Western Canada Business Litigation Blog - Vancouver | Calgary | Yellowknife

What is an illegal contract and is it enforceable?  If an illegal contract is unenforceable, does the party who received its benefit get to keep that windfall?  The short answer to the first question is that a contract is illegal when it is either contrary to a statute or is contrary to public policy.  Generally, illegal contracts are not enforceable.  The answer to the second questions is “it depends”.  Often, a court will decline to enforce an illegal contract but then find a remedy that deprives the party who received the benefit from profiting as a consequence of their participation in some illegal or immoral act. 

The case of Mr. Tsoi and Mr. Lai is a good example.  Mr. Lai ran an illegal mah-jong business and would lend money to his customers at outrageous interest rates.  Mr. Lai asked Mr. Tsoi to lend him $50,000 to fund these loans.  Mr. Tsoi agreed provided Mr. Lai paid him simple interest of 60% annually (Section 347 of the Criminal Code precludes interest greater than this).  For a time, Mr. Lai paid Mr. Tsoi the required interest but then stopped.  Mr. Tsoi sued for breach of the unwritten loan agreement and for unjust enrichment.

The first issue was whether Mr. Tsoi knew whether the loans would be used in the mah-jong business.  If so, Mr. Tsoi was involved in the promotion of an immoral and illegal activity.  On this ground, Mr. Loi argued that the loan agreement was unenforceable.  Mr. Tsoi’s claim could not, in the words of the legal authorities, “be founded upon a base cause . . . that was against public policy” (otherwise known by the Latin maxim ex turpi causa non oritur action).  The Court found that Mr. Tsoi had sufficient knowledge of Mr. Loi’s illegal purpose in borrowing the money to conclude the loan agreement was illegal and unenforceable. 

The Court then needed to consider whether there was some exception to this general rule that would prevent Mr. Loi from being able to keep the $50,000.  The recognized exceptions which relieve a party of the consequences of illegality include:

1. Where the party claiming the return of the property is less at fault than the defendant;
2. Where the claimant “repents” before the illegal contract is performed; and
3. Where the claimant has an independent right to recover the property (such as recovery in tort despite an illegal contract).

Mr. Tsoi chose option #1 and argued he was less at fault than Mr. Loi who, after all, actually ran the mah-jong business and charged his customers interest rates far in excess of the criminal rate.  As Mr. Tsoi only indirectly benefited from the illegal activity and was not directly involved in the mah-jong loans, the Court agreed that he was less at fault than Mr. Lai. 

The next issue was whether or not in those circumstances it would be unjust to allow Mr. Lai to “enjoy an unjustified windfall” by keeping the $50,000.  An unjustified windfall can provide grounds to override the court’s concern about illegality.  In this case, the Court held that the unjust windfall outweighed the illegal contract.  As a result, Mr. Lai was order to repay the $50,000 loan but Mr. Tsoi’s claim to any further interest (other than court ordered interest) was denied.

The moral of the story is that if you enter into an agreement with another person and you know or have reason to suspect the bargain has some taint of illegality or immorality, this may be enough to prevent you from seeking to enforce your bargain.  Don’t take the risk.

In general, corporate legislation in Canada provides that if a corporation engages in specific types of transactions, such as an arrangement or amalgamation, shareholders are entitled to vote against the transaction.  If the transaction is nevertheless approved, shareholders can then exercise a right to dissent and be paid fair value for their shares. 

Last month, I blogged that a chambers judge in the Yukon had allowed beneficial shareholders to exercise a right of dissent.  The decision of the chambers judge was contrary to the standard practice in Canada, which has traditionally limited dissent rights to registered shareholders.  I noted that this issue had been argued before the British Columbia Court of Appeal, sitting as the Yukon Court of Appeal, and queried how this would affect corporate meetings practice in Canada if the decision was affirmed.

On October 12, 2012, the decision in Certain Shareholders of Crew Gold Corporation v. Crew Gold Corporation was released by the Court of Appeal.  This decision has restored the traditional rule that, other than in very limited circumstances, only registered shareholders are entitled to exercise dissent rights.  The Court found that the chambers judge “erred in relieving” the shareholders “from the requirement that they be registered shareholders in order to exercise a right of dissent.”

The Court also found that the registration requirement was not a technicality but rather was a legislative requirement and that shareholders have only been judicially relieved from this requirement in “exceptional circumstances” where the conduct of a corporation has been misleading or amounted to a form of estoppel.  The Court held that this registration requirement protects against uncertainty and allows a corporation to rely upon the share register when determining which shareholders are entitled to exercise dissent rights.

