Rulings of engagement

Contract interpretation? Privacy limits? Litigation protection? These are just some of the important legal zones affected by Canada’s recent high court rulings. Here is Listed’s annual look at the most consequential of those decisions and how Canadian listed companies might navigate the challenges they present
By Jim Middlemiss


The Supreme Court of Canada has once again had a busy year with a number of rulings that impact the business world. Over the past 12 months, the court has ruled on everything from when companies can revise their deal documents after the fact to correct unwanted tax consequences, to how far courts should go when reviewing decisions of administrative bodies and tribunals, with plenty of ground in between.

Eugene Meehan, a lawyer at Supreme Advocacy LLP in Ottawa, an SCC litigation boutique, notes that Canada’s top court has shown it is “not afraid to tackle extremely complex and highly contentious issues” relevant to Bay Street.

A former executive director of the Supreme Court, Meehan cites the SCC’s ruling in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., a contentious construction case involving the appeal of an insurance contract (explained below) as one example. “Ledcor proves that when the Supreme Court hears Canada’s business community knocking at the door, that door gets opened, and the answer is given.”

After speaking with Meehan and a number of other top lawyers and Canadian legal watchers, we’ve compiled our annual list of the most significant of these high court rulings from the perspective of our listed company readership. Your company’s legal counsel may be all over these, but we present them here because it’s essential that directors and C-suite management have firsthand knowledge of the new decisions and precedents most likely to shape your strategy and tactical decision-making in the months and years ahead.

1

CASE Canada (Attorney General) v. Fairmont Hotels Inc. and Jean Coutu Group (PJC) Inc. v. Canada (Attorney General)
COURT Supreme Court of Canada
ISSUE Limits on companies amending documents in tax neutral deals to avoid unintended tax consequences

In the fast-paced world of mergers and acquisitions, companies are often called on to make snap judgments about corporate and financial structures in a bid to make them tax neutral. Nonetheless, those decisions may have unwanted or unexpected ramifications.

Companies have usually been able to rely on what is known in the law as “rectification” to fix any mistakes that arise. However, thanks to two rulings in the last year, the rectification doorway has narrowed considerably. Companies will now have to demonstrate that they actually have a properly structured plan in place to minimize the tax impact of their deals, rather than simply stating in their deal documentation that they had the intention to do so, says Salvatore Mirandola, a tax partner at Borden Ladner Gervais LLP in Toronto. “What the cases have done is narrow the circumstances in which taxpayers can get rectification.”

The cases involved are Canada (Attorney General) v. Fairmont Hotels Inc. and Jean Coutu Group (PJC) Inc. v. Canada (Attorney General). Both involved structures designed to deal with currency exchange rates and were supposed to be tax neutral.

In Fairmont’s case, when it decided to sell itself to an investor group in 2006, it triggered a potential foreign exchange issue involving its subsidiaries and an unrelated 10-year reciprocal loan agreement with the Legacy Hotels REIT. Because the loan had more years to run, the company parked that problem to deal with at a later date. However, shortly after the sale, Fairmont unexpectedly had to wind up that loan.

Fairmont’s internal tax adviser then mistakenly relied on a wrong document and recommended a share-redemption plan, which triggered an unwanted foreign exchange gain that Fairmont sought to fix.

In the Jean Coutu case, a structure designed to allay investor concerns over exchange rate fluctuations involving the purchase of U.S. assets had the unwanted consequence of triggering a foreign accrual property income (FAPI) issue. CRA assessed Jean Coutu a $2.2-million tax bill that could have been avoided had a couple of extra steps been added to the structure. Both companies sought to have their deals rectified.

However, the SCC sided with the tax authorities, overruling an earlier 1999 case, Juliar v. Canada (Attorney General), which had made it easier for businesses to fix their mistakes after the fact.

