Injunctions Primer FOR LITIGATORS
chair
Jason Squire Lerners LLP
November 1, 2016
*CLE16-0110101-a-puB* DISCLAIMER: This work appears as part of The Law Society of Upper Canada’s initiatives in Continuing Professional Development (CPD). It provides information and various opinions to help legal professionals maintain and enhance their competence. It does not, however, represent or embody any official position of, or statement by, the Society, except where specifically indicated; nor does it attempt to set forth definitive practice standards or to provide legal advice. Precedents and other material contained herein should be used prudently, as nothing in the work relieves readers of their responsibility to assess the material in light of their own professional experience. No warranty is made with regards to this work. The Society can accept no responsibility for any errors or omissions, and expressly disclaims any such responsibility.
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Library and Archives Canada Cataloguing in Publication
Injunctions Primer for Litigators
ISBN 978-1-77094-178-6 (Hardcopy) ISBN 978-1-77094-177-9 (PDF)
INJUNCTIONS PRIMER FOR LITIGATORS
Chair: Jason Squire, Lerners LLP
November 1, 2016 9:00 a.m. to 12:00 p.m. Total CPD Hours = 2 h 30 m Substantive + 30 m Professionalism
Donald Lamont Learning Centre The Law Society of Upper Canada 130 Queen St. W. Toronto, ON
SKU CLE16-01101
Agenda
9:00 a.m. – 9:20 a.m. Welcome and Opening Remarks
Jason Squire, Lerners LLP
9:20 a.m. – 10:20 a.m. Injunctions in the Litigator’s Toolbox
Moderator: Jason Squire, Lerners LLP
Panelists: Monique Jilesen, Lenczner Slaght LLP Dom Magisano, Lerners LLP Hendrik Nieuwland, Shields O’Donnell MacKillop LLP
10:20 a.m. – 10:30 a.m. Go Ahead and Ask Us - Q & A Panel
1
10:30 a.m.-10:50 a.m. Coffee and Networking Break
10:50 a.m. – 11:50 a.m. Understanding Strategic Considerations and Legal and Ethical Obligations (30 minutes )
Moderator: Jason Squire, Lerners LLP
Panelists: The Honourable Duncan Grace, Superior Court of Justice Rocco DiPucchio, Lax O’Sullivan Lisus Gottlieb LLP Kim Mullin, Weir Foulds LLP
11:50 a.m. – 12:00 p.m. Go Ahead and Ask Us – Q & A Panel
12:00 p.m. Program Ends
2
INJUNCTIONS PRIMER FOR LITIGATORS
November 1, 2016
SKU CLE16-01101
Table of Contents
TAB 1 Receiverships – Not Just a Tool for the Banks…………………..1 – 1 to 1 – 13
Domenico Magisano, Lerners LLP Christopher Shorey, Lerners LLP
TAB 2 Injunctions and Norwich Orders in the Employment Context……………………………………………………………………………...2 – 1 to 2 – 8
Hendrik Nieuwland, Shields O’Donnell MacKillop LLP
TAB 3 Strategic and Ethical Considerations in Seeking Injunction Relief……………………………………………….……………..3 – 1 to 3 – 15
Rocco DiPucchio, Lax O’Sullivan Lisus Gottlieb LLP Ryann Atkins, Lax O’Sullivan Lisus Gottlieb LLP
TAB 4 Injunctions: Understanding Legal and Ethical Obligations……………………………………………………………………..4 – 1 to 4 – 10
Kim Mullin, WeirFoulds LLP Lia Boritz, WeirFoulds LLP
TAB 5 Relevant Resources……………………………………..…………………….5 – 1 to 5 – 1
TAB 1
Injunctions Primer for Litigators
Receiverships – Not Just a Tool for the Banks
Domenico Magisano, Lerners LLP Christopher Shorey, Lerners LLP
November 1, 2016
Receiverships – Not Just a Tool for the Banks Domenico Magisano and Christopher Shorey, Lerners LLP
In our current legal environment when a receivership is mentioned the most common visual is that of an enforcement step taken by a secured creditor after its debtor defaults on its loan.
While a receivership is still a form of injunctive relief, it has become such a common proceeding in insolvency circles that our commercial courts and insolvency practitioners have created a set of standard form Orders1 to ensure consistency in the relief provided by the court.
While receiverships are still quite prevalent in insolvency circles, in recent years the use of receiverships has been expanded both in terms of use and the flexibility of powers provided by the court. In short, receiverships are not merely liquidation tools used by secured lenders; receiverships are increasingly being used as investigative tools, business management tools, and yes, judgment enforcement tools.
With this added scope have come added legal and practical concerns together with added questions about the scope of a Receiver’s appointment: Receivers are under continual scrutiny by both the court and other stakeholders both in terms of their actions and their costs, all while being asked to manage what are often difficult personal and business dynamics. The recent
Court of Appeal decision in Akagi v. Synergy Group (2000) Inc.2 (which will be discussed in detail later in this paper) should serve as a cautionary tale to receivers (and the lawyers who represent them) about the ramifications of a receiver straying beyond its mandate.
This paper will introduce the reader to receivership proceedings other than those commenced under the Bankruptcy and Insolvency Act3, the differences in the test for the appointment of a receiver under the BIA and other legislation, the ways that a receivership can assist the litigation process and the ramifications when a receiver wanders too far from its original mandate.
1http://www.ontariocourts.ca/scj/practice/practice- directions/toronto/#Commercial_List_Forms_including_Model_Orders 2 2015 ONCA 368 (hereinafter “Synergy Group”) 3 RSC 1985 c. B-2 (the “BIA”)
1 - 1 BIA Receiverships and Other Receiverships
Any analysis of receiverships must start from the baseline that it is just another form of injunctive relief. As such the test for appointment of a receiver is the same as the test for obtaining a Mareva injunction or an Anton Piller order. Accordingly the tri-part test as set out in
RJR-MacDonald4 remains applicable. That test requires:
(i) a preliminary assessment of the merits of the case to ensure that there is a serious issue to be tried;
(ii) a determination that the moving party would suffer "irreparable harm" if the motion is refused, and "irreparable" refers to the nature of the harm suffered rather than its magnitude; and
(iii) an assessment determining which of the parties would suffer greater harm from the granting or refusal of the remedy pending a decision on the merits - that is, the "balance of convenience".
However, the courts have also recognized a variety of factors unique to receiverships that should be considered when determining whether it is ‘just and convenient’ to grant a receiver:
(a) the appointment of a receiver to preserve assets for the purposes of execution is extraordinary relief, which prejudges the conduct of a litigant, and should be granted sparingly;
(b) the appointment of a receiver for this purpose is effectively execution before judgment and to justify the appointment there must be strong evidence that the plaintiff's right to recovery is in serious jeopardy;
(c) the appointment of a receiver is very intrusive and should only be used sparingly, with due consideration for the effect on the parties as well as consideration of the conduct of the parties;
(d) in deciding whether to appoint a receiver, the court must have regard to all the circumstances, but in particular the nature of the property and the rights and interests of all parties in relation thereto; and
(e) where the plaintiff's claim is based in fraud, a strong case of fraud, coupled with evidence that the plaintiff's right of recovery is in serious jeopardy, will support the appointment of a receiver of the defendants' assets.5
4 RJR — MacDonald Inc. v Canada (Attorney General), 1994 CarswellQue 120 (SCC), at para 48; Anderson v Hunking, 2010 ONSC 4008, at para 15(e) 5 Anderson v Hunking, 2010 ONSC 4008, at para 15; GE Real Estate v Liberty Assisted Living, 2011 ONSC 4136, at para 88
1 - 2 While the above test is generally applicable the courts have generally held that when a secured creditor is seeking to appoint a receiver over its debtor and its security documentation provides for the appointment of a receiver on default, the applicant need not demonstrate irreparable harm6. The nature of the receivership order becomes less extraordinary and less grounded in equity when the parties have contracted for a receiver as a term of their agreement.7 As a result, receiverships in the realm of secured transactions and the BIA have become (perhaps justifiably so) much more commonplace.
Notwithstanding, there are other statutes and other instances where a receivership can be appropriate, even helpful, in resolving disputes.
1. Receiverships pursuant to the Courts of Justice Act8
Section 101 of the CJA states:
In the Superior Court of Justice, an interlocutory injunction or mandatory order may be granted or a receiver or receiver and manager may be appointed by an interlocutory order, where it appears to a judge of the court to be just and convenient to do so.
Section 101 is quite broad and has been used to appoint receivers in aid of execution on a judgment9 and in instances where an appointing party isn’t seeking possession of the respondent’s assets, but wishes a receiver to have investigative powers over the respondent’s
6 Bank of Nova Scotia v Freure Village on Clair Creek, 1996 CarswellOnt 2328, at para 11 7 Bank of Montreal v Sherco Properties, 2013 ONSC 7023, at para 42; Bank of Montreal v Carnival National Leasing Ltd., 2011 ONSC 1007, at paras 25 & 27 8 R.S.O 1990 c. C. 43, as amended (“CJA”) 9 Haunert-Faga v Faga, 2013 ONSC 1581; Akagi v Synergy Group (2000) Inc., 2015 ONCA 368; Nashaat Aly et al v Adel Tohamy et al, Ont Sup Ct File CV-13-10311-00CL, Order of the Honourable Justice Brown, as he then was, December 17, 2013 (“Fuller Landau”)
1 - 3 business and affairs (colloquially referred to as a “non-possessory receiver” or an “investigative receiver”).10
Receiver in Aid of Execution A judgment creditor can apply to the court for a receiver in aid of execution of judgment pursuant to s. 101 of the CJA. A receiver in aid of execution requires, at the least, “evidence that the creditor's right to recovery is in serious jeopardy.”11 More specifically, there must be special circumstances which render the normal methods of execution ineffective or impractical.12
A receiver in aid of execution does not carry with it some of the concerns generally associated with receivers as it is not an injunction pending a determination of the issues on the merits.
That being said, a receivership is still an exceptional order that must be granted sparingly. The applicant and the receiver must be cautious not to overstep the boundaries of their appointment, discussed below.
Investigative Receiver An investigative receivership is non-possessory in that the receiver does not take control of the assets and business of the company. This can be a mutually beneficial process as it can permit a mutually agreeable third party to investigate the company’s affairs under court supervision, while allowing the company to operate in the ordinary course.
