutions Corp. et al.,[1] the first Canadian case of its kind. The Court also fixed the date of bankruptcy as the date for valuing claims denominated in cryptocurrency.

• QuadrigaCX, a cryptocurrency exchange, commenced proceedings under the Companies’ Creditors Arrangement Act (the CCAA) on February 5, 2019 and transitioned to a bankruptcy on April 15, 2019.
 
• Claims made against QuadrigaCX were denominated in various cryptocurrencies (e.g., Bitcoin, Litecoin and Ethereum), as well as US dollars and Canadian dollars.
 
• The Trustee planned to convert claims to Canadian dollars using the prevailing exchange rates as of the date of bankruptcy. One creditor opposed the Trustee’s motion and argued that cryptocurrency claims should be converted to Canadian dollars using the prevailing exchange rates as of the date of the CCAA initial order.
 
• The Court agreed with the Trustee and ordered that claims denominated in cryptocurrency be converted to Canadian dollars as of the date of bankruptcy.

Background

The Quadriga case arises from the collapse of QuadrigaCX, a Canadian cryptocurrency exchange launched in December 2013, that facilitated the buying, selling and trading of Bitcoin and other cryptocurrencies. Following the sudden death of QuadrigaCX’s co-founder and CEO, Mr. Gerald Cotten, on December 9, 2018, QuadriaCX’s exchange was suspended and thereafter the Nova Scotia Supreme Court granted Quadriga Fintech Solutions Corp. and certain of its affiliates an initial order pursuant to the Companies’ Creditors Arrangement Act (the CCAA) on February 5, 2019. Ernst & Young Inc. was appointed as the Monitor.[2]

On April 14, 2020, the Ontario Securities Commission issued a review of QuadrigaCX that focused on how QuadrigaCX operated, what happened to clients’ assets, the causes of its asset shortfall, and the implications of securities law.

On April 15, 2019, the CCAA debtors were assigned into bankruptcy under the Bankruptcy and Insolvency Act (the BIA). Ernst & Young Inc. was appointed as the Trustee-in-Bankruptcy.

The Claims Process

On June 27, 2019, the Nova Scotia Supreme Court granted an order establishing a claims process. Affected users of QuadrigaCX could file claims in Canadian dollars, US dollars, or one of more than six types of cryptocurrencies (or any combination thereof) traded on the QuadrigaCX exchange. Any distributions to creditors would be made in Canadian dollars. The order establishing the claims process did not explicitly fix a date for converting claims denominated in cryptocurrencies into Canadian dollars.

The Quadriga case was transferred to the Ontario Superior Court of Justice (Commercial List) on September 10, 2019.

On September 11, 2020, the Trustee disclosed that it had received 17,053 claims to that date. The Trustee subsequently brought a motion seeking an order setting the date of the bankruptcy (April 15, 2019) as the date for converting claims denominated in US dollars and cryptocurrencies into Canadian dollars. One claimant opposed the Trustee’s motion and submitted that claims denominated in cryptocurrencies should be converted into Canadian dollars using the prevailing exchange rates on the date of the CCAA initial order (February 5, 2019).

The date on which claims would convert into Canadian dollars was relevant because cryptocurrency prices were highly volatile and fluctuated significantly between the date of the CCAA initial order and the date of bankruptcy. Specifically, most cryptocurrencies rose in price during this period. Although the overall pool of distributable funds would remain the same regardless of the conversion date, the allocation of distributable funds from one user to another would fluctuate depending on the date chosen. For example, if claims were converted as of the date of the CCAA initial order, then the relative share of distributable funds that would be allocated to Canadian dollar claims would increase  relative to claims denominated in cryptocurrencies.

The Decision

Justice Hainey heard oral submissions on January 26, 2021 and released his decision on March 1, 2021. His Honour ordered that claims made in cryptocurrency be converted as of the date of bankruptcy.

The Court first addressed the classification of cryptocurrency under the BIA, writing that the definition of “property” as used in s. 67(1) of the BIA is broad enough to include cryptocurrency.

