Have a Contract in Canada? Your Class Action Risk is Greater Than You May Think

Non-Canadian companies: welcome to the Canadian class action party. In recent years, Canadians have increasingly begun to recognize and actively manage the major business risk posed by class actions, as more and more businesses have found themselves facing class actions in Canadian jurisdictions. But that growing risk does not stop at the Canadian border. Companies that do business in Canada”or even that simply have a contract formed in Canada or some other Canadian connection”should know that they can now be dragged into a Canadian class action in circumstances that might surprise them.

Traditionally, courts could assert jurisdiction over foreign defendants only if they were present in or had consented to the relevant jurisdiction. In a sharp break from the traditional rules, Canadian courts have come to recognize a third basis for asserting jurisdiction where there is a "real and substantial connection" between a dispute and the province the courts of which are asked to take jurisdiction over the dispute. Much judicial ink has been spilled over what kinds of connections qualify as real and substantial ones.

In 2012, the Supreme Court of Canada brought some clarity to the area. In Van Breda v Village Resorts Ltd, it held that at least one factor must connect the legal situation or subject matter of the litigation to the province. The Supreme Court identified four non-exhaustive factors that are presumed to establish a real and substantial connection: (i) the defendant is domiciled or resident in the province; (ii) the defendant carries on business in the province; (iii) a tort was committed in the province; and (iv) a contract connected with the dispute was made in the province. If one of these "presumptive connecting factors" is established, the onus shifts to the defendant to establish facts that demonstrate that the presumptive connecting factor does not point to any real relationship between the dispute and the province.

In some ways, the Supreme Court's discussion of presumptive connecting factors in Van Breda raised more questions than it offered answers. For example, what does it mean for a contract made in a province to be "connected" with a dispute under the fourth presumptive connecting factor in Van Breda? At first glance, that factor seems to be almost circular: a dispute will be connected with a Canadian province if there is a contract in the province that is connected to the dispute. Clear as mud. What kind of connection is needed?

On June 15, 2016, the Supreme Court considered the boundaries of that fourth presumptive connecting factor, in the class action context, in Lapointe Rosenstein Marchand Melanson LLP v Cassels Brock & Blackwell LLP. That case, which was started in Ontario, related to the fallout from the Canadian Government's decision to bail out General Motors of Canada Ltd. in the wake of the 2008 financial crisis. As part of the bailout, GM was required to close dealerships across Canada, so it entered into Wind-Down Agreements with more than 200 dealers. A proposed class action was commenced on behalf of the dealers against the law firm Cassels Brock & Blackwell LLP for allegedly failing to provide appropriate legal advice to the dealers in connection with the Wind-Down Agreements.

Cassels Brock added 150 law firms, which are based across Canada and provided independent legal advice to the dealers, as third-party defendants. Those firms (especially 32 firms based in Québec) challenged the jurisdiction of Ontario's courts and denied that any real and substantial connection between the third-party claims and Ontario existed. Cassels Brock responded that the fourth presumptive connecting factor from Van Breda was engaged: contracts connected with the dispute (the Wind-Down Agreements) had been made in Ontario.

The Supreme Court agreed with Cassels Brock. For a seven-judge majority, Justice Abella wrote that "all that is required is a connection between the claim and a contract that was made in the province where jurisdiction is sought to be assumed". She did not accept that the third-party law firms had to be parties to the contracts. Nor did she accept that the alleged liability had to flow from their contractual obligations. In her view, such restrictive glosses on the fourth presumptive connecting factor would "unduly narrow the scope of Van Breda" and undermine "the flexibility required in private international law".

In the GM case, the Wind-Down Agreements were enough to bring the third-party claims within the scope of the fourth presumptive connecting factor. Law firms from across Canada could thus be properly included in the Ontario class action. The flexible approach to jurisdiction expressed by Justice Abella is likely to compound existing case law that expands the ways in which non-Canadian companies can be dragged into Canadian class actions. Courts had already indicated, for example, an increasing willingness to accept that a foreign company carries on business in Canada through its Internet activities or the activities of a local subsidiary or related company, leading to potentially surprising assertions of jurisdiction.

The GM case thus contains a hidden warning to non-Canadian companies: if you have a contract in Canada”or even if your conduct could merely bring you within the penumbra of a Canadian contractual relationship”you would do well to consider your Canadian class action risk profile. Companies that ignore the trend toward "flexibility" in private international law in Canada may be facing more class action risk than they think.

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