Although not the first to appoint such a receiver, Justice Brown, as he then was, seems to have coined the phrase “investigatory receivership” in a pair of cases from 2009 and 2011.13 The
10 Akagi v Synergy Group (2000) Inc., 2015 ONCA 368. at para 75; Loblaw Brands Ltd. v Thornton, [2009] O.J. No. 1228 (Ont SCJ); General Electric Canada Real Estate Financing Holding Co. v Liberty Assisted Living Inc., 2011 ONSC 4136 (Ont SCJ [Commercial List]), aff'd 2011 ONSC 4704 (Ont Div Ct) 11 Akagi v Synergy Group (2000) Inc., 2015 ONCA 368, at para 67 12 Haunert-Faga v Faga, 2013 ONSC 1581, at para 30 13 Loblaw Brands Ltd v Thornton, 2009 CarswellOnt 1588 (Sup Ct); General Electric Canada Real Estate Financing Holding Co v Liberty Assisted Living Inc, 2011 ONSC 4136 (Ont SCJ [Commercial List]), aff'd 2011 ONSC 4704 (Ont Div Ct)
1 - 4 Court of Appeal in Synergy Group provided a list of principles to be applied when considering whether to grant an investigatory receivership:
a) the appointment of the investigative receiver is necessary to alleviate a risk posed to the plaintiff's right to recovery;
b) the primary objective of investigative receivers is to gather information and "ascertain the true state of affairs" concerning the financial dealings and assets of a debtor, or of a debtor and a related network of individuals or corporations;
c) generally, the investigative receiver does not control the debtor's assets or operate its business, leaving the debtor to continue to carry on its business in a manner consistent with the preservation of its business and property; and
d) in all cases the investigative receivership must be carefully tailored to what is required to assist in the recovery of the claimant's judgment while at the same time protecting the defendant's interests, and to go no further than necessary to achieve these ends.
Justice Brown in Loblaw Brands compared aspects of investigatory receiverships to Anton
Piller14 orders, and in this sense underscored the injunctive nature of this type of receivership and its focus on the preservation of evidence, rather than assets. He also emphasized that an investigatory receiver should be granted no more power than what is available under an Anton
Piller order to enter and search residences.15
2. Receiverships under the Securities Act16
Section 129 of the Securities Act states:
The Commission may apply to the Superior Court of Justice for an order appointing a receiver, receiver and manager, trustee or liquidator of all or any part of the property of any person or company.
14 An Anton Piller order gives the plaintiff access to the defendant's premises to inspect documents and remove items to which the plaintiff asserts a proprietary claim (Akagi v Synergy Group (2000) Inc., 2015 ONCA 771 at fn 2) 15 Loblaws Brands Ltd. v Thornton, 2009 CarswellOnt 1588, at para 21 16 R.S.O. 1990 c. S.5, as amended (“Securities Act”)
1 - 5 Upon an application by the Commission, the court must be satisfied that the appointment of a receiver is either in the best interests of the creditors or investors or that a receiver is appropriate for the due administration of securities law.17
The Best Interests of Creditors and Investors The criteria used for determining whether a receivership is in the best interests of creditors and investors are broad: all of the circumstances and the context of those circumstances should be considered.18 Moreover, the interests of all stakeholders, not only creditors, should be considered. This includes, for example, the interests of the company itself that is being considered for receivership.19 The case law has established several factors that may be considered under this first branch of the test:
(a) is there a history of mismanagement; were investment decisions being made in the best interests of creditors;
(b) is there evidence of a tangible alternative resolution, for example through credible refinancing efforts;
(c) are the creditors at risk if the status quo is preserved;
(d) is a receiver in a better position to protect creditors’ interests than the current leadership; and
(e) is there evidence of regulatory breaches or evidence that assets purchased with investors’ funds have been compromised such that a receiver could step in and provide an independent and verifiable analysis.20
These factors illustrate that, like with the BIA, the Securities Act focuses on the interests of creditors or investors when it considers appointing a receiver.
17 Securities Act, s 129. 18 Ontario (Securities Commission) v Sextant Strategic Opportunities Hedge Fund LP, 2009 CarswellOnt 4241, at para 54 (“Sextant”) 19 Sextant, at para 54; Ontario (Securities Commission) v Factorcorp Inc, 2007 CarswellOnt 7515, at para 48 (“Factorcorp”) 20 Factorcorp, at paras 42-47; Sextant, at paras 55-56
1 - 6 Appropriate for the Due Administration of Securities Law Absent the criteria in the first branch, the second branch of the test is sufficient to justify a receivership order, that “it is appropriate for the due administration of Ontario securities law” to do so.21 For this the Commission need only demonstrate non-compliance with the Securities
Act or raise “serious concerns” over possible breaches of the Securities Act.22
A brief review of some of the case law reveals that these sorts of receiverships are granted when investors’ funds are being seriously mismanaged.
Ontario (Securities Commission) v Sextant Strategic Opportunities Hedge Fund LP In Sextant, two corporations managed the Sextant mutual fund. The OSC had concerns with the management of the fund, including suspected fraud, potential misappropriation of investors’ money, misrepresentations, etc. For example, the share prices in a Sextant investment, IGP, increased by 1400% despite the investment being a non-operating business with no material development. This resulted in millions of ‘management fees’ to go to the directing mind of
Sextant, Mr. Spork. It turned out that the board of IGP set their own share prices and that Mr.
Spork was a member of the board. Justice Morawetz found that both the serious concern to investors as well as the concerns with regulatory compliance justified the granting of a receiver on either ground under section 129 of the Securities Act.
Ontario (Securities Commission) v Lance Kotton, Titan Equity Group, et al In Titan Equity, the Titan Group had raised approximately $30M from investors and purchased three parcels of real estate for development. The Titan Group failed to comply with the
Securities Act in several respects, the majority of its projects and companies were in deficits, and there were allegations of serious misdoing on the part of its director.
21 Securities Act, s.129(2)(b) 22 Ontario (Securities Commission) v Sbaraglia, Court file no. CV-10-883-00CL (unreported) at p 26; Sextant, at para 57
1 - 7 With approximately $20M in principle alone owing to investors and a pending sale of one of the properties, the Commission issued a cease trade order, registered Certificates of Direction (like
Certificates of Pending Litigation), followed shortly thereafter by its receivership application.
The court granted the application and the Titan Group has remained under the control of the
Receiver.23
3. Receiverships under Corporate Legislation
Both the Provincial and Federal Business Corporations Acts provide for the appointment of a receiver as a form of relief under the Oppression Remedy.24 Section 248 of Ontario’s Business
Corporations Act states:
(1) A complainant and, in the case of an offering corporation, the Commission may apply to the court for an order under this section.
…
(2) Where, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates,
(a) any act or omission of the corporation or any of its affiliates effects or threatens to effect a result;
(b) the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or
(c) the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,
that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation, the court may make an order to rectify the matters complained of.
(3) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,
…
(b) an order appointing a receiver or receiver-manager25
23 See the “Factum of the Ontario Securities Commission”, available at http://www.grantthornton.ca/services/reorg/bankruptcy_and_insolvency/titan 24 Business Corporations Act, RSO 1990, c. B.16 s 248(3)(b); The Canada Business Corporations Act contains the same provision under s 241(3)(b)
1 - 8 A “Complainant” has a very broad definition, including former or beneficial security holders and directors or officers of the corporation or its affiliates as well as “any other person” whom the
Court determines is a proper applicant.26
Although creditors may apply for a receivership under corporate legislation, the Oppression
Remedy is particularly useful when a shareholder or director believes a receivership is appropriate bout does not have the interest of a creditor that often underpins receiverships under the BIA and CJA. The following cases illustrate this aspect of a BCA receivership:
782900 Ontario Ltd v Lachance27 In Lachance, the Divisional Court heard an appeal from a decision by a motion’s judge to remove one of two warring brothers as officer and director of their company. Justice Loukidelis decided that there should be “some evidence” of oppressive conduct before the motions judge made the decision to remove the brother and therefore reversed the earlier decision and put the deposed brother back in his position as director. However, given the disruptive behaviour of the brothers, Loukidelis J. also found that to return “matters to their former state would not be in the best interests of the corporation or its shareholders” and therefore ordered a receiver manager to operate and manage the company.28
DBDC Spadina Ltd v Walton29 This case also involved problems between business partners. Dr. Bernstein Diet and Health
Clinics, Norma Walton and her husband, Ronauld Walton (the “Waltons”), were partners in an investment venture which either directly or indirectly owned 31 different commercial real estate projects. The Waltons took out $6M in mortgages on the properties without consultation with
DBDC Spadina Ltd. (“DBDC”), and was thus in breach of their agreement. DBDC applied under
25 Business Corporations Act, RSO 1990, c. B.16, s 248 26 Business Corporations Act, RSO 1990, c. B.16, s 245 27 782900 Ontario Ltd. v Lachance, 1992 CarswellOnt 1765 (Div Ct) 28 782900 Ontario Ltd. v Lachance, 1992 CarswellOnt 1765 (Div Ct), at paras 12, 13 29 DBDC Spadina Ltd. v Walton, 2013 ONSC 6833 aff’d 2014 ONCA 428
1 - 9 both the CJA and the BCA for a receiver. In his decision, Justice Newbould detailed the oppressive conduct that justified the receivership under the BCA.30
Justice Newbould also discussed the appropriateness of the RJR-MacDonald test regarding interlocutory injunctions in the case of a receivership of this nature. In this case the evidence underpinning the application was largely uncontested, so this was not an interim order pending a finding of fact. The receiver would be appointed indefinitely. However, Justice Newbould found that, even if the RJR-MacDonald tri-part test referenced above were applicable, it was not that different from the test typically applied to receivers under the CJA that requires a consideration of the effect of the order sought on the parties and their conduct.31
Justice Newbould considered and found that much of the Waltons’ conduct, including the co- mingling of funds without records to understand those funds, charging fees to a related corporation without available documentation, and the overall lack of records and reports, to be oppressive.32 Moreover, any potential downside effect on the parties was shared between the
Waltons and DBDC. Newbould J. also considered the harm that the status quo was causing and the need to bring stability to the situation. Importantly, an inspector had already been appointed pursuant to the BCA but the inspectors efforts had been consistently frustrated by the Waltons.
