Western Canada Business Litigation Blog

Orders Without Borders: Supreme Court of Canada affirms ability of Courts to grant worldwide injunctive relief against non-parties”

Posted in Intellectual Property
Comment

Can a court bind something that knows no bounds? The Supreme Court of Canada did just that recently when it upheld a British Columbia Court of Appeal decision to grant an interlocutory worldwide injunction against Google, requiring it to de-index certain websites from its global search results, where such websites were being used to sell merchandise in violation of several court orders.

From the respondent Equustek’s perspective, the injunction and its worldwide scope were necessary to give actual effect to the prior court orders, and to safeguard its intellectual property rights in an interconnected world where borders are increasingly illusory. From Google’s perspective, this was a massive overreach by the Court of its authority to grant injunctions, creating an unwelcome precedent whereby Google would be dragooned into censoring content, and courts in one jurisdiction could affect what the world sees online.

In a globalized world where business is conducted, and indeed seemingly every aspect of life is lived on the internet, the ramifications of Google v Equustek are potentially significant.

The respondent, Equustek Solutions Inc., is a small technology company in British Columbia that manufactures networking devices for industrial equipment. In an underlying action, Equustek claimed that the defendants, including Datalink, began to re-label one of Equustek’s products and pass it off as Datalink’s own, while acting as a distributor of Equustek’s products. Datalink also allegedly acquired confidential information and trade secrets belonging to Equustek, and used them to design and manufacture a competing product. After defying a series of injunctions ordered by several judges of the Supreme Court of British Columbia to cease the alleged wrongdoing, and to cease operating or carrying on business though any website, Datalink abandoned the proceedings and apparently left the jurisdiction, carrying on its business from an unknown location, and continuing to sell the impugned product on its websites to customers all over the world.

Not knowing where Datalink or its suppliers now were, Equustek approached Google in September 2012 and requested that it de-index the Datalink websites, for the reason that, with approximately 75% of worldwide search traffic, Google was instrumental to Datalink being able to market and sell its infringing products. Google initially refused, forcing Equustek to obtain a court order prohibiting Datalink from carrying on business on the internet, which Equustek did, and advised that it would only voluntarily de-index webpages, as opposed to whole websites.  Later that year, Google de-indexed 345 specific webpages associated with Datalink.

However, de-indexing webpages but not entire websites was ineffective since Datalink simply moved the objectionable content to new pages within its websites. Further, Google limited the de-indexing to searches conducted on google.ca. Potential Canadian customers could, as a result, find Datalink’s websites on other Google sites, such as google.com, or the Google search engines for any other country. Moreover, since the majority of Datalink’s customers appeared to be located outside Canada, Google’s de-indexing was largely ineffective.

Equustek therefore sought an interlocutory injunction to enjoin Google from returning search results for any of the Datalink websites on any of its search pages worldwide. In June of 2014, the Supreme Court of British Columbia granted the order, finding that it had territorial competence over Google, that BC was the appropriate forum for the application, and that it had the authority to grant an injunction against Google with worldwide effect. The Court of Appeal of British Columbia upheld the injunction.

On appeal to the Supreme Court of Canada, Google did not dispute that there is a serious claim, or that that Equustek was suffering irreparable harm as a result of Datalink’s ongoing sale of its counterfeit product. Google acknowledged that it inadvertently facilitated the harm through its search engine which leads purchasers directly to the Datalink websites. Rather, Google argued that the injunction was neither necessary to prevent irreparable harm to Equustek nor effective in doing so, and grounded its appeal in the following arguments:

  1. As a non-party, Google ought not to be the subject of an interlocutory injunction;
  2. It was improper for the Supreme Court of British Columbia to issue an injunction with extraterritorial effect; and
  3. The injunction engaged concerns over freedom of expression, including whether or not Google would be violating laws regarding freedom of expression in other jurisdictions by complying with the injunction.

The Court found the first two points to be contrary to the jurisprudence. The authority to grant injunctions against someone who is not a party to the underlying lawsuit is well established in a variety of contexts, including civil disobedience, and preservation orders. Here, the necessity of enjoining Google flowed from the necessity of its assistance to prevent Datalink’s ability to defy Court orders.

Similarly, Google’s argument that it was improper to make an injunction with extraterritorial effect was contrary to the existing jurisprudence. The court found that it had in personam and territorial jurisdiction over Google because of its advertising and search operations in the province. Where a court has in personam jurisdiction, and where it is necessary to ensure the injunction’s effectiveness, it can grant an injunction enjoining that person’s conduct anywhere in the world. The Internet has no borders. Thus “the only way to ensure that the interlocutory injunction attained its objective was to have it apply where Google operates – globally.”

