Ontario Securities Act s. 138

Ontario: The limitation period in s. 138.14 of the Securities Act is event-based

The Court of Appeal upheld the decision in Kaynes v. BP, P.L.C., which I wrote about here, holding that the limitation period in s. 138.14 of the Securities Act is event-based, and doesn’t commence until a public correction of a misrepresentation occurs.

[14]      The limitation period in s. 138.14 reads as follows:

138.14 (1) No action shall be commenced under section 138.3,

(a)     in the case of misrepresentation in a document, later than the earlier of,

(i)      three years after the date on which the document containing the misrepresentation was first released, and

(ii)      six months after the issuance of a news release disclosing that leave       has been granted to commence an action under section 138.3 or under comparable legislation in the other provinces or territories in Canada in respect of the same misrepresentation;

(b)     in the case of a misrepresentation in a public oral statement, later than the earlier of,

(i)      three years after the date on which the public oral statement containing the misrepresentation was made, and

(ii)      six months after the issuance of a news release disclosing that leave       has been granted to commence an action under section 138.3 or under comparable legislation in another province or territory of Canada in respect of the same misrepresentation; and

***

[15]      This is an event triggered limitation period, which commences on the making of the oral statement or the release of the impugned document. It is designed to run without regard to the plaintiff’s knowledge of the facts giving rise to the cause of action: Canadian Imperial Bank of Commerce v. Green, 2015 SCC 60 (CanLII), at paras. 66 and 180. The motion judge correctly found that for the eleven alleged misrepresentations made more than three years before the issuance of the appellant’s statement of claim the limitation period had expired.

[16]      The appellant’s primary submission on appeal is that s. 138.3(6) of the Act operates to extend the limitation period in the case of multiple misrepresentations. That subsection provides as follows:

(6) In an action under this section,

(a) multiple misrepresentations having common subject matter or content may, in the discretion of the court, be treated as a single misrepresentation; and

(b) multiple instances of failure to make timely disclosure of a material change or material changes concerning common subject matter may, in the discretion of the court, be treated as a single failure to make timely disclosure. 2002, c. 22, s. 185; 2004, c. 31, Sched. 34, s.12(7).

[17]      The appellant argues that treating the allege misrepresentations as a single misrepresentation would have the effect of extending the three-year limitation period for claims arising from the eleven out-of-time statements. In our view, the motion judge did not err in rejecting this argument. We reach this conclusion for the following reasons.

[18]      First, there is nothing in the language of s. 138.3(6) that suggests that it is intended to modify the clear event triggered limitation period provided in s. 138.14.

[19]      Second, the appellant submits that the motion judge erred in failing to take into consideration the “twin goals of investor protection and the deterrence of corporate misconduct” in his interpretation the Act.  That view of the policy objectives of the Act is too narrow.  As Cote J. noted in CIBC, at para. 69, the policy considerations are more nuanced, “Part XXIII.1 OSA strikes a delicate balance between various market participants. The interests of potential plaintiffs and defendants and of affected long-term shareholders have been weighed conscientiously and deliberately in light of a desired precise balance between deterrence and compensation.”

[20]      Part of the balance struck by the three year event driven limitation period was to protect subsequent shareholders from claims based on alleged misrepresentations made to previous shareholders.

[21]      Third, we agree with the motion judge’s conclusion that the legislative history of s. 138.3(6) demonstrates that it was enacted at as a consequence of an Ontario Securities Commission response to a Request for Comments. It is plain from that submission that the section was designed to protect issuers from multiple rights of action or multiple liability for essentially the same misrepresentation repeated on a number of occasions.

[22]      Finally, we note that even if the appellant is correct and s. 138.3(6) was intended to modify the limitation period analysis, it is arguable that in the case of multiple misrepresentations treated as a single misrepresentation the limitation period would run from the date the misrepresentation was first made.  Subsection 138.14 mandates that the running of the limitation period commences when the document is first released. Applied literally in this case, the result would be that the limitation period for all fourteen misrepresentations commenced in 2007 and the claims based on all of the documents would be statute-barred.

Ontario: Justice Perell on the horror of s. 138 of the Securities Act

Kaynes v. BP, P.L.C. considers the application of the limitation periods set out in s. 138.14 of Part XXIII.1 of the Ontario Securities Act.  As Justice Perell described it, the case is “the latest sequel or prequel in what has turned out to be the case law equivalent of a horror-movie franchise”:

[7]               The franchise began with: (I) Sharma v. Timminco Ltd., 2011 ONSC 2040, 2012 ONCA 107 (CanLII), which was followed by the equally terrifying: (II) Green v. C.I.B.C., 2012 ONSC 3637 (CanLII), 2014 ONCA 90, 2015 SCC 60; (III) Silver v.IMAX Corp., 2012 ONSC 4881 (CanLII), 2014 ONCA 90, 2015 SCC 60; (IV) Trustees of the Millwright Regional Council v. Celestica Inc.,2012 ONSC 6083 (CanLII), 2014 ONCA 90, 2015 SCC; and (V) Pennyfeather v. Timminco Ltd., 2016 ONSC 3124, 2017 ONCA 369 (CanLII).

