Understanding Litigation In Canada

Co-Written By Michael A Penny & John A Terry

This article first appeared in the April 16^th issue of the New York Law Journal

With the exponential growth of cross-border commerce and investment, United States businesses are increasingly likely to find themselves having to deal with litigation in Canada. They may be sued or need to sue there, or seek tactical or strategic advantage by choosing to sue in Canada instead of the U.S. Knowing the key differences between commercial litigation in the two countries allows litigants to avoid surprises and misunderstandings that can occur when a U.S. company or its Canadian affiliate is in litigation in Canada. This knowledge should also result in faster and more effective responses by defendants to lawsuits in Canada; better communication between U.S. and Canadian counsel and clients involved in cross-border litigation; and more effective litigation strategies, particularly when a United States business has the option of - and may be better off - litigating in Canada instead of doing so here.

This article discusses these key differences and the strategic considerations of litigants who are faced with the choice between litigation in one country or the other. Specifically focus will be placed on differences between the two countries' court systems and judicial selection, pre-trial discovery, trials and juries, civil damage awards, recovery of legal fees, contingency fees and class actions.

Canada has federal and provincial court systems, just as the United States has federal and state court systems. There are, however, significant differences between the two systems in how they divide jurisdiction and select judges.

The vast majority of Canadian commercial litigation is commenced in the superior courts of the provinces, before federally appointed judges. The superior courts of each province have inherent jurisdiction over most civil and criminal proceedings, including commercial matters such as corporate and securities law, breach of contract and products liability. The Federal Court of Canada has no diversity jurisdiction comparable to that of U.S. federal courts that would permit it to hear matters under provincial law. The Federal Court of Canada is a statutory court with limited jurisdiction over specified federal matters such as maritime law, immigration, antitrust, certain intellectual property, and judicial review of federal administrative tribunals.

The selection of judges in Canada differs from their selection here. Canadian judges are not elected, but rather, all are appointed. Significantly, the Canadian federal government appoints judges to the provincial superior and appellate courts as well as to the Federal Court and the Supreme Court of Canada. The federal government also sets and pays these judges' salaries. Federally appointed judges serve for an indefinite term and are removed only for significant misconduct or upon retirement or resignation.

As a result of this appointment system, Canadian judges tend to be less susceptible to political and local concerns than are elected judges in the U.S. Depending on the nature of the suit, the judicial selection system may be a significant factor in a litigant's choice between a federally appointed judge in a Canadian court and a local judge and jury in a U.S. state court.

Pretrial discovery is generally more restricted in Canada than it is in this country. Litigants in Canada do not have the same rights and opportunities as do U.S. litigants to search for and assemble evidence prior to trial. This difference is an important consideration for any litigant involved in or contemplating Canadian legal proceedings.

In most Canadian provinces, the parties must make full disclosure of all relevant documents after the pleadings are served. The scope of documentary discovery of parties is roughly the same in Canada as in the U.S. In Ontario, for example, each party must serve an affidavit listing every document "relating to any matter in issue" that is or was in the party's possession, power or control. The "matter[s] at issue" are defined by the pleadings. A document must be produced if it has "some semblance" of relevance. The existence, but not the content, of privileged documents must also be disclosed in the affidavit of documents. All non-privileged documents must be promptly produced for inspection and copying. As do courts in the United States, courts in Canada resolve any disputes over documents withheld on the basis of privilege.

Depositions tend to be more limited in Canada than here. Oral examinations under oath for purposes of discovery are called "examinations for discovery" in Canada.

In most Canadian jurisdictions, including Ontario, there is only the automatic right to examine each individual party and one representative of each corporate party. Additional witnesses can be examined with leave of court, but leave can be difficult to obtain. These oral examinations are essentially the same as depositions in the United States, except that in some provinces witnesses may refuse to answer questions that are objected to on the basis of form or relevance until the witnesses are ordered to answer them by the court.

In addition, a corporate representative is accountable for obtaining and supplying relevant information from others in the company, including all relevant information not within the corporate representative's personal knowledge. The corporate representative may also be required, by way of an "undertaking," to obtain relevant information from other companies in a corporate group or from non-parties who were connected in some way to the corporate party in the circumstances underlying the litigation.