In response to freedom of expression concerns, the Court noted that this was not an order to remove speech that engaged freedom of expression values; it was an order to de-index websites operating in violation of court orders. The Court stated, somewhat acidly: “We have not, to date, accepted that freedom of expression requires the facilitation of the unlawful sale of goods.” The Court also noted that if Google has evidence that complying with the injunction would require it to violate the laws of another jurisdiction, including interfering with freedom of expression, it was at all times free to apply to the British Columbia courts to vary the order accordingly. To date, Google had not done so.

Finally, Google argued that the injunction would interfere with its “content-neutral” character. The court dismissed this concern, noting that Google often alters search results, including to avoid generating links to child pornography and websites containing “hate speech,” and with content that allegedly infringes copyright and content that is subject to court orders. What’s more, Google admitted it would not be inconvenienced or incur any significant expense in de-indexing the Datalink websites.

Ultimately, the Supreme Court noted that Datalink is only able to survive – at the expense of Equustek’s survival – on Google’s search engine which directs potential customers to its websites. While this did not make Google liable for the harm, it did make Google a determinative player in allowing the harm to occur. An interlocutory injunction is the only effective way to mitigate the harm to Equustek, and to preserve Equustek itself pending the resolution of the underlying litigation.  Since the harm to Google was minimal to non-existent, the Supreme Court upheld the British Columbia Court of Appeal’s decision.

This case offers some clarity around the degree to which courts can and indeed, sometimes must, make orders with extraterritorial effect, including as against non-parties, in order to protect the rights of litigants within their jurisdiction, and indeed to enforce their own orders. Similarly, the decision affirms the lower Court’s reasoning, covered in an earlier blog post, that, having elected to operate in many jurisdictions, a party affected by such an injunction could not ask the Court to presume hardship arising from potential effects of the order in those other jurisdictions. The decision will be significant not only in areas such as protection of intellectual property, but also in areas such as online defamation, where the internet has rendered jurisdictional boundaries largely irrelevant. In addition, it will be interesting to see if and how this decision is considered by the courts of other jurisdictions, and whether they adopt or even amplify the reasoning to, in effect, change what the world sees on the Internet. Mind you, people could always use Bing.

With thanks to articling student Rochelle Kelava for her assistance.

Supreme Court of Canada confirms Sattva approach to review of commercial arbitration decisions in British Columbia

Posted in Civil Procedure
Comment

On June 22, 2017, the Supreme Court of Canada (the “SCC”) delivered its decision in Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32 [“Teal Cedar”]. The decision affirms the SCC’s prior ruling that narrowly construes the types of issues which are questions of law for the purpose of an appeal to a court from an arbitration ruling in British Columbia, and mandates a high degree of deference to the decisions of arbitrators. This case provides clarity on the statutory role of commercial arbitrators in British Columbia, and serves as a reminder that arbitration of disputes under contract or statute almost completely ousts the jurisdiction of courts, subject to narrow exceptions.

Sattva

In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 [Sattva][1], a dispute arising from a finder’s fee agreement was submitted to arbitration under the Arbitration Act. Sattva introduced Creston to an opportunity to acquire a mine. The parties entered into a finder’s fee agreement that required Creston to pay Sattva a certain amount of shares valued at a maximum amount of US$1.5 million. The parties disagreed on the appropriate date for valuation of the shares. The arbitrator found in favour of Sattva, resulting in a payment of shares valued around $8 million.

After a long series of appeals, the British Columbia Court of Appeal ultimately overturned the arbitrator’s decision as “incorrect”. The SCC overturned this decision.

Rothstein J., writing for the SCC, abandoned the historical approach which labelled contract interpretation as a question of law.  He found that contract interpretation requires examination of the factual matrix in which the contract was made to determine the intention of the parties. By its nature, this analysis is one of mixed fact and law. As such, the arbitrator’s decision could not have been appealed under section 31 of the Arbitration Act which limits appeals to pure questions of law. Furthermore, an arbitrator’s decision will generally be reviewable on a  reasonableness, not correctness, standard.

The key to Sattva is the policy rationale for commercial arbitration; efficiency and finality.

Teal Cedar

In Teal Cedar, a forestry company with operations in British Columbia commenced arbitration under the Forestry Revitalization Act, SBC 2003, c 17 (the “FRA“),because compensation owing to it due to the Province of British Columbia’s (“BC”) decision to reduce its allowable harvest and deleted certain areas from its land base. The arbitrator reached a decision on valuation method and entitlement to compensation. Both parties appealed the decision.

As in Sattva, the British Columbia Court of Appeal reversed the arbitrator’s decision.  The SCC, again, allowed the appeal and reinstated the arbitrator’s decision.