Importantly, the Court held that the corporation did not have a duty to advise each shareholder of the manner by which each could become a registered shareholder.  Instead, the Court decided that  “advice that might extend beyond referring shareholders to information already disseminated to them or their legal advisor and/or intermediary(ies), who are expressly tasked with the responsibility of advising the beneficial shareholders on this issue, in my view, would result in a positive or affirmative duty on a corporation that could give rise to potential liability for inaccurate advice and would undermine the clear intention of the legislature that this burden lies with the shareholder.”

In the end, the Court found that the judicial exception to the registration requirement is “very narrow” and only encompasses misleading or inaccurate information, or conduct amounting to an estoppel.  Directors and officers who manage corporate meetings that approve transactions giving rise to dissent rights can take note that order has been restored and, absent highly unusual circumstances, they will not be required (i) to assist shareholders in becoming registered, or (ii) to recognize the dissent rights of a beneficial shareholder.

2012 has seen a large increase in court applications relating to shareholder proxy contests in British Columbia.  In the face of these increased number of applications, the Supreme Court of British Columbia has shown an increased willingness to intervene to ensure meetings and proxy contests are conducted fairly.

On September 20, 2012, the Court gave oral reasons in Western Wind Energy Corporation v. Savitr Capital, LLC.  The Court granted an order for an independent chair and appointed the chair proposed by the dissident shareholder.  In doing so, it found that the “concentration of events” which included commencing legal proceedings (and abandoning them), and unsuccessfully seeking the disqualification of proxy votes, gave rise to a reasonable apprehension concerning the conduct of meeting if a management executive was allowed to chair the meeting..  In addition, the Court dismissed an application by the target company to enjoin the dissident from using its trademark in its proxy materials.

Earlier in September, the Court dealt with an application by TELUS to block a shareholder, an American hedge fund, from requisitioning a meeting of voting shareholders in an attempt to block a merger of Telus’ dual share structure of voting and non-voting shares into one class of common shares.  For the first time in Canada, the Court commented on an “empty voting” strategy which may mean that courts will be more willing to deny “empty” voters the ability to exercise normal shareholder rights.  Empty voting encompasses a range of tactics that investors use to decouple the voting interest from the economic interest carried in a share – meaning that voting control is not aligned with the company’s economic well-being.  The Court held that the practice of empty voting presented a challenge to shareholder democracy as the voter has no interest in enhancing the value of the investment.  The Court further held that while the conversion ratios between the voting and non-voting shares were of interest to all shareholders, the interest here of the hedge fund was not aligned: it was indifferent to the value of Telus and was concerned only with maximizing the price differential between the two classes of shares.  Ultimately, the Court rested its decision on non-compliance with the statutory provisions. The Court’s comments, however, indicate a more interventionist attitude.

Additionally, in August, the Court overturned the results of an AGM of a public company, including the election of its directors, and ordered the company hold a new meeting within sixty days of the decision.  In International Energy and Mineral Resources Investment (Hong Kong) Company Limited v. Mosquito Consolidated Gold Mines Limited, the Court ruled that the conduct of the previous meeting of Mosquito Consolidated Gold Mines Limited had been oppressive to the company’s shareholders.  In particular, it found that a voting system, in which votes were taken over the phone by a proxy solicitation firm, was oppressive.  The impugned voting system was specifically marketed as a means to give an advantage in proxy solicitation contests by recording votes more readily and by not requiring the shareholder to submit a proxy (or vote on the internet or by phone).

In an approximately two months, the Supreme Court of British Columbia has issued three important decisions on contested meetings and proxy contests in Canada.  In doing so, the Court has indicated a willingness to take a more interventionist role to ensure fairness in this process. Time will tell whether these cases signify a short term deviation or represent the start of a new trend in shareholder meeting practice in Canada.

In a decision that will be of interest to developers and others whose interests may be affected by zoning decisions of local governments, the B.C. Court of Appeal recently reaffirmed the duty of fairness owed to interested parties when such decisions are made.  The Court also provided some guidance as to what is required of local governments in order to meet that duty.

At issue in Fisher Road Holdings Ltd. v. Cowichan Valley (Regional District), 2012 BCCA 338 was the validity of a down-zoning amendment bylaw passed by the Cowichan Valley Regional District (“CVRD”) which changed the zoning of certain property owned by the Petitioner Fisher Road from “Light Industrial I-1” to “Light Industrial-Limited I-1C.”  The effect of the amendment was to remove composting, recycling and auto wrecking as possible uses on the subject property.

Prior to the amendment, Fisher Road operated a composting business on the property under a Solid Waste Management Licence issued by the CVRD.  In October 2009, Fisher Road applied to the CVRD to amend its licence in order to permit it to expand its composting business and to add a recycling business on its property.  In response to that application, the CVRD established a citizen’s advisory committee to review and make recommendations to its Director of Engineering concerning the application and it retained an environmental consultant to conduct an environmental review of Fisher Road’s existing and proposed operations.  The CVRD was aware of public concerns about the smell emanating from such businesses and possible contamination of groundwater.