Receiverships – With Great Power Comes Great Responsibility
At law, once appointed, the Receiver becomes an officer of the Court. That said, once appointed, the receiver is thrust into a vortex of different stakeholders with competing interests, many of which expect the receiver to “take their side”. This can often force the receiver to navigate complicated, and occasionally impossible, situations where they are forced to choose from bad options. In other instances, a receiver can be “too helpful” to one stakeholder or one
30 DBDC Spadina Ltd. v Walton, 2013 ONSC 6833, at paras 42, 45-47 31 DBDC Spadina Ltd. v Walton, 2013 ONSC 6833, at para 44 32 DBDC Spadina Ltd. v Walton, 2013 ONSC 6833, at para 47
1 - 10 interest, thus putting themselves at risk of personal liability. Below are instances where the
Receiver can overstep its role and run the risk of personal liability
1. The Receiver as Litigant
In theory, there is nothing untoward with a receiver commencing or continuing litigation. That being said, before proceeding a Receiver should understand both (a) whether engaging in litigation is appropriate use of their powers; and (b) are they properly funded to proceed with the litigation in question. Funding is particularly important as the courts have held that if the estate cannot satisfy a costs award against it, the Receiver can be held personally liable for said costs award:
The general rule is that a receiver or trustee litigates at its peril if there is no source of indemnity available to it, with the two standard sources of indemnity residing in the assets of the estate or a contract of indemnity from one or more creditors.33
With that in mind, a party seeking to appoint a receiver should also keep in mind the practicalities of doing so. In Haunert-Faga, for example, the receiver in aid of execution had spent approximately $2 million in pursuit of an outstanding $4.5 million judgment. However, by the time the receiver made it to court seeking a costs immunity order, that was ultimately denied, it had only recovered $50,000 for the judgment creditor.
2. The Receiver Exceeds its Jurisdiction
While cost award ramifications are a serious practical issue for a receiver, overstepping its mandate can be disastrous. In Synergy Group,34 what began as a receivership in aid of execution for a $137,000 judgment, “morphed into a wide-ranging ‘investigative receivership’,
33 Haunert-Faga v Faga, 2013 ONSC 1581 at para 12 34 Akagi v Synergy Group (2000) Inc., 2015 ONCA 368
1 - 11 freezing and otherwise reaching the assets of 43 additional individuals and entities”.35 The result was, as noted by Blair J., “breathtakingly broad” orders obtained on an ex parte basis which:
…were akin to Mareva injunctions, Anton Piller orders and Norwich orders combined, but with none of the procedural protections usually afforded to defendant litigants in such cases and none of the obligations usually required of plaintiffs.36
When the receivership orders were finally dismissed on appeal, the receiver attempted to argue that (1) it was operating in good faith, and (2) it was protected by section 142 of the CJA, and the terms of the receivership order itself, which had a no liability clause.37 The Court of Appeal dismissed all these arguments and awarded substantial indemnity costs of over $250,000 against the receiver, personally.38
With respect to good faith, there was no suggestion that the receiver was operating in bad faith; that was beside the point. The point was that the receiver was operating outside of its mandate.
It misconceived its role, lost objectivity, and engaged in litigation far out of proportion with the
$137,000 sum that it sought to recover.39
With respect to immunity under the CJA and the receivership order, section 142 of the CJA states that “a person is not liable for any act done in good faith in accordance with an order or process of a court in Ontario”. The Order stated that the receiver “shall have no liability with respect to carrying out such duties, obligations and activities.”40 The Court explained that section 142 will not protect a receiver who obtains a series of orders ex parte for an extraneous and impermissible purpose. The Order shields the receiver in case it gets sued as a result of its
35 Akagi v Synergy Group (2000) Inc., 2015 ONCA 368, at para 4 36 Akagi v Synergy Group (2000) Inc., 2015 ONCA 771, at paras 8, 30 37 Akagi v Synergy Group (2000) Inc., 2015 ONCA 771, at paras 18, 24 38 Akagi v Synergy Group (2000) Inc., 2015 ONCA 771, at paras 41, 45, 50, 51 39 Akagi v Synergy Group (2000) Inc., 2015 ONCA 771, at para 19 40 Akagi v Synergy Group (2000) Inc., 2015 ONCA 771, at para 24
1 - 12 court-ordered activity, it does not shield a receiver who chooses to engage in litigation.41
Although authorized, a receiver is not obliged to engage in litigation.42
Conclusions
In short, a court appointed receivership is not just the tool of insolvency counsel. Receiverships in a litigation context can be effective tools for both investigation and protection of assets and interests, subject to commercial litigation disputes. That said, a receiver, once appointed, must fully understand its mandate, its obligations to the court, and the financial resources at its disposal, before embarking on a course of action. Failure to do so could have significant consequences both to its reputation and its finances.
41 Akagi v Synergy Group (2000) Inc., 2015 ONCA 771, at para 25 42 Akagi v Synergy Group (2000) Inc., 2015 ONCA 771, at para 21
1 - 13
TAB 2
Injunctions Primer for Litigators
Injunctions and Norwich Orders in the Employment Context
Hendrik Nieuwland, Shields O’Donnell MacKillop LLP
November 1, 2016
Injunctions and Norwich Orders in the Employment Context
Hendrik T. Nieuwland1 Shields O’Donnell MacKillop LLP
EMPLOYMENT INJUNCTIONS
Many employees, over the course of their employment, gain access to an employer’s confidential documents and company trade secrets, and establish close working relationships with the company’s clients. Such access is often a normal part of the employment relationship. But it can leave an employer vulnerable when the employment relationship comes to an end. This is because some employees, when leaving the company, will take confidential documents or trade secrets and bring this information to a competitor, or will solicit clients to join their competing business.
The theft of confidential information and the poaching of clients are obviously detrimental for an employer, both from a financial and business perspective. Employers have a legitimate propriety interest in protecting their business information and keeping their clients. As such, employers will often incorporate restrictive covenants, such as non-competition, non-solicitation and confidentiality clauses, into their employment contracts in an attempt to restrict employees from engaging in post-employment misconduct.
Despite the presence of these contractual provisions, or of a common law duty for key fiduciary employees to refrain from soliciting clients, competing unfairly, or taking advantage of corporate opportunities, many former employees regularly engage in this misbehaviour.
In these situations, employers will often take action against former employees for breach of contract or for breach of their fiduciary duties. But lawsuits take time. How can an employer deal with the immediate problem of their former employee misusing confidential information or soliciting clients?
One option is to move for injunctive relief. Employment injunctions are judicial orders that prohibit former employees from breaching legitimate restrictions on their conduct pending a trial. When successful, an employment injunction can prohibit a former employee from using certain information, from dealing with certain clients, and in some (rare) cases from working with a competitor at all.
Yet the sad reality is that most injunctions brought by employers fail.
There are myriad reasons for this. It is very difficult to prove irreparable harm (i.e. that the harm to the employer cannot be compensated by way of damages). Restrictive covenants may have defects – e.g. consideration may not have been provided to the employee; they may restrict competition where non-solicitation would suffice; they may restrict solicitation of former clients over which there is no legitimate proprietary interest; or they may be unreasonably broad in time and geographic scope.
1 I am grateful for the assistance of our firm’s articling student Dayna Lubelski in the preparation of this paper.
2 - 1 I do not intend to address the law on all these issues. Many other authors have done so in innumerable papers and books. Instead, I wish to focus on why I believe most employment injunctions fail. In my view, it is the chronic inability of employers to meet the first part of the RJR-MacDonald test – the need to prove a ‘strong prima facie case’.
Before exploring that issue, it is important to briefly describe the various obligations on former employees that, if breached, could be the subject of an injunction motion.
What are a former employee’s obligations?
(a) Contractual obligations
Many employers will incorporate restrictive covenants as an express written clause in their employment contracts in order to prohibit employees from misusing confidential information, soliciting clients, or competing with them outright.2 The types of restrictive covenants typically used by employers include:
1) Non-Competition Clauses
A non-competition clause restricts the ability of an employee to compete with their former employer for a certain period of time and usually within a specific geographic zone.
2) Non-Solicitation Clauses
A non-solicitation clause restricts an employee from soliciting their previous employer’s clients for a certain period of time.
3) Confidentiality Clauses
A confidentiality clause identifies information, including client lists, financial documents, and trade secrets, which the employer wishes to restrict from being used or disseminated by former employees.3
(b) Common law obligations
In addition to express obligations which arise out of a written employment contract, there are a number of common law obligations that apply to fiduciary (or “key”) employees. Fiduciary employees are those who exercise key managerial or specialized functions in the workplace and are required to act in the best interests of the employer.4
2 Malcolm MacKillop and Thomlinson, New Perspectives on Canadian Employment Law (LexisNexis Canada: 2014) at 108 [“MacKillop”]. 3 Ibid at 109. 4 Ibid at 20.
2 - 2 Common law fiduciary obligations include:
1. A duty not to directly or indirectly solicit clients from an employer or former employer for a reasonable period of time.
2. A duty not to solicit the employees of an employer or former employer for a reasonable period of time.
3. A duty not to take advantage of corporate business opportunities which rightfully belong to the former employer (irrespective of whether the employer chooses to pursue the opportunity or not).5
(c) Confidentiality
In addition to fiduciary and contractual obligations, all employees have an equitable duty of confidence which exists both during and following their employment.6 As such, all employees have an obligation not to take unfair advantage of confidential information learned and obtained through the course of their employment.7
Low employer success rates in obtaining injunctions
As mentioned above, when an employee breaches their contractual, fiduciary or equitable obligations, employers have the option to bring an injunction to stop further breaches pending a trial.
Gord McGuire, a lawyer at Adair Barristers LLP, conducted a very interesting study of employment injunctions over the past 10 years. He found that employers have only been successful in obtaining an injunction in 26% of reported cases. Thus the vast majority of injunction motions (74%) are dismissed.8
Why the low success rate?
In my view, a key reason for the low success rate of employers seeking injunctive relief is the more stringent test employers face when applying for an injunction.
The test for an injunction is well known. It was set out by the Supreme Court of Canada (“SCC”) in RJR-MacDonald Inc. v. Canada (Attorney General). There are three parts to the test:
1) Is there a serious issue to be tried? 2) Will there be irreparable harm if the injunction is not granted? 3) Where does the balance of convenience lie? Which party will suffer greater harm if the injunction is granted or not granted?9
5 Ibid. 6 Ibid at 94. 7 Ibid at 96. 8 Gord McGuire, Interlocutory Injunctions to Restrain Departing Employees: Stumbling Blocks and Keys to Success (PowerPoint presentation), The Six-Minute Employment Lawyer, 2016, The Law Society of Upper Canada. 9 RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CarswellQue 120 [“RJR-MacDonald”].
2 - 3 Most injunctions in the employment context seek to curtail or entirely restrict the ability of a former employee to engage in their chosen line of work with a competitor. In these circumstances, the courts have modified the first part of the RJR-MacDonald test to make it more onerous on employers. In Boehmer Box LP v. Ellis Packaging Ltd, the court pointed out that:
In cases involving injunctions seeking to restrain a former employee from competing with, or soliciting customers of, his former employer, this principle operates to require a moving party to establish a strong prima facie case in order to meet the first branch of the RJR-MacDonald test.10
Therefore, instead of proving that there is a ‘serious issue’ to be tried, an employer will have to show that there is a ‘strong prima facie case’.