Gascon J. confirmed that, generally, issues of contractual interpretation are questions of mixed fact and law and are not reviewable under section 31 of the Arbitration Act. Statutory interpretation issues, such as which methods of valuation are permissible under the FRA, are reviewable questions of law; however, the question of which method is preferable is linked to the evidentiary record at the arbitration hearing, where various experts opined on the virtues of conflicting valuation ideologies, and is an unreviewable question of mixed fact and law. The correct application of valuation method to the facts in issue is similarly a question of mixed fact and law.

As such, the only reviewable question was which valuation methods are permissible under the FRA. The SCC corrected the Court of Appeal’s implicit finding that questions of law necessarily attract a correctness standard of review. The policy goals of arbitration, finality and efficiency, suggest that in most cases, review will be on a standard of reasonableness.

Gascon J. found no reason to depart from the presumed reasonableness standard: the question was not one of central importance to the legal system, a constitutional question, or one outside the arbitrator’s expertise. On this latter point, Gascon J. presumed expertise as the parties chose the arbitrator to adjudicate that very dispute. In this case, the arbitrator’s interpretation was defensible, and therefore upheld as reasonable.

Discussion

Teal Cedar cements the Sattva approach to review of commercial arbitration decisions in British Columbia such that appeal rights are very limited as there will rarely be pure questions of law.  The SCC also confirmed that the standard of review of commercial arbitration decisions is “almost always reasonableness’.

In Teal Cedar, the SCC has sent a strong message that courts will respect the decision of parties to resolve disputes through arbitration, and will rarely permit a party to circumvent that procedure, even where arbitration is required by statute. Parties to arbitration are well advised to put their best foot forward at arbitration – in British Columbia, there may be no second chance.

With thanks to articling student Jim Boyle for his assistance.

 


[1] Read our earlier blog post about this topic: Finally, the Supreme Court of Canada puts some finality into Arbitrations

Anti-Spam Private Right of Action Suspended

Posted in Privacy
Comment

The Government of Canada has suspended the implementation of the private right of action in Canada’s anti-spam legislation (CASL).

The provisions in connection with CASL’s private right of action were scheduled to come into force on July 1, 2017.  They would have given people the ability to seek damages against those who contravene certain sections of CASL, including the provisions with respect to sending commercial electronic messages, as well as certain sections of the federal Personal Information Protection and Electronic Documents Act.

The coming into force of these provisions was repealed by an Order in Council on June 2, 2017.  The short preçis associated with this Order remarks that the coming into force was suspended “in order to promote legal certainty for numerous stakeholders claiming to experience difficulties in interpreting several provisions of the Act while being exposed to litigation risk”.  The Government made the announcement on June 7, 2017, in a press release which stated that the suspension was done “in response to broad-based concerns raised by businesses, charities and the not-for-profit sector”.

The suspension of the coming into force of these provisions is indefinite.

To view an earlier blog post on this issue by Marko Vesely, click here.

The Seven Year Itch: The SCC Returns to Address an Unresolved Question regarding the Crown’s Duty to Consult Aboriginal People and the Legislative Process

Posted in Aboriginal, Constitutional, Environmental
Comment

On May 18, 2017, the Supreme Court of Canada agreed to hear an appeal in an important case that could further define the nature and extent of the Crown’s duty to consult Aboriginal people, including the previously unresolved question as to whether the Crown’s duty to consult Aboriginal people can be triggered by legislative action.

Background – When Does the Crown Duty to Consult Arise?

In 2010, the Supreme Court of Canada, in Rio Tinto Alcan Inc. v. Carrier Sekani Tribal Council, 2010 SCC 43, addressed the question “When Does the Duty to Consult Arise?”  The Court found that the test for triggering the Crown’s duty to consul can be broken down into three elements:

(1) the Crown’s knowledge, actual or constructive, of a potential Aboriginal claim or right;

(2) contemplated Crown conduct; and

(3) the potential that the contemplated conduct may adversely affect an Aboriginal claim or right. (para. 31)

In discussing the second element (contemplated Crown conduct), the Court went out of its way to clarify that it was not addressing the question of whether consultation obligations could arise from the government’s action in preparing or passing legislation.

We leave for another day the question of whether government conduct includes legislative action.”  (para. 44)

That day may arrive soon.

To read more, click here.

Dismissal for Chronic Delay – New Six Question Framework

Posted in Civil Procedure, Fraud
Comment

On April 19, 2017, in Humphreys v Trebilcock, 2017 ABCA 116 (“Humphreys“),  the Alberta Court of Appeal set out six “essential” questions that an adjudicator must ask in order to apply Rule 4.31, the “chronic delay” rule. Under the Alberta Rules of Court (the “Rules”), a party may apply to dismiss an action for undue delay pursuant to Rule 4.31 at any time in an action or Rule 4.33, the “drop dead” rule, if three years have passed without a significant advance in the litigation. While the Court has no discretion under Rule 4.33, Rule 4.31 provides the Court with broad discretion, but little direction.