In conjunction with Fisher Road’s application to amend its licence, the CVRD required it to hold a public meeting which occurred on May 20, 2010 with about 200 people in attendance.  Most of those in attendance were opposed to an expansion of the operations permitted under Fisher Road’s licence.  A report about the meeting was prepared by a CVRD staff member and presented to the CVRD’s Electoral Area Services Committee.  The report noted the concerns raised by area residents and suggested that it was unlikely that the smells emanating from the industrial uses and the threat to groundwater could ever be controlled or eliminated.  As a result of that report, the Committee proposed the down-zoning amendment bylaw and on June 23, 2010, the CVRD introduced and gave first and second reading to the bylaw.

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On September 7, 2012, the British Columbia Court of Appeal, sitting as the Yukon Court of Appeal, heard the appeal from the Yukon Supreme Court decision in Matre et al v. Crew Gold Corporation, 2011 YKSC 75.  The Court of Appeal’s eventual decision will address the question of whether beneficial, as opposed to registered, shareholders can exercise dissent rights under section 193 of the Business Corporations Act, R.S.Y. 2002, c. 20 (“YBCA”).  As the grant of dissent rights under the YBCA is similar to many other corporate statutes in Canada, the Court of Appeal’s decision will have Canada wide implications.

Crew Gold was a corporation registered under the YBCA.  A Plan of Arrangement was proposed to allow Crew Gold’s 93% shareholder to acquire the remaining outstanding shares at $4.65 USD.  The Plan of Arrangement gave the remaining shareholders the right to “dissent” from the Arrangement and, instead, be paid fair value for their shares.  The remaining minority shareholders held their shares beneficially in that their shares were legally registered in the name of a nominee bank.  The individual minority shareholders, who all lived in Norway, wrongly believed they were registered shareholders and delivered notices of dissent in their own personal names.  At the meeting to approve the Plan of Arrangement, they were all advised their notices of dissent were ineffective.  They applied to have these Notices declared valid.

There is a long line of Canadian jurisprudence that limits the exercise of dissent rights to the registered shareholder.  Notwithstanding this fact, the Yukon Supreme Court ordered that the beneficial shareholders be granted dissent rights.  It did so because it found the circumstances of the Norwegian shareholders to be “exceptional” and that Crew Gold should not be allowed to succeed on a “technical objection.”  The Court relied on the fact that the minority shareholders’ confusion arose from Crew Gold, who the Court found to have acted evasively.  The Court held that Crew Gold had an obligation to address the concerns of the minority shareholders given the minority shareholders’ attempts to obtain clarification on the dissent procedure.  In addition, the Court noted that Crew Gold listed two of the beneficial shareholders on its website as two of its top 50 shareholders and that Crew Gold’s circular did not include any meaningful information about how beneficial shareholders should go about exercising their dissent rights.

The Canadian courts have traditionally held that shareholders have to strictly comply with the statutory requirements in order to exercise dissent rights.  Accordingly, Matre represents a significant departure from traditional corporate practice in Canada.  We will need to wait to see whether the Court of Appeal returns to the traditional analysis and limits dissent rights to registered shareholders or whether the Court alters normal corporate practice by endorsing the chambers decision in Matre.

Retirement benefits have been much in the news recently with the announcement by the federal government that the eligibility age for public Old Age Security benefits will rise from 65-67 beginning in 2023.  Concerns about the affordability of retiree benefits is particularly acute in the private sector where factors such as the aging population, economic uncertainty, government offloading of public services and escalating health care costs are causing employers to examine their ability to continue to provide post-retirement benefits to their retirees.

It is generally accepted that employers can make changes to their benefit plans prospectively including changes to the health and welfare benefits that will be available to their employees in the future when they retire (health and welfare benefits must be distinguished from pension benefits that are subject to different rules and have a measure of statutory protection under pension standards legislation).  Less clear is whether employers can change the benefits provided to those people who are already retired.  Two recent British Columbia cases deal with this situation.

In Lacy et. al. v. Weyerhaeuser Company Limited, 2012 BCSC 353, five former MacMillan Bloedel employees sued Weyerhaeuser for changes made to Weyerhaeuser’s retiree benefit plan (Weyerhaeuser had purchased MacBlo in 1999 and had assumed responsibility for the retiree plan).  Up until 2010, retirees were eligible to have 100% of the cost of the premiums for the provincial Medical Services Plan and an extended health care plan paid by the company.  In October 2009 however, Weyerhaeuser advised retirees that due to concerns about the viability and affordability of the benefit plans, the company was freezing its contribution at 50% of the cost in place as of January 1, 2010 and that any future increases would be borne by retirees.