The ‘serious issue’ test is a relatively low threshold. The SCC characterized the application of the test this way: “whether the test has been satisfied should be determined by a motions judge on the basis of common sense and an extremely limited review of the case on the merits.”11
By contrast, the ‘strong prima facie case’ test sets a higher evidentiary threshold on employers, one that is ordinarily very difficult to meet. Not only do employers have to satisfy the court that there is a serious issue to be tried, but they also must show that they are clearly right and almost certain to be successful at trial.12
The difficulty in meeting the strong prima facie case test has been exemplified in a number of recent Ontario decisions.
In 2016, the court in Benson Kearley & Associates Insurance Brokers Ltd. v Valerio (“Benson”) dismissed an employer’s motion for an interim interlocutory injunction for failing to meet the strong prima facie test.13 In this case, the employer, an insurance brokerage firm, sought the injunction in order to restrain former employees from soliciting clients, inducing staff to leave and preventing them from using or disclosing confidential information.14
In Benson, the court held that the non-solicitation clause was too broad, did not have a durational limit and essentially amounted to a non-competition clause with no geographical limit.15 As such, the court held that the employer did not meet the higher strong prima facie case requirement with respect to the enforceability of the restrictive covenants.16 In addition, the court found that the former employees were not ‘key employees’ and therefore the employer had not met the higher strong prima facie case burden with respect to any fiduciary duties owed by the former employees.17
10 Boehmer Box LP v. Ellis Packaging Ltd, 2007 CarswellOnt 2726. 11 RJR-MacDonald, supra note 9, at para. 83. 12 Barton-Reid Canada Ltd. v. Alfresh Beverages Canada Corp. 2002 CarswellOnt 3653 at para. 9 (SCJ). 13 Benson Kearley & Associates Insurance Brokers Ltd. v Valerio, 2016 CarswellOnt 10425. 14 Ibid at 1. 15 Ibid at 44. 16 Ibid. 17 Ibid at 51.
2 - 4 In another recent decision, 1635770 Ontario Ltd v Wu, the court dismissed a motion for an interlocutory injunction and concluded that the employer failed to meet the strong prima facie case test.18 In reaching this conclusion, the court found that the employer failed to establish that the temporal and geographic features of the non-competition clause were reasonable.19
In addition to the two decisions above, there have been many other recent Ontario decisions where an injunction motion has been dismissed and the courts have held that the employer failed to meet the strong prima facie case test: Benayoune & Associates FZE v. Kanata Chemical Technologies Inc. 2014 ONSC 5874, Optilinx Systems Inc. v. Fiberco Solutions Inc, 2014 ONSC 6944, Teliphone Corp. v. Comwave Wholesale Inc. 2015 ONSC 5142, Lockwood Fire Protection Ltd. v. Caddick 2015 ONSC 6320, FLS Transportation Services Inc. v. Charger Logistics Inc., 2016 ONSC 3652.
Courts have consistently shown their suspicion of restrictive covenants in employment law by declaring these clauses void and unenforceable.20 Courts are especially reluctant to uphold a non- competition clause where a non-solicitation clause would be sufficient to achieve the intended purpose of the employer. However, in the absence of “smoking gun” solicitation letters or emails to clients, it is often difficult for employers to establish a breach of a non-solicitation clause. In addition, it has proven difficult for employers to establish that an employee is a fiduciary and, as such, owes common law fiduciary duties.
Where does success come?
This story is not all ‘doom-and-gloom’ for employers. Employers have had some success in obtaining an injunction in situations where former employees have physically taken or misused confidential information.
In Catalyst Capital Group Inc. v. Moyse, the employee had sent an internal investment memo he had prepared for the plaintiff to a competitor as part of his interview process, ostensibly to provide an example of the quality of his written work. The motion judge found there was a strong prima facie case that the memo contained the plaintiff’s confidential information that might be misused by the competitor. The motion judge therefore granted an injunction preventing the employee from working for the competitor for 6 months (although in a unique twist, the motion judge ordered the plaintiff to pay the employee during this 6 month hiatus).21
In TSI International Group Inc. v. Formosa, the court granted an interlocutory injunction after satisfying itself that the employer had established a strong prima facie case.22 In reaching this conclusion, the court looked at evidence which showed a former employee removing confidential information by taking and keeping company hard drives. 23
18 1635770 Ontario Ltd v Wu, 2015 CarswellOnt 878. 19 Ibid at 48. 20 MacKillop, supra note 2 at 110. 21 Catalyst Capital Group Inc. v. Moyse, 2014 ONSC 6442. 22 TSI International Group Inc. v. Formosa, 2015 CarswellOnt 2374. 23 Ibid at 89.
2 - 5 Canadian Hedge Watch Inc. v. Street is another decision where the court granted an interlocutory injunction, in part to prohibit a former employee from misusing confidential information.24 The court concluded that there was a strong prima facie case that the employee had breached her consulting agreement by keeping and using the employer’s information, which she was obligated to keep confidential, return, and not use.25
These cases illustrate that employers will likely have a higher chance of success in obtaining an injunction where they can prove the former employee has physically taken or is misusing confidential employer information.
NORWICH ORDERS
The scenario
An anonymous Gmail user has been defaming your employer client by sending out e-mails which harm your client’s personal and professional reputation. The e-mails were sent to an undisclosed and unknown list of recipients, and the Gmail user has threatened to send more. Understandably, your client wants to stop this wrongdoer from sending out further harmful e-mails and wants to bring an action for defamation.
(a) What should you do?
Before any steps can be taken to stop the anonymous wrongdoer, you must first identify who they are. You have access to their e-mail address, but that provides no identifying characteristics. However, the e-mail address does identify Google as their e-mail service provider.
As the e-mail service provider, Google has access to information, such as the assigned Internet Protocol (“IP”), which could help identify the anonymous Gmail user. It is highly unlikely that Google, or any e-mail service provider, would simply hand over the information requested. E-mail service providers are often required to protect the privacy of their users and have an obligation not to disclose this type of personal information in the absence of a court order.
(b) Seeking a Norwich Order
One way to obtain this information is by bringing an application for a Norwich Order.
A Norwich Order is an equitable order which allows an applicant to seek pre-action discovery from a third party in order to identify a wrongdoer.26
In order to grant a Norwich Order, a court must be satisfied that the following factors have been met:
1) The Applicant has provided sufficient evidence to raise a valid, bona fide or reasonable claim.
24 Canadian Hedge Watch Inc. v. Street, 2015 CarswellOnt 881. 25 Ibid at 26. 26 York University v. Bell Canada Enterprises, 2009 CarswellOnt 5206 (SCJ).
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2) The Applicant has established a relationship with the third party from whom the information is sought, such that it establishes that the third party is somehow involved in the acts complained of.
3) Whether the third party is the only practical source of the information available.
4) Whether the third party can be indemnified for the costs to which it may be exposed because of the disclosure; and
5) Whether the interests of justice favour obtaining the disclosure.27
If these factors are made out, the court has authority to grant a Norwich Order against Google. Google may consent to a draft Norwich Order after reviewing the Application Record, and will typically voluntarily agree to comply with the Norwich Order once it is issued and served.
The Norwich Order for Google should typically seek the following information regarding the anonymous Gmail user:
the subscriber registration information of the Google Account associated with the email address, including the ‘creation IP address’; and
the originating IP address associated with the defamatory emails.
In the event there is no voluntary compliance by Google, it will be necessary to obtain a ‘Commission and Letter of Request’ in order to enforce the Norwich Order against Google. The Commission and Letter of Request would allow a commissioner (usually a lawyer in the resident jurisdiction) to obtain the information by examining a representative of Google through the assistance of the courts in the resident jurisdiction (e.g. California).
If Google voluntarily complies with the Norwich Order, it will provide the information it possesses, typically within 20 days. Often the personal information provided by the anonymous Gmail user to create the account is inaccurate or misleading. However, Google will provide the IP address assigned to the user by the user’s Internet Service Provider (ISP).
The IP address can then be used to identify the ISP (e.g. Bell, Rogers, Telus, etc.). The ISP can potentially provide information identifying the anonymous Gmail user, but this will require a second application for a second Norwich Order.
The ISP will usually consent to a Norwich Order after receiving the application record, and will typically voluntarily agree to comply with the Norwich Order once it is issued and served.
The Norwich Order for the ISP should typically seek the following information regarding the anonymous Gmail user:
the first and last name, municipal address, and telephone numbers associated with the municipal address, associated with the IP information.
27 GEA Group AG v. Ventra Group Co., 2009 ONCA 619 at para 41.
2 - 7 the MAC address of the electronic device (which is a unique device identifier), and the electronic device information. Some ISPs collect this information from the devices that access the internet. If an employer provides company electronic devices to employees, obtaining this information could help identify the wrongdoer, if that wrongdoer is an employee.
Ideally, the anonymous Gmail user would be using his/her personal internet connection to send the emails. In that case, the ISP would be able to provide the name, home address, and telephone number of the Gmail user, which would then be used to identify the defendant and commence an action.
However, these days the reality is that most wrongdoers who send anonymous emails will know that they can be identified if they use their own internet connection. Many wrongdoers therefore use free public Wi-Fi in order to protect themselves from being identified. When this occurs, the ISP will provide the name, address and phone number of the free public Wi-Fi provider – typically a coffee shop or restaurant.
In these circumstances, the only remaining option to identify the wrongdoer is to obtain video surveillance footage from the coffee shop or restaurant on the dates/times the anonymous Gmail user sent the offending emails.
Assuming the establishments have video surveillance, they typically do not keep the footage for an extended period of time.
Consequently, the take-home message in seeking Norwich Orders is this – do it fast, or don’t bother.
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TAB 3
Injunctions Primer for Litigators
Strategic and Ethical Considerations in Seeking Injunctive Relief
Rocco DiPucchio, Lax O’Sullivan Lisus Gottlieb LLP Ryann Atkins, Lax O’Sullivan Lisus Gottlieb LLP
November 1, 2016
Strategic and Ethical Considerations in Seeking Injunctive Relief
Rocco DiPucchio and Ryann Atkins Lax O’Sullivan Lisus Gottlieb LLP
Introduction
Where a party to litigation requires immediate relief, an interlocutory injunction is the definitive tool. It can be used to enforce a party’s rights before they have been finally determined, and in some cases, before any harm has even been suffered. The purpose of injunctive remedies, while often described as protecting the status quo (e.g. by freezing funds and preserving evidence), can be understood more broadly as ensuring that no cause of action is rendered moot before a just determination can be achieved and a final order can be enforced.1
Apart from these tangible benefits, much has been written about how obtaining an
interlocutory injunction can infuse momentum into the plaintiff’s case at an early stage,
shifting pressure onto the defendant to push for a decision on the merits or settle.
