Frustration of Contract and COVID-19

Introduction

Contract law has always served an important role in facilitating business and economic activity. In particular, the law has long recognized the foundational nature of commercial obligations and the largely unqualified policy basis for holding parties strictly to their bargained-for positions. A significant exception to the “absolute” nature of contractual obligations arises from the doctrine of frustration of contract. The doctrine recognizes a supervening event beyond the contemplation of parties to an agreement and results in the discharge of outstanding contractual obligations, subject to the applicability of frustrated contracts legislation. Recently, the doctrine of frustration has seen a renewed significance upon the outbreak of COVID-19 and its global impacts. This article offers an overview of the state of the doctrine of frustration, its relationship with force majeure clauses, and the legal effect of frustration under the common law as modified by frustrated contracts legislation. It also offers some observations with respect to the manner in which the doctrine may be applied to future cases arising from the circumstances of COVID-19. 

The Doctrine of Frustration: An Overview

The legal framework underlying the doctrine of frustration has been subject to considerable disagreement over the course of its development within the English and Canadian jurisprudence.  Frustration has been approached in a number of ways throughout its evolution, most principally in accordance with what are commonly known as the “total failure of consideration”, “implied term” and “radical change” approaches.

The total failure of consideration approach essentially requires a supervening event to interrupt an agreement to such an extent that one party does not receive any part of their bargain. In contrast, the implied term and radical change approaches require the happening of supervening events beyond the contemplation of the parties. The implied term approach views such supervening events as triggering an implied term for the discharge of the contract on the happening of the unexpected event. In contrast, the radical change approach permits the discharge of an agreement only where a supervening event results in the performance of obligations being ‘radically different’ from that originally bargained for by the parties.[1]

The total failure of consideration approach has largely fallen out of view beyond its adoption in the seminal English case of Krell v Henry [Krell].[2] Dubbed the most consequential of the ‘coronation cases,’ Krell involved the hiring of a room from which to view the procession of the coronation of Edward VII. Upon the cancellation of the procession on the grounds of the King’s illness, Krell brought a claim for the payment of monies under the contract. The English Court of Appeal found that the defendant had specifically hired “rooms to view the procession” and, in this way, construed the contract to fundamentally respect the viewing of the procession, rather than treating the procession as an ancillary aspect of the agreement. The Court concluded that the doctrine of frustration applied on the basis that the cancellation of the procession created a total failure of consideration.

The total failure of consideration approach seems to have originated in the earlier case of Taylor v Caldwell,[3] where frustration of contract was considered to have occurred at the instance that the music hall for hire had “perished” in a fire. Nevertheless, in light of the Court’s construction of the contract in Krell, both the implied term and radical change approaches would have served as adequate bases for frustration. In contrast, the UK House of Lords relied upon the radical change approach in Tsakiroglou & Co v Noblee & Thorl GmbH.[4] In that case, the Court held that the closure of the delivery route through the Suez Canal and the consequent extra time and expense required for delivery of goods had not rendered performance under the contract to be so radically different from that contemplated by the agreement to amount to frustration. In this way the Court seems to conceive of a very narrow scope for the doctrine, according with the ancient rule that parties to an agreement are to be held strictly to their bargains unless expressly provided for within the contract.[5]

The high-water mark of judicial disagreement with respect to the proper approach to the doctrine of frustration appears to be found in the decision of the UK House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd [Panalpina].[6] The case involved a lease agreement for the demise of a warehouse for commercial purposes. Upon the closure of the street serving as the only access point to the property as a consequence of a nearby planned demolition, the plaintiff brought a claim for unpaid rent. Although the Court was largely in agreement that the proper approach to frustration is the radical change approach, Lord Wilberforce appeared to regard the doctrine of frustration as entirely equitable in nature and thus incapable of constraint into a rigid legal framework. The appropriate formulation, in his opinion, is that which accords with the dictates of justice. In the case at bar, he preferred the implied term approach, noting with respect to the total set of potential approaches that it was “not necessary to attempt selection of any one of these as the true basis,” that “they shade into one another” and that “a choice between them is a choice of what is most appropriate to the particular contract under consideration.”[7]

In contrast, the Canadian jurisprudence is largely in agreement that the radical change approach is the proper approach to the doctrine of frustration. While the 1922 decision of the Supreme Court of Canada in Canadian Government Merchant Marine v Canadian Trading Co[8] seems to adopt the implied term approach, this was supplanted almost 80 years later by the decision of the Court in Naylor Group Inc v Ellis-Don Construction Ltd,[9] which adopted the radical change approach to frustration. The latter case involved a claim for breach of contract stemming from the award of a construction contract to a subcontractor in breach of the bidding agreement. The appellant argued that the supervening event was a decision of the Ontario Labour Relations Board (OLRB) precluding it from considering the bids of subcontractors not affiliated with a certain union. Mr. Justice Binnie, writing for the Court, held that supervening events will not result in frustration unless they were unforeseeable and beyond the control of the parties. In particular, what the doctrine requires is a supervening event that alters the nature of the party’s obligation to contract to such an extent that to compel performance despite the changed circumstances would be to order the party to do something radically different from what they had agreed to under the contract. In the case at bar, the Court considered the decision of the OLRB to be a retroactive affirmation of the pre-existing collective bargaining agreement, rather than a novel statement of the obligations of the parties. Because the decision of the OLRB was not considered to create any new obligations, there was no radical change and no basis to apply the doctrine of frustration.

Similarly, the Ontario Court of Appeal in Capital Quality Homes Ltd v Colwyn Construction Ltd considered the radical change theory as the proper approach to the doctrine of frustration. In reviving the doctrine of frustration within the realm of real property transactions, the Court rejected the implied term approach, instead characterising the supervening event as an instance of “frustration of the common venture” encroaching upon the fundamental identity of the bargain.[10] The radical change approach was also applied by the British Columbia Court of Appeal in both KBK No. 138 Ventures Ltd v Canada Safeway Ltd[11] and Rickards (Estate of) v Diebold Election Systems Inc, the latter being one of the most recent statements on the law of frustration by our Court of Appeal. In that case, the Court viewed the radical change theory as requiring something akin to the deprivation of “a substantial part of the consideration for which [a party] had bargained.”[12] In this way the Court seems to have somewhat revived the “failure of consideration” perspective of frustration, albeit within the confines of the accepted radical change approach.

In general, the cases emphasize that frustration will not apply where the change in circumstances makes a party’s performance more expensive or onerous but does not prevent the party from performing the agreement.[13] Nor will the fact that changed circumstances make the contract non-advantageous or uneconomic for a party, provided that the contract can still be performed in accordance with its terms.[14] In such cases, it cannot be said that compelling performance despite the changed circumstances would be to order the parties to do something radically different from what had been agreed. Parties to a contract are understood to accept that the bargains they strike may become more or less economically advantageous, and performance more or less onerous, depending on the many external local, national and global events which continually impact the interests of parties. The law is understandably reluctant to excuse parties from bargains that are no longer valuable in hindsight, and it is only upon the happening of “black swan” events that the doctrine of frustration is realistically available.

In the same vein, courts have drawn a distinction between changes which are temporary or transient as opposed to permanent.[15] Where a change is temporary, it may temporarily interrupt performance or make it less economically viable, but it will not give rise to frustration unless it renders a complete change to the nature of the obligations. For instance, the Court in Panalpina was reluctant to recognize the street closure in that case as a true supervening event in consideration of the fact that the closure had not entirely abrogated the party’s remaining rights under the lease agreement, and was comparatively brief in relation to the entire term of the lease. In that case, it was decided that an interruption of one year in a contract conferring rights over a period of ten years was not sufficient to meet the radical change standard.

In addition, the doctrine of frustration will generally not apply where the party seeking to rely on it has brought about or contributed to the supervening event in the sense that the frustration is “self-induced.”[16] This principle arises from the requirement that the supervening event be beyond the control of the parties as well as the ancient principle that a party cannot rely on their own blameworthy conduct to escape liability.[17] In some cases, frustration may be partially self-inflicted in that the unexpected event exacerbates some pre-existing frailty, such as undercapitalization, poor management or existing supply chain issues. In such cases, parties are much less likely to obtain the protection of the doctrine of frustration.[18]

Frustration’s Relationship With Force Majeure

As discussed above, the doctrine of frustration typically applies only where a supervening event arises such that compelling performance despite the changed circumstances would be to order the parties to do something radically different from what had been agreed. Because of this, the doctrine of frustration should not apply where the parties have put their mind to the possibility of the “black swan” and made express provision for its arrival in their contract. In such cases, it cannot be said that the event was unforeseen.

It is for this reason that the doctrine of frustration generally has no applicability in cases where the contract contains a force majeure or other clause which makes provision for the contractual outcome in the event of the occurrence of the supervening event. In such cases, if the force majeure clause is triggered and thereby ends the contract it is not because the contract is frustrated but, rather, because the parties agreed to that outcome.[19]

The applicability and effect of any given force majeure clause depends on its language and the interpretation given to the language. Such clauses tend to be construed strictly and narrowly.[20] In some cases, the interpretation of a force majeure clause may impact the issue of whether the doctrine of frustration is available. For example, where a force majeure clause expressly makes provision for certain possibilities but excludes the one that did occur, this may provide a strong basis to conclude that the doctrine of frustration applies.

The Effect of Frustration at Common Law and Statute Law

The common law doctrine of frustration provides that upon the happening of a frustrating event the contract comes to an immediate end. The result is that neither party has any future obligations under the contract, although the contract is treated as having been valid and effective until the time of frustration. With respect to the situation after the moment of frustration, the common law essentially treats any losses as laying where they fall. While this may achieve a just result in some cases, it will create unfair outcomes in others.

For example, a supply agreement which is frustrated by some unexpected event after the date of supply but prior to the due date for payment may result in the purchaser becoming relieved of its obligation to make payment, thereby conferring on them an unfair windfall. While some courts found ways to avoid such unfair outcomes, such as by finding a total failure of consideration and thereby unravelling the entire bargain,[21] or considering some contractual obligations to have been severed from the contract prior to the time of frustration[22], these were often uneasy fits.[23]  For example, the total failure of consideration approach was limited in that the failure had to be “total”, meaning that the escape hatch was inaccessible where at least some consideration had passed.[24]

In response, legislatures attempted to equip courts with scalpels where the common law of frustration provided only blunt instruments. In the words of one appellate court judge, frustrated contracts legislation “allows a court to step in and to alleviate against some of the common law harshness with respect to frustration.”[25] In British Columbia, the applicable legislation is known as the Frustrated Contract Act (the “Act“).[26] There is similar legislation in all other Canadian jurisdictions, except Nova Scotia.[27]

The Act received very little attention during its debate in the British Columbia legislature in 1974. In general, it was superficially characterized as legislation that permitted “a settlement of claims to be worked out” given that the common law permitted recovery in the event of a “total failure of consideration” but not “partial failure”. It was also characterized as a “pruning Act” which “takes the unworkable parts of common law and adjusts them to the present-day practises and interpretations”.[28]

To-date, the Act has received very limited judicial attention, as has the comparable legislation in other Canadian jurisdictions.[29] On the face of the language of the Act, it permits the severance of those parts of the contract that were wholly performed or wholly performed except for payment at the time of the frustrating event. The Act requires that those severed aspects be treated as separate contracts that have not been frustrated. The Act also provides parties with the ability to claim restitution for any benefits they conferred on their counterparties prior to the time of frustration. The Act sets out a formula for calculating the value of such benefits, although it is limited to reasonable expenditures and excludes profit. In addition, where the frustrating event has created a loss in the value of a benefit conferred, the Act requires that the parties equally bear that loss.

The Act does not purport to modify the common law as it pertains to determining whether a contract has been frustrated. In particular, section 1 of the Act provides that it applies to contracts “from which the parties to it are discharged by reason of the application of the doctrine of frustration”. Further, section 2 of the Act expressly provides that it only applies to contracts which “contain no provision for the consequences of frustration”.

The language of section 2 is uncertain. In particular, it is not clear to what the Act refers when it speaks to a provision “for the consequences of frustration”. Viewed through a common law lens, the reference should not include a force majeure clause because in the presence of such a clause there can be no frustration. However, the alternative is that the section refers to a clause which specifies the outcome in cases where the contract has been frustrated. Such clauses are rare, and it would be an unusual contract that contains no force majeure clause but does contain a provision which dictates the consequences of frustration. Nevertheless, in a recent decision the British Columbia Supreme Court stated in obiter that the Act applies “[i]f frustration is established and the contract provides no guidance on what to do in the event of frustration”, which suggests that section 2 of the Act contemplates the existence of a clause which specifically provides for the consequences of frustration.[30]

In addition, section 6 of the Act provides that a party that has partly performed a contractual obligation is not entitled to restitution if there is “(a) a course of dealing between the parties to the contract”, “(b) a custom or a common understanding in the trade, business or profession of the party so performing”, or “(c) an implied term of the contract” to the “effect that the party performing should bear the risk of the loss in value.” The first two of these factors might be considered in determining whether a term should be implied into a contract,[31] which makes them an odd fit with the third factor which is arguably more in the nature of a legal conclusion to be reached based on the first two factors.

Moreover, there appears to be a fundamental inconsistency between section 6 and the other aspects of the Act. In particular, section 6(c) provides that restitution is not available where there is an “implied term” that one party is to bear the loss caused by the supervening event. However, in cases where there is such an implied term, that term could arguably be characterized either as a force majeure clause or as a “provision for the consequences of frustration”, which is the language used in section 2. However, contracts that contain force majeure clauses cannot be frustrated, and, if the implied term constitutes a “provision for the consequences of frustration” within the meaning of section 2, then the Act does not apply by virtue of section 2. Accordingly, if a contract has an implied term then the Act may well not become engaged in the first place.

It is also not clear why parties are precluded from claiming restitution under the Act where an exception in section 6 applies. Given that the Act appears intended to provide courts with the flexibility to do justice in all cases, it would arguably better support the object of the Act to permit courts the latitude to determine, unrestricted by section 6 of the Act, whether restitution is appropriate. It is also not clear whether restitution in unjust enrichment is available where restitution under the Act is not.[32] The Act does not appear to preclude such a claim, so this avenue may remain open.

There is also uncertainty with respect to when performance of a contract will constitute a “benefit” sufficient to trigger restitution. Section 5(1) of the Act provides that “every party to a contract to which this Act applies is entitled to restitution from the other party or parties to the contract for benefits created by his performance or part performance of the contract”. The term “benefit” is broadly defined in section 5(4) of the Act to mean “something done in the fulfilment of contractual obligations, whether or not the person for whose benefit it was done received the benefit.” In one case, the British Columbia Supreme Court found that a plaintiff who had agreed to write some chapters of a proposed school textbook had provided a “benefit” to the defendant within the meaning of the Act notwithstanding that the contract had been frustrated by a change in the curriculum which rendered the plaintiff’s work superfluous to the defendant. Yet, in a subsequent case, the Court found that no “benefit” within the meaning of the Act was created by a purchaser who had expended time, effort and funds to obtain subdivision approval in respect of a property which was the subject of a frustrated contract of purchase and sale because that work had not benefited the seller.[33] These different approaches to the concept of “benefit” under the Act indicate a tension between the plain language of the Act and the idea that no restitution should be available unless the benefit is a tangible one that survives the frustrating event and actually enriches the other party. This is a sensible approach, given that the underlying rationale of the Act appears to be to prevent the unjust enrichment of one party at the expense of the other.

COVID-19 as a Supervening Event

COVID-19 will undoubtedly generate litigation which prominently features the law of frustration. In this section, we offer some observations on the manner in which the legal framework may apply in COVID-19-related frustration cases.

Notwithstanding the magnitude and unprecedented nature of COVID-19, it is unlikely to provide parties with an automatic ‘free pass’ in respect of their failure to meet their contractual obligations. The pandemic is not an automatic frustrating event, but it may have consequences which impact certain contractual relations in a way that results in frustration.[34] For example, a supply contract does not become frustrated merely by the happening of COVID-19; it becomes frustrated, for example, by the decision of a jurisdiction to close its borders in a way that makes it impossible for the supplying party to deliver its goods. Accordingly, the analysis should be focused on the specific impacts of the pandemic on the parties and exactly how those impacts have brought a radical change to their contractual relations. Hardship and inconvenience will be insufficient, and, given the pandemic’s wide impact, one might expect courts to be cautious in applying the doctrine, reserving it for only the most compelling cases.

In conducting this analysis, courts may face challenges distinguishing between the uncontrollable impacts of COVID-19 and the impacts of related or intermingled matters that were arguably within a party’s control. Where a government decision clearly has the effect of suspending certain non-essential business activity (and thereby making performance illegal), the result on application of the doctrine of frustration should not be hard to predict.[35] However, where a party has voluntarily adopted policies or measures in accordance with public health directives intended to limit the spread of COVID-19, and it is those voluntary actions which impose a radical change on the contractual relationship, will the doctrine of frustration be unavailable because the true supervening event was not beyond its control? Or, where a party had pre-existing frailties that were exacerbated by the circumstances of COVID-19, but without which there would not have been any supervening event, will the doctrine be unavailable because the frustration was partially self-inflicted? In the former, more sympathetic scenario, one might argue that the doctrine of frustration ought to evolve to protect parties that have taken prudent steps to protect the wellbeing of others. The solution in such cases may be to incorporate a rule excusing a party where they acted in good faith and in a commercially reasonable manner. By evolving the common law in such a manner, courts can also make available the restitutionary features of the Act, thereby helping achieve a more just allocation of losses.

It may be that many COVID-19 frustration cases will involve extensive discovery processes in an effort to distinguish the uncontrollable impacts of COVID-19 from the impacts of related or intermingled matters that were within the party’s control. For example, while a party may plead frustration on the basis that COVID-19 made it impossible for the party to source sufficient labour to meet its contractual obligations, discovery processes may uncover that the party’s management chose to allocate the party’s remaining available labour to the performance of other contracts, with the result that frustration was arguably self-inflicted. In more complex cases, expert evidence may be required for courts to make findings as to the manner in which the consequences of COVID-19 impacted the parties and their economic relations.