In contrast to the civil procedure rules in the United States, there is generally no prima facie right in Canada to secure documents and depositions directly from non-parties. In most provinces, including Ontario, a party seeking documents from a non-party must apply for a court order. Upon such an application, the courts consider whether the information is unavailable from other sources, including the parties, and the production is necessary to avoid unfairness.

Most Canadian provinces also do not permit non-party oral discovery without leave of court. A party

seeking non-party discovery has the burden of showing that

• ƒnthe information cannot be obtained from a person whom the requesting party is entitled to examine,
• it would be unfair to force the requesting party to proceed to trial without the examination,
• the trial would not be delayed, and
• ƒnthe examination would not cause unreasonable expense to the other parties, or be unfair to the non-party.

Canadian courts, however, permit cross-examination of witnesses in connection with motions. These examinations may include parties and non-parties, regardless of whether the witness has filed an affidavit on the motion. The cross-examination is conducted out of court, like a deposition, and the transcript is filed with the court as part of the record on the motion; the scope of these examinations is restricted to matters that are relevant to the pending motion. The motion cross-examination procedure is not considered part of discovery in Canada, but it can open the door to the broad discovery of information, particularly on, for example, a motion for summary judgment where the merits of the claim or defense are at issue.

One other difference that should be kept in mind is that, unlike in the U.S., discovery obtained in a proceeding in Canada cannot be freely used in other proceedings. Most Canadian jurisdictions impose an express or implied undertaking on the parties and their counsel, which prohibits them from disclosing or using evidence or information provided during discovery in an action for any purpose other than the prosecution or defense of that action. Violations of this undertaking can be punished with monetary sanctions and contempt-of-court orders.

A party may apply to a court for relief from the undertaking, but the desire to use the information in another lawsuit is not generally considered sufficient grounds for such relief. The effect of the undertaking is that the kind of information-sharing that occurs among plaintiffs' lawyers in the United States is not likely to be acceptable in Canada.

There is no constitutional right in Canada to trial by jury of civil claims. A party may request a jury, but the courts have broad discretion to deny a jury trial if the legal or factual issues are complex or if a defendant might be prejudiced. Thus, civil jury trials tend to be rare in Canada except in personal injury and insurance litigation. Although theoretically available, jury trials are virtually non-existent in complex commercial litigation.

The infrequency of civil jury trials in Canada results in greater certainty in litigation outcomes, less bias against a deep-pocket or foreign defendant, and lower damage awards, all of which are significant strategic considerations for all sides.

General damage awards in Canada are substantially lower than those in the United States, even in cases tried by a jury. The Supreme Court of Canada has capped damages for pain and suffering in personal injury actions at an amount that, in today's dollars, represents a ceiling of Cdn $250,000, or U.S. $150,000. Multi-million dollar compensatory damage awards in personal injury actions are, as a result, much less frequent in Canada than in this country.

Punitive damage awards in Canada are also less common and tend to be smaller than they are in the U.S. In addition, Canada has no statutes providing for treble damages, as antitrust and RICO statutes do in the United States. When awarded, punitive damages typically do not exceed $50,000. Punitive damage awards for $1 million or more are unusual, and billion dollar awards like those sometimes seen here have never happened in Canada. With substantially lower damage awards, litigation is less risky, and settlements of claims tend to be considerably less costly for defendants in Canada than they are in the U.S.

In Canada, unlike here, there is a general rule that the party who loses litigation must pay the winning party's legal costs. The definition of "costs" in Canada is broader than it is in the U.S. and includes legal fees and expenses. This loser-pays rule creates a dynamic in Canadian litigation that differs from that in U.S. litigation, except in large cases, where the legal costs are proportionately small in relation to the amount in issue. By partially compensating a winning party and increasing the monetary risk to the losing party, the Canadian courts discourage weak or questionable claims.

The procedure for assessing costs varies from province to province. Costs usually follow the event, but they can be awarded on motions and at other interlocutory stages.

In Ontario and most other provinces, legal fees can be recovered at two levels. First, "party-party costs" are awarded based on a prescribed tariff, with fixed amounts of reimbursement for specific tasks performed by counsel, such as discovery, examinations, court appearances and motions. Party-party costs do not fully indemnify the winning party, but may result in the recovery of approximately one-third to one-half of the winning party's actual legal costs.