However, bringing an unsuccessful motion can conversely discourage a plaintiff and
embolden the defendant. Injunctions are complex, and because of the immediate and
serious consequences, they are often hard-fought and expensive to obtain. An
1 National Commercial Bank Jamaica Ltd v. Olint Corp Ltd (Jamaica), [2009] UKPC 16, at para. 16.
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unsuccessful motion for an injunction may be perceived as a step backwards for your
client, as would obtaining an injunction that is ultimately not enforceable.
Given the stakes involved in bringing an injunction, it is important to think critically about
how best to advance your client’s claim for this extraordinary relief. This paper will walk
through some of the key strategic decisions that a lawyer must make in considering
whether to bring a motion for an injunction, and how to do so in a way that maximizes
your chance of success. We will also address ethical issues that may arise in obtaining
and enforcing injunctive relief.
Framing the Relief Sought
In considering whether to seek an injunction, the first and most fundamental decision
one must make is selecting the appropriate form of injunctive relief to pursue. While
seemingly trite, defining the relief sought is often crucial to the success of the motion,
since certain kinds of injunctions require the moving party to meet a heavier burden of
proof.
In particular, framing the relief sought as prohibitory (i.e. restraining the defendant from taking certain actions) rather than mandatory (i.e. compelling the defendant to take positive actions) in nature can increase the chances of obtaining the relief sought. This
is because courts apply a more stringent test to mandatory injunctions than to
prohibitive injunctions.
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At the first stage of the analysis for interlocutory injunctions set out by the Supreme
Court of Canada in RJR MacDonald,2 prohibitive interlocutory relief requires the moving
party to show that there is a “serious issue to be tried”. This is a low threshold, requiring
only that the subject matter of the proceeding is neither vexatious nor frivolous.3 In contrast, a mandatory order forcing a party to perform a positive act requires the moving party to establish a “strong prima facie case” on the merits.4 Ontario courts have
interpreted this to mean that the plaintiff or applicant is “certainly right” and “almost
certain to be successful at trial”.5 Given the difficulties that most moving parties will have
in satisfying this heightened onus, failure to persuade the court that the relief sought is
prohibitory can be fatal to the request for injunctive relief.
Since an order requiring a party to do something affirmative implies an obligation not to
do the opposite, the line between a prohibitory and mandatory order is not always clear
and is often subject to interpretation.6 This is frequently the case in cases where one
party seeks to prevent the termination of a commercial relationship, where a negatively-
phrased injunction essentially requires temporary specific performance of a contract to
maintain an ongoing business.
In the leading Ontario case on this common scenario, TDL Group Ltd. v. 1060284
Ontario Ltd., the Divisional Court held that the determinative question is whether the
2 RJR MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311. 3 Ibid., at paras. 54-55 (WL); Look Communications Inc. v. Bell Canada, 2007 CarswellOnt 4902, at para. 28 (Commercial List). 4 TDL Group Ltd. v. 1060284 Ontario Ltd., 2011 CarswellOnt 3304, at para. 1 (Div. Ct.). Other circumstances where the higher burden is imposed include Mareva injunctions, Anton Piller orders, orders that would put an end to the action, and injunctions that have a restrictive impact on free speech (as in defamation and picketing cases). 5 See e.g. Barton-Reid Canada Ltd. v. Alfresh Beverages Canada Corp., 2002 CarswellOnt 3653, at para. 9 (S.C.J.). 6 TDL Group Ltd., supra note 4, at para. 4; Erinwood Ford Sales ltd. v. Ford Motor Co. of Canada Ltd., 2005 CarswellOnt 1954, at para. 61 (S.C.J.).
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injunction seeks to enforce a contractual right or whether the injunction would create a
new right that the parties never agreed to. Where the order compels the defendant to
comply with the terms of a contract, the order is to prohibit a breach of contract and is
therefore prohibitory in nature.7
However, determining the nature of an injunction is more than an exercise in semantics
and litigants should be careful when crafting the order sought not to misrepresent the
remedy they seek. Courts may look beyond a party’s characterization of the injunction to its essence. In Bark & Fitz, Justice Karakatsanis (then of the Ontario Superior Court of Justice) held that an injunction restraining franchisees from terminating and breaching the franchise agreement, while framed in prohibitory language and linked to contractual rights, was at least in part a mandatory one. In distinguishing TDL Group
Ltd., Justice Karakatsanis considered the restorative nature of the order sought and the positive actions that the franchisees would be required to take. Unlike TDL Group Ltd.
and the cases that followed it, the injunction in this case sought to correct a breach of
contract, not merely to prevent one.8
One caveat that must be placed on the strategic framing of the issues is to bear in mind
a lawyer’s ethical obligation not to mislead the court. An attempt to obscure the true
nature of the relief sought, or the impact that it will have on the opposing party, will implicate this duty. Rule 5.1-2 of the Law Society of Upper Canada’s Rules of
Professional Conduct mandates that “[w]hen acting as an advocate, a lawyer shall not
… (l) knowingly misrepresent the client’s position in the litigation or the issues to be
7 TDL Group Ltd, supra note 4, at paras. 7-9. 8 Bark & Fitz Inc. v. 2139138 Ontario Inc., 2010 ONSC 1793, at paras. 8-9.
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determined in the litigation”.9 The lawyer’s obligation to be fair in his or her presentation
of the issue is augmented in the case of ex parte motions, where the court does not
have the benefit of the safeguards offered by the ordinary adversarial process.10
Therefore, while it is important to frame the relief sought strategically, a lawyer seeking an ex parte injunction must be honest and fulsome in his or her presentation of the facts
and the law. While the same heightened responsibility to the court does not apply to
injunction motions brought on notice, a lawyer’s basic duty not to mislead the court
remains.
A plaintiff seeking injunctive relief which may require positive actions on the part of the
defendant may wish to consider the following strategic and ethical guidelines:
(a) Phrase the order in prohibitory language (e.g. enjoining the defendant from
taking steps to evict;11 restraining the defendant from interfering with the ordinary
course of the business12 or with the plaintiff’s rights under the contract,13 or
preventing the defendant from terminating services14);
(b) Identify whether there are any mandatory aspects to the relief sought, and where
possible, link those aspects to on-going contractual rights that the parties have
already agreed to;
(c) Take care not to mislead the court about the nature of the remedy requested or
the impact that it will have on the defendant; and
9 Law Society of Upper Canada, Rules of Professional Conduct, Commentary, Rule 5.1-2. 10 Stans Energy Corp. v. Kyrgyz Republic, 2014 ONSC 3236, at paras. 37-38; Business Development Bank of Canada v. Aventura II Properties Inc., 2016 ONCA 300, at para. 23 11 See TDL Group Ltd., supra note 4. 12 Ibid. 13 See International Steel Services Inc. v. Dynatec Madagascar S.A., 2016 ONSC 2810 (Commercial List). 14 See Look Communications Inc., supra note 3.
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(d) Where the essence of the injunction is restorative in nature, prepare to meet a
higher onus.
Crafting an Effective Order
In drafting a proposed injunction order, a litigator must balance two competing goals:
fully capturing the defendant’s harmful conduct to protect a client’s rights and interests,
and ensuring that the order granted will ultimately be enforced (i.e. through contempt
proceedings). Crafting an enforceable order means making sure that the terms of the order are clear and unambiguous such that the defendant understands what it must do
(or refrain from doing) to comply.15 While it may initially be appealing to draft an order that is as broad as possible, an order that is overbroad, vague, or lacks specificity may be vulnerable to attack later on. Given the time and expense involved in obtaining an
injunction, counsel will want to think critically about the wording of a proposed order. An
order that will not be enforced at the end of the day provides little protection.
The moving party is also less likely to win the motion for an injunction if the proposed
language is unclear. Courts are hesitant to order injunctions that require court
supervision, including relitigation of the issue in the event that the parties disagree on
the meaning of the order.16 Putting forward vague or ambiguous language therefore
increases the risk that the court will refuse the relief sought.
Parties should not be entirely reliant on courts to fulfill this gatekeeping function nor
assume that any order granted by the court will be enforced. An unclear order increases
15 Sharpe on Injunctions, supra note 11, at para. 1.390, quoting Pro Swing Inc. v. Elta Golf Inc., [2006] 2 S.C.R. 612, at para. 24. 16 Ibid.
3 - 6 - 7 - the costs to the plaintiff in enforcing the order and risks having the order set aside at a later date. Therefore, plaintiffs should be proactive in drafting orders that have a high likelihood of being upheld.
In Bell ExpressVu Ltd.,17 the Ontario Court of Appeal provided useful guidance on the considerations that will determine whether an order is sufficiently clear to be enforceable. The Court held that the order must state “clearly and unequivocally” what should and should not be done. Orders that are overbroad, that are missing an essential term, or that become obscured by external circumstances will not be enforced.18
However, a particularly onerous injunction will not be unclear simply because it is restrictive. In Laiken v. Carey, the Ontario Court of Appeal held that a Mareva injunction prohibiting the transfer of trust funds was not unclear simply by virtue of the fact that the order did not provide for the payment of living expenses. In the Court’s view, the order may have been overly restrictive, but for the purposes of contempt proceedings, the party’s obligations were clear.19
Aside from ensuring enforceability, tailoring an order to be more narrow or specific may improve the moving party’s case at the balance of convenience stage. This branch of the test seeks to weigh the relative impact upon the parties of granting or refusing the injunction. The analysis incorporates a wide variety of factors rooted in what is just and fair.20 This can involve an assessment of the comparative strength of the parties’
17 Bell ExpressVu Ltd. v. Torroni, [2009] O.J. No. 356 (Ont. C.A.). 18 Ibid., at paras. 20-22. 19 Laiken v. Carey, 2013 ONCA 530, at para. 48. 20 Sharpe on Injunctions, supra note 15, at para. 2.530
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cases,21 as well as consideration of the public interest.22 For this reason, the balance of
convenience analysis can be a wild card for litigants. Where the balance is not clear
going into the motion, it may be strategic to tailor the relief sought so as to shift the
balance in your client’s favour.