For contracts entered into after COIVD-19 was declared a pandemic, parties are unlikely to obtain the benefit of the doctrine of frustration given that the circumstances were or should have been known to them such that they are not unforeseeable. On a related point, given that COVID-19 represents only one of a number of pandemics that have arisen over past decades, it may become more difficult for parties to rely on the doctrine of frustration in the event of future pandemics. Rather, courts may for some time into the future treat pandemics as events that should have been foreseeable by parties. As a result, parties should consider including well-drafted force majeure clauses in their contracts which specify the outcome in the event that a future pandemic impacts the contractual relationship. By doing so, parties may achieve greater contractual certainty and avoid a potentially frustrating experience.

This article was also published here: “How Frustrating: The Doctrine of Frustration in the Age of COVID-19” (2020) 78:5 Advocate (Vancouver Bar Association) 685.

A substantially expanded and updated version of this article, which is more broadly focused on the law across Canada and informed by recent decisions concerning the doctrine of frustration in the context of COVID-19, was also published here: “Frustration of Contract in the Era of COVID-19” (2021) 51:1 The Advocates’ Quarterly 418.

[1] GHL Fridman, The Law of Contract in Canada, 5th ed (Toronto: Carswell).

[2] Krell v Henry (1903), 2 KB 740 (EWCA).

[3] Taylor v Caldwell (1863), 122 ER 309 (EWHC).

[4] Tsakiroglou & Co v Noblee & Thorl GmbH (1961), 2 All ER 179 (UKHL).

[5] See Paradine v Jane, where the Court expressed the view that contracts are “absolute” in the sense that impossibility is never an excuse unless expressly provided for in the contract.

[6] National Carriers Ltd v Panalpina (Northern) Ltd (1981), 1 All ER 161 (UKHL) [Panalpina].

[7] Ibid at 8.

[8] Canadian Government Merchant Marine v Canadian Trading Co (1922), 64 SCR 106 (SCC).

[9] Naylor Group Inc v Ellis-Don Construction Ltd (2001), [2001] 2 SCR 943 (SCC).

[10] Capital Quality Homes Ltd v Colwyn Construction Ltd (1975), 61 DLR (3d) 385 (ONCA) at 17.

[11] KBK No. 138 Ventures Ltd v Canada Safeway Ltd (2000), 185 DLR (4th) 650 (BCCA).

[12] Rickards (Estate of) v Diebold Election Systems Inc (2007), 69 BCLR (4th) 75 (BCCA) at para 39.

[13] See e.g. Delta Food Processors Ltd. v. East Pac. Enterprises Ltd. (1979), 16 BCLR 13 (BCSC).

[14] Supra note 1.

[15] See e.g. Polia v. Trelinski (1997), 32 RFL (4th) 209 (BCSC).

[16] See e.g. Maritime National Fish Co. v. Ocean Trawlers Ltd., [1935] AC 524 (PC).

[17] See e.g. Commr. of Agricultural Loans of Cont. v. Irwin, [1942] SCR 196 (SCC).

[18] See e.g. Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp & Paper Co., [1975] SCJ No. 46 (SCC) [Atlantic Paper], which involved a 10 year supply contract for the supply of waste paper utilized in the production of corrugation. Approximately one year into performance of the contract, the customer advised the supplier that it would no longer accept delivery of the waste paper. The Court held that the primary cause of the customer’s failure to perform its obligations was its lack of an effective marketing plan for its product. Although the case is a force majeure case rather than a frustration case, the same reasoning would presumably apply if there were no force majeure clause and the party had pled frustration instead.

[19] Ottawa Electric Co. v. Ottawa (City), [1903] OJ No. 520 (ONCA); Dover Corp. (Canada Ltd. v. Maison Holdings Ltd., [1976] AJ No. 607 (ABCA).

[20] Supra note 18.

[21] Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., [1943] AC 32 (HL).

[22] Appleby v. Myers (1867), LR 2 CP 651 (Ex. Ch) [Appleby].

[23] Ibid; St. Catharines (City) v. Ontario Hydro-Electric Power Commission [1927] OJ No. 139, 61 OLR 465 (Ont HC), aff’d [1928] OJ No. 39, 62 OLR 301 (Ont. CA).

[24] Supra, note 21.

[25] Witwicki v. Midgley, 1979 CarswellMan 100 (MBCA) at para. 10., rev’ing 1976 CarswellMan 63 (MBQB).

[26] RSBC 1996 c. 166.

[27] Frustrated Contracts Act, RSA 2000, c. F-27; CCSM c. F190; RSNB 2011, c. 164; RSNL 1990 c. F-26; RSNWT 1988, c. F-12; RSNWT (Nu.) 1988, c. F-12; RSO 1990, c. F.34; RSPEI 1988, c. F-16; SS 1994, c. F-22.2; RSY 2002, c. 96.

[28] Hansard, March 18, 1974, pages 1299-1300.

[29] For the more notable of the reported decisions, see e.g. Pure v. BC-Alta, 2019 BCSC 390 at paras. 81-84, Fort St. John Aircraft Maintenance Ltd. v. Canadian Indemnity Co., 1983 CarswellBC 1366 at paras. 10-12 and British Columbia v. Cressey Development Corp., 1992 CarswellBC 1133 at paras. 9-13.

[30] Pure v. BC-Alta, 2019 BCSC 390 at paras. 81-84.

[31] Moulton Contracting Ltd. v. British Columbia, 2015 BCCA 89 at para. 53.

[32] Prior to the enactment of the Act, the common law permitted recovery on the basis of a total failure of consideration, which is a quasi-contractual concept more grounded in restitutionary principles. See e.g. the decision of the House of Lords in Firbosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd., [1943] A.C. 32 (HL) which held that in situations involving a total failure of consideration there could be recovery essentially on the basis of restitutionary principles.

[33] British Columbia v. Cressey Development Corp., 1992 CarswellBC 1133 at paras. 9-13.

[34] There is some support for this concept in the comments of Kerans J.A. of the Alberta Court of Appeal in Atco Ltd. v. Continental Energy Marketing Ltd., [1996] 6 WWR 274 (ABCA) where a distinction was drawn between the alleged supervening event and the “proximate cause” of the interruption of the supply arrangement, which was the supplier’s decision to cut off supply to the buyer. Kearns J.A. emphasized that a force majeure clause is not just about the occurrence of an event, but about the effect of that event on the party seeking its protection. Arguably the same analysis ought to apply in frustration cases.

[35] One interesting question is whether governments may obtain the benefit of the doctrine of frustration where it was in fact their decisions which resulted in the supervening event. Previous case law suggests that the doctrine will not be available in such circumstances: see e.g. Wells v. Newfoundland, [1999] 3 SCR 199.

Schuppener v. Pioneer Steel Manufacturers Limited: Forum Selection Clauses and Public Policy

On January 21, 2020, the British Columbia Court of Appeal issued its decision in Schuppener v. Pioneer Steel Manufacturers Limited. The decision offers guidance with respect to the threshold to be met in order for considerations to rise to the level of public policy factors compelling enough to justify judicial intervention with freedom of contract in the context of forum selection clauses.

Background

The plaintiff/respondent purchased a steel storage building from the defendant/appellant, a manufacturer. The respondent allegedly became injured during his use of the building and commenced an action in the British Columbia Supreme Court against the appellant in negligence and breach of contract.

The contract between the appellant and respondent contained a forum selection clause which provided that any claim in connection with the supply of the building had to be commenced in the Ontario courts. Accordingly, the appellant brought an application seeking an order staying the proceedings in British Columbia on the basis that the forum selection clause applied to the claim and there was no reason not to enforce it.

The chambers judge hearing the application was required to apply the “strong cause” analysis, which is a two-part analysis applied to determine the enforceability of forum selection clauses. This analysis was settled by the Supreme Court of Canada in Z.I. Pompey Industrie v. ECU‑Line N.V., and recently modified in the consumer context by the Supreme Court of Canada in Douez v. Facebook, Inc., a three-way split decision.

In Douez, the plaintiff brought a proposed class action against Facebook, the large social network, for infringing the privacy rights of almost two million Canadian customers. This gave rise to complex legal issues regarding statutory privacy rights. The plaintiff’s standard form electronic contract with Facebook contained a forum selection clause providing that disputes would be litigated in California. Relying on the forum selection clause, Facebook moved to have the British Columbia action stayed. The Court applied the strong cause analysis and ultimately declined to enforce the forum selection clause on the application of the second stage of the analysis, which engages public policy. Three judges of the Court with Abella J. concurring in the result (and McLachlin C.J. and two others in strong dissent) found that “strong cause” existed due to the gross inequality of bargaining power and other “reasons of public policy that are compelling”, including the interest in Canadian courts adjudicating cases “impinging on constitutional and quasi-constitutional rights because these rights play an essential role in a free and democratic society and embody key Canadian values.”

Post-Douez, the two-part legal analysis requires that courts first determine whether the forum selection clause is enforceable and applies to the claim. The party seeking to enforce the forum selection clause bears the burden of proof at this stage. If this part of the test is met, courts then turn to assessing whether there are strong reasons not to give effect to an otherwise enforceable forum selection clause. The party seeking to displace the forum selection clause bears the burden of proof at this stage of the analysis. In addition, when the forum selection clause in question is contained in a consumer contract, courts should take account of all the circumstances of the particular case, “including public policy considerations relating to the gross inequality of bargaining power between the parties and the nature of the rights at stake.”

The chambers judge began by correctly determining that the forum selection clause, which was broadly worded, applied to the claim. Turning to the second stage of the analysis, the chambers judge properly considered a variety of circumstances, including the convenience to the parties, fairness between the parties, and the interests of justice. In addition, the chambers judge correctly identified that the consumer context required that he consider a “broader range of circumstances”, namely public policy factors.

In particular, the chambers judge found it “highly relevant” that the forum selection clause was contained in a standard form contract, meaning that the respondent had no ability to negotiate the applicability or terms of the clause. This determination was made notwithstanding the fact that the chambers judge had concluded, earlier in his reasons, that there was “no significant inequality of bargaining power” between the parties.

In addition, the chambers judge relied on the fact that the action sought damages in negligence for personal injury and was not a mere commercial dispute over a breached contract. The chambers judge appeared to be of the view that public policy interests were furthered by having the personal injury claim in negligence and product liability heard in British Columbia as opposed to Ontario. This determination was made notwithstanding that the chambers judge determined, earlier in his reasons, that there was no reason to believe that the governing law in Ontario would differ significantly from the law of British Columbia.

Lastly, the chambers judge relied on the fact that the respondent had alleged that the appellant sold the building to the respondent with knowledge that the product was unsuitable for the climatic conditions in British Columbia. The chambers judge reasoned that the public had an interest in seeing such a claim litigated in British Columbia where the issue arose and the damages were suffered.

Decision

The British Columbia Court of Appeal allowed the appeal and transferred the claim to the Ontario courts. The Court acknowledged that the chambers judge’s decision was discretionary and that the standard of review is deferential, but concluded that the chambers judge “erred in principle by characterizing ordinary considerations as matters of public policy compelling enough to justify overriding the forum selection clause.”

In the course of its analysis, the Court held that it is “important in conducting the strong cause analysis to bear in mind the principle that courts do not have discretion to refuse to enforce valid contracts unless there is some paramount consideration of public policy sufficient to override the public interest in freedom of contract.”

The Court held that the chambers judge erred in elevating the three factors described above to public policy factors sufficient to override the forum selection clause. With respect to the first factor, the Court held that the law “does not support the proposition that inclusion of a forum selection clause in a non-negotiable standard form consumer contract always raises a public policy concern sufficient to offset the public policy interest in holding parties to the terms of their bargain.” In addition, the Court held that “[n]either standard form contracts nor forum selection clauses raise public policy interests per se” and that courts will “generally give effect to the terms of standard form consumer contracts absent legislative intervention.”

As the Court recognized, it is not the fact that a forum selection clause is in standard form that gives rise to public policy concerns, but rather the existence of gross inequality of bargaining power between the parties. Because the chambers judge had found that there was no significant inequality of bargaining power, “the standardized form of the contract itself does not raise a public policy concern.”  

In addition, the Court noted that “[i]n many respect, the contract in issue falls closer to the sophisticated commercial contract end of the spectrum”, unlike the contract at issue in Douez, which was a “minor consumer transaction” entered into electronically. As the Court noted, in the present case the transaction had significant value, and was “more akin to the purchase of a vehicle”. The Court further held that transactions of this kind “occur infrequently in the lifetime of the average consumer and command heightened attention and scrutiny.”

Turning to the second factor relied upon by the chambers judge, the Court held that the claim at issue was categorically different than that in Douez. In particular, in Douez “the matter engaged a unique British Columbia statute which had no equivalent in the other jurisdiction.” In addition, in Douez “the nature of the claim was a strong reason to override the forum selection clause because it involved the choice between a Canadian and a foreign court and involved a quasi-constitutional right.” In contrast, the “present case concerns two competing Canadian forums with roughly equivalent laws of contract, personal injury and product liability.”

With respect to the third factor, the Court held that there was nothing unique to British Columbia about the cause of the building’s collapse as allegedly related to the climatic conditions in British Columbia. The Court observed that the difficulty in relying on that factor is that “there will always be a public interest in seeing cases with facts and damages arising in a particular province litigated in that province.” The Court accepted that this is a factor which relates to the balance of convenience and should be considered as part of the second stage of the strong cause analysis, but held that “it will rarely rise to the level of a public policy concern.”

Although the Court did not articulate the threshold to be met in order for a factor to raise to the level of a public policy concern, it confirmed that the power of courts to refuse enforcement on the grounds of public policy is a power which should be “rarely exercised” and only in compelling cases where “the harm to the public is substantially incontestable, and does not depend upon the idiosyncratic inferences of a few judicial minds.” In addition, the Court noted that it is “helpful to consider the categories of public policy interests traditionally held to be sufficient to override a contractual bargain”, which include those that are found to be injurious to the state, injurious to the justice system, in restraint of trade, involving immortality or affecting marriage. While the Court held that “the categories of public policy are not closed”, it cautioned that “significant judicial restraint is called for”.

Analysis

Following the decision of the Supreme Court of Canada in Douez, there was considerable uncertainty regarding the manner in which the strong cause test would be applied in future cases involving consumer contracts. In particular, there was uncertainty as to the manner in which courts would apply the two public policy factors noted in Douez – namely those related to “gross inequality of bargaining power” and the “nature of the rights at stake”. The decision in Schuppener provides some guidance on both factors.

Inequality of Bargaining Power

In Douez, the majority held that there was gross inequality of bargaining power because the forum selection clause in that case was contained in a “consumer contract of adhesion” which was not subject to negotiation. Following that decision, there was concern that all consumer contracts of adhesion would have this public policy factor weighing against them.

The decision in Schuppener clarifies that the public policy factor related to gross inequality of bargaining power will not invariably arise whenever the contract at issue is in standardized form and non-negotiable. To the contrary, the decision confirms that there is nothing wrong with standard form, non-negotiable agreements in and of themselves. They only become concerning when they arise in an environment of gross inequality of bargaining power. Accordingly, what must be examined is the power dynamic between the parties. While the fact that a contract is in standard form may be a contextual factor to consider in that analysis, it is not determinative.

As the appellant submitted before the Court, there is a distinction to be drawn between bargaining power and bargaining position. Whether or not there is gross inequality of bargaining power in any given case is a function of market factors, not the parties’ bargaining positions. This can be illustrated with the following hypothetical.

Imagine a consumer in need of legal services. Those services are required very urgently, and the consumer resides in a small town with only one lawyer. Suppose that this consumer wishes to hire the lawyer, and that the lawyer presents the consumer with a non-negotiable, standard form engagement agreement. In these circumstances, one might argue that the consumer’s free will has been vitiated by an overwhelming imbalance of bargaining power. They are in need of legal services urgently, and, given the market factors, they essentially have no choice but to accept the lawyer’s standard form, non-negotiable terms. This is a classic monopoly scenario, and it’s a situation where a standard form, non-negotiable agreement is troubling from a public policy perspective. But what makes it troubling is not the standard form nature of the agreement, but the environment of unequal bargaining power caused by market factors.

Now, let’s modify that hypothetical. Presume the facts are the same, except that there is no urgency to the legal services and the consumer resides in a large city with a multitude of different lawyers offering the same services. In those circumstances, it is much harder to argue that the consumer’s agreement to the lawyer’s terms occurred in a context where their free will had been vitiated by an overwhelming imbalance of bargaining power. The consumer had other options and ample time to consider those options. This is a situation where a standard form, non-negotiable agreement should not be troubling from a public policy perspective because the environment is not one of unequal bargaining power. In fact, in a highly competitive marketplace, it may well be the consumer that has the greater bargaining power. If in such a situation a supplier or service provider takes a non-negotiable position which the consumer dislikes, the consumer can turn to a different supplier or service provider.

In sum, bargaining power is not the same thing as bargaining position, and just because a party takes a non-negotiable position does not mean they have any bargaining power. It is for this reason that the Supreme Court of Canada in Douez was clear that the relevant question is whether there is gross inequality of bargaining power. The Court, in answering that question, implicitly canvassed the market factors that effectively put Facebook in a near monopoly position and, by the same stroke, put consumers in a position of gross inequality of bargaining power. That is not an outcome that will arise in every case involving a standard form contract. In the author’s view, it should be limited to cases where the service provider or supplier is essentially in a monopoly position and the service or product is essential to the consumer. In Douez, the Court reasoned that the service provided by Facebook met the latter requirement because it had “become increasingly important for the exercise of free speech, freedom of association and for the full participation in democracy” with the result that “[h]aving the choice to stay ‘offline’ may not be a real choice in the Internet era.” This should be distinguishable from cases where the product or service is either available from another supplier or service provider or is not essential to consumers, as in Schuppener.

The reasons of the Court in Schuppener also suggest that the weight to be given to forum selection clauses falls onto a spectrum, with sophisticated commercial contracts deserving of more weight and unsophisticated consumer contracts deserving of less weight. The analysis does not call for a binary determination, and not all contracts must be treated the same merely because one of the parties is a “consumer”.

