Court of Appeal addresses class action pleading standard for a breach of fiduciary duty claim

In Boal v. International Capital Management Inc., the Court of Appeal for Ontario addressed the pleadings standard for a proposed class action asserting breach of fiduciary duty against investment advisors in relation to the recommendation and sale of a specific investment. The Court of Appeal found that the claim discloses a reasonable cause of action for breach of fiduciary duty because, taken as a whole, the claim sufficiently pleaded that the relationship between all of the proposed class members and the investment advisors was one of vulnerability, trust, and reliance, in which the investment advisors undertook to act in the proposed class members’ best interests.

The issue

The central issue before the Court of Appeal was whether the statement of claim disclosed a cause of action on behalf of the proposed class members for breach of fiduciary duty — and, accordingly, whether the plaintiff met the pleadings requirement of the class certification test (s. 5(1)(a) of the Class Proceedings Act, 1992). The claim alleges that the investment advisor defendants owed their investment clients an ad hoc fiduciary duty and, further, that the investment advisors breached those fiduciary duties by recommending the purchase of certain promissory notes without disclosing that:

1. The investment advisors and their immediate family members owned 75% of the shares in the company issuing the promissory notes.
2. The investment advisors received commissions for each promissory note, and
3. The promissory notes were high-risk investments.

In Ontario, although the relationship between professional financial advisors and their clients is not always fiduciary in nature, investment advisors may owe their clients ad hoc fiduciary duties in some circumstances. The Supreme Court of Canada has directed that the question to ask is whether, given all the surrounding circumstances, one party could reasonably have expected that the other party would act in the former's best interests with respect to the subject matter at issue. Ontario courts typically use a multi-factor analysis to determine whether an ad hoc fiduciary duty should be recognized in the particular circumstances of a case.

The lower court decisions

Certification motion judge

The certification motion judge, Justice Perell, found that the claim failed to disclose a reasonable cause of action for breach of fiduciary duty because it failed to plead material facts establishing the existence of an ad hoc fiduciary duty. Justice Perell also reasoned that the existence of such a duty depends on the particular factual circumstances of each advisor-client relationship (such as financial circumstances, net worth, sophistication and expertise), and stated that, “in each individual case, it is contestable whether the relationship with the investor was a fiduciary relationship and, in each individual case, the breach of any fiduciary duty is idiosyncratic and not common.” Accordingly, he dismissed the plaintiff’s certification motion.

Initial appeal to the Divisional Court

On appeal, a majority of the Divisional Court affirmed Justice Perell’s decision, finding that the claim of breach of fiduciary duty is “essentially and in its entirety” based on professional rules, regulations, and bylaws, such as those of the Mutual Fund Dealers Association of Canada. The majority reasoned that recognizing a class-wide fiduciary duty based upon the pleaded claim would have “inappropriately” turned the existence of professional rules into the sole factor in determining whether an ad hoc fiduciary duty exists.

In dissent, Justice Sachs found that it was not plain and obvious that the pleaded breach of fiduciary duty claim could not succeed. Justice Sachs concluded that — in addition to the professional standards — the plaintiff sufficiently alleged that the investment advisors were more than mere “order-takers”. She found that, in relation to all the proposed class members, the statement of claim pleaded that the defendant investment advisors solicited and recommended the investment, profited from that investment, and had access to all of the information about the investment. Justice Sachs also found that, despite the motion judge’s comments on the need to consider the individual circumstances of each client, fiduciary obligations have been found in some cases “without regard to the sophistication of the client and in spite of the fact that the ultimate decision with respect to the investment rested with the client.”

The Court of Appeal

The Court of Appeal allowed the appeal, substantially for the dissenting reasons of Justice Sachs. The Court of Appeal found that, taken as a whole, the pleaded relationship between the proposed class members and the investment advisors was one of vulnerability, trust, and reliance, in which the investment advisors undertook to act in their clients’ best interests.

Accordingly, the Court of Appeal found that the claim met the pleadings threshold for the certification stage and remitted the action to the Superior Court of Justice for a fresh determination of the common issues and preferable procedure certification criteria. The Court of Appeal agreed with Justice Sachs that those non-pleadings criteria should be determined by a court of first instance; if an appellate court made the fresh determination, it could interfere with the parties’ future appeal rights regarding those matters.

Takeaways

The pleadings requirement of the class certification test is not a high hurdle: the plaintiff must establish that it is not “plain and obvious” that the claim has no reasonable prospect of success. However, this case helpfully demonstrates why that can be a difficult standard to apply in the class actions context to determine whether the pleading is sufficiently alleged not only in the circumstances of the proposed representative plaintiff, but also on behalf of all the proposed class members. And, although the Court of Appeal ultimately found that the action got past the pleadings threshold for certification, it remains to be determined by the Superior Court whether the evidence satisfies the commonality and preferability requirements.