For example, it is quite common when seeking a Mareva order to carve-out reasonable
living expenses and legal fees, thus reducing the restrictions on the defendant and
precluding an obvious objection. Similarly, parties may tailor their orders to protect
innocent third parties who may be affected. This was achieved in AbbVie Corporation et
al. v. Janssen Inc.23 In that case, the plaintiff pharmaceutical company whose patent
was found to be valid and infringed by the defendant sought and obtained a limited
injunction restricting certain sales and marketing activities of the defendant, but falling
short of a complete prohibition on the defendant’s product in Canada. The order was
tailored to protect third party patients who had a medical need to infringe the patent and
whose interests had to be taken into account in the balance of convenience analysis.24
Tailoring for this strategic purpose must be undertaken with care. Excessive exceptions
or carve-outs risk introducing uncertainty to the terms of the order, or increasing the
need for court supervision. As discussed above, this would undermine the order’s enforceability. Lawyers should therefore not interpret this as an invitation to make the order overly complex, but rather as an opportunity to consider what specifically a client is trying to achieve, and to focus the “ask” on that objective.
21 Paul Sadlon Motors Inc. v. General Motors of Canada Ltd., 2011 ONSC 4432, at para. 74. 22 Sharpe on Injunctions, supra note 15, at para. 2.530. 23 2014 FC 489, set aside on other grounds 2014 FCA 241. 24 Ibid., at paras. 15-16, 40-42, 54.
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Evidence of Irreparable Harm
Before bringing a motion for an interlocutory injunction, it is important to consider the
evidence that your client will need to marshal to meet its case. In this regard, one area
where litigators sometimes struggle is in demonstrating that the moving party will suffer
irreparable harm if the injunction is not granted, at the second branch of the RJR
MacDonald test. The proper approach to establishing irreparable harm is to focus on the
nature of the harm that the party will suffer if the injunction is not granted, rather than on
the magnitude.25 Irreparable harm means harm that cannot be quantified in monetary
terms or which cannot be cured (usually because one party cannot collect damages).26
Harm can also be irreparable if damages awarded after a trial on the merits would come
too late in the day or be insufficient to do justice.27
What will constitute irreparable harm in any given case will depend on the factual
matrix. For example, while loss of market share, loss of goodwill, and damage to
reputation will often constitute irreparable harm, these injuries are not necessarily
unquantifiable.28 Courts have held that loss of sales and market share are compensable in damages in cases where the moving party failed to put forward evidence that such
losses were permanent and irremediable.29
Given the fact-specific nature of the irreparable harm inquiry, a party seeking an
injunction must ensure that it is putting forward sufficient evidence to meet its burden. In
one sense, this is not a particularly onerous burden: while the Supreme Court of
25 International Steel Services Inc., supra note 13, at para. 50. 26 RJR MacDonald Inc., supra note 2, at para. 59. 27 Optilinx Systems Inc. v. Fiberco Solutions Inc., 2014 ONSC 6944, at para. 11. 28 Ibid., at para. 12; Paul Sadlon Motors Inc., supra note 21, at para. 78. 29 Cana International Distributing Inc. v. Standard Innovation Corp., 2010 ONSC 6273.
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Canada originally held that evidence of irreparable harm must be “clear and not
speculative”,30 Ontario courts (and other provincial courts) have preferred a flexible
approach,31 requiring only proof of a “meaningful risk of irreparable harm” or a
“meaningful doubt as to the adequacy of damages”. This was held to be a relatively low standard.32 As stated by McLachlin J.A. (as she was then), clear proof of irreparable
harm is not required. Doubt as to the adequacy of damages can be sufficient to support
an injunction.33 This is in contrast with the Federal Courts, which have held that it is not
enough that irreparable harm may arguably result.34
The challenging aspect of the irreparable harm analysis is surprisingly less to do with
the level of certainty that harm will follow and more to do with the type of evidence
required to show that the harm is unquantifiable or incurable. For instance, courts have
held that parties should put forward financial evidence to establish loss of market share,
reputation, or goodwill.35 However, financial evidence establishing that loss may
sometimes be used to show that the damages are reasonably quantifiable. In fact,
defendants have sometimes successfully avoided an injunction by providing an
undertaking to preserve the records necessary for an expert to measure loss of market
share.36 It will often be advisable to provide expert opinion evidence to demonstrate to
30 RJR MacDonald Inc., supra note 2, at paras. 57-59 (WL); Optilinx Systems Inc., supra note 27, at para. 11. 31 Bell Canada v. Rogers Communicatins Inc., 2009 CarswellOnt 4536, at para. 38. 32 International Steel Services Inc., supra note 13, at para. 51, quoting Potash Corp. of Saskatchewan Inc. v. Mosaic Potash Esterhazy Ltd. Partnership, 2011 SKCA 120, at paras. 59-61. 33 British Columbia (Attorney General) v. Wale (1986), 9 B.C.L.R. (2d) 333 (B.C.C.A.), quoted in International Steel Services Inc., supra note 13, at para. 51. 34 International Steel Services Inc., supra note 13, at para. 51; Bell Canada, supra note 31, at para. 38. 35 See e.g. Opitlinx Systems Inc., supra note 27, at para. 38. 36 Bell Canada, supra note 31, at para. 45.
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the court that the harm is truly unquantifiable. Indeed, in the Federal Courts it appears
that expert evidence is required as a matter of course.37
Misuse of Injunctions
While an injunction can be a powerful tool with a significant impact on the course of litigation, lawyers should be cognizant of the ways in which injunctions can be misused, and their ethical obligations not to participate in abusive conduct. This dilemma most often arises in the context of post-injunction settlement discussions where an injunction is employed to force the defendant into a hard bargain, rather than to protect the bona fide rights of the plaintiff. An injunction can be a significant motivator for a defendant to settle in any circumstance, but courts will not grant or maintain an injunction that is being used solely to improve a plaintiff’s bargaining position, or to extort a settlement that bears no relation to the plaintiff’s damages, as this is antithetical to the purpose of an equitable remedy.38
For example, in Denovan v. Lee, the British Columbia Court of Appeal set aside an
injunction where the plaintiff lessee no longer had an interest in the lease at issue and
merely sought to uphold the injunction in order to negotiate favourable terms for the
surrender of the lease.39 Where, however, there is no improper purpose, the increased
bargaining power which is a natural consequence of having an injunction in place is not
a reason for setting aside an injunction40 and is not unethical. The injunction must
37 See e.g. University of California v. I-Med Pharma Inc., 2016 FC 350. 38 Sharpe on Injunctions, supra note 15, at para. 1.160; Michael Santarsieri Inc. v. Unicity Mall Ltd., 1999 CarswellMan 485 (C.A.). 39 1989 CarswellBC 519, at paras. 10-13 (C.A.). 40 1465152 Ontario Ltd. v. Amexon Development Inc., 2015 ONCA 86, at para. 26.
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therefore provide the plaintiff with a substantive useful benefit and not merely harm the
defendant.41
A lawyer’s obligation not to misuse an injunction for an ulterior purpose is related to the
lawyer’s role in upholding the administration of justice. Rule 5.1-1 of the Law Society of
Upper Canada Rules of Professional Conduct provides that “When acting as an
advocate, a lawyer shall represent the client resolutely and honourably within the limits
of the law while treating the tribunal with candour, fairness, courtesy, and respect”. This
duty encompasses an obligation to discourage a client from tactics that merely harass
the other side, as this would bring the administration of justice and the legal profession
into disrepute.42
Therefore, in determining whether to bring an injunction, it is important for litigators to
consider the purpose behind the injunction and the legitimate interests of the client that
need protecting.
Undertaking in Damages
Another important consideration in determining whether to bring an injunction is the
normal requirement that the moving party give an undertaking to pay for any damages
caused to the defendant by reason of the injunction in the event that the injunction is
found to have been improperly granted.43 In Ontario, this requirement is formalized in
Rule 40.03 of the Rules of Civil Procedure. Since this requirement puts the moving party at risk of paying potentially significant damages to the defendant if its claim does not
41 Allard v. Shaw Communications Inc., 2010 ABCA 316, at para. 30. 42 Law Society of Upper Canada, Rules of Professional Conduct, Commentary, at pp. 73-74. 43 Sharpe on Injunctions, supra note 15, at para. 2.470.
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ultimately succeed on the merits, the undertaking requirement serves to discourage
injunctions in frivolous cases. Further, a plaintiff who discontinues his or her action prior
to trial is deemed to have admitted that the injunction obtained was improper.44 This prevents the plaintiff from incurring the benefit of a temporary injunction while avoiding a determination on the merits and its obligation to pay damages to the defendant.
The undertaking is a critical aspect of the balance of convenience analysis and should not be disregarded. The inadequacy of an undertaking can sometimes be raised as a reason to decline the injunction where there is reason to believe that the plaintiff would not be capable of paying the defendant’s damages after a trial on the merits.45 For
example, in Barton-Reid Canada Ltd., the Ontario Superior Court of Justice declined to grant an injunction where the basis of the plaintiff’s irreparable harm argument was that the plaintiff was at risk of becoming insolvent if the injunction was not granted. In this
case, the plaintiff’s submissions on irreparable harm undermined the undertaking that
was put forward.46 The plaintiff can strengthen its undertaking by showing that it has
financial means to satisfy the undertaking or a valuable asset against which the
undertaking can be enforced.47
Lawyers have an ethical obligation to advise their clients of the seriousness of the
undertaking. Non-performance on the undertaking is a contempt of court with serious
consequences.48 Accordingly, the undertaking should be made in an affidavit, by a
person with clear authority to bind the company giving the undertaking. It cannot be
44 Ibid., at para. 2.514.1 45 Look Communications, supra note 3, at paras. 34-36. 46 Barton-Reid Canada Ltd., supra note 5, at para. 19. 47 Look Communications, supra note 3, at paras. 34-36. 48 642947 Ontario Ltd. v. Fleischer, 2001 CarswellOnt 4296, at para. 23 (Ont. C.A.)
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given orally by a lawyer as an afterthought.49 The party providing the undertaking has
an obligation to disclose whether it or its principals have sufficient assets to satisfy a
damages award.50 Courts have been willing to enforce an undertaking against the principals or alter egos of a company where it turns out that the company did not have sufficient assets to pay damages. In such a circumstance, the company and its
principals are held to have made a misrepresentation to the court, which justifies
piercing the corporate veil.51 Thus, the undertaking in damages is not a mere formality
to be taken lightly.
As a consequence of the undertaking requirement, the plaintiff should seriously and
honestly assess the merits of its claim before moving for an interlocutory injunction,
even though most parties seeking an injunction need only establish in court that there is
a serious issue to be tried. Parties contemplating injunctive relief ought to weigh the
relative risks and benefits of the order sought, against the likelihood that the defendant
will suffer damages as a result of the injunction, the likelihood that the defendant would
ultimately be unsuccessful on the merits, and the plaintiff’s ability to afford a potentially
significant damages award.