Humphreys provides direction as to when and how to apply the Court’s discretion under Rule 4.31. The six “essential” questions are as follows:

  1. Has the nonmoving party failed to advance the action to the point on the litigation spectrum that a litigant acting reasonably would have attained within the time frame under review?
  2. Is the shortfall or differential of such a magnitude to qualify as inordinate?
  3. If the delay is inordinate has the nonmoving party provided an explanation for the delay? If so, does it justify inordinate delay?
  4. If the delay is inordinate and inexcusable, has this delay impaired a sufficiently important interest of the moving party so as to justify overriding the nonmoving party’s interest in having its action adjudged by the court? Has the moving party demonstrated significant prejudice?
  5. If the moving party relies on the presumption of significant prejudice created by r. 4.31(2), has the nonmoving party rebutted the presumption of significant prejudice?
  6. If the moving party has met the criteria for granting relief under r. 4.31(1), is there a compelling reason not to dismiss the nonmoving party’s action?

In dismissing the action in Humphreys, the Court considered both litigation and nonlitigation prejudice, including: the exacerbated stress associated with alleged fraud; the business and reputational toll on alleged wrongdoers when claims are not prosecuted in a reasonable time; the balance of the plaintiffs’ interest in securing a judicial determination with the defendants’ interest in carrying on business without fear that unsubstantiated claims in an extant lawsuit will cause others to refrain from doing business with them; and, degraded memories.

Rule 4.31 (at issue in Humphreys) provides an alternative for defendants where the requirements of Rule 4.33’s mandatory dismissal are not met, but the suit is languishing.

Canada’s Anti-Spam Law Adds Teeth, Leaves Potential Opening for Class Actions

Posted in Class Actions, Privacy
Comment

Canada already has one of the world’s strictest regimes regulating commercial electronic messages, and, just in time for the country’s 150th birthday, the consequences for breach are about to get much more severe. On July 1, 2017, this regime will add additional teeth in the form of a private right of action, which could drastically increase the threat of legal proceedings and financial consequences for those who violate it.

Until July 1, 2017 the primary concern is that violations of Canada’s Anti-Spam Law (“CASL”) would be prosecuted by the bodies responsible for its enforcement (Canadian Radio-television and Telecommunications Commission (the “CRTC”), the Competition Bureau, and the Office of the Privacy Commissioner).  After July 1, 2017 those who send commercial electronic messages also face the risk of class proceedings specifically permitted by CASL.

What is CASL?

CASL creates a broad and comprehensive set of offences, enforcement mechanisms and penalties applicable to a number of activities, including the unauthorized installation of computer programs on computers and electronic devices, the alteration of transmission data and various other forms of online fraud. However, for the vast majority of organizations, CASL’s requirements with respect to commercial electronic messages (“CEMs”) are the primary concern. Subject to limited exemptions, CEMs may only be sent if the recipient has given his or her informed consent and the CEM contains certain prescribed information, including a functioning “unsubscribe” mechanism.  Further, deemed or implied consent is only permitted in specific circumstances and there are rules and limitations on how express consent can be obtained.

What is the private right of action?

Once the relevant provisions are in force on July 1, 2017, CASL will allow individuals and organizations to bring a private action in civil courts against those who violate certain CASL provisions.

Starting July 1 individuals will be able to commence an action in court where they are affected by an act or omission:

  1.               that constitutes a contravention under sections 6 through 9 of CASL (those sections set out the fundamental rules for the sending of CEMs, the alteration of transmission data and the installation of computer programs);
  2.              that relates to a violation of the email harvesting and use provisions in sections 7.1(2) and (3) of the Personal Information Protection and Electronic Documents Act (“PIPEDA”); or
  3.               that results from false or misleading electronic messages within the meaning of the Competition Act.

Importantly, only one of these conditions needs to be satisfied for the private right of action to be available.

Currently, CASL is enforced jointly by the CRTC, the Competition Bureau, and the Office of the Privacy Commissioner. These public bodies have a range of enforcement mechanisms at their disposal, including imposing administrative monetary penalties on those who contravene CASL. Thus far, enforcement has been generally limited to more flagrant offences and also limited by each public regulator’s own internal resources.

Why should companies be concerned with the private right of action?

There are three primary reasons to be concerned with the private right of action that will come into force July 1:

  1. CASL is already a broadly drafted statute which creates an enhanced risk of a violation even inadvertently;
  2. CASL also allows a court to award damages regardless of whether actual loss has occurred to the plaintiff (up to a capped amount) which may encourage more claims to be advanced; and
  3. The private right of action may be particularly amenable to a class proceeding.