The plaintiff ventured a novel argument to “attempt to ward off the monster by relying on s. 138.3(6) (multiple misrepresentations) of the Act.”  He argued that the constituent elements of the cause of action in s. 128.3 did not crystallize until a public correction of the misrepresentation occurred.  Justice Perell had none of it:

[33]            Unlike the general limitation periods found in the Limitations Act, 2002, S.O. 2002,       c. 24, Sched. B, s. 138.14 of the Ontario Securities Act is an event-triggered limitation period. Under s. 138.14, the statutory cause of action does not have to exist, and if it does exist, it does not have to have been discovered to trigger the running of the limitation period. The Ontario Securities Act plainly states that no action for a misrepresentation shall be commenced later than three years after the date on which the misrepresentation was made.

[34]           There is a difference between event-triggered and cause-of-action or claim-based limitation provisions. When the legislature specifies that the commencement of a statutory limitation period is linked to an event and not to the accrual of a cause of action, the court cannot impose a discoverability requirement. In Ryan v. Moore, 2005 SCC 38 (CanLII) at para. 24, the Supreme Court stated:

  1. [T]he [discoverability] rule is ‘generally’ applicable where the commencement of the limitation period is related by the legislation to the arising or accrual of the cause of action. The law does not permit resort to the judge-made discoverability rule when the limitation period is explicitly linked by the governing legislation to a fixed event unrelated to the injured party’s knowledge or the basis of the cause of action.

[35]           Unlike other general and special limitation periods, the limitation period found in            s. 138.14 continues to run even after the notice of action or statement of claim is issued. This feature of s. 138.14 is the source of the horror movie franchise of cases beginning with Sharma v. Timminco Ltd., supra.

[36]           The legal narrative of those cases is that:

  1.   In Sharma v. Timminco Ltd., the Ontario Court of Appeal held that the limitation period found in s. 138.14 of the Ontario Securities Act did not stop running until the court granted leave to pursue the s. 138.3 claim.
  2.   But in Green v. C.I.B.C., Silver v. IMAX Corp. and Trustees of the Millwright Regional Council v. Celestica Inc., a five-member panel of the Court of Appeal overturned Sharma v. Timminco and held that s. 28 of the Class Proceedings Act, 1992 suspended the running of the limitation period with the issuance of the notice of action or statement of claim.
  3.   However, on further appeal, the Court of Appeal was reversed, and in Green v. C.I.B.C., the Supreme Court of Canada restored Sharma v. Timminco, but the Court held that pursuant to the nunc pro tunc doctrine, the running of the statutory limitation period could, in effect, be suspended if the notice of motion for leave under s. 138.8 was delivered before the limitation period had tolled.

[37]           It may be parenthetically noted that in 2014, s. 138.14 of the Ontario Securities Act was amended to add s. 138.14 (2), which provides that the limitation period is automatically suspended when the notice of motion for leave under s. 138.8 is filed with the court. The amendment to s. 138.14 is not retroactive, and the Supreme Court of Canada in Green v. C.I.B.C. did not rely on it in formulating its rule about how the running of the limitation period could be suspended.

[38]           Notwithstanding the line of authorities that have discussed the operation of s. 183.14 of the Ontario Securities Act, Mr. Kaynes argues that the constituent elements of the statutory cause of action found in s. 138.3 did not crystallize until there was a public correction, which is a constituent element of the claim, and that this did not occur until, at the earliest, April 21, 2010, and therefore, the three-year limitation period could not have begun to run until April 21, 2010. Based on this argument, Mr. Kaynes asserts that since he commenced his action within three years of April 21, 2010, none of the 14 misrepresentation claims were untimely.

[39]           With respect, this argument ignores the plain language of s. 138.14, transmutes to the point of mutation an event-driven limitation period into a discoverability-claim-driven limitation period, obliterates the legislative policy for introducing a limitation period into Part XXIII.1 of the Ontario Securities Act, and is contrary to how s. 138.14 has been discussed, interpreted, and applied in numerous cases including the Sharma v. Timminco line of cases. In Green v. CIBC, supra at paras. 66, 180 the Supreme Court noted that the statutory limitation period was designed to run without regard for the plaintiff’s knowledge of the facts giving rise to the cause of action.