Conclusion
An injunction is a useful and flexible tool that bestows significant advantages on a party
requesting it. As an extraordinary equitable remedy, it is often difficult to obtain. A
lawyer thinking strategically should consider how best to frame the issue and tailor the
order sought in order to maximize the likelihood of success. A thoughtful litigator will
49 Guelph Taxi Inc. v. Guelph Police Service, 2016 ONSC 3671, at para. 17. 50 Ibid., at para. 15. 51 Fleischer, supra note 48, at paras. 58-70 (in obiter).
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carefully consider the wording of the order sought to ensure that the order obtained at
the end of the day will be enforceable and therefore serve its intended purpose. These
strategic decisions must be undertaken reasonably, so as not to run afoul of a lawyer’s
duty to uphold the administration of justice. This means taking care not to mislead the court about the nature of the remedy sought or the client’s legitimate interests which the
injunction is designed to protect. An injunction is not appropriate for every litigant in every situation. In some cases it will be more difficult to establish irreparable harm, such that the motion is unlikely to succeed. Expert evidence may be required in order to meet this onus. Moreover, if the plaintiff has a weak case on the merits of its action, bringing an injunction risks not only the usual cost consequences, but also a potentially significant damages award if the defendant is harmed by the injunction. Therefore, the availability and sensibility of an injunction will depend on the facts of each case: the rights at issue, the relative merits of the case, and the resources of the parties.
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TAB 4
Injunctions Primer for Litigators
Injunctions: Understanding Legal and Ethical Obligations
Kim Mullin, WeirFoulds LLP Lia Boritz, WeirFoulds LLP
November 1, 2016
Injunctions: Understanding Legal and Ethical Obligations Kim Mullin and Lia Boritz, WeirFoulds LLP
An injunction is a powerful tool in the litigator’s toolbox. If used properly and effectively, an injunction can significantly impact the future of your client’s case and provide an advantage in future settlement negotiations. However, in addition to the practical and strategic considerations in determining whether to seek an injunction, there are serious legal and ethical obligations that must also be understood and considered.
Ex parte injunction motions
Obligation of full and frank disclosure
Seeking an injunction without notice to the other party is risky and any order issued as a result will in most cases be open to attack by the other party once they learn of the order. One of the most common arguments that arises on challenges to ex parte motions is that the moving party failed to make “full and frank disclosure” of all the facts when they sought the ex parte order.
In Chitel v Rothbart, the Court of Appeal stated the following with respect to the basic obligation of full and frank disclosure on ex parte motions:
There is no necessity for citation of any authority to state the obvious that the plaintiff must, in securing ex parte interim injunction, make full and frank disclosure of the relevant facts, including facts which may explain the defendant's position if known to the plaintiff. If there is less than this full and accurate disclosure in a material way or if there is a misleading of the court on material facts in the original application, the court will not exercise its discretion in favour of the plaintiff and continue the injunction.1
In addition, Rule 39.01(6) of the Rules of Civil Procedure states that where a motion or application is made without notice, the moving party shall make full and fair disclosure of all material facts, and failure to do so is in itself sufficient ground for setting aside any order obtained on the motion or application.
With respect to the obligation of full and frank disclosure, Justice Brown explained in Levy v Fitzgerald that on ex parte motions, counsel for the moving party effectively has dual roles – “that of advocate for their client, but also that of devil’s advocate for the party not present
1 Chitel v Rothbart, 1982 CarswellOnt 508 at para 18 (CA).
9678673.5 4 - 1 - 2 - against whom an order is sought.”2 The law imposes this dual role to ensure that the judge has all known material facts which might affect the judicial decision-making process. In the same case, Justice Brown also summarized the principles regarding the practical application of the requirement to make full and frank disclosure in ex parte motions:
1) there must be full and fair disclosure of all material facts when an ex parte motion is brought; 2) material facts are those of which the court must be made aware in arriving at a decision, non-disclosure of which may affect the outcome of the motion; 3) the non-disclosure or misstatement must be such as was material to the decision and either would have made the decision doubtful or may have affected the outcome of the motion; 4) in making full and frank disclosure of the relevant facts, the plaintiff must include facts which may explain the defendant’s position, if known to the plaintiff; 5) it is insufficient for a plaintiff to simply append a document as an exhibit without highlighting in the body of the affidavit itself any important clauses or portions of the exhibit; 6) the onus on the plaintiff to make full and complete disclosure is not discharged by disclosing only what is the most limited basis of information that may be relevant. Full disclosure may and often will require a plaintiff to advise the court of matters of both fact and of law which form the position of the other side; 7) the test of materiality is an objective one; and 8) if a finding is made of material misrepresentation or material non-disclosure the court is not stripped of all of its discretion but, generally speaking, the ex parte order will be set aside.3
Consequences of non-disclosure
Failure to make full and frank disclosure on an ex parte motion can have significant consequences including the order being set aside, steep adverse costs awards, or other potential sanctions by the court. To avoid these potential consequences, it is important for counsel for the moving party to ensure that they are very careful and relatively balanced in presenting both sides of the story. The following case illustrates the problems that can arise when counsel does not meet this standard.
Levy v Fitzgerald involved a dispute over the ownership of shares in a company. The plaintiffs had come up with an idea for an internet company and approached outside investors for capital. A deal was struck with certain initial investors who were to put up $3 million and receive 50% of
2 Levy v Fitzgerald, 2012 ONSC 2015 at para 46. 3 Ibid at para 40; Sparkle Ventures Inc v At My Accounting Department Inc, 2011 ONSC 1972 at para 19.
9678673.5 4 - 2 - 3 - the company’s shares in return. It was the plaintiffs’ contention that, although they believed this to be the state of affairs of the shareholdings, they later discovered that the investors had put up much less than the $3 million contemplated by the deal, yet had received 84.5% of the company’s shares, leaving the plaintiffs holding only 16.5% of the shares. The plaintiffs had been unaware of this because the defendants had not given them access to the corporate, banking or accounting records of the company.
The plaintiffs obtained an injunction on an ex parte motion prohibiting the defendants from selling their shares until the true ownership of the shares could be determined. When the matter returned to court, the defendants argued that the Order should be set aside because the plaintiffs had failed to make full and frank disclosure of all the facts when they sought the injunction. The Court agreed – the plaintiffs had failed to make full disclosure of the material facts, particularly those facts that went against them. Among other things,
Levy failed to disclose that as president and secretary of WGL he executed all of the share certificates of the initial investors in December, 2009; previously he had received email communications showing the shareholdings of other investors in 2008 and 2009; he executed a March, 2010 shareholders' agreement which identified the holdings of each shareholder; and, he knew of a February, 2011 WGL subscription agreement which set out that management held 16.3% of the company's issued capital.4
As a result of the material non-disclosure, the Order was set aside. Justice Brown noted that the urgency of a situation does not detract from the obligation to make full and frank disclosure, but rather heightens that obligation. In this case, Justice Brown found the plaintiffs’ failure to be so egregious that, although dissolving the injunction order might result in the defendants removing their assets from Ontario, he considered preserving the integrity of the ex parte motion process to trump this concern.5
Similarly, in Sparkle Ventures Inc v At My Accounting Department Inc, failure to make full and frank disclosure led the Court to set aside a Mareva injunction. The moving party had failed to inform the Court that on the eve of the motion, they were still communicating with and seeking financial statements from the respondents. Although the Court had the discretion to continue the
4 Levy v Fitzgerald, supra note 2 at para 32. 5 Ibid at paras 60-62.
9678673.5 4 - 3 - 4 - injunction notwithstanding the failure to give full disclosure, it set aside the Mareva injunction despite evidence of a risk of dissipation of assets.6
In Factor Gas Liquids Inc v Jean, the Court set aside an Anton Piller order which had authorized the search of a defendant’s home for, among other reasons, the failure of the moving party to make full and frank disclosure. In addition, the Court made a substantial indemnity costs award against Factor Gas of approximately $500,000. Factor Gas appealed this decision, but it was upheld by the Divisional Court which noted that plaintiffs seeking Anton Piller orders on ex parte motions assume “significant responsibilities”.7 This case also demonstrates that even where a party satisfies the conditions necessary to issue an Anton Piller order, failing to make full disclosure at the initial ex parte motion gives the court on review or appeal the discretion to set the order aside.
In addition to putting clients at risk of substantial cost awards or adversely affecting the future success of the litigation, lawyers should also be aware of the risk of violating the Rules of Professional Conduct (the “Rules”). Failure to make full disclosure on an ex parte motion could be seen as violating section 2.1 of the Rules which requires lawyers to practise with integrity. Specifically, the Rules state that:
2.1-1 A lawyer has a duty to carry on the practice of law and discharge all responsibilities to clients, tribunals, the public and other members of the profession honourably and with integrity.
2.1-2 A lawyer has a duty to uphold the standards and reputation of the legal profession and to assist in the advancement of its goals, organizations and institutions.
In addition, the following rules, in section 5.1 relating to the lawyer as an advocate, are of particular relevance when considering the obligation of full and frank disclosure on ex parte motions:
5.1-1 When acting as an advocate, a lawyer shall represent the client resolutely and honourably within the limits of the law while treating the tribunal with candour, fairness, courtesy, and respect.
5.1-2 When acting as an advocate, a lawyer shall not
[…]
6 Sparkle Ventures Inc, supra note 2 at paras 55-57. 7 Factor Gas Liquids Inc v Jean, 2010 ONSC 5153 at para 1 (Div Ct).
9678673.5 4 - 4 - 5 -
(b) knowingly assist or permit the client to do anything that the lawyer considers to be dishonest or dishonourable,
[…]
(e) knowingly attempt to deceive a tribunal or influence the course of justice by offering false evidence, misstating facts or law, presenting or relying upon a false or deceptive affidavit, suppressing what ought to be disclosed, or otherwise assisting in any fraud, crime, or illegal conduct,
(f) knowingly misstate the contents of a document, the testimony of a witness, the substance of an argument, or the provisions of a statute or like authority,
(g) knowingly assert as true a fact when its truth cannot reasonably be supported by the evidence or as a matter of which notice may be taken by the tribunal,
[…]
(l) knowingly misrepresent the client's position in the litigation or the issues to be determined in the litigation;
[…]
5.1-4 A lawyer who has unknowingly done or failed to do something that if done or omitted knowingly would have been in breach of the rules in Section 5.1 and who discovers it, shall, subject to the rules in Section 3.3 (Confidentiality), disclose the error or omission and do all that can reasonably be done in the circumstances to rectify it.
In order to comply with rule 5.1-4, it may be necessary for a lawyer who has inadvertently failed to make full and frank disclosure to take positive steps to inform the court of such a mistake.