Nature of the Rights at Stake

With respect to the other public policy factor – namely the “nature of the rights at stake” – Schuppener clarifies that the threshold is a high one.

The Court essentially distinguished Douez as an outlying case on the basis that it concerned a statute unique to British Columbia, constitutional and quasi-constitutional rights of great importance to Canadian society, and the prospect that a foreign court would adjudicate such uniquely Canadian issues.

Read together, Douez and Schuppener arguably suggest that the nature of the rights at stake will not give rise to a public policy factor unless (1) the court specified in the forum selection clause would be unable to properly adjudicate the claim; or (2) litigation in the specified forum would deprive Canadian society of a compelling public good.

Those requirements were not met in Schuppener, where there was neither a basis to conclude that the Ontario courts could not properly adjudicate the somewhat standard claim, nor a basis to conclude that litigating the claim in Ontario rather than British Columbia would deprive Canadian society of a compelling public good.

Matthew Nied acted for the successful appellant in this case. This article was also published here: “Recent Developments in the Law of Forum Selection Clauses and Public Policy” (2020) 9:2 Commercial Litigation and Arbitration Review 13.

Forjay Management Ltd. v. 0981478 B.C. Ltd.: Disclaimer of Contract in Insolvency Cases

On April 4, 2018, the Supreme Court of British Columbia issued a decision (Forjay Management Ltd. v. 0981478 B.C. Ltd.) directing a receiver to disclaim presale agreements in the context of a real estate receivership. The decision clarifies the analytical framework to be applied when considering whether to disclaim contracts in a receivership and offers an example of circumstances in which a court will not defer to a receiver’s recommendation.

Background

In October 2017, Madam Justice Fitzpatrick of the Supreme Court of British Columbia (the Court) granted a receivership order in respect of a 92-unit strata condominium development known as “Murrayville House,” located in Langley, British Columbia. The development was owned by a single-purpose development company (the Debtor) with no other significant assets.

The receivership order was granted on the application of one of the mortgagees with the support of the other mortgagees. The receivership was precipitated by ballooning debt caused by cost overruns, lengthy delays, the filing of various legal claims and certificates of pending litigation, and allegations of financial misconduct on the part of the Debtor. At or around the time of the receivership order, the creditors faced a shortfall of more than $30 million.

The development was substantially complete at the time of the receivership order, subject only to certain exterior work, common area deficiency work and in suite deficiency work. In addition, all of the units in the development had been made the subject of presale agreements with individual purchasers years prior to the receivership. At the outset of the receivership, it was anticipated that the receiver’s task would essentially be to complete the construction, file a new disclosure statement, obtain new home warranty coverage and then monetize the development.

The receiver’s task was complicated by changes in the real estate market in British Columbia. Subsequent to the execution of the presale agreements, the value of the units increased by 46%, based on an appraisal obtained by the receiver. That translated into a total increase in value of nearly $5.5 million. In light of this value lift, the receiver was faced with the decision of whether to complete the presale agreements and permit the purchasers to benefit from the lift, or, alternatively, remarket the units at current market prices in order to maximize the realization for the benefit of the creditors.

The receiver decided that it should complete the presale agreements and brought an application seeking directions from the Court confirming that decision. The application, which was heard over five days in March 2018, was supported by the purchasers as well as the B.C. Superintendent of Real Estate. It was opposed by the mortgagees and the Debtor.

The application involved two central issues. The first issue was whether the presale agreements had terminated prior to the receivership as a result of the effluxion of time (by way of the passing of an outside date), in which case the agreements were not binding and the receiver’s decision to resurrect them was an improvident one. The second issue was whether, if the agreements were enforceable, they should be disclaimed in favour of remarketing the units and maximizing the realization.

Decision

The Court directed the receiver to disclaim the agreements and remarket the units. In addition, the Court directed that the receiver grant the purchasers a right of first refusal in respect of their units. The purchasers who did not wish to exercise their right of first refusal were entitled to the return of their deposit monies with interest.

The Court was satisfied that the application could be resolved by consideration of the disclaimer issue alone, premised on the assumption that the contracts remained valid and enforceable. As a result of its conclusion that the contracts should be disclaimed, the Court did not need to consider the first issue.

The Court began by recognizing the well-settled principle that a receiver has discretion to disclaim contracts entered into prior to the commencement of a receivership in order to maximize the recovery of the assets under its charge. However, the Court also recognized that a receiver must assess all equitable considerations or “equities” in the course of considering whether to disclaim a contract.

The Court went on to review prior disclaimer decisions in British Columbia and Ontario and ultimately adopted the following analytical framework which was substantially advanced by one of the mortgagees (represented by Matthew Nied):

  1. First, what are the respective legal priority positions as between the competing interests?
  2. Second, would a disclaimer enhance the value of the assets? If so, would a failure to disclaim the contract amount to a preference in favour of one party?; and
  3. Third, if a preference would arise, has the party seeking to avoid a disclaimer and complete the contract established that the equities support that result rather than a disclaimer?

Applying the first stage of the analysis, the Court determined that the mortgagees had legal priority over the purchasers whose agreements expressly provided that they created “contractual rights only and not any interest in land” and that the purchasers would only acquire an interest in land “upon completion of the purchase and sale.” In addition, the Court determined that the purchasers could not have an equitable interest in the units because the remedy of specific performance was not available to them in the circumstances.

Having concluded that the purchasers’ contractual rights did not have legal priority over those held by the mortgagees, the Court proceed to the second stage of the analysis. The Court concluded that there was no doubt that remarketing the units would enhance the value of the assets to be distributed to the stakeholders, and that, on this basis, disclaimer was appropriate. The Court also noted that permitting the presale contacts to complete would require the Court to discharge the mortgages in circumstances where the mortgagees would not receive payment of the amounts they bargained to accept in exchange for discharge, which would be an “exceptional result.”

Having made that determination, the Court proceeded to the third stage of the analysis, which was to consider whether the purchasers had established that the equities supported overriding the mortgagees’ legal priority in their favour, as opposed to allowing a disclaimer.

The Court considered various equitable considerations advanced by the purchasers, including that the contracts did not complete due to the Debtor’s actions; that many of the purchasers would be priced out of the real estate market if they could not complete their contracts; and that the public policy objectives of consumer protection justified completing the contracts. The Court addressed each of those arguments in detail and noted its sympathy for the position of the purchasers, but ultimately concluded that the purchasers had not demonstrated that the equities justified overriding the mortgagees’ legal priority “and giving the purchasers a preference that they would not otherwise enjoy.”

The Court determined that the receiver had not applied the correct analysis to the question of disclaimer and that the receiver’s recommendations should not be accorded any deference. In particular, the Court held that the issues before the Court did not involve a consideration of business choices made by a receiver, which is where deference to the knowledge and experience of a receiver would ordinarily be accorded. The Court also noted that, given the significant dispute between the parties, it “would have been best for the Receiver to have provided facts as known to it and thought to be relevant to a determination, but otherwise to have remained neutral as to the result.”

Implications

This decision illustrates that disclaimer remains a useful tool for maximizing realizations in insolvencies for the benefit of all stakeholders. The decision also confirms that disclaimer will generally be appropriate where continuing a contract would create a preference unless there are compelling equitable considerations which favour creating that preference.

In cases such as these, the purchasers’ only recourse will generally be to bring a damages claim against the debtor. While such an option may be fruitful in rare cases, in most insolvencies a damages claim, even if successful, will likely not be recoverable against an insolvent debtor. In addition, in some cases (such as this case) presale agreements may contain exclusion clauses preventing purchasers from bringing claims against the developer beyond seeking return of their deposit monies.

Significantly, the decision in this case was largely driven by the conclusion that the mortgagees had legal priority because the presale agreements expressly provided that they created “contractual rights only and not any interest in land.” In the absence of such language, purchasers may have a basis to claim that they have a proprietary or in rem interest that takes priority over the interests of secured creditors.

In addition, there was no evidence of any agreement on the part of the mortgagees to partially discharge their security against the development in order to permit the presale agreements to complete. To the contrary, the mortgage terms did not require the mortgagees to discharge their security unless they were repaid in full. This may be distinguishable from cases in which mortgagees agree to partially discharge their security in order to permit presale contracts to complete or have conducted themselves in a manner suggestive of that.

Matthew Nied acted for one of the mortgagees in this matter.

The Ghosts of Fundamental Breach: New Developments in the Enforceability of Contractual Limitations of Liability Since Tercon

Recent years have witnessed significant developments in the law that governs the enforceability of contractual limitations of liability. These legal developments were prompted by a new, simplified and seemingly exhaustive analytical approach to determining the enforceability of limitation clauses, set forth in the 2010 decision of the Supreme Court of Canada in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways).

This new approach was, in the graphic words of Binnie J., intended to “shut the coffin” on the “jargon” associated with the doctrine of “fundamental breach” in the context of limitation clauses. That doctrine, which was first posited by Lord Denning and applied by Canadian courts in various forms for more than 50 years, effectively provided that a party could not rely on a clause that purported to limit its liability if the party was in breach of the fundamental “core” of the contract and thereby deprived its counterparty of the very thing bargained for.

The application of the doctrine of fundamental breach tended to focus on whether a limitation clause was “unfair” or “unreasonable” at the time of breach. This conferred on courts a seemingly broad, after-the-fact discretion to depart from the terms of a valid contract “upon vague notions of ‘equity or reasonableness'”.  This led to unpredictable outcomes that cast significant doubt on the enforceability of limitation clauses.

The new approach reinforces the right to limit liability in the interests of preserving individual liberty and commercial flexibility by attempting to circumscribe a court’s ex post facto discretion. It provides that a party will only be able to avoid the effects of a limitation clause if at least one of three things is true: 1) if the clause, interpreted in context, does not apply to the liability at issue; 2) if the clause was unconscionable at the time the contract was made; or 3) if enforcement of the clause would be contrary to public policy.  According to Tercon, a court has no residual discretion beyond these cases to decline to enforce a limitation clause.

In the four years since Tercon, courts have generally applied the new approach in a consistent manner.  However, uncertainty has crept into the analysis in three key areas. First, while Tercon dealt with the doctrine of fundamental breach in the context of limitation clauses, there is some question as to the continued applicability of the doctrine in other contexts.  Second, it is unclear whether the unconscionability stage of the analysis incorporates the traditional requirement that special notice be provided of extraordinary or unusual limitation clauses. Third, the breadth of the public policy stage of the analysis remains unclear.

This article provides an overview of the legal framework established in Tercon and analyzes the three areas of continuing uncertainty.

Read the full article here: Matthew Nied (co-author), “The Ghosts of Fundamental Breach: New Developments in the Enforceability of Contractual Limitations of Liability Since Tercon” (2014) 72:5 The Advocate (Magazine of the Vancouver Bar Association) 665 [cited by the Quebec Court of Appeal in 6362222 Canada inc. c. Prelco inc., 2019 QCCA 1457 at para. 23].

Clicking Away Privacy: Email and the Tort of Intrusion Upon Seclusion

Today, many service providers offer email accounts for free and monetize them through advertising. For example, every email sent to or from an account with “Gmail,” Google’s popular email service, is an advertising opportunity for Google. This is because Google, or, rather, its computer algorithms, “reads” each email as it arrives or departs, scanning for keywords that will trigger corresponding advertisements. As a result, an email that mentions photography may, when viewed by the recipient, display an advertisement for cameras.

In October 2012, Wayne Plimmer filed a class-action lawsuit against Google in British Columbia. Mr. Plimmer, a non-Gmail user, claims that Google has been “reading” emails that he has sent to Gmail users, that he has never consented to Google’s use of his private emails for advertising purposes, and that Google is liable for damages for invading his privacy. The claim alleges invasion of privacy under both the common law and the British Columbia Privacy Act. Gmail had more than 425 million active users in or around the time of the filing of the claim.

More than 120 years before, on a day in 1890, Samuel D. Warren, a Boston attorney, felt a similar frustration with his own privacy interests. He and his wife had hosted a series of elite social events, including a wedding for their daughter, which the Boston newspapers had covered in highly personal and embarrassing detail. Exasperated, Warren approached his former law partner, Louis D. Brandeis, with the desire of finding some legal remedy for this constant invasion of privacy, one that would protect his right to be “left alone.”

Later that year, Warren and Brandeis published “The Right to Privacy” in the Harvard Law Review. It called for common-law protection for, among other items falling within the penumbra of privacy, the use of private letters by an unintended third-party recipient.

In 1939, this proposed right to privacy was incorporated into the Restatement of Torts, and by 1960 it was adopted in 26 states and the District of Columbia. In 1977, the Restatement (Second) of Torts provided as an example of such a tort an “investigation or examination into [one’s] private concerns, as by opening his private and personal mail.” Throughout the 20th Century, it was taken as established that reading someone else’s mail would satisfy the elements of this tort.

By 2001, all but two US states had recognized some form of a right to privacy, and today the concept has begun to make its way into Canadian law. Yet, as the tort gains wider acceptance, its scope is called into question when considered in the new context of Internet communications. Although Warren and Brandeis bristled at the thought of third parties intercepting private mail, the facts of Plimmer v. Google have been described by one academic as an “are-you-kidding-me” lawsuit.

This article explores why the act of intercepting and reading another’s mail—an act that was initially viewed as an obvious example of an invasion of privacy—could today be viewed by some as an obvious non-starter. This article first compares the common-law invasion-of-privacy regime in Ontario with the statutory regime in British Columbia. The regimes in these provinces are among the most developed of the Canadian invasion-of-privacy regimes and generally are representative of the common law and statutory regimes in other Canadian jurisdictions. It is suggested that, in practice, the analysis applicable to the tort of intrusion upon seclusion, as a subset of invasion of privacy, is similar under both the common law and statutory regimes.

Next, the article surveys US jurisprudence, which has informed the development of Canadian law, and shows why voluntarily disclosure of information to a third party may have different implications under the Canadian common law regime than it does in the United States. Finally, the article explores the impact of consent under the common law and statutory regimes, and briefly considers the potential implications for a case such as Plimmer.

Read the full article here: Matthew Nied (co-author), “Clicking Away Privacy: Email and the Tort of Intrusion Upon Seclusion” (2014) 17:9 Journal of Internet Law 3.

Mainstream Canada v. Staniford: Defamation, the Defence of Fair Comment, and the “Factual Foundation” Requirement

In Mainstream Canada v. Staniford, 2013 BCCA 341, the British Columbia Court of Appeal considered whether the defence of fair comment applied to defamatory material published on the internet and in a press release. The key issue was whether the defamatory material sufficiently referenced the “factual foundation” required to establish the defence.

The Court held that the defamatory material did not sufficiently reference the factual foundation required to establish the defence. As a result, the Court overturned the trial judge’s dismissal of the claim, granted a permanent injunction, and awarded general damages of $25,000 and punitive damages of $50,000.

The decision clarifies the circumstances in which the “factual foundation” requirement of the defence of fair comment will be met. It also provides guidance with respect to the application of the defence of fair comment to internet publications involving hyperlinked documents.

Background

The appellant, Mainstream Canada (“Mainstream”), was a producer of farmed salmon in British Columbia. The respondent, Don Staniford (“Mr. Staniford”), was an activist dedicated to the eradication of salmon farming. Mr. Staniford was also the author of a website under the name of The Global Alliance Against Industrial Aquaculture (“GAAIA”).

Starting in January 2011, Mr. Staniford posted various publications and images regarding salmon farming on the GAAIA website, and also sent a press release to the media containing similar content.

In general, the publications alleged that salmon farming was hazardous to human health and the environment. The publications also drew comparisons between salmon fish farmers and cigarette manufacturers.

Mainstream commenced an action seeking general and punitive damages on the basis that the publications were defamatory, as well as a permanent injunction restraining Mr. Staniford from publishing similar words and images in the future.

The trial judge dismissed the action. Although the trial judge held that the publications were defamatory, she held that the defence of fair comment applied.

Mainstream appealed the trial judge’s decision on the basis that the defence of fair comment did not apply.

Law

In a defamation action, the plaintiff has the burden of proving that a publication is defamatory. If the plaintiff succeeds, the onus shifts to the defendant to advance a defence, including the defence of fair comment, in order to escape liability.

The defendant must prove five elements to establish the defence of fair comment:

  • The comment must be on a matter of public interest;
  • The comment must be based on fact;
  • The comment, though it can include inferences of fact, must be recognisable as comment;
  • The comment must satisfy the following objective test: could any person honestly express that opinion on the proved facts?; and
  • Even though the comment satisfies the objective test the defence can be defeated if the plaintiff proves that the defendant was actuated by express malice.

The second element of the defence of fair comment requires that a comment have a sufficient factual foundation. In particular, the comment must be an expression of opinion on a known set of facts, and the audience must be in a position to assess or evaluate the comment.

Decision

On appeal, Mr. Justice Tysoe, writing for a unanimous three-member panel, held that the trial judge erred in finding that the defence of fair comment applied to the defamatory material. In particular, the Court concluded that the defence did not apply because the second element of the defence was not met.

The Court began by observing that the “factual foundation” requirement could be met in any of three ways:

  • The factual material can be expressly stated in the same publication as that in which the comment appears (i.e. by “setting it out”);
  • The factual material commented on, while not set out in the material, can be referred to (i.e. by being identified “by a clear reference”); or
  • The factual material can be “notorious”, as to be already understood by the audience.

The Court concluded that the factual foundation for certain comments in the publications “were neither notorious nor contained in the defamatory publications”.

As for whether there was a “clear reference” to the factual foundation, the Court observed that although the publications made general reference to certain scientific evidence that might have provided a factual foundation for the comments, the publications neither provided details of the evidence nor contained hyperlinks to the scientific papers in which the evidence was contained. At best, the references were indirect: the publications hyperlinked to articles that contained references to the scientific papers that might have provided a factual foundation for the comments.

Accordingly, the Court held that there was no clear reference in the defamatory publications as to where the factual foundation might be found. In addition, the Court observed that the trial judge, by concluding that it would take a “determined reader” to locate the factual foundation upon which the comments were based, had “implicitly acknowledged that there was not a clear reference to the facts that were neither notorious nor contained in the defamatory publications.”