In his decision dated March 9, 2012, Mr. Justice Saunders of the B.C. Supreme Court found in favour of the Plaintiff retirees and held that Weyerhaeuser was not entitled to make the change.  He concluded that while the benefits were originally extended to retirees as a matter of company policy, over time they had evolved into a contractual obligation and had become a form of deferred compensation.  The Judge found that the promise of premium-free benefits in retirement had been communicated to the Plaintiffs throughout much of their working lives and, as such, was binding upon Weyerhaeuser.  The benefits vested upon retirement and accordingly the Plaintiffs were entitled to the level of benefits in place as of the date each of them retired.

Shortly after the Lacey decision was released, the B.C. Court of Appeal rendered its decision in Bennett v. British Columbia, 2012 BCCA 115.  Bennett involved an appeal from the dismissal of a class action brought by former B.C. public servants challenging changes made to their retiree benefits provided through the B.C. Public Service Pension Plan.  The changes in issue were similar to those considered in the Lacey case in that retirees were required for the first time to contribute to the cost of the benefits.  The Plaintiffs’ claims were similar as well in that they alleged that they had been promised premium-free retiree benefits as part of their contracts of employment with the provincial government.  Unlike in Lacey however, the Court disagreed.

In Bennett, the Court held that the statements relied upon by the Plaintiffs were not contractual promises but rather were merely descriptions of the retirement benefits available from time to time.  The Court distinguished between representations and promises and found that the various statements about the future benefits fell short of having contractual force.  The Court further found that many of the statements were made well after the Plaintiffs were hired and often when they were close to retirement.  As such, the Plaintiffs’ continued employment and service did not provide any new or good consideration for the “promise” of benefits in retirement.

The Lacey decision is currently under appeal and it remains to be seen whether the Court of Appeal will apply a similar analysis as that employed in Bennett and overturn the decision.  In the meantime, notwithstanding the different result in the two decisions, certain common lessons can be drawn for employers who are considering the future of their retiree benefit programs:

• If retiree benefits vest or become guaranteed, they do so at the date of retirement so employers are generally free to make changes prospectively to the benefits for future retirees (subject to any employment law concerns about alteration of existing employment contracts); and

• The ability to change benefits for current retirees will depend in large part about how the benefits have been implemented and communicated to employees and retirees over time.  Employers will be in a stronger position if they have made it clear in relevant communications that they reserve the right to change the benefits.

One issue that forms an undercurrent to both the Lacey and Bennett decisions, but is not addressed by the courts in any detail, is the significantly changed circumstances that exist today from when many of the retirement promises in issue were made.  For example, all of the Plaintiffs in Lacey worked in and retired from the forest industry at a time when that industry was flourishing and when companies operating in the industry were well able to afford generous benefit packages for their retirees.  At the same time, the cost of those benefit packages was relatively small.  Those days are long gone.  Today, the B.C. forest industry has been ravaged by the economy and many companies in the industry simply cannot afford to maintain the existing retiree benefit plans.  If they are held to promises or representations made in the past (often by predecessor companies) under very different circumstances, their economic viability may be threatened.

Because retiree health benefits are not paid out of accumulated assets like pension benefits, but rather are funded by current operating revenues, any threat to the viability of the employer company is in effect also a threat to the long term viability and security of the benefits.  Accordingly, in many instances, retirees would be better served by working with their former employers to achieve some form of compromise that would permit the employer to realize some cost savings while at the same time maintaining a reasonable level of benefit coverage.  If retirees insist however on compelling the employer to maintain historical benefit levels, they do so to the prejudice of current employees and ultimately to their potential prejudice as well.

On December 22, 2011, the Supreme Court of Canada released its decision in Reference Re: Securities Act, 2011 SCC 66.  As noted in a previous post, the Reference involved a show down between the federal government and various provincial governments over the question of whether the legislation creating a proposed new national securities regulator is constitutionally valid.

According to the Supreme Court, the answer to that question is no.  The federal government sought to justify the creation of a national regulator pursuant to Parliament’s power over trade and commerce as set out in s. 91(2) of the Constitution Act, 1867.  It argued that the reality of the modern securities industry is such that a coordinated national approach to regulation is required in order to adequately protect investors and to ensure the integrity and stability of the financial system.  While the Supreme Court recognized these important objectives, it held that the federal government had not established that securities law had so transformed as to now fall within federal jurisdiction.  The Court further held that the principal components of the legislation are concerned with the day-to-day regulation of securities contracts and, as such, deal with matters of provincial concern that fall under the heading of property and civil rights in the provinces.

