Recent Decision Requires Defendants to Plead in Class Action Prior to Certification

The common convention in class proceedings in Ontario has been for defendants to not deliver a Statement of Defence until after the case has been certified by the court as being appropriately commenced as a class proceeding. The practice has been sanctioned by the courts for at least the last 15 years, largely in recognition of the fact that the issues to be tried in a common issues trial will not be known until after certification (if it is granted).

In reasons released on July 14, 2011, Justice Paul Perell of the Ontario Superior Court of Justice stated that it "is time to revisit the convention that defendants do not deliver a Statement of Defence before the certification motion". Even though leave had not yet been granted to commence the secondary market liability claim (as is required under the Securities Act), Justice Perell ordered all of the defendants (even those who were not moving or responding parties on the motion) to deliver Statements of Defence prior to certification.

If this decision is adopted by other courts in Ontario and becomes the prevailing orthodoxy, it is entirely foreseeable that Rule 21 motions to strike and Rule 20 summary judgment motions will be brought with increasing frequency prior to certification. Further, in the context of secondary market liability Securities Act claims, the decision will further water down the leave requirement in the statute, effectively making that requirement nothing more than leave to commence discoveries for a claim that has already advanced passed the pleadings stage.

The Motion for Particulars

In Pennyfeather v. Timminco, the purported representative plaintiff commenced an action alleging negligence and negligent misrepresentation against Timminco Limited and certain of its officers and directors. The statement of claim alleged that the defendants issued or authorized the issuance of public statements containing material misrepresentations that affected the price of Timminco's shares. In its pleading, the plaintiff sought leave to assert secondary market misrepresentation claims pursuant to Part XXIII.1 of the Securities Act.

One group of defendants moved for particulars of certain allegations in the statement of claim, taking the position that the particulars were necessary to respond on certification. The plaintiff argued that an order for particulars was premature because, under the Rules of Civil Procedure, particulars are only required for the purposes of pleading. Because of the procedural convention in class proceedings to delay delivery of the statement of defence until after certification, the plaintiff argued that he should not be ordered to provide particulars when no defence is currently required. Justice Perell ordered that most of the requested particulars be furnished, but as a quid pro quo also ordered the defendants to defend the action prior to certification.

Reasons of Justice Perell

In his reasons, Justice Perell rejected the plaintiff's contention that the certification motion determines which causes of action and common issues will proceed to trial, and therefore influences the content of the statement of defence. To the contrary, Justice Perell said that all causes of action pleaded have the potential to be tried, not only those certified for the common issues trial, stating that non-certified causes of action are not struck out of the statement of claim. While recognizing that the common issues trial and preceding discovery are typically confined to the common issues, Justice Perell noted that restricting production and discovery in this manner is “not an absolute rule”.

In ordering the defendants to defend, Justice Perell observed that the convention delaying delivery of the defence until after certification may run contrary to the legislature's intention as expressed in subsection 2(3) of the Class Proceedings Act. Subsection 2(3) provides that a certification motion be brought within 90 days of delivery of the last statement of defence or notice of intent to defend, or within 90 days of the deadline to defend, or subsequently with leave of the court. Given the alternative formulations in this subsection, and the fact that certification is rarely sought within 90 days of the deadline to defend, it is not clear how the statute supports the conclusion reached by the court. The statute equally supports the current practice of allowing the certification motion to be brought after the deadline to defend has expired without the delivery of a statement of defence.

In ordering that statements of defence be provided, Justice Perell identified several perceived advantages to closing the pleadings prior to certification. He noted that closing pleadings may narrow or eliminate the first inquiry on the test for certification, namely that the plaintiff disclose a cause of action. He noted that closing pleadings will foreclose any subsequent attack on irregularities in the statement of claim. He also noted that closing pleadings prior to certification will encourage defendants to bundle all technical and substantive challenges to the statement of claim into one motion. According to Justice Perell, if defendants are encouraged to bring comprehensive pleadings challenges prior to certification, then the requirement on certification for the plaintiff to show a cause of action also could be resolved prior to certification.

In Timminco, the statement of claim was deficient in many respects, meriting particulars, and by ordering particulars Justice Perell assisted the parties by narrowing issues for certification. Whether the parties were equally assisted by ordering the delivery of early defences may be a matter for debate.

Additional Observations

This decision represents a marked departure from the prevailing procedure in class actions. It remains to be seen whether other judges in Ontario and elsewhere in Canada will follow this decision. In a 1996 decision, now Chief Justice Winkler held that “in the preponderance of cases the statement of defence will not be required for determination of the certification motion.”¹ In that case, the court also accepted submissions that a statement of defence may have to be “entirely reformulated” in response to the outcome of a certification hearing, and as such, would have served “no useful purpose” prior to certification in that case. This decision has been followed and applied across Canada. In addition to Chief Justice Winkler's comments, there is the additional issue in secondary market liability claims, where the plaintiff must seek leave to commence the secondary market claim. In Timminco, the defendants are required to actively defend, even though leave to assert the claim has yet to be granted.

While Justice Perell reasoned that early defences would streamline class actions, the decision could have the opposite effect. The dominant view in class actions today is that the first motion in a class proceeding should be the certification motion.² Consistent with the practice that defers defences until after certification, current practice limits Rule 20 summary judgment motions prior to certification. As summary judgment motions can be brought only after a defence is filed, the logic in deferring summary judgment motions may be lost if defendants are required to plead prior to certification.

In addition, in his reasons, Justice Perell expressly invited class action defendants in future cases to bring Rule 21 motions to strike in advance of the certification motion, whereas there had been a growing body of jurisprudence standing for the proposition that the first motion in a class action should be the certification motion (which itself contains a requirement to consider whether the pleading discloses a cause of action). Class action defendants are very likely to accept this invitation, which could cause certification motions to be put off to a much later date in a class proceeding.

Finally, until we have appellate court guidance or the adoption of a uniform practice among trial court judges managing class actions, this decision will create uncertainty that will serve as a platform for motions practice in Ontario class actions, and possibly in class actions in other provinces.

The authors are counsel to one of the defendants in the Timminco proceeding, but did not participate in the motion discussed in this article.

Notes

1. Mangan v. Inco Ltd. (1996), 30 O.R. (3d) 90 (Gen. Div.) at paras. 14-15.
2. Attis v. Canada (Minister of Health) (2005), 75 O.R. (3d) 302 at para. 7.