The Court also considered whether the factual foundation could be sufficiently stated if it were contained somewhere on the website, contained in scientific papers hyperlinked on the website, or if the website set out the website addresses for the scientific papers.

On that point, the Court held that “[i]t is not sufficient for the defence of fair comment for facts upon which the comments were made to be contained on website pages that were not alleged to contain defamatory comments or in hyperlinked documents unless those other pages or hyperlinked documents were identified by a clear reference to contain such facts.”

The Court added that “[w]hether hyperlinks in a defamatory publication on a website to other documents containing facts upon which the defamatory comment was made is sufficient will depend on the circumstances of each case. If the defamatory publication advises the reader that a hyperlinked document contains facts upon which the defamatory comment is based and sets out where in the document they are contained, then there may well be a sufficient reference to those facts.”

In the case at bar, “the readers of the defamatory publications were not advised which of the multitudinous hyperlinked documents in the publications or elsewhere on the GAAIA website contained facts upon which Mr. Staniford’s comments were based.”

As a result, the Court concluded that “the facts upon which Mr. Staniford’s defamatory comments were based were not all notorious, contained in the defamatory publications or sufficiently referenced to be contained in other specified documents.” Accordingly, the defence did not apply.

Ross River Dena Council v. Government of Yukon: “Open Entry” Mining Claims and the Duty to Consult

In Ross River Dena Council v. Government of Yukon, 2012 YKCA 14, the Yukon Court of Appeal unanimously held that the Government of Yukon has a duty to consult with First Nations before recording mineral claims staked in areas claimed by First Nations, and that merely providing notice of mining claims will not be sufficient to meet that duty.

The “duty to consult” is a duty on the part of Canada’s governments (the “Crown”) to engage in a process of consultation with First Nations where proposed Crown conduct may adversely affect Aboriginal claims or rights.

The decision may have implications for similar mining claim regimes in British Columbia and other Canadian jurisdictions.

On February 25, 2013, the Government of Yukon filed an application seeking leave to appeal the decision to the Supreme Court of Canada.

Background

The plaintiff, the Ross River Dena Council (the “Council”), claimed Aboriginal title and rights to a portion of traditional territory known as the “Ross River Area”. The claim covered approximately 13% of the Yukon.

The dispute focused on the mining claim system established by the Quartz Mining Act, S.Y. 2003, c. 14 (the “Act”), which provides that an individual may acquire mineral rights simply by physically staking a claim and then recording it with a designated regulatory authority.

Once a mining claim is recorded, the Act provides that a claimant is entitled to the minerals within the claim and may conduct certain exploration activities on the land without further authorization and without notice to the Government of Yukon. Such a system is typically referred to as an “open entry” or “free entry” mineral claim system.

The regulatory authority’s role in registering a mineral claim is purely ministerial in nature. That is, the authority does not possess any discretion to refuse to record a claim that complies with the requirements of the Act.

The Council argued that this system permits exploration activities potentially adverse to its asserted Aboriginal title and rights, and that the Government  has a duty to consult before recording mining claims within the claimed territory.

The chambers judge held that the Government’s practices in respect of new mineral claims under the Act did not measure up to the consultation requirements required by the law, but held that those requirements would be satisfied by a scheme under which the Government provided notice to the Council of newly-recorded quartz mining claims within its traditional territory.

The Council appealed, arguing that consultation must take place before the recording of mineral claims, and that consultation requires more than mere notice of new claims.

Law

The law provides that the Crown has a duty to consult with First Nations with respect to contemplated Crown activities when:

  • The Crown has knowledge, actual or constructive, of the potential existence of a First Nations claim or right;
  • The Crown contemplates conduct or a decision; and
  • The conduct or decision may adversely affect the First Nations claim or right.

The duty to consult is grounded in the honour of the Crown. While the treaty claims process is ongoing, there is an implied duty to consult with First Nations claimants on matters that may adversely affect their treaty and Aboriginal rights, and, where appropriate, to accommodate those interests in the spirit of reconciliation.

It is not necessary for a First Nation to definitely establish a claim or right for the duty to consult to arise. The depth of the required consultation in connection with an unproven claim increases with:

  • The strength of the prima facie First Nations claim; and
  • The seriousness of the impact on the underlying claim or treaty right.

As a result, a dubious or peripheral claim may attract a mere duty of notice, while a stronger claim may attract more stringent duties.

The remedy for a breach of the duty to consult varies with the situation. The Crown’s failure to consult can lead to a number of remedies ranging from injunctive relief against the conduct, to damages, to an order to carry out the consultation prior to proceeding further with the proposed Crown conduct.

Decision

The question on appeal was whether the three elements of the duty to consult were present where the Government sought to record a mineral claim within territory subject to Aboriginal rights and title claims.

There was no dispute that the first element of the duty to consult was satisfied, since the Government had knowledge of the Council’s asserted Aboriginal rights.

There was also no doubt that the third element of the duty to consult was met. The regulatory regime could allow mineral claims to be granted without regard to asserted Aboriginal title, and could also allow exploratory work that might adversely affect claimed Aboriginal rights to be carried out without consultation.

Accordingly, the key issue in dispute was whether the second element of the duty to consult was met. That is, the question was whether the recording of a mineral claim under the Act qualified as “contemplated Crown conduct” despite the fact that the regulatory authority had no discretion in respect of the granting of the mineral claim provided that the requirements of the Act were met.

Mr. Justice Groberman, writing for the Yukon Court of Appeal, rejected the notion that “the absence of statutory discretion in relation to the recording of claims under the … Act absolve[d] the Crown of its duty to consult.” In the Court’s view, the duty to consult “exists to ensure that the Crown does not manage its resources in a manner that ignores Aboriginal claims”, and that “[s]tatutory regimes that do not allow for consultation and fail to provide any other equally effective means to acknowledge and accommodate Aboriginal claims are defective and cannot be allowed to subsist.”

The Court also held that the duty to consult required more than the mere provision of notice of mining claims. Although the Court acknowledged that “the open entry system … under the … Act has considerable value in maintaining a viable mining industry and encouraging prospecting” and “that the system is important both historically and economically”, the Court held that the system had to be modified “in order for the Crown to act in accordance with its constitutional duties.”

However, the Court did not specify precisely how the regime could be brought into conformity with the requirements of the duty to consult. In the Court’s view, “[w]hat is required is that consultations be meaningful, and that the system allow for accommodation to take place, where required, before claimed Aboriginal title or rights are adversely affected.”

In particular, where “exploration activities are expected to have serious or long-lasting adverse effects on claimed Aboriginal rights, … [t]he affected First Nation must be provided with notice of the proposed activities and, where appropriate, an opportunity to consult prior to the activity taking place.” In doing so, “the Crown must ensure that it maintains the ability to prevent or regulate activities where it is appropriate to do so.”

In the result, the Court declared that the Government had a duty to consult “in determining whether mineral rights … within [the claimed lands] are to be made available to third parties under the provisions of the … Act.” The Court also declared that the Government “has a duty to notify and, where appropriate, consult with and accommodate the plaintiff before allowing any mining exploration activities to take place within the [claimed territory], to the extent that those activities may prejudicially affect Aboriginal rights claimed”.

The Court suspended these declarations for one year in order to permit the Government time, if it wished, to make statutory and regulatory changes in order to provide for appropriate consultation.

The decision may have implications for similar “open entry” mining claim regimes in British Columbia and other Canadian jurisdictions. Although the decision is binding precedent only in the Yukon, the judges of the Yukon Court of Appeal are comprised of the judges of the British Columbia Court of Appeal. Accordingly, the decision is likely to be highly influential in British Columbia.

On February 25, 2013, the Government of Yukon filed an application seeking leave to appeal the decision to the Supreme Court of Canada.

Antrium Truck Centre v. Ontario: Injurious Affection and Private Nuisance

In Antrium Truck Centre Ltd. v. Ontario (Minister of Transportation), 2013 SCC 13, the Supreme Court of Canada reviewed the law of injurious affection, which occurs when a defendant’s activities interfere with the claimant’s use or enjoyment of land. The decision provides important guidance with respect to the circumstances in which a landowner will be entitled to compensation when their business or property is negatively affected by the construction of public works but no expropriation has occurred.

The key issue on appeal was how to determine whether an interference with the private use and enjoyment of land is unreasonable when it results from construction which serves an important public purpose.

The Court held that the reasonableness of an interference must be determined by balancing the competing interests, as in all other cases of private nuisance. That balance will be appropriately struck by answering the question of whether, in all of the circumstances, the individual claimant has shouldered a greater share of the burden of construction than it would be reasonable to expect individuals to bear without compensation.

Background

Antrim Truck Centre Ltd. (“Antrim”) owned and operated a truck stop on Highway 17 near Ottawa. For more than 25 years, the business benefited from the patronage of motorists travelling along the highway.

In 2004, the Province of Ontario constructed a new highway that significantly and permanently altered Highway 17 in a manner that restricted motorists’ access to the truck stop, decreasing the market value of the land and effectively putting the truck stop out of business.

Antrim sought compensation for injurious affection before the Ontario Municipal Board, which awarded damages of approximately $400,000 for business loss and for loss in the market value of the property.

The award was upheld by the Divisional Court of the Ontario Superior Court of Justice, but set aside by the Ontario Court of Appeal on the basis that the interference was not unreasonable given the important public purposes served by the highway’s construction.

Decision

The key issue on appeal was how to determine whether an interference with the private use and enjoyment of land is unreasonable when it results from construction which serves an important public purpose.

In order to establish a claim for injurious affection, Antrim had to establish three elements under the Ontario Expropriations Act:

  • The damage must result from action taken under statutory authority;
  • The action would give rise to liability but for that statutory authority; and
  • The damages must result from the construction and not the use of the works.

If Antrim could establish those three elements, it would be compensated for the amount by which the affected land’s market value was reduced because of the interference, and for personal and business damages.

On appeal, there was no dispute that the first and third requirements of injurious affection were met. The unresolved question was whether the second requirement was met. That is, if the highway construction had not been done under statutory authority, could Antrim have successfully sued for damages caused by the construction under the law of private nuisance?

Mr. Justice Cromwell, writing for the Court, began by observing that in order to establish a claim in private nuisance a claimant must establish that the interference with their use or enjoyment of land is both substantial and unreasonable.

To conclude that an interference is substantial, it must be shown to be “non-trivial” and “amount[ing] to more than a slight annoyance or trifling interference.” This requirement “underlines the important point that not every interference, no matter how minor or transitory, is an actionable nuisance; some interferences must be accepted as part of the normal give and take of life.”

Once the substantial interference threshold is met, the inquiry proceeds to the unreasonable interference analysis, which is concerned with whether the substantial interference was also unreasonable in all of the circumstances.

The question of whether an interference is unreasonable where that interference arises from an activity that furthers the public good “must be determined by balancing the competing interests”. In the Court’s view, that balance is “appropriately struck by answering the question whether, in all of the circumstances, the individual claimant has shouldered a greater share of the burden of construction than it would be reasonable to expect individuals to bear without compensation.”

In the traditional law of private nuisance, courts assess whether an interference is unreasonable by balancing the gravity of the harm against the utility of the defendant’s conduct. However, because the acts of a public authority will generally be of significant utility, public interests will generally outweigh the private interests affected by even very significant interferences. Accordingly, a simple balancing of private interests against  public utility may well undermine the purpose of legislation that provides compensation for injurious affection.

In order to avoid that result, the Court held that “the question is not simply whether the broader public good outweighs the individual interference when the two are assigned equal weight”. Rather, “the question is whether the interference is greater than the individual should be expected to bear in the public interest without compensation”. The rationale is that “everyone must put up with a certain amount of temporary disruption caused by essential construction.”

The Court thus drew a distinction between interferences that constitute the “give and take” expected of all members of the public and “interferences that impose a disproportionate burden on individuals.” The Court observed that “the reasonableness analysis should favour the public authority where the harm to property interests, considered in light of its severity, the nature of the neighbourhood, its duration, the sensitivity of the plaintiff and other relevant factors, is such that the harm cannot reasonably be viewed as more than the claimant’s fair share of the costs associated with providing a public benefit.” Another relevant factor is whether the public authority “has made all reasonable efforts to reduce the impact of its works on neighbouring properties.”

The Court ultimately allowed the appeal on the basis that it was reasonable for the Board to conclude that, in all of the circumstances, Antrim should not be expected to endure “permanent interference with the use of its land that caused a significant diminution of its market value in order to serve the greater public good.”

It is important to recognize that Antrim was decided on the basis of Ontario’s statutory regime. Although s. 41 of the British Columbia Expropriation Act also permits claims for compensation on the basis of injurious affection, it remains unclear how Antrim will impact compensation claims in British Columbia.

Tang v. Zhang: Forfeited Deposits and Proof of Damages

In Tang v. Zhang, 2013 BCCA 52, the British Columbia Court of Appeal considered the interpretation of “deposit” clauses in standard form contracts for the purchase and sale of real estate. The key issue was this: where a buyer fails to complete a real estate purchase, and has paid a deposit that the contract states is to be forfeited to the seller “on account of damages”, must damages be proven in order for the seller to retain the deposit?

The Court held that a deposit will generally be forfeited without proof of damages, subject to a clear expression of contrary intention in the contract. This decision clarifies the law in British Columbia and resolves a conflict between prior inconsistent decisions.

Background

The sellers entered into a standard form contract to sell a residential property for approximately $2,000,000. The buyer paid a deposit of $100,000. The contract provided that if the buyer did not complete the sale, “the Seller [could], at the Seller’s option, terminate [the] Contract, and, in such event, the amount paid by the Buyer [would] be absolutely forfeited to the Seller … on account of damages, without prejudice to the Seller’s other remedies.”

The buyer paid the deposit, but failed to complete the transaction. The sellers subsequently went to court seeking a declaration that the deposit was absolutely forfeited to them. In the meantime, the sellers managed to sell the property to another buyer at a higher price. As a result, the seller did not suffer any damages as a result of the buyer’s failure to complete the sale.

The trial judge observed that the contract provided that the sellers “were only entitled to the deposit ‘on account of damages’” in the event that the buyer did not complete the sale. The trial judge interpreted this to mean that the sellers did not have an unconditional right to the full deposit; instead, they only had a right to claim proven damages out of the deposit funds. Because the sellers had suffered no damages, the buyer was entitled to the return of the deposit.

Decision

The sole issue on appeal was whether the deposit was absolutely forfeited without proof of damages.

The Court began by reviewing the legal principles that govern deposits. The Court observed that the common law supports the notion that, in general, a deposit is lost by the party who fails to perform a contract, even in the absence of damages, on the basis that a deposit is “not merely a part payment”, but also a practical mechanism to “creat[e] by the fear of its forfeiture a motive in the payer to perform the rest of the contract.”

The Court held that although the question of whether a deposit is forfeited is a matter of contractual interpretation, a deposit is generally forfeited without proof of damages. This is consistent with the purpose of deposits, which is to motivate contracting parties to carry through with their bargains.

However, the Court noted that the mere act of labeling a payment as a “deposit” in a contract will not permit the parties to “immunize [the payment] from judicial scrutiny.” A court is not precluded from considering whether a “deposit” is in fact a penalty (in which case relief from forfeiture is available at common law), or unconscionable (in which case relief is available in equity). The Court observed that a deposit of up to 10% of the purchase price has generally been regarded as reasonable, and noted that there was an instance in which a deposit of 20% was regarded as reasonable.

The Court expressly rejected the argument that the phrase “on account of damages” should be interpreted to limit the forfeiture of a deposit to proven damages. In the Court’s view, the phrase was intended to mean that “in any action by a vendor to recover damages against a defaulting purchaser for breach of contract, the amount of the deposit would be counted toward (or “on account of”) such damages.” Seen in this manner, “[t]he phrase forecloses double recovery if damages are proven”, which is “not inconsistent with the nature of the deposit as a ‘guarantee’ of performance which encourages contracting parties to complete their contracts in accordance with their terms.”

Tang does not preclude parties to a contract from providing that a deposit will not be forfeited unless damages are proven. However, in light of the Court’s reasoning, doing so would appear to require the use of language that clearly and unambiguously expresses the parties’ intentions to negate the general rule and the policy rationale underlying it.

TELUS Corporation v. Mason Capital Management: Shareholder Meeting Requisitions and “Empty Voting”

In TELUS Corporation v. Mason Capital Management LLC, 2012 BCCA 403, the British Columbia Court of Appeal considered the validity of a shareholder’s requisition for a general meeting of shareholders. The Court clarified that a requisition made under s. 167 of the British Columbia Business Corporations Act need not identify the beneficial owner of the shares used to call the meeting in order to be valid. In addition, the Court held that it had no authority under the Act to restrain a shareholder from requisitioning a meeting on the basis of its “net investment” or that its interests are not aligned with the economic well-being of the company.

Read the full article here: Matthew Nied (co-author), “Mason Capital Succeeds: Appeal Court Confirms CDS’s Ability to Requisition Meeting By ‘Empty Voter’” (2012) 7:4 Corporate Governance Report 41.

Southcott Estates v. Toronto Catholic District School Board: Mitigation and Specific Performance

In Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51, the Supreme Court of Canada considered whether a plaintiff in a case involving a failed real estate transaction was excused from mitigating its losses on the basis that it had made a claim for specific performance.

Although the Court recognized that a plaintiff’s refusal to mitigate may be reasonable if the plaintiff had a “substantial justification” or a “substantial and legitimate interest” in specific performance, the Court held that the plaintiff had no such interest because the property was intended as an investment and had no peculiar or special value to the plaintiff.

Background

The plaintiff, Southcott Estates Inc. (“Southcott”) was a single-purpose company incorporated solely for the purpose of a specific land purchase. It had no assets other than money advanced to it by its parent company for the deposit relating to the land purchase.

Southcott entered into an agreement of purchase and sale for a specific property with the defendant, the Toronto Catholic District School Board (the “Board”). When the Board failed to satisfy a condition and refused to extend the closing date, Southcott brought a claim for specific performance of the contract, and argued that it was not required to mitigate its losses by purchasing a different property.