The court held 7-2 in Fairmont that the company was unable to show how it planned to deal with the foreign exchange issue with its subsidiaries when it arose at the sale of the company. “Rectification is not equity’s version of a mulligan,” the court held. “Courts rectify instruments which do not correctly record agreements. Courts do not ‘rectify’ agreements where their faithful recording in an instrument has led to an undesirable or otherwise unexpected outcome.”

In Coutu, also a 7-2 ruling, the court held that Quebec’s Civil Code does not allow companies “to retroactively amend the documents recording and implementing their agreement in the circumstances of this case.

“There was no error in the way their agreement was expressed. Moreover, they did not turn their minds to FAPI or a particular means of avoiding it, but merely had a general intention that their agreement be tax-neutral.”

The court added if the companies “had turned their minds to FAPI and had agreed to a transactional scheme that, if recorded and implemented properly, would have accomplished the goal of neutralizing currency fluctuations while also preventing the generation of FAPI, it would be appropriate to permit the written documents related to the transactions to be amended if that common intention was improperly transcribed in them. But this is not what happened.”

Mirandola says the days of tying up loose ends after the fact are over. “You need to develop a specific plan for dealing with the tax before doing the transaction. A general intention of achieving tax results is not enough to get rectification.”

2

CASE Edmonton (City) v. Edmonton East (Capilano) Shopping Centres Ltd. COURT Supreme Court of Canada
ISSUE Extent of deference given to Canadian administrative agencies by appeal courts when reviewing their decisions

Sometimes it doesn’t pay to appeal your tax assessment. That’s what one Edmonton mall owner discovered, after being ordered to pay $10 million more than the original assessment, in a ruling that could have far-reaching effects when it comes to fighting decisions made by federal, provincial and municipal administrative boards and tribunals.

Every day, these quasi-legal bodies make decisions that impact businesses on everything from taxes to licenses, health and safety, transportation, securities law and human rights issues. “Most regulations that businesses have to comply with are made by administrative agencies, not by Parliament or provincial legislatures,” notes Paul Daly, a law professor at Cambridge who runs the Administrative Law Matters blog and follows Canadian legal developments.

The challenge is what happens if a company doesn’t like a ruling? How far can judges go in overturning an administrative body’s finding? Do agencies have to be correct in their findings, or do they only need to make reasonable decisions? It’s a fine distinction known as the standard of review and remains one of the open sores in administrative law.

In Edmonton (City) v. Edmonton East (Capilano) Shopping Centres Ltd., the Supreme Court of Canada split 5-4 on the standard that should be applied when reviewing a decision of the city’s Assessment Review Board. The majority held that a reasonableness standard applies, suggesting courts will be deferential to the findings of agencies and tribunals. The November ruling has since been cited in 82 cases.

The city assessed tax for the Capilano mall at $31 million; the company disputed the assessment, seeking a reduction to $22 million. The city discovered an error and determined the mall should have been classified as a power centre, and the value of the rent from WalMart Canada should have been assessed at $11.50 a square foot, not $3.50. So at Capilano’s appeal, the city asked the Assessment Review Board to raise the tax to $45 million. The board landed on a $41-million reassessment. The company appealed and won at Alberta Superior Court and Appeal Court levels, but the Supreme Court overruled them.

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WANT MORE? Our long list of top rulings included five more important decisions. We’ve summarized them here: “Rulings pt. 2: More orders from the court.”
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Writing for the majority, Justice Andromeche Karakatsanis said the reasonableness standard applies, noting that a “presumption of deference on judicial review respects the principle of legislative supremacy and the choice made to delegate decision-making to a tribunal, rather than the courts. A presumption of deference on judicial review also fosters access to justice to the extent the legislative choice to delegate a matter to a flexible and expert tribunal provides parties with a speedier and less expensive form of decision-making.”

Daly says “reasonableness means that there is in most cases a range of possible and acceptable outcomes. So the agency gets to pick and choose between the different possible interpretations that would further its policy objectives.”