[40]           It is plain and obvious that the action based on the 11 misrepresentations is statute-barred.

[41]           Mr. Kaynes, however, attempts to save the 11 statute-barred claims by relying on            s. 138.3(6) of the Ontario Securities Act. He submits that all the misrepresentations are a continuous misrepresentation that began on May 8, 2007 and continued until May 24, 2010, and, therefore, he argues that the limitation period for all of the misrepresentations started to to run on May 24, 2010, making his November 15, 2012 Statement of Claim timely for all claims, subject to leave being obtained under Part XXIII.1 of the Act.

[42]           Mr. Kaynes’ argument about how s. 138.3(6) operates fails for three reasons.

[43]           First, Mr. Kaynes interpretation of s. 138.3(6) offends the principles of statutory interpretation that a statute should be interpreted coherently, harmoniously, and without internal contradictions.

[44]           To interpret a statute, the court should look at the Act as a whole and attempt to find an interpretation that is in harmony with the entire legislative scheme, including the regulations and forms: Verdun v. Toronto-Dominion Bank, 1996 CanLII 186 (SCC), [1996] 3 S.C.R. 550 at p. 559; Mavi v. Canada (Attorney General) (2009), 2009 ONCA 794 (CanLII), 98 O.R. (3d) 1 (C.A.) at paras. 92-96. In interpreting a statute, it is presumed that the constituent elements of a legislative scheme are meant to work together logically and teleologically, each contributing to the achievement of the legislator’s goal without contradictions or inconsistencies among the constituent elements: Peel (Police) v. Ontario (Special Investigations Unit), 2012 ONCA 536 (CanLII)at paras. 26, 60; R. v. Morgentaler, 1975 CanLII 8 (SCC), [1976] 1 S.C.R. 616 at p. 676.

[45]           In Green v. C.I.B.C., supra at para. 55, Justice Côté rejected interpretations of the statutory scheme of Part XXIII.1 of the Ontario Securities Actthat undermine the s. 138.14 limitation period; she stated:

Even if we were to assume that there is an ambiguity in the wording of the relevant provisions — which there is not — the legislative purpose and structure of those provisions would nonetheless support my conclusion. In other words, “the scheme of the Act, the object of the Act, and the intention of Parliament” are consistent with the ordinary and grammatical meaning of the words, which is another reason not to depart from that meaning […] To hold that s. 28 CPA operates to suspend a limitation period for a statutory claim under s. 138.3 OSA before leave is obtained would be to circumvent the carefully calibrated purposive balance struck by the limits to the statutory action provided for in Part XXIII.1 OSA. Such an interpretation would render s. 138.8 OSA ineffective, since the suspension of the limitation period, although not permanent, could nevertheless delay the decision on the merits of leave for several months or even for years, as the cases at bar demonstrate.

[46]           As demonstrated by the case at bar, Mr. Kaynes’ interpretation and argument about the application of s. 138.3(6) of the Ontario Securities Actessentially obliterates the operation of s. 138.14 and the clear policy of the Legislature that no action shall be commenced under           s. 138.3 after three years from the first release of the misrepresentation. As demonstrated by the case at bar, Mr. Kaynes’ action is brought based on misrepresentations that, at the commencement of the action in 2012, were over five years old.

[47]           Second, Mr. Kaynes’ interpretation is contrary to the scheme of Part XXIII.1 of the Ontario Securities Act, which carefully calibrates the regulation of the securities marketplace balancing a myriad of factors including the rights of plaintiffs and defendants and the reality that where damages are awarded against a corporation, it is their innocent long-term shareholders who ultimately pay the price for corporate misconduct. As Justice Côté noted in Green v. C.I.B.C., supra at para. 69:

  1. Part XXIII.1 [of the] OSA strikes a delicate balance between various market participants. The interests of potential plaintiffs and defendants and of affected long-term shareholders have been weighed conscientiously and deliberately in light of a desired precise balance between deterrence and compensation. The legislative history reveals a long, meticulous development of this balance, one that found expression in all the limits built into the scheme.

[48]           Third, Mr. Kaynes’ interpretation of s. 138.3(6) of the Ontario Securities Act is contrary to the legislative history that explains the Legislature’s purpose for including s. 138.3 as part of the legislative scheme. The legislative history reveals that s. 138.3(6) was added based on a suggestion from the Ontario Securities Commission in response to a Request for Comments. The Commission suggested that s. 138.3(6) would enable the court to deem repeated common misrepresentations to be a single misrepresentation and thus prevent multiple liability for disclosure violations that were so interconnected to be considered a single disclosure violation. In other words, s. 138.3(6) was designed to protect defendants and the provision was not intended to affect the limitation provisions of the Ontario Securities Act.