The Court proceeded to address the opposing claimant’s submission that claims made in cryptocurrency were unliquidated and contingent claims because each claim represented a breach of contract by QuadrigaCX. The opposing claimant posited that the universal date for assessing such breach of contract claims should be the date of the CCAA initial order because QuadrigaCX’s affected users would have been aware of their claims by that date. Justice Hainey disagreed and wrote that claims made in cryptocurrencies were liquidated claims because they were proven obligations that could be easily ascertained “as a matter of arithmetic”. All that was required to determine the Canadian dollar value of cryptocurrency claims was to multiply the amount of cryptocurrency in question by the prevailing exchange rate, which could be determined by reference to the cryptocurrency market.

Justice Hainey then listed his three reasons for selecting the date of bankruptcy as the appropriate date for converting cryptocurrency claims into Canadian dollars:

• Cryptocurrency claims are analogous to debts in a currency other than Canadian currency, which s. 215.1 of the BIA provides are to be converted as of the date of bankruptcy;
 
• The bankruptcy of QuadrigaCX may be analogized to the bankruptcy of a securities firm as captured by Part XII of the BIA, and cryptocurrency may be analogized to a security and/or customer pool fund, which Part XII of the BIA provides are to be, in certain circumstances, valued on a pooled basis as of the date of bankruptcy; and
 
• The principles of efficiency and economy applicable to bankruptcy claims administration support valuing cryptocurrency claims as of the date of bankruptcy.

The third point about efficiency and economy appears to be related to concerns raised by the Trustee that if cryptocurrency claims are treated as unliquidated and contingent claims, then it does not necessarily follow that such claims are to be universally converted as of the date of the CCAA initial order, which the opposing claimant had argued. Rather, the Trustee noted that case law suggests that each unliquidated and contingent claim may need to be assessed individually, which would be a significant administrative burden and cost to the estate.

Key Take-Aways

First, the Court in Quadriga explicitly recognized cryptocurrency as “property” that is divisible among the bankrupt’s creditors per s. 67(1) of the BIA. This appears to be the first time a Canadian court has so clearly and explicitly recognized a proprietary interest in cryptocurrency.

Second, it is notable that Justice Hainey refrained from classifying cryptocurrency as a specific type of asset (e.g. “currency”, “money”, “security” or “commodity”). While the Court compared cryptocurrencies to foreign currencies (s. 215.1 of the BIA) and securities (Part XII of the BIA), it limited these references to analogies and not findings of law.

Finally, the Quadriga case is one of the few cases involving a CCAA proceeding that transitions into a bankruptcy, and one of the only cases dealing with whether claims should be valued as of the date of the CCAA initial order or the date of bankruptcy.

[1] Re Quadriga Fintech Solutions Corp et al. (1 March 2021), Toronto CV-19-627184-00CL (31-2560674), CV-19-627185-00CL (31-2560984) and CV-19-627186-00CL (31-2560986) (Ont Sup Ct [Comm List]) [Quadriga].

[2] Stikeman Elliott LLP acted for Ernst & Young Inc. in its capacity as Monitor and later Trustee-in-Bankruptcy.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

* Content provided with permission from Stikeman Elliott LLP. 

No fiduciary duty owed by condominium developers to purchasers

by Hein Poulus, Joseph Ensom, Kasey Campbell | Harris & Company LLP 

One West Holdings Ltd. V. The Owners, Strata Plan LMS 2995, 2021 BCSC 473

Harris commercial litigation lawyers Hein Poulus, QC, Joseph Ensom and Kasey Campbell were successful on behalf of a major developer following a 34-day trial before Mr. Justice Myers in the BC Supreme Court. The decision has significant implications for the legal structuring of condominium projects as well as the nature and scope of the disclosure duties owed by developers to purchasers of strata units. We summarize the decision and key takeaways below.

Background

The Plaintiff was the developer of a mixed-use condominium development in Vancouver known as Marina Pointe. The developer used a widely-used legal structure for the allocation of parking rights (the “Option/Lease Structure”) as follows:

1. Just before the strata plan was filed, the developer had the registered owner of the development property grant, to an affiliate of the developer’s, an option for a long term lease of the entire parking lot. The lease gave the tenant the right to make partial assignments of individual stalls.
2. The option was registered in the land title office (which does not attract Property Transfer Tax).
3. The option was exercised; but the resulting lease (the “Parking Lease”) was not registered in the land title office.
4. After stratification, the developer made assignments of parking stalls to buyers of strata units by way of a form of assignment in which the assignee acknowledged the Parking Lease and agreed to be bound by it. It used the same document to assign 106 visitor parking stalls to the strata corporation (the “Strata”).