These three reasons are explored in greater detail below.

Broad scope of CASL: CASL has been criticized for its broad drafting and that criticism applies well to the private right of action provisions (sections 47-51).  Those sections provide that any person who alleges that he or she has been “affected” by a contravention of sections 6 through 9 may bring an action in court. This, coupled with CASL’s definition of CEM – which includes any electronic message that seeks to “encourage participation in a commercial activity” and effectively captures millions of messages sent each year – creates the potential for a large number of plaintiffs to commence lawsuits over a massive number of potential contraventions.

Different liability standard: Further and as noted above, in addition to compensatory awards for amounts equalling the actual loss suffered by the claimant, a court may also award non-compensatory damages up to $200 for each CASL breach and up to $1 million for each day during which a breach occurs.  These “statutory damages” favour the claimant, because they do not require the same level of proof as other types of damages. A claimant need only prove that he or she was “affected” by the CASL contravention.

Class action concerns: As the actual losses suffered by an individual as a result of a breach of CASL are likely to be modest in most cases, the viability of bringing individual civil suits is low. However, given that CASL’s broad language captures a vast range of messages, combined with the fact that enormous numbers of individuals could be “affected” by contraventions, the conditions may be ripe for class actions arising from breaches of CASL.

The availability of statutory damage awards only increases the amenability of class actions to this private right of action. Under CASL’s provisions, courts may award the $200 per violation, $1 million per day non-compensatory awards without evidence being provided of actual loss or injury. These potential non-compensatory award amounts could be multiplied by hundreds, if not thousands, depending on the scope of the violation.

The CRTC has handed out several substantial fines in the past pursuant to its regulatory authority under CASL, but these amounts would be paltry compared to the amounts that could conceivably be awarded by a court for a private right of action. For instance, in March of 2015, Vancouver-based online dating service PlentyofFish paid $48,000 as part of a voluntary settlement (known as an “undertaking” under CASL). This payment was for alleged violations involving CEMs that contained a deficient unsubscribe mechanism that were sent over a three-month period.  If such a contravention was pursued by way of a private right of action after July 1, and with a potential $1 million in statutory damages for each day the contravention occurred, PlentyofFish could theoretically have been liable for an amount in the vicinity of $90 million.

Consider also the $200,000 fine that Rogers Media Inc. paid to the CRTC in 2015 for allegedly sending contravening emails over a one-year period. Under a private right of action, Rogers’ liability could have exceeded $365 million.

What are the limitations?

Two aspects of CASL’s private right of action may limit statutory damage awards in practice. First, there are a number of factors that a court must consider when determining the amount of an award, including the offender’s ability to pay, any financial benefit obtained from the commission of the contravention, and any previous contraventions. Courts must also consider the purpose of an award, which is to promote compliance with CASL, PIPEDA, or the Competition Act, and not to punish offenders.

Second, under section 48(1) of CASL, where an offender has entered into an “undertaking” to comply with CASL, or has been served with a notice of violation (essentially, if regulatory proceedings have been commenced), then a court may not consider a private right of action against that person. This provision could potentially allow for parties who are faced with a multi-million dollar class action to enter into a settlement with the CRTC for a lesser amount so as to bar any further private right of recovery.

Conclusion

CASL has been in force for nearly three years now, and most organizations should be familiar with the legislation’s requirements. Come July 1, however, the availability of CASL’s private right of action will undoubtedly increase the consequences of violations, making compliance with the legislation essential for anyone engaged in sending CEMs.

With thanks to articling student Zander Grant for his assistance.

Court of Appeal upholds mortgage exit fee in face of Interest Act challenge

Posted in Banking, Civil Litigation
Comment

Section 8 of the Interest Act, R.S.C. 1985, c. I-15, prohibits any “fine, penalty or rate of interest . . . that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.” Relying on this provision, borrowers often challenge fees and charges that borrowers levy when seeking to enforce a secured debt that has gone into arrears. For the defaulting borrower, it can slow down the lender’s effort to seek judgment and, if successful, can amount to relief from portions of the debt being claimed. However, what section 8 actually means and how it applies in any given case is a question that constantly bedevils courts.

Two recent decisions illustrate the practical difficulties in categorizing the nature of charges accruing to a secured debt and whether they contravene the Interest Act. Arguably, one decision, Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18, does away with prior judicial distinctions that made commercial sense (though were difficult to apply) and makes relief under section 8 more likely. The other decision, Bankers Mortgage Corporation v. Plaza 500 Hotels Ltd., 2017 BCCA 66, illustrates a clear mechanism for lenders to avoid the perils of section 8 of the Interest Act.