It should be noted that a mistake or non-disclosure on an ex parte motion does not necessarily mean that the order will be discharged. In Two-Tyme Recycling Inc v Woods, the Court found that the plaintiff had misstated and omitted certain facts, but did not do so deliberately and the omitted facts were found not to be material. The Court determined this to be an appropriate case to exercise its jurisdiction in favour of continuing the injunction despite its view that certain facts should have been disclosed.8 However, the Court further noted that even where there has been material misleading or non-disclosure that might have had an impact on the order being made, courts retain a residual discretion to decline to set aside an injunction.9
[I]nterpreting the rules against non-disclosure too strictly might encourage unscrupulous defendants to allege material non-disclosure when they have a hopeless case on the merits. The purpose of the rule is to deprive the plaintiff of an advantage improperly
8 Two-Tyme Recycling Inc v Woods, 2009 CarswellOnt 7181 at paras 43 (Sup Ct). 9 Ibid at paras 20-21.
9678673.5 4 - 5 - 6 -
obtained and to remind litigants of the duty to be frank and candid at ex parte applications. Where those principles do not apply, the rule is not as strictly enforced.10
Compliance with injunctions
Lawyers must also understand and be aware of their obligations to comply with injunction orders and their duty as officers of the court to take care to ensure respect for court orders.
Carey v Laiken is a recent Supreme Court of Canada case which demonstrates the importance of complying with court orders and, in particular, with injunctions. It is a decision that reinforces the seriousness with which courts will view a breach of the terms of Mareva orders and highlights certain available remedies where parties do not comply with such orders.
In this case, Ms. Laiken had obtained an ex parte Mareva injunction freezing the assets of various defendants, including Mr. Sabourin. The Order prohibited the defendants or those knowledgeable of the Order from “disposing of, or otherwise dealing with” the defendants’ assets. A few months after the Order, Mr. Sabourin’s legal counsel, Mr. Carey, obeyed the client’s instructions to return funds to the client after failed settlement negotiations, which had been paid into the solicitor’s trust account earlier. When Ms. Laiken learned of the transfer, she applied to have Mr. Carey found in contempt.
Ms. Laiken’s motion was granted, but Mr. Carey was successful in having the contempt hearing re-opened and the finding of contempt set aside. Ms. Laiken appealed this decision and the Court of Appeal reinstated the finding of contempt, which was appealed once again by Mr. Carey. At the Supreme Court, Mr. Carey argued against the application, claiming (1) that the release of funds was not a “transfer”; and (2) that the Mareva Order conflicted with Mr. Carey’s solicitor-client obligations, specifically relating to privilege. The Court rejected both arguments.
The Court stated that it would be illogical to interpret the Order as allowing trustees of assets held for the client’s benefit to freely transfer those assets between accounts and even between jurisdictions, potentially putting those assets beyond the reach of the court.11 The Court also found that there was not a true conflict between the Order and the solicitor’s professional duties such that he had no option but to transfer the trust funds back to his client. There was no legal or ethical duty that compelled Mr. Carey to breach the injunction by transferring trust funds back
10 Ibid at para 44. 11 Carey v Laiken, 2015 SCC 17 at paras 50-53.
9678673.5 4 - 6 - 7 - to the client or that conflicted with obeying the Order.12 The Court noted that Mr. Carey had the duty to avoid assisting his client in evading an execution arising from the judgment and it was not an answer for Mr. Carey to say that he breached the Order so that he would avoid the possibility of a future ethical dilemma.13
This thinking is reflected in section 3.2 of the Rules of Professional Conduct which states that lawyers must be on guard against becoming the tool or dupe of their client or persons associated with their client:
3.2-7 A lawyer shall not knowingly assist in or encourage any dishonesty, fraud, crime, or illegal conduct or instruct a client or any other person on how to violate the law and avoid punishment.
3.2-7.1 A lawyer shall not act or do anything or omit to do anything in circumstances where he or she ought to know that, by acting, doing the thing or omitting to do the thing, he or she is being used by a client, by a person associated with a client or by any other person to facilitate dishonesty, fraud, crime or illegal conduct.
3.2-7.2 When retained by a client, a lawyer shall make reasonable efforts to ascertain the purpose and objectives of the retainer and to obtain information about the client necessary to fulfill this obligation.
3.2-7.3 A lawyer shall not use their trust account for purposes not related to the provision of legal services.
Independent Supervising Solicitor in Anton Piller orders
In Celanese Canada Inc v Murray Demolition Corp, the Supreme Court set out extensive guidelines for the preparation and execution of Anton Piller orders, including the endorsement of the use of an independent supervising solicitor (“ISS”):
The order should appoint a supervising solicitor who is independent of the plaintiff or its solicitors and is to be present at the search to ensure its integrity. The key role of the independent supervising solicitor was noted by the motions judge in this case "to ensure that the execution of the Anton Piller order and everything that flowed from it, was undertaken as carefully as possible and with due consideration for the rights and interests of all involved". He or she is "an officer of the court charged with a very important responsibility regarding this extraordinary remedy".14
It is clear from the Celanese decision that the Court saw the presence of an ISS as a practical way of assuring the proper execution of an Anton Piller order as well as a way to avoid the
12 Ibid at paras 57-60. 13 Ibid at para 57. 14 Celanese Canada Inc v Murray Demolition Corp, 2006 SCC 36 at para 40.
9678673.5 4 - 7 - 8 - potential for plaintiff’s counsel to exceed the terms of the order such that the plaintiff gains an undue advantage in the litigation.
According to the Celanese guidelines, the role of the ISS is to:
act as a neutral officer of the court;
explain the order to the defendant, particularly pending the defendant obtaining its own legal advice;
supervise the search for and seizure of evidence from the defendant;
protect against the disclosure of apparently privileged materials;
provide a report to the court detailing the execution of the order including who was present and what evidence was seized; and
aid the court and counsel for all parties in technical matters.15
Consequences if ISS does not act properly
Walden Electrical Ltd v Lopes Mechanical Ltd is an example of a case where the ISS acted improperly. In this case, during the hearing on the ex parte motion for an Anton Piller order, the plaintiff’s counsel assured the Court that in addition to the plaintiff’s counsel, an “independent and separate” solicitor would be present at each location where the order was executed. Unbeknownst to the Court, the ISS was a lawyer who had acted previously for the plaintiff and whose involvement in the case had continued up to the time of the motion. In addition, that lawyer recommended an additional lawyer to act as ISS and this second solicitor’s firm had previously acted for the principal of Walden.
On review of the Anton Piller order, the Court concluded that not only were there significant issues with respect to the plaintiff failing to make full and frank disclosure, the plaintiff had also actively misled the Court by representing that the proposed search would be supervised by an independent solicitor. It was also clear that the purported ISS had, among other things: (1) done nothing to constrain or control the execution of the order; (2) permitted a representative of the
15 See the Model Anton Piller Order used on the Toronto Region Commercial List. See also Teledyne Dalsa Inc v Li, 2014 ONSC 1422 at paras 17-23.
9678673.5 4 - 8 - 9 - plaintiff to mark for seizure items that were not covered by the order; and (3) left the premises during the search to get lunch.16 The Anton Piller order was set aside.
In Grenzservice Speditions GmbH v Jans, the Court removed the searching lawyers from the record after they behaved ‘egregiously’ in the execution of a Mareva injunction with elements of an Anton Piller order.17 In this case, the plaintiff was claiming restitution for unjust enrichment in a customs fraud perpetrated on Germany. As a result of the alleged fraud of the defendants, the plaintiff, an Austrian customs broker, had become obligated to pay the German government the equivalent of about $4 million. A Mareva injunction was ordered which restrained the defendants from dealing with their assets in any way, and in support of this Order, an Anton Piller order was made authorizing the search and seizure of Deutschmarks at the defendants’ premises.
Safeguards were built into the Anton Piller order which included that the solicitor for the plaintiff (the “supervising solicitor”) who was to accompany the receiver authorized to conduct the search would be “acting as an officer of the court”.18 Although the Order was limited to the search and seizure of Deutschmarks and taking a list of assets, plaintiff’s counsel and counsel to the insurance adjusters:
also searched for documents that might provide evidence of the whereabouts of money;
took a sworn declaration from and engaged in unauthorized questioning of the defendants regarding their assets without their lawyer present;
questioned the defendants about documents that were privileged communications to or from the defendants’ lawyer; and
allowed unauthorized persons into premises to assist in and film the search.
In addition, the usual practice with regard to Anton Piller orders was not followed: (1) the Order was not served upon the defendants; (2) a detailed list of items copied or seized was not made; (3) the supervising solicitor did not file a written report to the court after the search; and (4) the supervising solicitor did not explain the Order to the defendants, nor did he advise them of their right to obtain legal advice before permitting entry.
16 Walden Electrical Ltd v Lopes Mechanical Ltd, 2006 CarswellOnt 8854 at paras 50-53 (Sup Ct). 17 Grenzservice Speditions GmbH v Jans, 1995 CarswellBC 1041 (BCSC). 18 Ibid at para 35.
9678673.5 4 - 9 - 10 -
The Court stated that the supervising solicitor appeared not to have “exercised the independent judgment, the prudence, the caution, and the respect for the rights of the defendants, that the Court expects of a supervising solicitor acting as an officer of the Court.”19 As the Anton Piller order had already been executed, the Court was unable to set it aside, but expressed its disapproval of the manner in which the Order was executed and removed the plaintiff’s counsel from the record. Additional damages suffered by the defendants were to be considered at trial.
Conclusion
Although injunctions are powerful tools for litigators, they need to be sought with care and with an understanding of the ethical obligations that may arise from their use or execution. In addition to being mindful of the Rules of Professional Conduct which govern the profession, it is especially important to be aware of how actions such as material non-disclosure of facts on ex parte motions, non-compliance with injunctions or the improper execution of orders may impact clients’ interests or affect the outcome of the litigation.
19 Ibid at para 86.
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TAB 5
Injunctions Primer for Litigators
Relevant Resources
November 1, 2016
Relevant Resources
The following are prepared and maintained by the Toronto Commercial List Users’ Committee and are reviewed from time to time in that committee. Further information can be found via the following link: http://www.ontariocourts.ca/scj/practice/practice- directions/toronto/#Commercial_List_Forms_including_Model_Orders
Mareva Order Form http://www.ontariocourts.ca/scj/files/forms/com/mareva-order-EN.doc
Precedent Order to Allow Entry and Search of Premises (Anton Piller Order) http://www.ontariocourts.ca/scj/files/forms/com/anton-piller-order-EN.doc
Receivership Order Form http://www.ontariocourts.ca/scj/files/forms/com/receivership-order-EN.doc
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