In recent years, the Supreme Court has expressed reluctance to draw clear lines around heads of provincial and federal power under the Constitution Act, 1867 so as to create exclusive areas of jurisdiction.  Rather, the court has developed the “double aspect’ doctrine to permit the concurrent application of both federal and provincial legislation to subject matters that have both federal and provincial aspects.  As the Court noted in its recent decision concerning the Insite safe injection site this approach is more in keeping with modern Canadian constitutional interpretation which favours cooperative federalism.

However, the Court concluded in this case that the federal and provincial securities regulatory schemes could not co-exist because the proposed federal scheme was in fact intended to supplant the provincial schemes.  In its view, the federal legislation went beyond what could be justified under the federal trade and commerce power and constituted an impermissible intrusion into provincial jurisdiction.

The Court did suggest in closing that a cooperative approach remains available that would maintain provincial authority over securities regulation while at the same time permitting the federal government to deal with genuine national concerns.  However it remains to be seen whether there is an appetite amongst the provinces to work with the federal government in such a cooperative fashion given the apparent reluctance on the part of many of the provinces to cede any authority in the area of securities regulation.

This post was submitted by Lawson Lundell guest author Euan Sinclair, Director, Knowledge Management.

The titanic legal battle over the soul of Alberta’s Personal Information Protection Act took a new twist recently, when the Supreme Court of Canada refused the Alberta Information and Privacy Commissioner’s application for leave to appeal the Alberta Court of Appeal’s landmark 2-1 judgment in favour of its opponent, Leon’s Furniture Limited.  As such, the Court of Appeal’s majority judgment prevails.

The effect is that it will be reasonable, and therefore lawful, for organizations to collect and retain personal information in Alberta (such as the information contained on a driving licence) as part of system for combatting theft and fraud. Note that there are limits here:  an important factor in the Court of Appeal’s judgment was that, as an integral part of that system, Leon’s Furniture:

• stored the information separately from the other customer information;
• did not share the information with third parties; nor
• used the information for marketing or other collateral purposes.

The Court of Appeal’s decision that information on a vehicle licence plate is not “personal information”, as it does not relate directly to an individual and is available to the public in any event, also stands.

The Supreme Court’s refusal to hear the appeal will be a blow to the Alberta Information and Privacy Commissioner, as his avenue for appeal is exhausted. Only primary legislation can change the law now. The refusal by the Supreme Court to hear the appeal may well redefine the balance to be struck between security and privacy across Canada.

The separate legal personality of the corporation as distinct from its shareholders has been a corner stone of corporate law since the landmark decision of Salomon v. Salomon, [1897] AC 22.  Canadian courts have consistently held that a corporation is a distinct legal entity from its shareholders who are not liable for the acts of the corporation.  However, over the last century, the courts have recognized a small exception to this distinct legal status where they have allowed litigants to “pierce the corporate veil” to impose liability directly on shareholders for the acts of the corporation.  Nevertheless, two recent Canadian cases, including one from British Columbia, have reaffirmed that this is a very limited crack in the corporate veil.

In Chan v. City Commercial Realty Group, the Ontario Superior Court reaffirmed that the identity, rights and obligations of corporations and their shareholders are distinct and that the separate legal personality of a corporation will not be disregarded lightly.  The Court did recognize that it had the jurisdiction to pierce the corporate veil to impose liability directly on shareholders but limited that power to largely fact specific situations where the corporation has been used for illegal, fraudulent or improper conduct. 

More recently in British Columbia, the British Columbia Supreme Court in Emtwo Properties Inc. v. Cineplex (Western Canada) Inc., further constrained the jurisdiction to pierce the corporate veil by describing that power in these terms: “The circumstances in which the Court will lift the veil and impose the contractual liability of a subsidiary on a parent require more than the exercise of total control by the parent over the subsidiary.  The corporate veil will not be pierced absent conduct akin to fraud.”

Business owners can take solace that the courts remain strong in their recognition of distinct legal personality of the corporation and the limited ability to pierce the corporate veil.

The press is riddled with stories concerning perceived problems with the court system.  Various commentators say it is too slow, too expensive and procedurally unwieldy.  These concerns have led some to conclude that arbitration is a better alternative. Arbitration agreements do have risks which parties should understand before agreeing to an alternate form of dispute resolution.

The long running saga of Creston Moly Corp. v. Sattva Capital Corp.provides an example of the potential pitfalls of arbitration.   These parties are engaged in an ongoing dispute concerning an arbitration decision handed down on December 23, 2008, in which the arbitrator ruled that Creston was required to pay $4,140,000 plus costs as a finder’s fee in connection with the acquisition of Creston's molybdenum property in Mexico. The dispute is over the valuation of the finder’s fee and the arbitrator ruled in favour of the finder.