The trial judge refused to award Southcott specific performance and, instead, awarded damages to Southcott. On appeal, the Court of Appeal concluded that the Board had breached its contractual obligations, but that Southcott had failed to take available steps to mitigate its losses. As a result, the Court of Appeal reduced Southcott’s damage award to a nominal sum.

Decision

The key issue on appeal was whether a plaintiff must mitigate its losses where the plaintiff has made a claim for specific performance.

The majority reasons, penned by Madam Justice Karakatsanis, recognized that “there may be situations in which a plaintiff’s inaction is justifiable notwithstanding its failure to obtain an order for specific performance.” In particular, “[i]f the plaintiff has a ‘substantial justification’ or a ‘substantial and legitimate interest’ in specific performance, its refusal to purchase other property may be reasonable, depending upon the circumstances of the case”.

In the Court’s view, this was not a case where the plaintiff could reasonably refuse to mitigate. The Court began by observing that “[a] plaintiff deprived of an investment property does not have a “fair, real, and substantial justification” or a “substantial and legitimate” interest in specific performance unless he can show that money is not a complete remedy because the land has “a peculiar and special value” to him. In this case, Southcott had no “substantial and legitimate” interest in specific performance because the land had no peculiar or special value to it. Rather, Southcott had simply “engaged in a commercial transaction for the purpose of making a profit”, such that “[t]he property’s particular qualities were only of value due to their ability to further profitability.”

As a result, the Court held that Southcott owed a duty to mitigate its damages by purchasing an alternative property, notwithstanding its specific performance claim.

In light of the decision, a plaintiff with a claim of specific performance must carefully evaluate the strengths and weakness of its claim. If a plaintiff chooses to pursue its claim of specific performance and declines to mitigate its losses in the interim by buying an alternative property, the plaintiff must be prepared to suffer a reduction in its damage award in the event that a court rejects its claim of specific performance and finds that the plaintiff unreasonably failed to mitigate its losses.

Lines v. British Columbia (Securities Commission): Foreign Regulatory Authorities and Reciprocal Orders

In Lines v. British Columbia (Securities Commission), 2012 BCCA 316 (“Lines”), the British Columbia Court of Appeal held that the British Columbia Securities Commission (the “Commission”) could not impose a “public interest” order pursuant to s. 161(6)(d) of the Securities Act, R.S.B.C. 1996, c. 418 (the “Act”) more onerous than an order made by a regulatory authority in a foreign jurisdiction.

Background

The Appellants, Scott and Brian Lines (the “Lines”), became the subjects of a complaint filed by the United States Security Exchange Commission (“SEC”) for alleged infractions of U.S. securities laws. The complaint was settled when the Lines entered into settlement agreements with the SEC (the “Agreements”).

Significantly, the Agreements provided that the Lines were neither admitting nor denying the alleged infractions but would nevertheless disgorge certain funds, pay certain penalties, and refrain from trading in penny stocks on over-the-counter markets for a number of years. This restriction left the Lines free to continue trading on the main American exchanges.

The terms of the Agreements were ultimately incorporated into final judgments filed by consent in a New York court (the “Judgments”). The Judgments were discreet. They did not expressly state the nature of the SEC’s complaints against the Lines, or the reason why disgorgement and civil penalties were agreed to, nor did they explain why the Lines were required to refrain from trading only in penny stocks for the stated periods.

Some time later, the Commission issued a “reciprocal order” against the Lines pursuant to s. 161(6)(d) of the Act (the “Reciprocal Order”). The Reciprocal Order prohibited the Lines from trading in any securities for a number of years. This was a far more onerous result than provided by the terms of the Agreements which only prohibited the Lines from trading in penny stocks on over-the-counter markets.

The Commission relied only on the Agreements and the Judgments in making its determination under s. 161 of the Act that the Reciprocal Order was in the public interest.

The Lines appealed to the British Columbia Court of Appeal on various grounds, including that in the absence of evidence or admissions of wrongdoing, the Commission did not have an evidentiary basis to found a substantially more onerous order.

Law

Section 161(1) of the Act provides that if after a hearing the Commission or the Executive Director considers it to be in the public interest, either of them may make various orders, including orders prohibiting a person from trading, acting as a director or officer of an issuer, engaging in “investor relations activities”, or disseminating information to the public.

In particular, s. 161(1)(b) of the Act permits the Commission or Executive Director to order that:

(i)         all persons,

(ii)        the person or persons named in the order, or

(iii)       one or more classes of persons

cease trading in, or be prohibited from purchasing, any securities or exchange contracts, a specified security or exchange contract or a specified class of securities or class of exchange contracts …

In addition, s. 161(6) of the Act permits the Commission or Executive Director to make orders based on finding of contravention made by a court or securities regulatory authority in another jurisdiction:

The commission or the executive director may, after providing an opportunity to be heard, make an order under subsection (1) in respect of a person if the person

…

(d)        has agreed with a securities regulatory authority, a self regulatory body or an exchange, in Canada or elsewhere, to be subject to sanctions, conditions, restrictions or requirements.  [Emphasis added.]

Decision

The issue on appeal was whether, under s. 161(6)(d) of the Act, a settlement agreement in which wrongdoing was not admitted could found a substantially more onerous order than that made by a regulatory authority in a foreign jurisdiction.

The Lines’ principal argument was that, in accordance with principles of procedural fairness, s. 161(6)(d) of the Act should, in the circumstances in the case at bar, be interpreted to only permit orders that replicated or closely mirrored the undertakings given by persons who were the subject of complaints by foreign regulatory authorities.

Madam Justice Newbury, writing for the Court, applied a standard of reasonableness in reviewing the Commission’s decision and found that the material before the Commission, which did not include any finding or admission of wrongdoing on the part of the Lines by any regulatory authority, did not reasonably support the order of the Commission. In the Court’s view, the Commission had unreasonably “made the leap in logic from the fact that the Lines had consented to certain sanctions without admitting wrongdoing, to the conclusion that the public interest required that they be prohibited from trading in all securities in British Columbia.”

Although the Court found the Commission’s decision to be unreasonable, it held that the Commission could, if it determined it was in the public interest, make an order that “mirrored” the Agreement.

Interestingly, the Court concluded by noting that it was not deciding “that the Commission may never impose a sanction under s. 161(6)(d) that is materially more onerous than the terms of the agreement on which it is based”. Nevertheless, the Court stated that “justice as well as transparency and intelligibility require that the Commission have evidence or an admission of a defendant’s wrongdoing ‒ and of course that the defendant be in a position to challenge such evidence at a hearing ‒ before such an order could reasonably be made under s. 161(6)(d).”

Edward Jones v. Voldeng: Investment Advisors, Non-Solicitation Covenants, and Injunctions

In Edward Jones v. Voldeng, 2012 BCCA 295 (“Voldeng”), the British Columbia Court of Appeal considered the test for granting an interlocutory injunction in the context of a restrictive covenant prohibiting solicitation contained in the employment contract of an investment advisor. The Court made several notable remarks regarding the irreparable harm and balance of convenience elements of the test for granting an interlocutory injunction.

Background

Randy Voldeng, an investment advisor, worked at Edward Jones, a national brokerage firm. The employment agreement contained a restrictive covenant that prevented Mr. Voldeng from soliciting sales from any client of Edward Jones after his employment relationship with Edward Jones ended.

Ultimately, Mr. Voldeng left his employment with Edward Jones and commenced employment with a competing brokerage firm. Shortly after leaving Edward Jones, Mr. Voldeng contacted a number of Edward Jones’ clients and allegedly encouraged them to transfer their accounts to the competing brokerage firm.

Edward Jones commenced an action and sought an interlocutory injunction restraining Mr. Voldeng from making further solicitations.

In order to obtain an interlocutory injunction, an applicant must establish that:

  • there is a serious question to be tried;
  • the applicant will suffer irreparable harm if the injunction is not granted; and
  • the balance of convenience favours granting the injunction.

The lower court held that Edward Jones had established these three elements. Accordingly, the lower court granted an interlocutory injunction.

Decision

The key issues on appeal were whether there was evidence of irreparable harm and whether the balance of convenience favoured granting the injunction. There was no dispute that there was a serious question to be tried.

Mr. Justice Chiasson, writing for the Court, began by describing two types of irreparable harm:

  • harm that cannot be quantified in monetary terms, such as permanent market loss or irrevocable damage to business reputation; and
  • harm that cannot be compensated because, for example, an award of damages will not be collectible.

The lower court accepted that the facts gave rise to the first type of irreparable harm. It held that damages were not an adequate remedy for the alleged breach of the non-solicitation covenant because it would be extremely difficult to separate damages for loss of business caused by the breach from those resulting in fair competition.

The Court disagreed. In its view, “the damages that flow from a violation of a non-solicitation covenant in the employment contract of an investment advisor  generally are calculable”. This is because the industry is regulated in a manner such that the “value of the portfolio of a departing client is known, as is the return to the brokerage firm of managing the portfolio.”

In the case at bar, the evidence was clear that Mr. Voldeng had received instructions to transfer client accounts with an approximate total value of $20.2 million. Accordingly, the potential damages arising out of the alleged solicitation, being calculable, did not constitute irreparable harm.

Turning to the assessment of whether the balance of convenience favoured the granting of an injunction, the Court held that “in the context of a non-solicitation covenant, the interests of an individual investment advisor and his or her clients often tips the balance of convenience in favour of the investment advisor.”

In particular, the Court recognized that the interests of the clients of an investment advisor are a legitimate public policy factor to consider in the balance of convenience analysis. On this point, the Court cited previous decisions which emphasized that “clients should be free to receive information from all competitive sources and to have the ability to decide if they wish to follow a person with whom they have developed an individual trust and confidence regarding investment advice.”

The Court also noted that while the “interests of the clients of investment advisors are a legitimate factor to take into account, [they] should not be considered as unique to that relationship.” Accordingly, “[t]here are many other relationships in which similar interests may be relevant.”

In the course of assessing the balance of convenience, the Court also observed that granting the interlocutory injunction could have caused irreparable harm to Mr. Voldeng “because, if his conduct were found to be proper, it would not be possible to determine which of his clients would have shifted to [the competing brokerage firm] if he had been able to inform them of his contact particulars.”

Based on these factors, the Court concluded that the balance of convenience did not favour the granting of an injunction.

In the result, having determined that the irreparable harm and balance of convenience elements were not met, the Court overturned the lower court’s decision to grant an interlocutory injunction.

Clements v. Clements: Negligence Claims, Causation, and the “Material Contribution to Risk” Test

In Clements v. Clements, 2012 SCC 32 (“Clements”), the Supreme Court of Canada clarified the circumstances in which a plaintiff in a negligence action may establish causation on the basis that the defendant’s conduct materially contributed to the risk that gave rise to the plaintiff’s injury, rather than the “but for” test.

The Court held that the “material contribution to risk” test will apply only where the plaintiff’s injury would not have occurred “but for” the negligence of two or more wrongdoers, each of which are potentially responsible for the loss, and the plaintiff, through no fault of their own, is unable to show that any one of the possible wrongdoers was the “but for” cause of the injury.

Background

The parties went on a motorbike trip. The defendant was driving the bike and the plaintiff was riding behind on the passenger seat. The weather was wet and the bike was overloaded with weight. Unbeknownst to the parties, a nail had punctured the bike’s rear tire. Although the defendant was travelling in a 100 km/h zone, he accelerated to at least 120km/h in order to pass a car. As he did so, the nail fell out of the tire, the rear tire deflated, and the bike began to wobble. The defendant was unable to bring the bike under control, and it crashed. The plaintiff was thrown off and suffered a severe traumatic brain injury. She sued the defendant, claiming that her injury was caused by his negligent operation of the bike.

In order to succeed in a negligence claim, a plaintiff must establish that:

  • the defendant owed the plaintiff a duty of care;
  • the defendant breached their duty of care;
  • the plaintiff suffered damages; and
  • the defendant’s breach of their duty of care caused the plaintiff’s damages.

In Clements, there was little dispute with respect to the first three elements. The key issue was whether the defendant’s negligence caused the plaintiff’s injury.

In general, the test for showing causation is the “but for” test. This means that a plaintiff cannot establish causation unless the plaintiff shows that they would not have suffered the loss “but for” the defendant’s breach of their duty of care.  In other words, the defendant’s breach must have been necessary in order for the the plaintiff’s loss to have occurred.

At trial, the defendant called an expert witness who testified that the probable cause of the accident was the tire puncture and the deflation, and that the accident would have occurred even without the plaintiff’s negligence. The trial judge rejected this evidence, but did not conclude that the plaintiff’s injury would have occurred “but for” the defendant’s breach. Instead, the trial judge held that the defendant’s breach materially contributed to the plaintiff’s injury, and that this was sufficient to establish causation.

Decision

The key issue before the Supreme Court of Canada was whether the “but for” test for causation applied, or whether causation could be established on the basis of the “material contribution to risk” test.

Chief Justice McLachlin, writing for the majority, clarified that although a plaintiff must generally establish causation on the basis of the “but for” test, a plaintiff may, in exceptional circumstances, establish causation by showing that the defendant’s breach materially contributed to the risk of the plaintiff’s injury. In order to do so, the plaintiff must establish that:

  • the damage would not have occurred “but for” the negligence of two or more wrongdoers, each of which are possibly responsible for the loss; and
  • the plaintiff, through no fault of their own, is unable to show that any one of the possible wrongdoers in fact was the necessary or “but for” cause of her injury, because each can point to one another as a possible “but for” cause of the injury, defeating a finding of causation on a balance of probabilities against anyone.

In these exceptional circumstances, the “material contribution to risk” test will, in the Court’s view, result in a fair outcome. The plaintiff will have established “but for” causation with respect to the group of defendants as a whole, each defendant will have failed to act with the necessary care to avoid potentially causing the plaintiff’s loss, and each defendant may have in fact caused the plaintiff’s loss.

In the result, the Court concluded that the “material contribution to risk” test did not apply. Because the case involved a single defendant, the only issue was whether the injury would have occurred “but for” the defendant’s breach. Accordingly, the Court returned the matter to the trial judge to be assessed on the basis of the “but for” test.

Freeway Properties Inc. v. Genco Resources Ltd: Financial Statements and Confirmation of Causes of Action Under the Limitation Act

In the recent case of Freeway Properties Inc. v. Genco Resources Ltd., 2012 BCCA 258 (“Freeway”), the British Columbia Court of Appeal Court held that a company’s financial statements are capable of confirming a creditor’s cause of action against the company and extending the creditor’s time for commencing an action under the Limitation Act, R.S.B.C. 1996, c. 266 (the “Act”).

Background

The decision concerned appeals from summary trial dismissals of two debt actions. The trial courts held that the actions were statute barred by s. 3(5) of the Act because they were brought after the expiration of six years after the right to bring the actions arose. The Court of Appeal heard the appeals together since they involved common issues of law and fact, related plaintiffs, and a common defendant.

The focus of the appeal was whether the defendant, a public company, had confirmed the plaintiffs’ causes of action by mailing to its shareholders, including the plaintiffs, a copy of the defendant’s financial statements. The financial statements, which were approved and signed by two of the defendant’s directors, contained a balance sheet with an entry of $73,402 described as a current liability “[d]ue to related parties”. The entry made no specific reference to the plaintiffs. The financial statements were also broadly addressed to the defendant’s shareholders rather than addressed specifically to the plaintiffs.

The law of confirmation is governed by s. 5 of the Act. Section 5(1) of the Act provides that if a confirmation takes place before the expiration of a limitation period, the time during which the limitation period runs before the date of confirmation does not count in the reckoning of the limitation period. In other words, when a confirmation occurs before a limitation period expires, the limitation period starts afresh.

In order for a person to have the benefit of a confirmation under the Act, three elements must be established:

  • the cause of action must be confirmed, which requires either an acknowledgement of the cause of action, right, or title of another (s. 5(2)(a)(i), Act) or payment in respect of a cause of action, right, or title of another (s. 5(2)(a)(ii), Act);
  • the confirmation must be in writing and signed by the maker (s. 5(5), Act); and
  • the confirmation must be made to the person or to a person through whom the person claims (s. 5(6)(a), Act).

Decision

The first issue on appeal was whether the defendant’s financial statements contained an acknowledgement of the plaintiffs’ causes of action in accordance with s. 5(2) and (5) of the Act. The Court relied on a line of English authorities to conclude that a company’s financial statements are capable of containing an acknowledgement of a cause of action. In the Court’s view, “what must be decided objectively is whether the ‘maker’ of the alleged acknowledgement intended by it to admit liability.” The Court held that the defendant had clearly intended to admit liability to the “related parties” mentioned in the balance sheet, and that the plaintiffs had proven by extrinsic evidence that they were the “related parties”.

The second issue was whether the confirmation was made to the plaintiffs in accordance with s. 5(6)(a) of the Act. The Court held that it was sufficient that the financial statements were sent to the plaintiffs, observing that “nothing in the Act requires that the acknowledgment be ‘specifically written to the plaintiff, or that the communication be addressed to the plaintiff’”. Although not necessary for the determination of the issue, the Court went on to add that “an acknowledgement actually received by the creditor would be effective … whether or not the ‘maker’ of the acknowledgment intended that the creditor should receive it, and it is not necessary to imply such an intention.”

The final issue was whether the effective date of the confirmation was the date of the year end to which the balance sheet related or, rather, the date that the plaintiffs received the financial statements. The Court relied on English and Australian authorities to conclude that the effective date of confirmation was the date of the balance sheet.

Based on that conclusion, the Court dismissed the plaintiffs’ actions as statute barred under s. 3(5) of the Act because the actions had been commenced after the expiration of six years after the date of the confirmation.

The reasoning in Freeway will likely to apply to the new Limitation Act once it has been brought into force: Bill 34 – 2012 Limitation Act (the “New Act”). Like s. 5(1) of the Act, s. 24(1) of the New Act provides that a person may extend a limitation period before it expires if “[b]efore the expiry of [the applicable limitation period] … a person acknowledges liability in respect of the claim”. Similarly, s. 24(6) of the New Act provides, like s. 5(5) and (6) of the Act, that an acknowledgement must be in writing, signed, made by the person making the acknowledgement, and made to the person with the claim.