Second, the court may award "solicitor-client costs," which are intended to indemnify the winning party fully for all reasonably incurred costs. Solicitor-client costs may result in the recovery of two-thirds to three-fourths of the winning party's actual legal costs. Solicitor-client costs are usually limited to cases in which a party or counsel has been guilty of misconduct (by, for example, asserting a claim without any basis or taking steps that unreasonably protract the proceedings), or in which a party has rejected a settlement offer that was better than the result at trial. The threat of such awards in Canada plays a more significant role than do sanction rules in the United States in discouraging parties from asserting frivolous claims. This threat is one reason, for example, that fraud claims are not as common in Canada as they are here.

As a further protection for defendants, Canadian courts in most jurisdictions may order a plaintiff to post security for a potential award of costs. Security may be required if the plaintiff is from outside the province (an important fact for potential U.S. litigants to keep in mind) or if there is reason to believe that the plaintiff has insufficient assets to pay a costs award. The court has discretion to deny a request for the posting of security if requiring security would have the effect of preventing the prosecution of a meritorious claim. In addition, courts often order that security for costs be posted in instalments as the litigation proceeds, rather than as one up-front lump sum.

Lawyers are permitted to use contingency fee arrangements in most Canadian provinces. In Ontario, however, lawyers are not permitted to use them except that in class actions, contingency fees are permitted but subject to court approval.

For some plaintiffs, this can make it more difficult financially to retain capable counsel and prosecute an action in Ontario than to do so in this country. A plaintiff's difficulty financing an action makes it more likely that the action may not be brought or may not be prosecuted as effectively. Even though contingency fee arrangements are permitted in most Canadian provinces, they are not used as much in Canada as they are here.

Class actions have been a major part of civil litigation in the United States for a long time. They are a more recent, but growing, phenomenon in Canada. Plaintiffs' class action lawyers in Canada have begun to copy actions first brought in this country and often make cross-border arrangements to work with plaintiffs' lawyers in the United States.

Only three provinces (British Columbia, Ontario and Quebec) have modern class action legislation. Class action rules have been proposed for the Federal Court of Canada, but these are still in the study phase. Among the three provinces with class action legislation the rules vary, but Ontario's class action regime is fairly representative.

The test for class certification in Ontario is easier than the test in the United States. The easier certification threshold is significant because defendants are more likely to settle class actions once certification is granted.

Under Rule 23 of the U.S. Federal Rules of Civil Procedure, class members must be sufficiently numerous to justify a class action, common issues must "predominate," a class action must be "superior" to other available means of adjudication, and the representative plaintiff's claims must be typical of the claims of the entire class. In contrast, a class action in Ontario requires only two or more plaintiffs. Common issues are required, but they need not predominate. A class action merely needs to be a "preferable" but not necessarily a superior means of adjudication. The representative plaintiff's claims need not be typical of the claims of the entire class. Ontario courts have the flexibility to allow for the creation of subclasses at any stage of the proceedings.

The general loser-pays rule applies to class actions. One might expect that this would create a strong disincentive towards acting as a representative plaintiff, because the liability for the costs of a class action may be large, while the representative plaintiff's individual recovery in the event of success may be small. This has not, however, been the Canadian experience.

Ontario has a Class Proceedings Fund that will, under certain circumstances, fund a plaintiff's disbursements and cover any adverse costs award. In addition, courts are more likely to exercise their discretion and deny or limit costs awards against a representative plaintiff in a class action than against a plaintiff in a non-class action. Ontario's class action rules specifically allow courts to consider whether the class proceeding involves a test case, raises a novel point of law or involves a matter of public interest in their decision whether to impose costs on a losing plaintiff. The risk of an adverse award of costs is a significant consideration for a defendant in a class action and may create a further incentive for a defendant to settle, particularly after class certification.

One of the biggest uncertainties of class actions in the United States is the outcome of a jury trial, particularly the potential for a jury to award astronomical compensatory and punitive damages. The absence of jury trials and the likelihood of lower damage awards are undoubtedly the most significant factors favoring a defendant in a class action proceeding in Canada.

Increased cross-border commerce and investment have also increased the likelihood that American

companies doing business in Canada will be exposed to litigation there. The differences between litigating in Canada and litigating in the United States discussed in this article should be considered by general counsel and business executives that may do, or that already do, business in both jurisdictions.

Steven R. Schoenfeld is a partner in the Litigation Department of Torys New York. Michael A. Penny is a partner and John A. Terry is an associate in the Litigation Department of Tory¡¦s Toronto. Torys is an international business law firm with 280 lawyers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.