Parties often enter into Arbitration agreements because they view arbitrator’s decisions as “final”.  However, the Commercial Arbitration Act (British Columbia) does provide limited rights of appeal with respect to arbitration awards. Section 30 allows arbitration decisions to be overturned if they were improperly procured and section 31 allow appeals on errors of law if permission, or leave, is granted by the British Columbia Supreme Court.  Similar, but arguably broader, appeal provisions are found in sections 44 and 45 of the Arbitration Act (Alberta).

In Creston Moly, these appeal rights have delayed the ultimate resolution of this case.  Creston Moly first applied to the British Columbia Supreme Court for leave to appeal the arbitrator's decision and was denied.  Creston Moly then appealed to the British Columbia Court of Appeal which overturned the decision and granted leave to Creston Moly to appeal the arbitrator’s decision.  Creston Moly announced on May 6, 2011 that the substance of the appeal was heard and dismissed.  However, Creston Moly also stated its intention to appeal that decision to the British Columbia Court of Appeal.  Nearly three years after a supposedly “final” decision, the arbitrator’s decision is still subject to review.

Creston Moly is instructive.  It does not suggest that arbitration is bad and the court process is good or vice versa.  Rather, it suggests that an arbitration agreement should be approached in the same manner as other commercial agreements with an understanding of each process and an effort to tailor an arbitration agreement to the specific circumstance.  For example, parties should consider:

• The cost of the Arbitrator?  In the court system you do not have to pay for the Judge and the cost of an arbitrator can be a disincentive to arbitration.
• The speed of the process?  Arbitration may be faster.  However, if you are looking for a fast process, you should consider a number of issues up front to speed the arbitration process. 
• What Rules do you want to govern the arbitration?  Do you want to prohibit discovery of documents or witnesses?  Do you want to specifically name an Arbitrator or only a process for naming one?

All of these questions can substantially impact on the arbitration process. The most common Rules governing arbitration in British Columbia and Alberta provide an arbitrator with a great deal of discretion in setting the process for an arbitration.  Accordingly, there is a good chance an arbitration may emulate a court process unless the parties intially agree that they intend a different more limited process.

The moral of the story is that one size arbitration agreements do not fit all and to “look” before you leap into one.

A few months ago I posted on the legal intrigues surrounding the sale of Liverpool F.C.

I received a bunch of positive feedback and a significant amount interest on that topic. As you may recall, I also promised to update readers on the progress of the Hicks and Gillett lawsuit in the U.S. So, with that segue, here's what has happened…..

When we last left our tale, Hicks and Gillett had pledged to pursue their damages lawsuit in the US against the Royal Bank of Scotland, which had been quantified in the range of $1.6 billion over what they called an "epic swindle" - their being blocked by the High Court in enjoining the sale of Liverpool to NESV (New England Sports Ventures), now called Fenway Sports Group.

In late February, Hicks and Gillett applied to the High Court (the Honorable Mr. Justice Floyd - who had granted the anti suit injunction) to lift the anti-suit injunction which had been put in place, "on the basis of what appeared to me [Mr. Justice Floyd] to be the unconscionable conduct of the former owners in seeking to undermine the English proceedings."

To summarize the scoreline, Hicks and Gillett were drubbed.

Mr. Justice Floyd ruled that Hicks and Gillett could not pursue their lawsuit in the US (where obviously damages can be more punitive) without the express permission of the High Court in England; he also ruled that NESV, Sir Martin Broughton (former Liverpool chairman) and the Royal Bank of Scotland could pursue claims against Hicks personally….. But, I have jumped into the action a bit in medias res as they say, so, let me back up a tad…

Before the sale of Liverpool to NESV, the club itself had loans in excess of 235 million pounds to RBS and Wells Fargo and, it was commented on that the sale itself of the club was occasioned by the indebtedness. Accordingly, Broughton and RBS and NESV would clearly welcome the opportunity to pursue a claim against Hicks for his conduct while still owner.

So, when Hicks and Gillett went before the Court to lift the anti-suit injunction they also sought a "strike out or stay" application in respect of claims by Broughton against Hicks and Gillett. This claim was dismissed, paving the way for a claim against Hicks.

The Court ruled, " the reality of the situation is that the former owners have already started 2 sets of proceedings and openly asserted their intention to start more. They will undoubtedly start more proceedings if allowed to do so. There is a real threat that those proceedings will be in the U.S. I still find it difficult to imagine what possible real connection such a claim would have with any jurisdiction in the U.S. The dispute concerns an English asset, duties owned by English directors under English law to English companies and corporate governance arrangements governed by English law. I think the time has come when they need to state their case or accept that they do not have one."