The challenge, he says, is that when companies don’t like an administrative agency’s decision, it’s hard for lawyers to gauge how an appeal would fly. “All a lawyer can say is that it looks like this interpretation of the law falls within a reasonable range. It is difficult to say how large the range is or how small the range is.

“I think the lesson of this case and a lot of other administrative law cases the Supreme Court of Canada has decided over the last couple of decades is that when you are in front of an administrative agency and they are interpreting their powers, they are going to get a lot of leeway.”

3

CASE Royal Bank of Canada v. Trang
COURT Supreme Court of Canada
ISSUE Permissibility under privacy law to disclose someone’s personal financial information to further debt collection

One of the biggest challenges a company faces is collecting on a debt. A second is dealing with privacy laws, such as the Personal Information Protection and Electronic Documents Act (PIPEDA). Combine the two and it can get real messy. It’s no wonder, then, that the Supreme Court weighed in on the case of Royal Bank of Canada v. Trang.

In 2008, the Trangs borrowed $35,000 from Royal and defaulted on the loan. In 2010, Royal obtained a judgment for $26,000 plus interest and costs. The Trangs owned property in Toronto and a first mortgage was filed in 2005 for $262,500, which was held by Scotiabank. Royal filed a writ of seizure and sale with the sheriff to sell the home. However, the sheriff refused without first obtaining a mortgage discharge statement from Scotiabank. Such a statement is necessary so the sheriff understands what Scotiabank’s interest is in the property and what the rights are between it and Royal when splitting proceeds.

In a bid to get the mortgage discharge statement, Royal served the Trangs in 2011 with an order to attend an examination, but the Trangs did not attend. So Royal turned to Scotiabank, but it refused to provide the document without the Trang’s consent because it said the statement was protected from disclosure by PIPEDA. In 2012, Royal again served the Trangs, who did not appear, so it sought a court order compelling Scotiabank to produce the document.

The Trang case is noteworthy on a few of fronts. First, the Supreme Court of Canada used it to overturn an earlier Ontario case, Citi Cards Canada Inc. v. Pleasance, where a credit card company was prevented from obtaining a mortgage discharge statement because it was personal information under PIPEDA. That case had never reached the Supreme Court, and so had stood as an Ontario precedent affecting subsequent collections disputes.

Second, the Supreme Court held that disclosure was necessary to comply with an order of the court and that fell under one of the exceptions under PIPEDA that permits disclosure. It noted that a creditor “should not be required to have to undergo a cumbersome and costly procedure to realize its debt.”

Third, the court also found the Trangs “impliedly consented” to such disclosure when they took out a mortgage because information about the mortgage is registered in a public record. The SCC held it was “less sensitive” information and a “reasonable mortgagor” would know that information about their mortgage would be disclosed to a judgment creditor.

Chris Stanek, a litigator at Gowling WLG in Toronto, says that seizing and selling property is one of the best “avenues of collection and enforcement of judgments against private individuals.” However, the Citi Card case created havoc when it came to collections. The SCC has now sorted out that mess and he says that should make it easier for companies to enforce judgments related to things like mortgages or other loan agreements, where a company has a security interest in personal property that is registered with a government authority.

Stanek says the implied consent finding is also important for privacy law, as the court discusses when implied consent arises that would justify disclosure of personal information. However, Stanek warns that it’s not ubiquitous. “There’s a bit of caution to be had here. I don’t think in every circumstance of a debt or loan that implied consent under PIPEDA would be found.”

4

CASE Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co.
COURT Supreme Court of Canada
ISSUE Treatment of take-it-or-leave-it standard form contracts by courts when under appeal

In 2015, we told you about the sleeper case Sattva Capital Corp. v. Creston Moly Corp., which dealt with how contracts should be interpreted. It was a major case that has been cited in 634 rulings. In it, the SCC rejected the “historical approach to contract interpretation,” and held appeal courts should be deferential to lower court rulings when it comes to contracts. It gave trial judges wider latitude to consider the “factual matrix” around the formation of a contract, and said appeal courts should be loath to interfere with lower court findings.