After selling all of the condos in the Marina Pointe development, the developer was left with 40 unsold commercial parking stalls. The developer rented them to customers of the commercial owners and to others. The developer’s retention of the right to rent unsold stalls was disclosed in the disclosure statements for the development.

Years later, the Strata seized the commercial parking stalls and continued to rent them, for its own account.

When the developer sued, the Strata attacked the validity of the option/lease structure that the developer had used to create the titles to the parking stalls – the same structure that has been used to create the titles to tens of thousands of parking stalls in BC. The Strata’s attack was primarily made on three fronts:

1. The Parking Lease was void due to a breach of fiduciary duty by the developer, which was alleged to have failed to disclose its intention to retain and rent out the parking stalls;
2. The Option/Lease Structure failed to bind the Owners; and
3. The Option/Lease Structure was prohibited by the Condominium Act and/or the Land Title Act.

Mr. Justice Myers rejected the arguments advanced by the Strata and found that the Option/Lease Structure was valid and binding. Significantly, the Court declined to follow numerous cases that had held that condominium developers owe a fiduciary duty to purchasers, concluding instead that developers owe no such duty.

Decision

There is no developer fiduciary duty

The Strata argued that that the developer owed a fiduciary duty to all buyers and that retaining and renting out the 40 stalls was a “self-dealing transaction” which violated that duty.  It relied on a 1981 Ontario Court of Appeal decision named York Condominium v. Newrey, which held that a developer “stands in a fiduciary relationship with purchasers and holds the property in trust for them”. York Condominium had been cited favorably for this proposition by a number of trial and appellate decisions across Canada, including decisions in BC.

Justice Myers rejected theYork Condominium doctrine and held that:

• York Condominium was not reconcilable with later Supreme Court of Canada decisions: developers do not owe fiduciary duties to their purchasers.
• Developers do owe fiduciary duties when they act as the strata council in the period between the filing of the strata plan and the election of the first strata council.
• However, any act by the developer that might be a breach of fiduciary duty is permissible if the developer has disclosed fairly that it would take that step (and the developer in this case had in fact disclosed fairly its retention of the right to rent unsold stalls).

The option/lease structure binds the Owners

The Court held that the Owners were bound by the Option/Lease Structure, in two distinct ways.

First, the Court held that the registered option created “privity of estate” between the owners of the parkade (the condo owners, collectively) and the developer. The option included a promise by the optionor to sign a registrable form of lease if the optionee asked for one. The Strata had refused to comply with that term.  The Court ordered the Strata to comply.

Second, the Court held that there was “privity of contract” between the owners of the parkade and the developer because the Strata, after it had come into existence, had evinced an intention to be bound by a contract on terms identical to the terms of the Parking Lease. The single most important factor leading the court to that conclusion was that the assignment, by which the developer had conveyed the 106 visitor stalls to the Strata, had included a promise by the Strata to be bound by the Parking Lease. The court came to this conclusion – even though, at the time of the assignment, the  Strata was controlled by the developer – because the Option/Lease Structure had been fully disclosed to prospective owners.

The “privity of contract” was between the Strata and the developer. The Court found – following the recent Crystal Square decision in the Supreme Court of Canada – that the contract binds not only the Strata but also all then and future owners.

The option/lease structure is legal and valid

Justice Myers found that the Condominium Act did not apply before the strata plan is filed. So it did not apply to the grant of the option and lease, both of which predated stratification.

The Court also held that the option and lease did not require subdivision approval by an Approving Officer under Part 7 of the Land Title Act, because they fell within the exception in section 73(3) for leases of part of a building.   

Outcome of the case

The Court concluded that the Strata breached the Parking Lease when the Strata took control of the commercial parking stalls. The Court declared the option valid and binding and ordered the Strata to sign a registrable copy of the parking lease. The Court made similar orders respecting a roof lease that gave the developer the right to install telecom equipment on the roof. Damages for breach of the Parking Lease are to be assessed at a future hearing.