….. Stay tuned for the current owner's next move……

Now, here’s another related story which touches on sport, law, and corporate governance.

As you may also recall from my prior Liverpool blog, the issue of foreign ownership of English football clubs is not every Englishman's cup of tea. And, as matters stand, 10 teams now have foreign ownership.

So, with that in mind, last week Stan Kroenke, an American businessman, increased his shareholdings in Arsenal F.C. (the Gunners to fans) to 62% and made an offer for the balance of the club. The club itself, an English sporting totem and valued in excess of 700 million pounds, is currently chasing the Premiership title (and Manchester United).

Kroenke, whose estimated worth is 1.7 billion pounds, also owns the NBA's Denver Nuggets, the NFL's St. Louis Rams, the NHL's Colorado Avalanche and MLS' Colorado Rapids. His wife's family is related to the Wal Mart empire and "Silent Sam" first became involved with Arsenal in 2007.

But here is where the legal fight may be on. The remaining 27% of Arsenal's shares are held by Uzbeki billionaire Alisher Usmanov who is apparently incandescent about Kroenke's latest corporate move….. Your move Mr. Usmanov…. Stay tuned."

On April 13–14, 2011, the Supreme Court of Canada will hear a reference involving a show down between the federal government and various provincial governments over the question of whether the proposed new national securities regulator is constitutionally valid.

Currently, the securities industry in Canada is primarily regulated through provincial securities commissions and the involvement of the federal government is minimal.  However, the federal Conservative government is looking to change this by way of its proposed national securities commission.  The federal government argues that the current system is outdated and inadequate to properly regulate what is now a national and international industry.

The federal proposal has been met with mixed views by the provinces.  While Ontario is on record as supporting the initiative, a number of provinces have expressed reservations and Alberta and Quebec have actively opposed the concept.  Both provinces submitted the issue to their respective Courts of Appeal by way of constitutional references and both the Alberta Court of Appeal (2011 ABCA 77) and the Quebec Court of Appeal (2011 QCCA 591) have recently held that the creation of a national regulator would be unconstitutional.  In response in part to provincial concerns, the federal government has referred the question to the Supreme Court of Canada.

The issue turns upon whether the regulation of the domestic securities industry is a matter of “property and civil rights” which is an area of provincial jurisdiction under the Constitution Act, 1867 or whether the modern reality of the securities industry is such that it warrants a national approach that can be justified under the federal “trade and commerce” power in the Constitution. 

The Alberta and Quebec Courts of Appeal both held that the regulation of the securities industry falls within provincial jurisdiction.  In contrast, leading constitutional scholar, Peter Hogg, has taken the view that the federal government can regulate because of the national importance of the industry.  In support of his position, he points to a previous Supreme Court of Canada decision that upheld the constitutionality of the federal competition laws. 

The Supreme Court’s decision will have a significant impact on the regulation of the securities industry in Canada.  Currently, Canada is the only G7 country without a national securities regulator.  However, even if the Supreme Court finds in favour of the federal government, provinces will still have the ability to opt out of the national regulatory system although the utility of one or two provinces going it alone in the face of a national system is questionable.

Regardless, in addition to impacting the regulation of the securities industry in Canada, the Supreme Court decision will cast light on the ever changing balance of federal/provincial powers under the Canadian constitution, a debate that has been ongoing since the time of Confederation.

The court process in Canada’s two western most provinces have much in common.  Prominently, new Rules of Civil Procedure has come into effect in both British Columbia and Alberta in the last 8 months.  Rules of Civil Procedure, often called Rules of Court, establish the procedures by which lawsuits are commenced and proceed in the superior courts of each province.

In British Columbia, the new Supreme Court Civil Rules came into effect on July 1, 2010.  This was the culmination of a long process which began with the B.C. Justice Review Task Force in March 2002.  The Task Force consulted with a broad range of groups including the Law Society of British Columbia, the Ministry of Attorney General and others to identify a range of potential reforms that could make the justice system more responsive, accessible and efficient.  It also formed several working groups, including the Civil Justice Reform Working Group. The working group released a report which outlined a vision for a streamlined civil justice system which an emphasis on proportionality (procedures designed to fit a specific case) and access to justice (ensuring cases are affordable).

This process led to the implementation of the new Supreme Court Civil Rules.  The main initiatives include a revised system of pleadings, a case planning conference in each case leading to a case planning order designed to implement case specific procedures and deadlines, modified rules for expert witnesses to ensure their independence and accountability, time limits on examinations for discovery, modifications on the requirements to produce documents and a mandatory trial management conference to streamline the ultimate trial process.