In Krayzel, the Alberta courts applied a strict or narrow interpretation of s. 8 and categorized the interest rate in issue as “an incentive to pay” rather than a penalty for non-payment. In Krayzel, the borrower and lender renegotiated a secured loan after the borrower ran into difficulties. It was agreed that the loan interest rate would be 25% but that the borrower need only pay a monthly rate of 7.5% with the remaining interest accruing to the debt. If the borrower repaid the loan on time, the unpaid interest would be forgiven. If not, the unpaid interest would form part of the secured debt to be repaid. The Alberta trial and appellate courts held that this was not a “fine, penalty or rate of interest” on the arrears but rather an incentive to the borrower to repay on time. They upheld the interest rate. The Supreme Court of Canada (though with a dissent) disagreed, choosing instead to see this interest arrangement as contravening section 8. It reasoned that the focus of the inquiry was not on how to characterize the impugned charge (incentive v. penalty), but to look at its effect. If the effect is to impose a higher rate of interest on arrears of interest or principal than that payable on principal money not in arrears, the charge will offend the Interest Act because it makes it more difficult for borrowers who are already in default to redeem or protect their equity.

In the Plaza 500 Hotels case, the borrower sought to invoke the reasoning in Krayzel to argue that a mortgage exit fee it was obliged to pay to a mortgage broker offended the Interest Act and could not be enforced. As part of the original loan, the borrower agreed it would pay the mortgage broker an exit fee of $96,000 (0.67% of the principal amount of the loan) if the loan was either not renewed or not repaid on time.  After the mortgage went into default, the lender foreclosed and the mortgage broker sued to recover the exit fee. The broker then registered its judgment on title to the property that had been mortgaged to the lender.

The borrower argued the mortgage exit fee was “related to the mortgage” as it was triggered by default under the mortgage and had the practical effect of making repayment more difficult. The B.C. Court of Appeal disagreed and upheld the mortgage exit fee. The distinguishing feature was that the mortgage exit fee was not part of the secured debt. It was, in the words of the Interest Act, not “stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property . . . that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.” In other words, because the mortgage exit fee was not part of the secured debt, it did not fall within the scope of the Interest Act.

This decision is good news for lenders as it illustrates that there are sound commercial methods to set up incentives for borrowers to meet their obligations without worrying about running afoul of the Interest Act. While “incentives,” “bonuses” or “discounts” can still be used, they just cannot be tied to the secured debt. As an unsecured debt, this may make recovery more difficult but charges of this nature are nonetheless enforceable against a debtor and its guarantors. The Interest Act will not interfere to prevent recovery.

How do the courts allocate loss amongst innocent victims of a fraud?

Posted in Civil Litigation
Comment

Fraudsters are very clever. Many set up elaborate commercial transactions for the purpose of absconding with someone else’s money.  By the time the scheme is discovered, an innocent victim is usually out of pocket, often for large sums of money. In an effort to recover that loss, the victim often turns to other innocent parties who were unknowingly involved in the deal and seeks to impose the loss on them. The courts are left with the invidious task of deciding who, among these innocent litigants, should bear the loss. How do they make that decision?

The short answer is that it is usually entirely dependent on the facts of each case. It is those facts which define the legal principles that will provide the answer. A recent Alberta case provides a common example. The case involved paying out a mortgage debt with the payment being made to a company, Fuoco, that held itself out as agent for the lender. Once paid, the company and its principal disappeared with the cash. The lender, a Mr. Currie, was left to go after his borrowers, the Craigs, and their lawyer who made the payment to the fraudster at the fraudster’s direction. Mr. Craig also sought to assert his mortgage security still had priority over the mortgage the Craigs granted to TD Bank, some of the proceeds of which had been used to pay the fraudster (and purportedly discharge Currie’s mortgage).

The legal answer in this case turned on the law of agency and, in particular, the actual or implied authority of the fraudster, as agent, to act on Currie’s behalf. As a general rule, where an agent acts within their actual authority, the principal is bound by those acts, even if fraudulent. However, where an agent has gone rogue, most principals argue the agent was either not their agent at all or, more commonly, acted outside their authority. Mr. Currie did so in this case. As a result, the legal question then became whether Fuoco had “ostensible authority” to act for Currie. As a matter of law, the answer depends on whether the principal has, by words or deeds, held out their agent as having the authority to do the challenged act. In other words, did the agent have “ostensible authority.”

In making that decision, the Alberta court relied on the following propositions:

  1. Representations about the authority of an agent must come from the principal; an agent cannot clothe themselves with authority;
  2. The onus is on the party relying on the act of the agent to prove ostensible authority; and
  3. When an agent has actual authority, but that authority is subject to limitations, the onus is on the principal to prove that the limitations were conveyed to the third party who relied on the agent.

