Dismissal of summary judgment motion leaves issues of importance to businesses and the legal profession to be examined at trial

July 13, 2012

On June 18, 2012, the Ontario Superior Court of Justice dismissed the summary judgment motion brought by a defendant law firm to a class action involving the take-over of Endeavour Resources by one of the defendants, Aspen Group Resources Corporation (“Aspen”). Applying the full appreciation test set out by the Court of Appeal in Combined Air Mechanical Services Inc. v. Flesch, Justice Strathy found that he could not obtain a full appreciation of the evidence or fairly resolve the issues without the benefit of a full factual record at trial.  The issues in this case are of importance to the business world and legal profession and include whether an as of yet unrecognized category of a duty of care exists between a law firm tasked with preparing a Circular for its client in a take-over bid and the securities holders of the entity being taken over, and whether vicarious liability of a partnership under the Partnerships Act can apply to statutory causes of action.

Background

The action had previously been certified as a class proceeding on December 4, 2009: Allen v. Aspen Group Resources Corp. (Certification Decision), and the class was defined as the securities holders of Endeavour whose securities were acquired by Aspen. The plaintiff submitted the defendants made certain misrepresentations or failed to disclose material facts in the take-over bid Circular (the “Circular”) prepared in respect of the bid. In particular, the plaintiff claimed that the defendant law firm, through one of its partners, was negligent in the preparation of the Circular and, among other things, failed to ensure that it disclosed material facts.

On the certification motion, the defendant law firm submitted that in signing the Circular, the partner was not acting in his capacity as a partner in in the law firm, but rather as a director of Aspen, and that the firm could not be liable for the partner’s actions qua director, unless he was carrying on the usual and ordinary business of the law firm. On Certification, Justice Strathy addressed that submission, stating “it is arguable that a lawyer, through his or her law firm, acts as corporate counsel to a corporation and who also sits on the corporation’s board, may well be acting in the ordinary course of the law firm’s business when he or she takes a seat at the boardroom table.”  On the motion for summary judgment Justice Strathy found that the evidence supported the conclusion that partner’s activities on the Aspen Board were part of the ordinary course of the business of the law firm.

The summary judgment motion raised the issue of whether there was a genuine issue requiring trial concerning: (a) whether the defendant law firm owed a common law duty of care to class members in preparing the Circular for its client, Aspen; and (b) whether the firm was vicariously liable for the partner’s liability, if any, under s.131 of the Ontario Securities Act (the OSA).

Justice Strathy dismissed the summary judgment motion brought by the law firm on both the duty of care issue and the claim under s.131 of the OSA, and directed that the issues proceed to trial.    

The Duty of Care Issue

Relying on the general rule that a solicitor owes a duty only to his or her client and not the opposite party, the defendant law firm argued that it owed no duty of care to the shareholders of Endevour with respect to the accuracy of the Circular. The law firm also submitted that it could not reasonably have foreseen that Endeavour shareholders would look to it for advice and protection in connection with the take-over.  

Following the framework set out by the Court of Appeal in Attis v. Canada (Minister of Health), Justice Strathy found that the law firm’s partner could have foreseen that shareholders of Endeavour would suffer damages if the Circular contained misrepresentations. The factors of expectation, representation and reliance were all held to exist: (1) the shareholders of Endeavour could reasonably expect that a lawyer who prepared and signed the Circular would ensure that it was accurate; (2) there was an express representation by the partner that the Circular was accurate; and (3) it would be reasonable to expect that there would be reliance on the Circular by Endeavour’s shareholders in deciding whether to tender their shares. Justice Strathy acknowledged that the relative weight to be applied to these factors demands a careful analysis and requires a trial, particularly in view of the novelty of the complex and nuanced and important question of whether a duty of care exists in this case and if so, whether it is negative by policy considerations.

The Claim under s. 131 of the OSA

The plaintiff submitted that the law firm was responsible for the partner’s liability as a director under s. 131(1) of the OSA, which provides the security holder of an offeree a cause of action for misrepresentation against, among others, a director of the offeror. In particular, the plaintiff asserted that law firm was responsible for the partner’s liability as a director under s.131(1) by virtue of sections 6 and 11 of the Partnership Act.  

The defendant law firm argued that the doctrine of vicarious liability has no application to a statutory cause of action and, as a matter of statutory interpretation, s.131 does not make law firms responsible for the statutory liability of their partners or employees who sit on corporate boards because: (i) the ordinary meaning of s.131 (1)(a) applies only to directors; and (ii) the liability under s. 131(1)(a) is personal to the director.

After reviewing a number of authorities on the issue and distinguishing the authorities that the law firm had referred to in support of its argument that the vicarious liability of a partnership under the Partnership Act does not apply to statutory causes of action, Justice Strathy held that in the case of a statutory wrong, it will be necessary to examine the statute to determine whether vicarious liability is expressly or impliedly excluded.

His Honour ultimately concluded that imposing liability on those who employ a director or who are in a partnership with a director, is in keeping with the purpose of the OSA as it promotes the goals of compensation, loss distribution and risk management. Furthermore, the Court held that imposing liability on the law firm also fulfills the purpose of the Partnership Act, which reflects the principle that those who are responsible for the activities of a partnership and who profit from these activities should be accountable to the persons who suffer wrongs committed in the conduct of the business.

Justice Strathy rejected the submission of the law firm that this decision will deter lawyers from acting as directors. On the contrary, His Honour was of the view it would provide greater protection for the public, result in higher standards and controls and put risk on the party most able to control and insure it.  

His Honour concluded that summary judgment under this head should be dismissed without prejudice to the law firm’s right to raise the issue at trial, and as the action would proceed to trial under the common law duty of care issue in any event, the issue of the law firm’s liability under the OSA should also be left to the trial judge.

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