Breeden v. Black and Éditions Écosociété v. Banro: Jurisdiction in Defamation Cases

In the companion cases of Breeden v Black, 2012 SCC 19 (“Breeden”) and Éditions Écosociété Inc. et al. v Banro Corp., 2012 SCC 18 (“Banro”), the Supreme Court of Canada clarified the manner in which courts should determine whether to exercise jurisdiction over multijurisdictional defamation claims involving foreign defendants.

Although the decisions support the ability of plaintiffs to advance defamation claims in any Canadian jurisdiction in which allegedly defamatory material is published, the decisions also leave open the possibility that the law will evolve to reduce the potential for forum shopping.

Background

In Breeden, the plaintiff commenced defamation actions in Ontario against the defendants, who were certain directors, advisors, and a vice president of a corporation headquartered in the United States. The plaintiff alleged that statements issued by the defendants and posted on the internet were defamatory and were published in Ontario when they were downloaded, read, and republished in Ontario by Canadian newspapers. The defendants brought a motion to have the defamation actions stayed on the grounds that the Ontario court should not exercise jurisdiction because there was no real and substantial connection between the actions and Ontario or, alternatively, because an American court was the more appropriate forum.

The facts in Banro are similar. There, the defendants, who were based in Québec, published a book which commented on the international mining activities of certain corporations, including the plaintiff. Copies of the allegedly defamatory book were available to be purchased or read in Ontario. The plaintiff brought an action in Ontario against the defendants alleging that the book was defamatory. The defendants moved to stay the Ontario action on the basis that there was no real and substantial connection between the action and Ontario, and that a Québec court was the more appropriate forum.

Decisions

In both cases, Justice LeBel, writing for the Court, applied a new analytical framework for determining whether a court should exercise its jurisdiction. That analytical framework was established in the companion case of Club Resorts Ltd. v Van Breda, 2012 SCC 17 (“Club Resorts”), reasons of which were issued at the same time as those in Breeden and Banro.

The analytical framework involves a two-stage analysis. In the first stage, which depends on the application of the real and substantial connection test, the plaintiff must demonstrate a “presumptive connecting factor” that links the subject matter of the litigation with the jurisdiction. If the plaintiff demonstrates a presumptive connecting factor, then there will be a presumption of jurisdiction unless the defendant rebuts the presumption. In Club Resorts, the Court identified a non-exhaustive list of presumptive connecting factors. The most important of those presumptive connecting factors, for the purposes of Breeden and Banro, is the commission of a tort in the jurisdiction.

The defendant may rebut a presumption of jurisdiction by establishing “facts which demonstrate that the presumptive connecting factor does not point to any real relationship between the subject matter of the litigation and the forum or points only to a weak relationship between them.” For example, where the presumptive connecting factor is the commission of a tort in the jurisdiction, rebutting the presumption may be possible “where only a relatively minor element of the tort has occurred in the province.” If no presumptive connecting factor applies in the circumstances of the case, or if the presumption of jurisdiction resulting from such a factor is rebutted, the court cannot assume jurisdiction.

If the plaintiff establishes jurisdiction, the court will proceed to the second stage of the analysis, which involves application of the doctrine of forum non conveniens. At this stage, the burden shifts to the defendant to demonstrate that the court should not exercise jurisdiction because the court of another jurisdiction is the more appropriate forum for the hearing of the action. To succeed, a defendant must show that the other forum is “clearly more appropriate” because it is better suited to “fairly and efficiently” resolve the dispute. The defendant may point to a variety of factors, including the locations of the parties and witnesses, the possibility of conflicting judgments, and the substantive law that should apply to determine the claims.

In Breeden and Banro, the Court concluded that jurisdiction had been properly assumed. There was a real and substantial connection between Ontario and the defamation actions based on the fact that the alleged torts had been committed in Ontario. The Court was not convinced that the defendants in either case had rebutted the presumption of a real and substantial connection.

Significantly, the Court recognized that the analytical framework raises concerns about libel tourism, which is a variety of forum shopping in which a plaintiff brings a defamation action in the jurisdiction most likely to provide a favorable result. The prospect of libel tourism arises because the tort of defamation “crystalizes” upon publication of defamatory material.

Defamatory material is “published” whenever it is viewed or read by a third party, and is presumed to be “published” when it is printed in a book. As a result, where allegedly defamatory material is published in multiple jurisdictions – a feat easily achievable, even inadvertently, due to the ubiquity, universality, and accessibly of the internet – the courts of multiple jurisdictions will generally be able to exercise jurisdiction over the same claim.

Because the law of defamation varies between jurisdictions such that it is easier or more difficult for plaintiffs to establish their claims depending on their choice of jurisdiction, plaintiffs can strategically advance their actions in the jurisdictions in which they have the greatest juridical advantage. For example, American defamation law may require some plaintiffs to demonstrate malice on the part of the defendant as a pre-requisite to establishing liability. Because no such requirement exists in Canada, plaintiffs may enjoy a juridical advantage by pursuing their defamation claims in Canada rather than in the United States.

The Court’s reasons in Banro may provide courts in future cases with a way to restrain libel tourism. After concluding that jurisdiction had been properly assumed, the Court turned to determine whether the court of another jurisdiction was a more appropriate forum for the hearing of the action. In the course of applying the doctrine of forum non conveniens, the Court considered the question of which substantive law should be applied to determine the claim. Courts have traditionally applied the lex loci delicti rule (“the place where the tort occurred”) to decide which law applies to determine tort claims. The rationale for the application of the lex loci delicti rule is that, in the case of most torts, the occurrence of the wrong constituting the tort occurs in the same jurisdiction in which the consequences of the wrong are suffered.

The Court recognized that the lex loci delicti rule may not be appropriate in all defamation cases. In certain cases, the reputational harm caused by the publication of defamatory material may be suffered in a jurisdiction other than the one in which the defamatory material was published. The Court suggested that in those circumstances it may be more appropriate to apply a rule based on the “place of most substantial harm to reputation.” According to that rule, the applicable law would be that of the jurisdiction most closely connected to the harm occasioned by the publication. Such an approach could eliminate the strategic advantage to libel tourism by providing that the same law would apply regardless of where the matter was heard.

The Court concluded that it did not need to decide whether the lex loci delicti rule ought to be abandoned as the choice of law rule in multijurisdictional defamation cases in favour of an approach based on the location of the most substantial harm to reputation. The Court observed that, on the facts of both cases, application of either rule had the same effect. Under a rule based on the location of the most substantial harm to reputation, Ontario law would apply. Alternatively, under the lex loci delicti rule, Ontario law would also apply because the alleged torts were committed in Ontario.

Implications

Breeden and Banro challenged the Court to consider the appropriate balance between the protection of reputation, freedom of expression, and jurisdictional restraint. The decisions clarify that Canadian courts will have presumptive jurisdiction over defamation cases involving foreign defendants if the defamatory statements are published to at least one person in the jurisdiction. For example, if a person in Hong Kong were to create an allegedly defamatory website, an Ontario court would have presumptive jurisdiction over an action brought by the plaintiff against the person in Hong Kong if the plaintiff demonstrated that at least one other person in Ontario viewed the website.

This precedent will likely have significant consequences, particularly given the ubiquity, universality, and accessibility of the internet. As Lebel J. recognized, with a “globalized world comes the sometimes poisonous gift of ubiquity.” Statements published in one location may, with the aid of the internet, be widely disseminated and viewed in a multitude of jurisdictions all over the world. Given the ease by which allegedly defamatory material may be published in Canadian jurisdictions through the use of the internet, plaintiffs in cases involving internet defamation will likely face little difficulty establishing a presumption of jurisdiction.

As a result, litigation involving jurisdictional disputes in defamation cases will likely turn on whether the foreign defendant is able to rebut a presumption of jurisdiction or demonstrate that another jurisdiction is a more appropriate forum. Foreign defendants may succeed in rebutting a presumption of jurisdiction by demonstrating that only a relatively minor element of the tort of defamation, such as publication, occurred in the jurisdiction.

Although the analytical framework applied in Breeden and Banro may create a heightened risk of libel tourism in future cases, the Court’s remarks with respect to the appropriateness of a choice of law rule based on the location of most substantial harm to reputation may provide lower courts with a legal foundation to curb libel tourism.

Finally, it must be recognized that the analytical framework applied in Breeden and Banro is subject to legislation in certain provinces that governs the assumption of jurisdiction and the doctrine of forum non conveniens: see e.g. Court Jurisdiction and Proceedings Transfer Act, S.B.C. 2003, c. 28. However, because those statutes contemplate an approach similar to the analytical framework applied in Breeden and Banro, the reasoning in those cases is likely to influence the manner in which courts in those provinces determine whether to exercise jurisdiction over defamation cases involving foreign defendants.

This article was originally published at The Court (Osgoode Hall Law School).

 

Recent Developments in the Enforceability of Website Terms of Use Agreements

The British Columbia Supreme Court recently considered a claim for breach of contract arising from a terms of use agreement contained on a website in Century 21 Canada Ltd. Partnership v. Rogers Communications Inc., 2011 BCSC 1196. The central issue was whether the terms of use gave rise to a binding contract between the owner of the website and its user in the absence of an affirmative act on the part of the user expressing assent to the terms. The case challenged the Court to consider the evolving nature of “offer” and “acceptance” in the new context of internet contracting. In a precedent-setting decision, the Court held that the act of accessing a website containing terms of use may give rise to an enforceable contract. The decision has significant implications for internet users and businesses that engage in internet commerce. This article discusses the decision’s background, reasoning, and implications.

Read the full article here:

Matthew Nied, “I Browse Therefore I Accept: Recent Developments in the Enforceability of Website Terms of Use Agreements” (2012) 1:1 Commercial Litigation and Arbitration Review 11.

Preventing Spoliation of Social Networking Profile Evidence in Insurance Litigation

Recent years have witnessed the phenomenal growth of social networking websites, such as Facebook and MySpace. Social networking websites are now commonly used by individuals to communicate information about their personal life to other members of their network. As a result, they have become an integral part of the disclosure process in insurance litigation where plaintiffs put their enjoyment of life, psychological well-being, or ability to work in issue. In these cases, photographs or other materials on a plaintiff’s social networking profile may be relevant to demonstrating their ability to engage in work or recreational activities. For these reasons, courts now routinely admit profile material as evidence in insurance litigation.

Few disclosure issues will arise when a plaintiff’s profile is publicly accessible because insurers will have access to any relevant material. However, not all material is publicly accessible. Many users now have “access-limited” profiles which permit them to limit access to designated persons. Accordingly, a user’s profile will often have a public space and a private space. Because material on a profile’s private space will generally not be accessible to insurers, it will often be impossible for insurers to determine whether it contains relevant material. Where an insurer has reason to believe that a plaintiff has not complied with their disclosure obligation, they may move for relief before the courts. Unfortunately, recent cases demonstrate that some plaintiffs, if alerted of an insurer’s attempts to seek production of access-limited profile evidence, will frustrate those attempts by deleting material harmful to their claims.

Some insurers have attempted to reduce this risk by seeking ex parte orders to compel plaintiffs to preserve the contents of their access-limited profiles. Preservation orders are remedies sought to ensure that evidence is preserved and available for the trial of an action where there is a significant likelihood that a party will destroy it once notified of the other’s interest in accessing it. This article discusses the risk of spoliation of social networking profile evidence, considers cases in which insurers have sought ex parte preservation orders to alleviate that risk, and discusses potential alternatives.

Read the full article here: Matthew Nied, “Preventing Spoliation of Social Networking Profile Evidence in Insurance Litigation” (2011) 29:6 Canadian Journal of Insurance Law 81.

Crookes v. Newton: Hyperlinking, Defamation Law, and Freedom of Expression on the Internet

Last week, the Supreme Court of Canada released its landmark decision in Crookes v. Newton, 2011 SCC 47, affirming 2009 BCCA 392 and 2008 BCSC 1424. At issue was whether creating an internet hyperlink to defamatory material constitutes “publication” of the material for the purposes of defamation law. The case challenged the Court to strike an appropriate balance between the competing interests of freedom of expression and the protection of reputation in the new context of internet communications.

To succeed in a defamation action, a plaintiff must first prove that defamatory words were published. The decision in Crookes stands for the proposition that a hyperlink, by itself, is not publication of the content to which it refers. Publication will only occur if the hyperlink is presented in a way that repeats the defamatory content. This article discusses the decision’s background, reasoning, and implications.

Background

The appellant brought numerous defamation actions against various individuals and organizations alleging that he had been defamed in several articles on the internet. After those actions were commenced, the respondent posted an article on his website which commented on the implications of the plaintiff’s defamation suits for operators of internet forums. The respondent’s article included hyperlinks to websites containing some of the allegedly defamatory articles that were the subject of the plaintiff’s actions. However, the respondent’s article did not reproduce or comment on the content in those articles.

The appellant discovered the respondent’s article and advised him to remove the hyperlinks. When the respondent refused, the appellant brought an action seeking damages for defamation on the basis that the hyperlinks constituted publication of the allegedly defamatory articles. There was evidence that the respondent’s article had been viewed 1,788 times, but no evidence as to how many times, if any, the hyperlinks in the article had been followed.

Decision of the Supreme Court of Canada

The issue on appeal was whether creating a hyperlink to allegedly defamatory material constitutes publication of that material. The reasons of the six-justice majority, penned by Abella J., began by describing the evolution of the “publication rule.” Under this rule, any act which had the effect of communicating defamatory words to a third person constituted publication. The breadth of activity caught by the publication rule over the years has been vast. For example, a person whose role was to manually operate a printing press was, in one older case, found liable for defamatory words contained in the publication, despite being unaware of its contents.

The majority observed that the harshness of the publication rule was later alleviated by the development of the “innocent dissemination” defence, which protects defendants that play a role in the distribution of potentially defamatory material.  Defendants, such as booksellers and libraries, may avoid liability if they had no actual knowledge of alleged libel, were not aware of circumstances that would give cause to suspect a libel, and were not negligent in failing to discover the libel.

The majority also recognized that, in recent years, the application of the publication rule has been tempered by cases which suggest that some acts of communication are so passive that they should not be considered publication. For example, the majority referred to English cases in which internet service providers and search engines were not held liable as publishers because they only played a passive instrumental role, and acted without knowledge, in the process of publishing the defamatory words. In other cases referred to by the majority, courts had held that merely making a reference to defamatory material was not publication.

In light of these developments, the majority concluded that creating a hyperlink to defamatory material is not the type of act that constitutes publication. In the majority’s view, modern realities made it necessary to interpret the publication rule to exclude references, such as hyperlinks, in order to accord with Charter values, recent jurisprudence, and the evolution of communications technology.

In declining to expose hyperlinks to the wide breadth of the traditional publication rule, the majority reasoned that hyperlinks are essentially content neutral references to material that hyperlinkers have not created and do not control. Although a hyperlink communicates that information exists and may facilitate the transfer of information, it does not, by itself, communicate information.

It is also significant that the majority’s reasons focused on the important role of the internet in promoting freedom of expression, and the importance of hyperlinks in facilitating access to information on the internet.  As Abella J. writes,

[36]      The Internet cannot, in short, provide access to information without hyperlinks.  Limiting their usefulness by subjecting them to the traditional publication rule would have the effect of seriously restricting the flow of information and, as a result, freedom of expression.  The potential “chill” in how the Internet functions could be devastating, since primary article authors would unlikely want to risk liability for linking to another article over whose changeable content they have no control.  Given the core significance of the role of hyperlinking to the Internet, we risk impairing its whole functioning.  Strict application of the publication rule in these circumstances would be like trying to fit a square archaic peg into the hexagonal hole of modernity.

However, the majority also recognized that a hyperlink will constitute publication if it “presents content from the hyperlinked material in a way that actually repeats the defamatory content.” This might occur, for example, where a person inserts a hyperlink in text that repeats the defamatory content in the hyperlinked material. In these cases, the hyperlink would be more than a reference; it would be an expression of defamatory meaning. This had not occurred in the case at bar, so the majority dismissed the appeal.

McLachlin C.J.C. and Fish J. substantially agreed with the majority, but held that “a hyperlink should constitute publication if, read contextually, the text that includes the hyperlink constitutes adoption or endorsement of the specific content it links to.” In their view, a hyperlinker should be liable for linked defamatory content if the surrounding context communicates agreement with the linked content. In these cases, the hyperlink “ceases to be a mere reference and the content to which it refers becomes part of the published text itself.”

Deschamps J. agreed with the result, but disagreed with the approaches taken by the other justices. In her view, the blanket exclusion of all references from the scope of the publication rule erroneously treats all references alike. According to Deschamps J.’s reasons, the majority’s approach “disregards the fact that references vary greatly in how they make defamatory information available to readers and, consequently, in the harm they cause to reputations.” To address this concern, Deschamps J. proposed a nuanced and highly fact-driven framework under which a hyperlink would constitute publication if the plaintiff established two elements: that the defendant “performed a deliberate act that made defamatory material readily available to a third party in a comprehensible form,” and that “a third party received and understood the defamatory [material].”

To establish the first element under Deschamps J.’s approach, plaintiffs would need to demonstrate that the defendant played more than a passive instrumental role in making the information available, and make reference to numerous factors bearing on the ease with which the referenced information could be accessed. To establish the second element, plaintiffs would need to adduce direct evidence that a third party had received and understood the defamatory material, or convince the court to draw an inference to that effect based on the totality of the circumstances.

Implications

Crookes presented the Court with a welcome opportunity to consider the proper balance between the competing interests of freedom of expression and the protection of reputation in the context of internet communications. Five years ago, defamation law leaned significantly towards protecting reputation. Today, as a result of Crookes and other landmark cases – such as WIC Radio Ltd. v. Simpson, 2008 SCC 40, and Grant v. Torstar, 2009 SCC 61 – defamation law better protects and promotes the fundamental right to freedom of expression.