Relying on those propositions, the Alberta court found that the fraudster, Fuoco, had the ostensible authority to accept payment of the mortgage debt from the Craigs’ lawyer. As a result, Currie was the innocent party who bore the resulting loss, not the Craigs, their lawyer or TD Bank. This finding was based on specific facts, including that Currie:

  • allowed Fuoco to negotiate the original loan with the Craigs;
  • allowed Fuoco’s address to be used on the mortgage documents;
  • signed off on and allowed Fuoco to provide mortgage payout statements; and
  • did not voice any objection to or place any limit on Fuoco’s conduct with any third party, including the Craigs or their lawyer.

Based on this, the Alberta court found the Fuoco also had “ostensible authority” to receive payments on the mortgage debt and to do so in Fuoco’s name.

The underlying lesson here is that any principal should be cautious when clothing an agent with any authority to act on their behalf. Pay close attention to what your agent is doing and who they are dealing with on your behalf. Had Mr. Currie been paying closer attention to what Fuoco was doing, he would likely not have fallen victim to this fraud

Search and Ye May Find Something Else: Use of Competitors’ Names in Keyword Advertising and Domains

Posted in Civil Litigation, Torts
Comment

Introduction

In Vancouver Community College v Vancouver Career College (Burnaby) 2017 BCCA 41, the British Columbia Court of Appeal found that Vancouver Community College (“VCC”) had established the tort of passing off against Vancouver Career College (“Career College”) for using “VCC” and “VCCollege” as part of Career College’s internet presence, overturning the trial judge on each component of passing off and awarding a permanent injunction to restrain Career College from using “VCC” or “VCCollege” to represent itself on the internet, including the domain name “VCCollege.ca” The court also considered for the first time whether or not the use of competitors’ marks in keyword advertising constituted passing off.

Background

VCC was appealing its initially unsuccessful attempt to have Career College cease use of VCC’s recognizable initials.  VCC had claimed passing off as a result of the respondent Career College’s use of the domain name VCCollege.ca, and breach of the official marks of VCC, but also contended that Career College’s practice of bidding on the keywords “VCC” and “Vancouver Community College” was confusing enough to satisfy the second component of passing off, and further breached its official mark. The trial judge found against VCC on each component of the tort of passing off, and dismissed the claim for breach of VCC’s official marks.

The Tort of Passing Off

To establish the tort of passing off, a party must prove goodwill in the trade name at stake, and that a misrepresentation was made by the defendant that is likely to confuse the public by presenting or suggesting a connection between the plaintiff and defendant. Damage to the plaintiff is presumed due to the plaintiff’s loss of control over their reputation resulting from the misrepresentation.

In this case, goodwill was easily established by showing that a sufficient portion of the marketplace knew that “VCC” indicated Vancouver Community College. The second component is likely confusion of the public through a misrepresentation. The trial judge found that the first impression of the trade name was formed only after the consumer had clicked through to the defendant’s website, so any confusion in the domain name “VCCollege.ca” was irrelevant. The Court of Appeal overturned that to find that “VCCollege” was equally as descriptive of VCC as of Career College and contains the acronym “VCC”, so the domain name “VCCollege.ca” was a misrepresentation likely to cause confusion. Finally, damage was sufficiently established by proving interference with VCC’s goodwill.

The Court did not think it had the necessary evidence before it to determine whether a breach of the official mark had occurred. It referred that matter back to trial for consideration after laying out the framework upon which it should be decided.

Keyword Advertising

Keyword advertising involves predicting which words a target consumer will enter into a search engine, and engaging in competitive bidding on those words. The highest bidder for each word will have their title and description displayed at the top of the search results, which ensures higher traffic to their website. The keyword itself may or may not be displayed in the search result. In recent years, it has become more and more common to bid on a competitor’s trade name, to ensure that one’s website is not only included in an internet search for the competitor’s, but may actually rank ahead of it in the search results.

A previous case against Career College considered its use of the words “VCC” and “VCCollege” in keyword advertising in the context of misleading advertising under the Private Career Training Institutions Act, [SBC 2003] c. 79.  In Private Career Training Institutions Agency v Vancouver Career College (Burnaby) Inc, 2010 BCSC 765, the court determined that Career College’s use of keyword advertising was not misleading advertising under the legislation. The use of a competitor’s name or mark in keyword advertising alone was not intended to mislead, and that it provided choice to the consumer which was considered a benefit.