[49]           I conclude that it is plain and obvious that s. 138.3(6) does not bring back from the dead the 11 statute-barred misrepresentation claims.  

Ontario: Under s. 138 of the OSA, each misrepresentation is a separate claim

There is a statutory cause of action in the Securities Act for misrepresentation in secondary market disclosure documents, which is subject to a three year limitation period:

[2]         Under s. 138.3(1) of Part XXIII.1, a person or company who acquires or disposes of an issuer’s security between a document’s release and public correction of a misrepresentation in the document has a right of action for damages, without regard to whether the person or company relied on the misrepresentation. However, in order to limit meritless litigation or “strike suits”[1], s. 138.8(1) of the OSA requires leave of the court to commence an action under s. 138.3. Section 138.14(1) also imposes a three-year limitation period for the commencement of the action, measured from the date the document containing the misrepresentation was first released.

In Drywall Acoustic Lathing and Insulation, Local 675 v. SNC-Lavalin Group, (quoted above),  the appellants argued that because they commenced their action and pleaded misrepresentations in the impugned documents within the limitation period, any related misrepresentation claim arising out of the same documents was not statute-barred.  In other words, “if a plaintiff commences an action asserting misrepresentation in a disclosure document within the limitation period, the plaintiff can, at any time thereafter, assert any related misrepresentation claims arising out of the same documents” (para. 73).

Note so, held the Court of Appeal:

[74]      The appellants were granted leave to commence a particular action, namely one asserting that representations in the impugned documents were false because of evidence that amounts had been paid to agents and that SNC was engaged in criminal activity with respect to the Padma Bridge Project in Bangladesh. As I concluded above, the appellants did not obtain leave to pursue claims founded on other misrepresentations, and therefore those other claims are not part of the action. As the impugned documents are now more than three years old, those claims are statute-barred.

[75]      If leave is required to advance further misrepresentation claims arising out of previously impugned documents, then those further misrepresentation claims are a different “action”, and are subject to the limitation period in s. 138.14(1).

Supreme Court says no, plaintiffs don’t need to control when they commence actions

In Canadian Imperial Bank of Commerce v. Green, the Supreme Court rejected a basic principle of limitations law: the plaintiff must always be in control of when it commences a proceeding.

This appeal concerned the interaction of the limitation period in section 138 of the Ontario Securities Act and section 28 of the Class Proceedings Act, which suspends the limitation period applicable to all the causes of action asserted in a class proceeding.

Section 138.3 creates a cause of action for misrepresentations regarding shares trading in the secondary market. A plaintiff, most often a representative plaintiff in a class proceeding, can only commence a section 138.3 claim with leave, and has three years from the date of the misrepresentation to obtain leave and do so.  In Sharma v. Timminco, the Court of Appeal held that a claim for damages under section 138.3 is statute-barred if the plaintiff does not obtain leave to commence it within the limitation period, and that section 28 of the Class Proceedings Act did not operate in respect of a 138.3 claim until leave is obtained.

The Timminco decision was problematic. Its effect was to require representative plaintiffs to move for and obtain leave to commence a section 138.3 claim within three years, but the plaintiffs could not control the timeliness. Obtaining leave within three years was challenging, if not impossible.  Even if a plaintiff brought the motion in good time, the defendant could initiate procedural steps resulting in delay, and court availability could affect the timing of the hearing and the rendering of the decision.  In the context of limitations jurisprudence, this was both novel and perverse: plaintiffs did not control whether they commenced their action in time.

In this action, the Court of Appeal reversed itelf and set aside Timminco’s interpretation of the Class Proceedings Act, holding instead that when a representative plaintiff brings a section 138.3 claim within the limitation period, pleads section 138.3 together with the facts that found the claim, and pleads an intent to seek leave to commence, the claim has been “asserted” for the purposes of the Class Proceedings Act, and the limitation period is thereby suspended for all class members.

Subsequently, the legislature amended the Securities Act so that the limitation period is suspended on the filing of a motion for leave.   However, the issue remained live for actions commenced before the amendments, and so the Supreme Court heard the appeal.  In a lengthy decision from a fractured court, it overturned the Court of Appeal’s decision.

From a limitations perspective, the noteworthy aspect of the decision is the court’s willingness to accept that a plaintiff will not in all circumstances retain control of bringing its action in time.  This was a foremost concern for the Court of Appeal.