However, the decision in Crookes could have undesirable consequences in certain circumstances. As the Court recognized, the internet’s borderless and far-reaching mode of publication has tremendous power to harm reputation. As a result of Crookes, a victim of internet defamation who wishes to vindicate their reputation and prevent the spread of defamatory material only has a remedy against the person who created and controls the material – not persons who have referred their readers to it.

It is surprising that in the majority’s view this approach creates “little or no limitation to a plaintiff’s ability to vindicate his or her reputation.” Yet, in some cases, the majority’s approach may create opportunity for abuse that significantly limits a plaintiff’s ability to vindicate their reputation. The creation of a hyperlink is a means by which defamatory material can be rapidly disseminated. Defamatory material contained on an obscure website may, for example, receive the attention of a vast number of readers if a popular blogger hyperlinks to it. In these circumstances, the plaintiff would have no action against the hyperlinker, even if they created the hyperlink with the malicious intent of spreading the defamatory words.

Such a situation would be especially troubling if the victim were also unable to pursue a remedy against the creator of the defamatory material because they published the material anonymously – a common occurrence on the internet. In addition, if the defamatory material were posted on a third party’s website operated in the United States, and that website passively hosted the material, legislation would apply to immunize the operator of the website from liability: see Communications Decency Act, 47 U.S.C. § 230 (1996); see also Crookes at para. 28. If the operator of the website refused to remove the defamatory material, it would remain visible for the world to see. The victim would be left without any remedy and, meanwhile, the use of hyperlinks could cause the defamatory material to rise from obscurity to notoriety.

Although this concern might be alleviated by adopting the more contextual and nuanced approaches suggested by McLachlin C.J. and Fish J., and Deschamps J., those approaches lack the welcome certainty of the majority’s bright-line rule. McLachlin C.J. and Fish J.’s test for publication is dependent on the presence of indicia of “adoption or endorsement,” the scope of which is inherently uncertain. Deschamps J.’s approach is similarly fact-driven. If either test applied, it would be difficult to predict in advance whether a hyperlink constituted publication. Uncertain exposure to liability might then deter the public from using hyperlinks, which could inhibit the internet as a medium for free expression. This very concern likely drove the majority to establish its bright-line rule.

The non-majority approaches would also have the undesirable effect of shifting the weight of litigation to defendants. Once a plaintiff establishes a prima facie case of defamation, the onus shifts to the defendant to raise any available defences. Both of the non-majority approaches would lower the threshold to be met by plaintiffs in order to establish a prima facie case. As a result, more internet users would be thrown into the costly position of having to justify their conduct by reaching for the protection of a defence. Although the wide availability of defences for hyperlinkers may, as Deschamps J. suggests, “dissuade overeager litigants from having a chilling effect on hyperlinking,” it would not deter plaintiffs who wish to stifle criticism by intimidating defendants through costly litigation.

Lastly, it is important to recognize that the decision in Crookes may not be the final word on defamation liability for hyperlinks. The Court expressly left open the question of whether the same principles apply to embedded or automatic hyperlinks, which automatically display referenced material with little or no prompting from the reader. These hyperlinks are distinguishable from the user-activated hyperlinks in Crookes, which require users to click on the hyperlink in order to access content. Although the Court declined to comment on the legal implications of automatic or embedded hyperlinks, it appears that they would constitute publication, according to the majority’s reasoning, to the extent that they make third party content appear as part of the website that the hyperlinker controls.

This article was originally published at The Court (Osgoode Hall Law School) and in the Commercial Litigation Review and is reproduced here with permission. This article was also referred to on the Heenan Blaikie LLP Entertainment and Media Law Signal.

The Internet, Cloud Computing, and the Charter Right to Privacy: The Effect of Terms of Service Agreements on Reasonable Expectations of Privacy

The use of the internet as a tool in the commission of crime has given rise to new search and seizure issues. When individuals use the internet, their personal information may be transmitted to various online service providers, such as social networking websites, email service providers, and internet service providers. In many cases, online service providers impose terms of service agreements on their users which require them to agree to the disclosure of their personal information to the authorities for the purpose of criminal investigations. Recent decisions indicate that such terms of service agreements are a key factor in assessing the legality of warrantless disclosure in the internet context under s. 8 of the Canadian Charter of Rights and Freedoms.

These decisions may contribute to an erosion of privacy rights as the internet becomes increasingly central to daily life. Individuals use the internet to perform a variety of personal activities, including writing and receiving correspondence, storing personal files, and developing social networks. However, in order to use these increasingly vital services, individuals must trust their information to online service providers. In doing so, users often unknowingly subject themselves to non-negotiated terms of service agreements that may limit their privacy expectations. As computing trends fuel a migration of information from personal computers to remote servers controlled by online service providers, more of the public’s information may become exposed to warrantless seizure by the state. This article surveys the law, discusses the effect of terms of service agreements, and considers the privacy implications.

Read the full article here: “The Internet, Cloud Computing, and the Charter Right to Privacy: The Effect of Terms of Service Agreements on Reasonable Expectations of Privacy” (2011) 69:5 The Advocate (Magazine of the Vancouver Bar Association) 701. Also published in (2011) 12:5 Internet and E-Commerce Law in Canada 40.

Baglow v. Smith: Removing the Defamatory Sting From Online Debates on Blogs and Message Boards

Earlier this week, the Ontario Superior Court of Justice released its decision in Baglow v. Smith, 2011 ONSC 5131. The decision suggests that an allegedly defamatory statement made in a debate on blogs or internet forums may not be found to be defamatory if the plaintiff previously engaged in the debate but did not respond to the statement despite having the opportunity to do so.

The plaintiff claimed that the defendants defamed him by making statements that exceeded the boundaries of their normally acrimonious political debate on the internet. In particular, the plaintiff complained that the defendants defamed him by branding him “one of the Taliban’s more vocal supporters” on an internet message board. The words complained of referred back to an ongoing discussion, largely on the plaintiff’s blog, where the parties had debated the validity of the trial of Omar Khadr. The parties had aggressively berated each other, and often employed colourful derogatory characterizations. Although the plaintiff had the opportunity to respond to the impugned statements on the internet message board, he did not do so. The defendants brought a summary judgment motion to dismiss the action on the basis that the statements were not defamatory or, alternatively, that the defence of fair comment applied.

Mr. Justice Annis concluded that the impugned statements were not defamatory and granted summary judgment dismissing the action. Significantly, the Court proceeded to remark in obiter that the conclusion that the statements were not defamatory was supported by the fact that the statements were made “in the context of an ongoing blogging thread over the Internet” that provided each party with the opportunity to “respond to disparaging comments before the same audience in an immediate or relatively contemporaneous time frame.” According to the Court, “a statement is not derogatory when made in a context that provides an opportunity to challenge the comment and the rules of the debate anticipate a rejoinder, unless the statement is wholly outside the scope of the debate or otherwise so outrageous as to prevent meaningful argument from continuing.”

In the Court’s view, the fact that the statements were made in the context of an internet debate forum was a contextual factor to consider in determining whether the statements were defamatory:

[58] Although I am satisfied that the words complained [of] are not capable of damaging the reputation of the plaintiff, I am of the view that there is another contextual factor that would further bolster this conclusion, namely that the alleged defamatory words were made in the context of an ongoing blogging thread over the Internet.

[59] Internet blogging is a form of public conversation. By the back and forth character it provides an opportunity for each party to respond to disparaging comments before the same audience in an immediate or a relatively contemporaneous time frame.

[60] This distinguishes the context of blogging from other forms of publication of defamatory statements. One exception could be the live debate, of which blogging constitutes the modern written form.

[61] I am not suggesting that defamation can never occur in a live debate. I do say however, that the live debate forum should be considered as a contextual factor to determine whether the statement is defamatory in so far as whether it is complete.

The Court suggested that the defamatory sting arising from statements made on the internet may be substantially reduced or eliminated by responding to the statements:

[62] An example that does not in any manner reflect the Court’s views on these issues, but which might serve to explain how derogatory, even defamatory remarks are expected to be parried in a live debate so as to remove the “sting of the libel” and attenuate any threats of diminution of reputation might be as follows:

[The defendant] knows full well that I abhor what the Taliban stand for. His calling me one of their supporters because I think they should be entitled to due process in accordance with International law would be like me calling him (some derogatory descriptor, e.g. “a Nazi fascist”) because he wants to trample the rights that Canadians cherish, etc. [Example provided by the Court]

[63] Given that the plaintiff pleads his belief that “there is a reasonable likelihood of damage to my reputation if it became generally believed that I supported the enemies of the Canadian Forces”, it seems that the tendency of the comment to lower his reputation, particularly when arising in the form of a comment in a debate, could have been quickly nipped in the bud by a simple rejoinder in the fashion described above. This would have had the additional benefit of allowing him to score some points of his own.

The Court’s comments were based on the principle that a statement is defamatory if it tends to injure the reputation of the person to whom it refers by lowering him or her in the estimation of right-thinking members of society: Baglow, at para. 11.  Accordingly, the issue of whether the statements on the blog were defamatory was to be judged through the eyes of its readers:

[64] More importantly to the issue of context, the blogging audience is expecting and would indeed want to hear a rejoinder of this nature where the parry and thrust of the debaters is appreciated as much as the substance of what they say.

[65] In essence, I am suggesting that the Court, in construing alleged defamatory words in an ongoing debate, should determine whether the context of the comment from the perspective of the reasonable reader or listener is one that anticipates a rejoinder, which would eliminate the possible consequence of a statement lowering the reputation of the plaintiff in their eyes.

[66] To some extent the Court is attempting to decide whether the debate should have gone forward, such that walking off the blogging stage, so to speak, is a form of “gotcha” contrary to the rules governing the debate.

[67] I realize that this sounds like a form of defence of mitigation of a defamatory comment. But I see it more as an uncompleted comment, something akin to a plaintiff arguing that he or she has been defamed by a question, when the response was what the audience was expecting.

It appears that the Court’s view was a response, in part, to the concern that the threat of legal action may chill debate on the internet:

[70] Bringing an action on the comment in mid-debate runs contrary to the rules and has the effect of chilling discussion. If allowed, it places the opposing party in a defensive mode, rather than an offensive one, strategically putting that party at a disadvantage.

…

[74] The comment of the defendant Smith was on topic and generally consistent with the language and positions taken in the on-going debate. Accordingly, in no sense was it one that would have had any different effect on the plaintiff’s reputation from other derogatory remarks made throughout the blogs. Like those comments, it should have been answered to remove the sting, if any, and to comply with expectations of readers of these blogs.

It is interesting to note that the impugned statements were made on an internet message board that was distinct from the blogs on which much of the previous debate had occurred. The Court appears to have considered the comments made in all of these forums as a whole rather than concentrating on isolated comments in determining whether the impugned statements were defamatory: Baglow, at para. 27. However, one might question whether the forums had the same audience, and whether a reasonable reader will  anticipate a rejoinder in a place on the internet that differs from the one where the previous debate occurred.

In any event, the Court’s comments should not be read to suggest that persons defamed on the internet should necessarily enter the fray and respond to defamatory comments if given the opportunity to do so. The allegedly defamatory statements in this case were made in the context of an acrimonious debate in which the plaintiff was found to have participated. This is distinguishable from circumstances in which a plaintiff finds themselves defamed by statements made on a blog or message board in which they have not participated. In these cases, the context of the comment from the perspective of the reasonable reader will not be one that anticipates a rejoinder. It may be advisable for victims of internet defamation in these circumstances to avoid responding to defamatory comments in order to avoid inviting further attention to the matter and increasing the harm to their reputation.

Quoted on Slaw, the Heenan Blaikie LLP Entertainment and Media Law Signal, and also posted on the International Forum for Responsible Media.

Warman v. Fournier et al: Balancing Disclosure, Privacy, and Freedom of Expression Interests in Internet Defamation Cases

While the internet provides users with an environment in which socially valuable anonymous speech can flourish, it also provides users with an opportunity to defame others behind a shield of anonymity. If these users can be identified, they may be held liable for defamation. Unfortunately for plaintiffs, the identities of these individuals are usually known only by the website or internet service provider (“ISP”) through which the statements were made, and these entities generally decline to disclose a user’s identity in the absence of a court order compelling them to do so. Faced with a growing stream of plaintiffs who seek these kinds of orders, courts have sought to craft approaches to evaluating applications for disclosure that strike an appropriate balance between the privacy interests of anonymous internet posters and the reputational interests of plaintiffs.

Yesterday, the Ontario Divisional Court released its decision in Warman v. Fournier et al, 2010 ONSC 2126 (Div. Ct.) rev’g (2009), 309 D.L.R. (4th) 227, 76 C.P.C. (6th) 155 (Ont. S.C.J.) (“Warman”). At issue was whether the disclosure provisions of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (the “Rules”) automatically entitle plaintiffs in internet defamation cases to obtain the identifying information of anonymous posters from websites and ISPs, or whether courts must balance the interests of plaintiffs with the freedom of expression and privacy interests of anonymous posters. The decision is now the leading authority in Ontario for the proposition that the objectives of the disclosure obligations under the Rules must be balanced with the right of freedom of expression in internet defamation cases. This article discusses the background, holding, and implications of Warman.

1. Background

The Respondent commenced an action against the Appellants, the operators of an internet message board, and eight anonymous message board participants with respect to a series of allegedly defamatory postings. After commencing the action, the Respondent brought a motion for an order compelling the Appellants to comply with Rule 76.03 of the Rules which required the Appellants to file an affidavit of documents that disclosed the email and internet protocol (“IP”) addresses of the anonymous posters in order to allow the Respondent to identify the posters and serve them with the statement of claim.

The motions judge rejected the Appellants’ submission that the Respondent was required to establish a prima facie case of defamation before disclosure could be ordered. Instead, Justice Kershman concluded that Rule 76.03 of the Rules required the Appellants to disclose all documents in their power or control and that such disclosure should be automatic upon the issuance of a statement of claim because the information was relevant and not protected by privilege.

This decision stood in stark contrast with earlier cases that offered some protection to the privacy interests of internet users by requiring plaintiffs to demonstrate a bona fide or prima facie case of defamation before ordering disclosure (see: previous posting). The motions judge distinguished these cases on the basis that the Respondent was seeking to compel the Appellants to follow the Rules as required by named parties to the action, whereas the other cases involved discretionary orders for the production of documents from third parties.

2. Holding on Appeal

The Divisional Court unanimously allowed the appeal and remitted the matter to a different motions judge for re-consideration, recognizing that the anonymous posters’ right of freedom of expression under the Charter should have been taken into account in considering the Respondent’s request for disclosure under the Rules. Moreover, the Court noted that the posters’ express decisions to remain anonymous gave them a reasonable expectation of privacy that weighed in their favour.

In rejecting the notion that disclosure should be automatic, the Court also expressed concern for the ease by which a plaintiff could abuse the Rules by filing claims in a spurious manner simply to identify an anonymous poster:

If disclosure were automatic, a plaintiff with no legitimate claim could misuse the Rules of Civil Procedure by commencing an unmeritorious action for the sole purpose of revealing the identity of anonymous internet commentators, with a view to stifling such commentators and deterring others from speaking out on controversial issues. For this reason, the commencement of a defamation claim does not trump freedom of expression or the right to privacy.

[Warman, at para. 33]

After surveying previous decisions, Justice Wilton-Siegel set out four considerations, aimed at preventing abuse of the Rules and respecting the privacy of internet users, that should have been considered by the motions judge in deciding whether to order disclosure under the Rules:

  • whether the unknown alleged wrongdoer could have a reasonable expectation of anonymity in the particular circumstances;
  • whether the Respondent has established a prima facie case against the unknown alleged wrongdoer and is acting in good faith;
  • whether the Respondent has taken reasonable steps to identify the anonymous party and has been unable to do so; and
  • whether the public interests favouring disclosure outweigh the legitimate interests of freedom of expression and right to privacy of the persons sought to be identified if the disclosure is ordered.

[Warman, at para. 34]

In concluding that plaintiffs should be required to meet a prima facie standard rather than a lower bona fide standard, the Court emphasized the importance of protecting freedom of expression and noted that there was no concern that the higher standard would deprive applicants of a remedy:

In para. 34 of BMG [2005 FCA 193], the Federal Court of Appeal expressed the concern that, in that case, imposition of a prima facie case standard would effectively strip an applicant of a remedy because the plaintiff could not know the actual case it wished to assert against the defendants until it knew not only their identities but also the nature of their involvement in the [internet] file-sharing activities. Because the present proceeding is a defamation action, that concern does not arise. Unlike BMG, the respondent knows the details of precisely what was done by each of the unknown alleged wrongdoers.

In addition, because this proceeding engages a freedom of expression interest, as well as a privacy interest, a more robust standard is required to address the chilling effect on freedom of expression that will result from disclosure. It is also consistent with the recent pronouncements of the Supreme Court that establish the relative weight that must be accorded the interest in freedom of expression. In the circumstances of a website promoting political discussion, the possibility of a defence of fair comment reinforces the need to establish the element of defamation on a prima facie basis in order to have due consideration to the interest in freedom of expression. On the other hand, there is no compelling public interest in allowing someone to libel and destroy the reputation of another, while hiding behind a cloak of anonymity. The requirement to demonstrate a prima facie case of defamation furthers the objective of establishing an appropriate balance between the public interest in favour of disclosure and legitimate interests of privacy and freedom of expression.

[Warman, at paras. 41 – 42]

3. Implications

Warman represents an important recognition that while internet users’ anonymity ought not to be protected absolutely, the mere commencement of a defamation action should not give rise to an automatic entitlement to information identifying a previously anonymous poster without a consideration of the interests of privacy and freedom of expression.