Key takeaways:

1. Developers need not fear becoming liable for breach of fiduciary duty (except where they act as the strata council).
2. The quality of the developer’s legal and disclosure documentation is critical. A significant factor in this case was the high quality of that documentation. Underinvesting in the legal documentation is risky, as is the failure to disclose fully.
3. After the strata plan is filed and before a strata council is elected the developer – acting as the strata council – should have the strata corporation bind itself to any contracts that the developer wants to make binding on all present and future owners. Provided that there has been full disclosure, this should be effective.

If you have any questions about this decision, or its implications for condominium developers, please contact Hein Poulus, QC in Harris’ commercial litigation group.

* Content provided with permission from Harris & Company LLP. 

Changes to Ontario Estate Legislation

by Dave Johnston | Mills & MIlls LLP

There have recently been several changes implemented and proposed to legislation concerning Wills and Estates in Ontario.

Definition of a Small Estate

The biggest change is in the definition of what constitutes a Small Estate. As of April 1, a “Small Estate” will be one worth up to $150,000.00, replacing the prior $50,000.00 limit. An Applicant seeking to probate a Small Estate can utilize a simplified probate procedure, exempt from the requirement for certain supporting documents to be filed (e.g., a commissioned Affidavit of Service), and typically exempt from the requirement to post a bond (unless there are overriding circumstances, such as incapable or minor beneficiaries.)

With this revised definition of a Small Estates come a pseudo-probate document, the “Small Estates Certificate” (“Certificate”) which enables the appointed person to receive and manage the assets of the Estate listed in the Small Estate Certificate Application. Unlike a conventional Certificate of Appointment of Estate Trustee (“CAET”), which grants the Estate Trustee the authority to manage all of the deceased’s assets, this Certificate is only good for the assets for which it was granted. If an estate turns out to be in excess of the $150,000 limit, the Estate Trustee will then have to apply for a CAET to manage any other assets, and the Small Estate Certificate is revoked on the issuance of a CAET for the same estate.

Proposed Changes

In the proposed changes yet to be implemented, the Accelerating Access to Justice Act, 2021 (“AAJA”) was introduced by the Ontario legislature on February 16, 2021. The AAJA contains several provisions which would impact Estates in Ontario, particularly with respect to probate.

One set of changes of the AAJA would amend the Substitute Decisions Act (the “SDA”) confirms the temporary measures implement to deal with the COVID-19 pandemic. This measure allows for remote witnessing of Powers of Attorney (“POAs”), where one witness is a licensee of the Law Society, via audio-visual communication technology, for POAs entered into on or after April 7, 2020. Also proposed is an amendment to the SDA with respect to the Public Guardian and Trustee’s entitlement to access records of an alleged-incapable person in the context of a required investigation under the SDA.

Another proposed change brought by the AAJA would amend the Succession Law Reform Act (“SLRA”) to allow for remote witnessing of Wills, in the same manner as POAs.

Proposed Changes to Marriage, Separation, and Wills

Significant changes have been proposed for the way in which marriages are treated with respect to Wills. Where a marriage ends in divorce or is nullified, currently any provisions in the testator’s Will respecting the former spouse are revoked and the testator’s Will is read as though the former spouse had predeceased the testator. The proposed change would apply this same interpretation to cases of still-legally-married spouses who are separated at the time of the testator’s death. Further, separated spouses would no longer enjoy any entitlement under the Intestate Succession provisions of the SLRA. Additionally, Wills would not be revoked by marriage, as they currently are (to the surprise of many testators)!

Finally, the same set of proposed changes would alter Ontario’s strict compliance regime with regards to the preparation and execution of Wills, and make it more of a substantial compliance regime like British Columbia. The Court would have jurisdiction to validate a Will, or the revocation of a Will, and “order that the document or writing is as valid and fully effective as the will of the  deceased, or as the revocation, alteration or revival of the will of the deceased, as if it had been properly executed or made” where the purported document “sets out the testamentary intentions of a deceased or an intention of a deceased to revoke, alter or revive a will of the deceased.” This change could be transformative to the practice as it would open up a host of new documents to interpretation, potentially increase the number of Applications made to obtain such an interpretation, and likely increase the number of challenges to propounded Wills and revocations.

* Content provided with permission from Mills & MIlls LLP.