In this case, VCC attempted to claim that bidding on the words “VCC” and “Vancouver Community College” was sufficient to satisfy the second component of the tort of passing off. The Court did not agree, finding that, “merely bidding on words, by itself, is not delivery of a message. What is key is how the defendant has presented itself, and in this the fact of bidding on a keyword is not sufficient to amount to a component of passing off…”

Relevance

The BC Court of Appeal has given a strong indication of how keyword advertising will now be treated in the context of passing off cases.  Whether or not bidding on the keywords “VCC” and “Vancouver Community College” can be considered a breach of an official mark was referred back to trial for determination, so that is yet undecided. What is known, however, is that the mere act of bidding on a competitor’s trade name as a keyword for one’s website will likely not result in a finding of passing off.

With thanks to articling student Caitlin MacDonell for her assistance.

BC Court of Appeal Reaffirms Finality of Arbitration Decisions

Posted in Civil Litigation, Civil Procedure
Comment

The recent decision of the British Columbia Court of Appeal in Chriscan Enterprises Ltd. v. St. Pierre, 2016 BCCA 442, reminds those who elect to resolve their business disputes through arbitration that decisions of the arbitrator, even those touching on the fairness of procedures, will generally be final and not subject to review by the courts. As the Court noted, the “scope to appeal arbitral awards is narrow because arbitration is intended to be an alternate dispute resolution mechanism, rather than one more layer of litigation.”

The Court of Appeal’s Decision

The appellants, the St. Pierres, contracted with the respondent, Chriscan Enterprises Ltd., in 2004 for the construction of a house. The project was completed in 2006, but some issues arose concerning Chriscan’s failure to obtain competitive bids for some of the work (the “Overcharge Issue”) and certain alleged deficiencies relating to the driveway (the “Deficiency Issue”). The contract contained an arbitration clause which required the parties to submit their disagreements to arbitration.

The St. Pierres attempted to have the Overcharge Issue heard by the courts, arguing breach of fiduciary duty, but were directed back to the arbitration process. The arbitrator rejected the St. Pierres’ breach of fiduciary claim, ruling that the issue was one of breach of contract. The St. Pierres did not seek to amend their Statement of Claim at that time, and the arbitrator continued to hear and decide the Deficiency Issue. The St. Pierres later made an application to amend their Statement of Claim to allege the Overcharge Issue through breach of contract. The arbitrator allowed the amendment, finding that the delay in bringing the application to amend was explained by other steps taken in the litigation and that Chriscan would suffer no substantial prejudice. By this time, the parties had made no fewer than four court applications in the dispute.

The Chambers Judge granted leave to appeal the amendment decision. He was of the view that the proposed appeal was on a point of law, and that the importance of the decision to the parties justified the court’s intervention. Citing reasonableness as the standard of review, the Chambers Judge allowed the appeal.

The Court of Appeal disagreed with this characterization. Writing for a unanimous Court, Savage J.A. held that the issue of whether to allow the amendment was a question of mixed fact and law and that leave to appeal should not have been granted. Rule 22 of the Domestic Commercial Arbitration Rules of Procedure provides a permissive power to arbitrators to allow amendments to pleadings. It sets out two situations where the arbitrator may not allow the amendment: (i) where the delay is prejudicial; or (ii) where the amendment is beyond the terms of the agreement. Any finding as to delay is therefore a finding of fact. The Chambers Judge improperly rejected this factual finding when he substituted his own finding that to allow the amendment would be a manipulation of the adversarial process.

The Court addressed Chriscan’s several other arguments including res judicata, estoppel, waiver, and abuse of process. On the res judicata issue, the Court held that it was clear that the Overcharge Issue was never dealt with on the merits and that the initial jurisdiction decision served only to eliminate the St. Pierres’ claim in breach of fiduciary duty. The breach of contract issue remained extant, although not pleaded. The Court commented that it was inappropriate to treat the parties’ arbitral process as being the same as an action in the courts, where a final entered order ends the jurisdiction of a trial judge. The parties chose to “litigate in slices” and discrete issues were dealt with at different times. As a result, no finding was made in respect of the breach of contract issue. With respect to waiver and estoppel, the Court accepted the arbitrator’s conclusion that the St. Pierres had not, either by their words or conduct, abandoned their contractual claim. As for abuse of process, the Court rejected this claim summarily, repeating that the amendment decision was a question of mixed fact and law.

The Bottom Line

The Court of Appeal reminds us that parties submitting to arbitration subscribe to “the whole package that comes with it.” The Arbitration Act limits the Courts’ role in reviewing arbitral decisions to true questions of law, and the courts will apply the deferential standard of reasonableness, even on important matters of procedure. Choosing arbitration means choosing to be bound by the Arbitration Act, the Domestic Commercial Arbitration Rules of Procedure, and the discretion of the arbitrator chosen.