Well, the court has now ruled that standard form contracts, also known as contracts of adhesion, where one party sets the term and the other can take it or leave it, fall outside the Sattva case and will draw more scrutiny on appeal. In Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., the court considered an insurance policy and whether it excluded coverage for the costs of making good faulty workmanship after window cleaners used the wrong tools and scratched the windows of a building under construction. The general contractor claimed under its insurance policy to replace the windows, but the insurer denied the claim and then lost at the SCC.

Appeal courts have been mixed on whether the Sattva reasonableness standard of contract review extended to popular standard form contracts—things like purchase-sale agreements, insurance policies, indemnities and warranties, franchise agreements, and distribution agreements.

Meehan, who argued the case for Ledcor, says the SCC clarified that and backed off the Sattva approach for standard form contracts. Instead, it held that the standard of review was “correctness,” meaning that appeal courts in fights over standard form agreements are more likely to undertake a review of a lower court ruling.

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WANT MORE? Our long list of top rulings included five more important decisions. We’ve summarized them here: “Rulings pt. 2: More orders from the court.”
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Meehan says the case is “not a tectonic plate shift, but definitely a small earthquake worth watching.” It’s already been cited 58 times since the fall.

“Ledcor is important because so many commercial contracts—everything from getting your shoes fixed to buying an aircraft—take the form of standard form contracts.”

He says companies should be “re-examining the language contained in any and every standard form contract to protect their clients from the heightened risk of judicial scrutiny.”

The court noted that the “importance of the factual matrix” carries less weight with standard form contracts, since they are generally not negotiated, but rather are a “take-it-or-leave-it proposition.” Moreover, standard form contracts have great precedential value in the marketplace, further justifying a correctness standard of review.

5

CASE Canada (Attorney General) v. Chambre des notaires du Québec; Lizotte v. Aviva Insurance Company of Canada
COURT Supreme Court of Canada
ISSUE Use of privilege to withhold confidential information from authorities seeking it for use in investigations

Another area of note involves a pair of rulings where the SCC bolstered “privilege,” a defensive mechanism used to protect sensitive information from being disclosed to other parties. This is an important area for companies involved in litigation or subject to attempts by third parties, such as government or regulators, to gain access to sensitive information.

In Canada (Attorney General) v. Chambre des notaires du Québec, the Supreme Court held that Quebec notaries are the equivalent of corporate lawyers and are covered by solicitor-client privilege. The court further found that such privilege is paramount in our justice system and should only be violated in rare circumstances. That case involved attempts by the CRA to get at client tax information through notaries using search warrants under the Income Tax Act. The court held that was an unjustified search and seizure.

In Lizotte v. Aviva Insurance Company of Canada, the court addressed litigation privilege. A Quebec regulator of insurance adjusters demanded information about claims from an insurance company as part of an investigation into an adjuster’s handling of a file, which was the subject of a regulatory complaint. The insurer provided some information, but claimed litigation privilege over other information. The insurance company prevailed at the SCC.

The court held that litigation privilege is distinct from solicitor-client privilege and can be asserted against third parties. According to the ruling, while solicitor-client privilege protects relationships, litigation privilege “is to ensure the efficacy of the adversarial process; solicitor-client privilege is permanent, whereas litigation privilege is temporary and lapses when the litigation ends.” As such, it applies to unrepresented parties and covers non-confidential documents and is not directed at communications between solicitors and clients, but protects documents and communications prepared for litigation.

Mahmud Jamal, a litigator at Osler, Hoskin & Harcourt LLP in Toronto, who acted for an intervener in both cases, says the rulings are notable because “they are decisions from a relatively new generation of Supreme Court judges affirming the robust protections of solicitor-client privilege and enhancing the protections of litigation privilege.” He says the concern was that by agreeing to hear the appeals, the SCC might backtrack on the scope of privilege. “They are not backtracking at all and continue to robustly protect privilege.”

Illustration: Pete Ryan

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