In Alberta, the new Alberta Rules of Court came into force on November 1, 2010.  The Rules are the result of a multi-year Rules Project, led by the Alberta Law Reform Institute.  The goal of the new Rules was to maximize their clarity, usability and effectiveness and to contribute to a fair, accessible, timely and cost effective civil justice system.

The new Alberta Rules of Court provide for major structural changes in the manner in which litigation proceeds in Alberta. Importantly, the Rules expressly set out how they are to be interpreted.  The goal is to make all precedent from the former Rules irrelevant and non-binding.  Structurally, a number of important changes are made to the litigation process including use of electronic service, service ex juris without court order, standardization of timing requirements, mandatory ADR, renaming of Examinations for Discovery as “Questioning” and expressly including undertakings arising from “Questioning” in the Rules.

To date, the experience under both new sets of Rules has been uneven.  Lawyers in both jurisdictions have not clearly adopted new practices in response to the new Rules.  For example, the more limited form of document discovery in British Columbia has not been evident and Lists of Documents have tended to be as inclusive as under the prior Rules.  In Alberta, the inclusion of mandatory ADR has been met with some skepticism with some simply seeing it as another procedural hurdle required prior to obtaining a trial date as opposed to a legitimate technique to resolve the dispute prior to trial.

Some time will clearly be required before it can be determined whether the new Rules have met the expectations that led to their implementation.  At this point, the jury remains out.

When Liverpool players take to the pitch, they are greeted by a chorus of cheers as tens of thousands of Liverpudlians sing “You’ll Never Walk Alone” - the Club’s theme. 

In the last 2 months, however, it was the form, tactics and results of lawyers off the pitch which had Liverpool supporters most vocal.  To try and do justice to football pundits, it would go something like this:  “Build-up play by Club’s current owners.  Oh, a strong purchase move by the would-be owners has the current owners playing defence … it’s one-way traffic, but, a couple of dodgy corporate tackles by the current owners … they are trying to block the sale … wait, the English Courts are having none of this blockage … but wait, an American referee is going to give them a restraining order … ball back to the would be-owners, audacious bid … they are going for it … GOAL!!” 

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The repercussions of the first Gulf War have now made their way to the courts of Canada. The Supreme Court of Canada has recently weighed in on whether Kuwait Airways Corp. ("KAC") could enforce in Canada a C$84 million judgment against the Republic of Iraq.

In 1990, Iraq invaded and occupied Kuwait. Iraq ordered its national airline to appropriate aircraft and equipment owned by KAC. After the war ended, KAC was able to recover some but not all of its aircraft and equipment. KAC brought an action for damages in the United Kingdom ("UK") and was eventually awarded a judgment of over C$1 billion against the Iraq national airline. In the course of the trial, it was determined the Republic of Iraq had controlled the defence of its national airline and, in doing so, has committed perjury, and had intentionly misled the court. The Republic of Iraq was added as a Defendant for the purposes of costs and an award was made against it for C$84 million.

In making this costs award, the UK court held that the Republic of Iraq did not have "sovereign immunity" from a judgment because it was engaged in a commercial enterprise as opposed to acting as a sovereign state. If the Republic of Iraq had been successful in this argument, the UK court would have been prohibited from issuing a judgment against it.

In Canada, the UK judgment against the Republic of Iraq is a foreign judgment which requires recognition by our courts before it can be enforced in Canada. KAC applied in Quebec for recognition so that it could enforce the judgement by seizing undelivered planes being manufactured by Bombardier. Both the Quebec Superior Court and the Quebec Court of Appeal held that the judgement could not be recognized in Canada.

The Supreme Court of Canada disagreed with the Quebec Courts and recognized the UK judgment. In Kuwait Airways Corp. v. Iraq 2010 SCC 40, the Supreme Court of Canada ruled that it must be proven in Canada that sovereign immunity does not apply and that a Canadian court cannot rely upon a foreign court’s determination of that issue. However, in this case, they found that Iraq’s involvement in the UK commercial litigation was distinct from its sovereign act of seizing the aircraft during war. As a result, sovereign immunity did not apply and the Court remitted the matter back to the Quebec courts for enforcement proceedings.

In British Columbia, enforcement of foreign judgments from certain "reciprocating states" is governed by the Court Order Enforcement Act. In particular, Part IV of that Act governs the enforcement of judgments from the UK. It provides for a summary court process allowing the registration of the foreign judgment in certain instances. With respect to judgments against foreign governments, however, the Supreme Court of Canada has said that in addition to those registration requirements, an applicant must also show that the foreign government is not entitled to sovereign immunity in Canada regardless of whether the foreign court that issued the judgment had already ruled that sovereign immunity did not apply.