Let’s be “mutually exclusive” - Alternative procedures in the preferable procedure analysis

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Jan 14, 2020

In the recently released decision Whitehouse v. BDO Canada LLP, Justice Perell rejected the Defendant’s arguments regarding the preferable procedure criterion of the certification test because the alternative proceeding that it argued was preferable was not “mutually exclusive” with the proposed class proceeding. While he refused to certify the class action on the basis that the plaintiff’s claims disclosed no cause of action, Justice Perell’s comments regarding alternative proceedings may make it more difficult for defendants to resist certification on the grounds of preferable procedure in future.

Background

The plaintiffs were investors in certain mutual funds issued by a company over which the Ontario Securities Commission appointed a Receiver after the company failed to deliver its annual audited financial statements. The plaintiffs subsequently commenced a proposed class action against BDO Canada LLP, which acted as auditors to the company, alleging negligence for failing to discover alleged fraud by management. As part of the receivership proceedings, the Receiver also commenced a direct action against BDO in the name of the company.

No cause of action

Justice Perell refused to certify the proposed class action for failing to meet the cause of action criterion for certification. Consistent with Hercules Managements Ltd. v. Ernst & Young and Lavender v. Miller Bernstein LLP, he found that while the company itself had a direct contractual right of action against its auditor, BDO did not owe a proximate duty of care to the plaintiffs and potential class members. Among other things, Justice Perell concluded that the statutory scheme of the Securities Act did not give rise to a free-standing duty of care on the part of auditors, and the interposition of the OSC between the plaintiffs and BDO rendered the relationship too remote to ground a duty of care.

Preferable procedure

BDO also argued that the preferable procedure criterion was not satisfied, as the Receiver’s action against BDO in contract was the preferable alternative procedure. Among other things, BDO submitted that resolving the issue of duty of care in negligence in the proposed class proceeding would substantially prolong a trial that could otherwise focus on whether there was a breach of contract in circumstances where BDO's potential liability in contract is conceded.

Justice Perell rejected BDO’s arguments in this regard, accusing the defendant of “huffing and puffing […] to blow the class proceeding down as not the preferable procedure.” He held that the Receiver’s action was not a true “alternative” to the class proceedings, as “alternative” procedures should be limited to situations where the two procedures are mutually exclusive.

In this case, Justice Perell found that the Receiver’s action and the proposed class actions were “complementary” or “supplementary” procedures that fit together, given that:

  • The same counsel acted for both the Receiver and proposed class;
  • The two cases had the same “factual footprint”;
  • The legal issues in the two cases were virtually identical; and
  • The two cases were proposed to be heard in a consolidated manner.

While these remarks were arguably in obiter (given that he had already decided that the plaintiffs’ claims disclosed no cause of action and the class action could not be certified), Justice Perell’s comments seemingly represent a novel approach to preferable procedure insofar as they appear to establish a higher threshold for alternative processes (i.e., mutual exclusivity). This decision may impact defendants’ ability to resist certification on this basis in the future, although it will be interesting to see how this analysis gets applied going forward.

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