Justice Côté stated that requiring the plaintiff to have unilateral control over whether a claim is brought in time is misplaced, and fails to acknowledge that “modern limitation periods” balance the rights of the plaintiffs and the defendants:

[79]                          The Court of Appeal wrote that the effect of Timminco, namely that a plaintiff does not unilaterally control whether his or her claim is brought within the limitation period (because of the starting point of the limitation period or because of delays caused by the defendant or the court), was “foreign to the concept of a limitation provision” (para. 27). In my view, the Court of Appeal failed to appreciate not only that modern limitation periods flow from an exercise in balancing the rights of plaintiffs and defendants, but also that the legislature undertook that balancing exercise in designing the limitation period in question. Section 138.14 OSA does not have an internal suspension mechanism, and the limitation period begins to run regardless of knowledge on the plaintiff’s part, be it on when a document containing a misrepresentation is released, when an oral statement containing a misrepresentation is made, or when there is a failure to make timely disclosure. The scheme is exacting and even harsh, but it is structured in this manner to balance the interests of plaintiffs, defendants and long-term shareholders.

This reasoning is hard to understand.  The very nature of limitation periods requires a balancing of plaintiff and defendant rights, and the courts engaged with this balance frequently under the pre-modern legislation (that is, the former Limitations Act).  See for example the Supreme Court decision in Peixeiro v. Haberman (1997): “Whatever interest a defendant may have in the universal application of a limitation period must be balanced against the concerns of fairness to the plaintiff who was unaware that his injuries met the conditions precedent to commencing an action”.

 In any event, this balance between plaintiff and defendant rights is normally a matter of the length of a limitation period—allow the plaintiff sufficient time to commence her claim, but not so much time that the defendant will suffer prejudice. Here it seems that the balance means taking some control over the running of time and handing it the defendant.  Perversely, this gives the defendant an incentive to delay the commencement of the claim (in this case, by delaying the application for leave).

It seems Justice Côté understood the perversion, because he dismisses it:

[81]                          Like Goudge J.A in Timminco, I am unwilling to rely upon an isolated purpose of limitation periods, taken out of context, in order to give priority to one stakeholder over others, particularly where the legislature was so clearly alive to these considerations in making the choices it made generally for Part XXIII.1 OSA, and more specifically for s. 138.14.

His solution to potential injustice is a nunc pro tunc order.  An order granting leave to proceed with an action is available nunc pro tunc where leave is sought prior to the expiry of the limitation period.

[85]                          The courts have inherent jurisdiction to issue orders nunc pro tunc. In common parlance, it would simply be said that a court has the power to backdate its orders. This power is implied by rule 59.01 of the Rules of Civil Procedure: “An order is effective from the date on which it is made, unless it provides otherwise”.

 

[90]                          In fact, beyond cases involving the death of a party or a slip, the courts have identified the following non-exhaustive factors in determining whether to exercise their inherent jurisdiction to grant such an order: (1) the opposing party will not be prejudiced by the order; (2) the order would have been granted had it been sought at the appropriate time, such that the timing of the order is merely an irregularity; (3) the irregularity is not intentional; (4) the order will effectively achieve the relief sought or cure the irregularity; (5) the delay has been caused by an act of the court; and (6) the order would facilitate access to [citations omitted[. None of these factors is determinative.

 

[93]                          Thus, subject to the equitable factors mentioned above, an order granting leave to proceed with an action can theoretically be made nunc pro tunc where leave is sought prior to the expiry of the limitation period. One very important caveat, identified by Strathy J., is that a court should not exercise its inherent jurisdiction where this would undermine the purpose of the limitation period or the legislation at issue.

 

[94]                          This is because, as with all common law doctrines and rules, the inherent jurisdiction to grant nunc pro tuncorders is circumscribed by legislative intent. Given the long pedigree of the doctrine and of rule 59.01, to which I have referred, it has been held that the legislature is presumed to have contemplated the possibility of a nunc pro tunc order:McKenna, at para. 27; Parker, at pp. 286-87; New Alger Mines, at pp. 570‑71. However, nunc pro tunc orders will not be available if they are precluded by either the language or the purpose of a statute. None of the other equitable factors listed above, including the delay being caused by an act of the court, can be relied on to effectively circumvent or defeat the express will of the legislature.

The practical reality is that there are very few circumstances in which plaintiff won’t be fully in control of when it commences its action.  Nevertheless, the court’s willingness to depart from this basic, common sense limitations principle on rather dubious grounds is troubling.

You may find the decision helpful for its high-level summaries of the doctrine of special circumstances (paras. 112-113) and the purpose of limitation periods (paras. 57-58).