Nevertheless, there is still uncertainty with respect to the degree of protection that courts will afford to anonymous posters in the future. Under Canadian law, plaintiffs have two ways to seek disclosure in internet defamation cases. Apart from identifying anonymous defendants by seeking pre-action discovery or production of relevant information under procedural rules, as occurred in Warman, plaintiffs may also bring independent actions for disclosure of the identity of anonymous defendants by way of an equitable bill of discovery known as a “Norwich order”. Norwich orders were introduced in the decision of the House of Lords in Norwich Pharmacal Co. v. Customs and Excise Commissioners, [1974] A.C. 133 (H.L.) in which it was held that where a third party becomes involved in the tortious acts of others, that third party has a duty to disclose the identity of the tortfeasor so that the plaintiff may pursue its remedies. The Norwich factors were recently confirmed by the Ontario Court of Appeal in GEA Group AG v. Flex-N-Gate Corporation, 2009 ONCA 619 and applied in the internet defamation context by the Ontario Superior Court of Justice in York University v. Bell Canada Enterprises (2009), 311 D.L.R. (4th) 755 (Ont. S.C.J.) (“York University”):

  • whether the applicant has provided evidence sufficient to raise a valid, bona fide or reasonable claim;
  • whether 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 involved in the acts;
  • whether the third party is the only practicable source of the information;
  • whether the third party can be indemnified for costs to which it may be exposed because of the disclosure; and
  • whether the interests of justice favour obtaining the disclosure.

[York University, at para. 13]

Although the second and fourth Norwich factors were not relevant in Warman because they apply only to third party respondents rather than co-defendants [see Warman, at para. 39], some of the other Norwich factors are similar to the considerations set out in Warman that are now applicable to the question of whether a court should order disclosure under the Rules. However, an important difference remains. While the approach under Warman requires plaintiffs to demonstrate a prima facie case of defamation, Norwich jurisprudence has required plaintiffs to meet the lower bona fide standard. For example, even though the plaintiff in York University managed to establish a prima facie case of defamation, the court did not require the plaintiff to demonstrate more than a bona fide case. Although Warman provides compelling reasons to prefer the higher prima facie standard where the plaintiff seeks disclosure through a Norwich order, it remains open for courts to require plaintiffs to meet the lower standard instead.

Also posted on Law is Cool and quoted on Slaw, the Wise Law Blog, the Heenan Blaikie LLP Entertainment and Media Law Signal, the International Forum for Responsible Media, and the Blog Law Blog.

Grant v. Torstar and the defence of responsible communication: implications for bloggers and users of other online media

In the recent decision of Grant v. Torstar Corp., 2009 SCC 61 (“Grant”) and its companion case, Quan v. Cusson, 2009 SCC 62 (“Quan”), the Supreme Court of Canada sought to strike a more appropriate balance between freedom of expression and the protection of reputation by creating the new defence of “responsible communication on matters of public interest” (the “Defence”). The Defence allows defendants in libel cases where statements of fact are at issue to evade liability if they can show that they acted responsibly in reporting on a matter of public interest, even if the statements of fact are untrue. Prior to the decision, defendants could not avoid liability in these cases unless they showed that the statement was substantially true (the defence of justification), or that the statement was made in a protected context (the defence of privilege).

Importantly, the Defence applies not only to journalists and print-based publishers – the types of defendants in Grant and Quan – but also to non-journalist bloggers and users of other online media:

[T]he traditional media are rapidly being complemented by new ways of communicating on matters of public interest, many of them online, which do not involve journalists. These new disseminators of news and information should, absent good reasons for exclusion, be subject to the same laws as established media outlets. I agree … that the new defence is “available to anyone who publishes material of public interest in any medium”. [Grant, at para. 96]

[Emphasis added]

Although the extension of the Defence to non-journalist bloggers and users of other online media is an important recognition of the growing relevance and legitimacy of these groups, the Defence is – at least currently – unlikely to protect most members of these groups. To gain the protection of the Defence, the defendant must establish two elements: (1) that the publication is on a matter of public interest; and (2) that the publication was responsible, in that the defendant was diligent in trying to verify the allegation. The trial judge will determine the first element. If the judge concludes that the first element is met, the jury will determine the second element, having regard to several factors:

  • the seriousness of the allegation;
  • the public importance of the matter;
  • the urgency of the matter;
  • the status and reliability of the source;
  • whether the plaintiff’s side of the story was sought and accurately reported;
  • whether the inclusion of the defamatory statement was justifiable;
  • whether the defamatory statement’s public interest lay in the fact that it was made rather than its truth; and
  • any other relevant circumstances

In assessing whether the defendant was diligent, the jury will be guided by “established journalistic standards”:

[M]any actions now concern blog postings and other online media which are potentially both more ephemeral and more ubiquitous than traditional print media. While established journalistic standards provide a useful guide by which to evaluate the conduct of journalists and non-journalists alike, the applicable standards will necessarily evolve to keep pace with the norms of new communications media. [Grant, at para. 97]

[Emphasis added]

This indicates that the same journalistic standard must be applied to every defendant irrespective of whether or not they are journalists. As a result, the Defence will likely not apply to non-journalist bloggers and users of other online media unless they perform the due diligence expected of a journalist in the circumstances.

The problem for many members of these groups is that they are generally not guided by established journalistic norms. Although they may approach online publishing in good faith and with a level of diligence reasonably expected of non-journalists, this level of diligence is unlikely to meet the required journalistic standard. For example, although journalists will generally make a point of seeking the plaintiff’s side of the story and speaking directly to witnesses and experts, non-journalist bloggers – who are generally unpaid for their efforts – will rarely have the time, resources, training, or willingness to do so. As one American commentator argues,

blogging and journalism clearly differ. The former ‘implies that a disinterested third party is reporting facts fairly’ (Andrews, 2003: 64). Blogs are ‘unedited, unabashedly opinionated, sporadic and personal’ (Palser, 2002) – in many ways, the antithesis of traditional US journalism. Some say that is the best thing about them. ‘Journalism is done a certain way, by a certain kind of people,’ but bloggers “are oblivious to such traditions” (Welsh, 2003). [Jane B. Singer, “The political j-blogger: ‘normalizing’ a new media form to fit old norms” (2005) 6(2) Journalism 173 at 176]

[Emphasis added]

Even if a non-journalist blogger or user of other online media does engage in the level of diligence required to meet the journalistic standard, they may unknowingly fail to do so in a way that produces a strong record of evidence from which a court can conclude that they did act diligently. As a result, many of these defendants may simply not have access to the protection of the Defence.

Nonetheless, Grant does not foreclose the possibility that courts will apply a different diligence standard to non-journalist bloggers and users of other online media as the “norms of new communications media” evolve. Although the court isn’t clear on this point, these groups might be able to gain the protection of the Defence in future cases even if they haven’t performed their diligence in the same way that a traditional journalist would have:

While established journalistic standards provide a useful guide by which to evaluate the conduct of journalists and non-journalists alike, the applicable standards will necessarily evolve to keep pace with the norms of new communications media. [Grant, at para. 97]

[Emphasis added]

Even if the standard applicable to these groups does not shift to allow them to gain the protection of the Defence, juries – who have been tasked with the responsibility for assessing whether the defendant was diligent – may be sympathetic to these groups and apply the journalistic standard less rigidly.

In summary, although the Defence extends to non-journalist bloggers and users of other online media, many members of these groups are unlikely to be protected by the Defence because it requires that they performed the due diligence expected of a journalist. Nonetheless, the law does not necessarily foreclose the possibility that courts will apply a different diligence standard to these groups in future cases, or that juries will less rigidly apply the existing journalistic standard.

Also posted on Law is Cool and quoted in the Canadian Association of Journalists Media Magazine at p. 27.

Swartz v. Does: American and Canadian approaches to anonymity in internet defamation cases

A recent case illustrates that American jurisprudence is increasingly coalescing around a uniform approach to determine whether a plaintiff may compel the disclosure of an anonymous defendant’s identity in internet defamation cases. As discussed below, the Canadian experience has been different.

In Swartz v. Does (“Swartz”) (see: judgement) a Tennessee state court held that plaintiffs were entitled to discover the identity of an anonymous blogger that published allegedly defamatory statements about them. The case arose when the plaintiffs subpoenaed Google, the parent company of the blogging service used by the anonymous defendants (see: news article).

The decision is notable for Justice Brothers’ survey of the various standards previously applied by American courts and his ultimate application of the standard most protective of internet anonymity. This standard, established in Dendrite International, Inc. v. John Doe No. 3, 775 A.2d 756 (N.J. App. Div. 2001) (the “Dendrite Standard”) and commonly but perhaps misleadingly known as the “prima facie standard”, requires a plaintiff to meet several requirements. One of these requires the plaintiff to make a “substantial legal and factual showing” that the defamation claim has merit before a court will compel the disclosure of an anonymous defendant’s identity.

Justice Brothers considered this requirement of the Dendrite Standard and concluded that the plaintiffs had made a substantial legal and factual showing on each of the three elements of a defamation claim under Tennessee law. Interestingly, Justice Brothers proceeded to offer guidance for future litigants by providing a detailed description of how the plaintiffs met the requirement, which does not appear to be onerous:

Plaintiffs submitted and displayed several copies of the blog posts in question, and testified that the statements were publicly available for several months. Plaintiffs testified that the [allegedly defamatory allegations] are all false. Plaintiffs also testified that they experienced actual damages from the allegedly defamatory statements, including loss of business, harm to their reputations, emotional distress, and the costs of having to hire a security expert inspect their home [sic].

Swartz is yet another American case that has followed the increasingly prevalent Dendrite standard. Unfortunately, Canadian jurisprudence has yet to begin coalescing to the same extent.  The scarce Canadian law on this issue, most of which comes from Ontario, indicates that plaintiffs have two ways to compel online service providers to reveal the identities of anonymous defendants:

  • by seeking pre-action discovery by way of an equitable bill of discovery known as a Norwich Order; or
  • by seeking pre-action discovery or production from the online service provider by bringing a motion under the applicable rules of civil procedure.

The requirements of each approach vary substantially. While the Norwich Order approach requires plaintiffs to establish only a bona fide case of defamation (see York University v. Bell Canada Enterprises, [2009] O.J. No. 3689 (S.C.J.) and BMG Canada Inc. v. John Doe, [2004] 3 F.C.R. 241 (C.A.)), the alternate approach has generated different requirements depending on the rules of civil procedure under which the plaintiff brought their motion. In an early case, the court required the plaintiff to establish a prima facie case of defamation similar to that required under the Dendrite standard (Irwin Toy Ltd. v. Joe Doe, 2000] O.J. No. 3318 (S.C.J.)). Yet, in a more recent and controversial case, the court held that the plaintiff had no obligation to establish a prima facie or even bona fide case because disclosure was automatic upon the issuance of a statement of claim (Warman v. Wilkins-Fournier, [2009] O.J. No. 1305 (S.C.J.)). Although these cases are distinguishable on the basis of differences in the applicable rules of civil procedure, more uniformity is needed to ensure that courts consistently strike an appropriate balance between privacy and reputational interests.

Also posted on Law is Cool and PogoWasRight.

Distinguishing Twitter postings from other forms of communication in online defamation cases

The New York Times published an interesting article today about the growing number of defamation actions involving messages posted on Twitter (see: article). The article noted that the special characteristics of Twitter postings may distinguish them from other forms of online posting when it comes to defamation actions:

[T]here are few prescribed social norms on Twitter like those in more closed communities like Facebook. The service has attained mass popularity without much time to develop an organic users’ culture. On top of that, with tweets limited to 140 characters, users come right to the point without context or nuance.

“It’s the same reason why schoolyard fights don’t start out with, ‘I have a real problem with the way you said something so let’s discuss it,’ ” said Josh Bernoff, a researcher and an author of “Groundswell: Winning in a World Transformed by Social Technologies.”

“You get right to the punch in the nose. Twitter doesn’t allow room for reflection. It gets people to the barest emotion.”

But the article proceeds to imply that the short and blunt nature of Twitter postings might make it easier for defendants to argue that Twitter postings aren’t taken seriously by readers and – therefore – aren’t harmful to a plaintiff’s reputation:

“The basic law [of defamation] will be the same, but I would think that a defendant might argue that the language used on Twitter is understood to not be taken as seriously as is the case in other forms of communication,” said Mr. [Floyd] Abrams, who has represented The New York Times. “We will have to wait and see how judges and juries figure out how to deal with this.”

American courts have already given some indication of how they might deal with such an argument. The decision of Justice Madden of the New York State Supreme Court in the infamous Cohen v. Google case (see: previous posting) is illustrative. In that case, the defendant blogger (the “Defendant”) argued that statements made on her blog were not perceived by readers as factual assertions because blogs had become forums for venting personal opinions:

The Blogger further argues that even if the words are capable of a defamatory meaning, “the context here negates any impression that a verifiable factual assertion was intended,” since blogs “have evolved as the modern day soapbox for one’s personal opinions,” by “providing an excessively popular medium not only for conveying ideas, but also for mere venting purposes, affording the less outspoken, a protected forum for voicing gripes, leveling invective, and ranting about anything at all.”

Although Justice Madden rejected this argument, her reasons did not directly address the issue of context:

The court also rejects the Anonymous Blogger’s argument that this court should find as a matter of law that Internet blogs serve as a modern day forum for conveying personal opinions, including invective and ranting, and that the statements in this action when considered in that context, cannot be reasonably understood as factual assertions. To the contrary, as one court in Virginia has articulated: “In that the Internet provides a virtually unlimited, inexpensive, and almost immediate means of communication with tens, if not hundreds, of millions of people, the dangers of its misuse cannot be ignored. The protection of the right to communicate anonymously must be balanced against the need to assure that those persons who choose to abuse the opportunities presented by this medium can be made to answer for such transgressions. Those who suffer damages as a result of tortious or other actionable communications on the Internet should be able to seek appropriate redress by preventing the wrongdoers from hiding behind an illusory shield of purported First Amendment rights.

Although more jurisprudence on the effect of context in cases involving Twitter and similar online services is almost certainly forthcoming, the judgment in Cohen v. Google indicates that courts may be reluctant to tolerate an increasingly outspoken and defamatory online culture at the expense of a plaintiff’s right to a good reputation.

Buckle v. Caswell: Defamation on Blogs

A recent Canadian case offers another example of the legal dangers facing bloggers that post potentially defamatory statements.

In the case of Buckle v. Caswell (see: judgement), Wayne Buckle – a senior Crown prosecutor – (the “Plaintiff”), sued Gay Caswell – a former member of the Saskatchewan legislature – (the “Defendant”), for defamation in connection with a blog operated by the Defendant (the “Blog”). The Blog contains a statement which alleges that the Plaintiff is, among other things, a drug user that was disbarred for misappropriating funds (the “Statement”):

Mr. Buckle and his sister were busted for a grow operation. (They were charged with growing marijuana). Mr. Buckle lost his licence as a lawyer with the Sask. Law Association because he took money belonging to a client. He then headed the Legal Aid office but misused funds there. He is a well known and publicly known cocaine user. One person told me his personal experience when judge, lawyer (Buckle) and he, the accused had a court adjournment to toke-up (do marijuana) behind the La Ronge court house.

Justice A.R. Rothery concluded that the Plaintiff had proved the elements of defamation and awarded damages of $50,000 and an injunction requiring the Defendant to remove the Statement. The Defendant has publicly refused to remove the Statement.

The action was undefended, and the Defendant claims that she lacked the funds necessary to hire representation and was too ill to attend court. The Defendant has indicated that she will appeal the decision.

TCI Journal: The exposure of anonymous online speakers

A recent case illustrates the problem of allowing a court to expose the identity of an anonymous online speaker without first requiring the plaintiff to demonstrate a prima facie or even bona fide case of defamation.

In late August, the California Superior Court issued a subpoena that compelled Google to disclose the identity of anonymous journalists in the TCI Journal case. In that case, a resort developer – Dr. Cem Kinay – (the “Plaintiff”) sought a subpoena to compel Google to disclose the names of the anonymous owners of the e-mail address for TCI Journal, a small, volunteer-run online newspaper that reports on government corruption in the Turks & Caicos Islands (the “TCI Journal”). The Plaintiff alleged that the TCI Journal posted defamatory statements which associated the Plaintiff with government corruption.

What makes the TCI Journal case troubling is that the Plaintiff was able to determine the identify of the anonymous operators of the TCI Journal without being required to demonstrate a prima facie or even bona fide case of defamation. In similar Canadian and American cases – including the infamous Cohen case (see: previous post) – plaintiffs have been required to demonstrate that their claim had some merit before a court would compel an online service provider to disclose the identity of an anonymous online speaker. In this case, the Plaintiff appears to have been required to do little more than file a court document and pay a small fee. Although the TCI Journal could have made a motion to quash the subpoena – this appears to have not occoured – likely because the TCI Journal couldn’t afford legal representation.

To make matters worse, Google declined to oppose the subpoena, as illustrated in the following extract from an email sent to the operators of the TGI Journal:

Google has received a civil subpoena for information related to your Google account …

To comply with the law, unless you provide us with a copy of a motion to quash the subpoena (or other formal objection filed in court) via email at legal-support@google.com by 5pm Pacific Time on September 16, 2009, Google will assume you do not have an objection to production of the requested information and may provide responsive documents on this date.

Unfortunately, Google is not in a position to provide you with legal advice.

If you have other questions regarding the subpoena, we encourage you to contact your attorney.

The TCI Journal case should concern online entities that depend on their anonymity to function yet lack the funds required to protect it. In many cases, exposing a critic’s identity might be sufficient to silence that critic. If the critic lacks the funds required to fight the plaintiff’s attempt to expose their identity – and if the law does not independently require the plaintiff to demonstrate that their defamation claim has some merit – plaintiffs might be permitted to achieve their purpose in the absence of any real case of defamation. This is especially problematic if the critic’s purpose is to further the public good.

Google forced to reveal identity of anonymous blogger

A former Canadian model, Liskula Cohen, (the “Plaintiff”) has received an order from Justice Madden of the New York State Supreme Court to force Google, the Defendant, to reveal the identity of an anonymous blogger that defamed the Plaintiff on a blog (see: text of judgement). The blog, called Skanks in NYC (the “Blog”), contained the following allegedly defamatory statements (the “Statements”):

How old is this skank? 40 something? She’s a psychotic, lying, whoring, still going to clubs at her age, skank.

(…)

I would have to say the first-place award for ‘Skankiest in NYC’ would have to go to the Defendent.

The Plaintiff sued Google in an attempt to force Google to reveal the identity of the person that posted the Statements. The Blog was hosted by Google, which initially fought to keep the blogger’s identity a secret. Now that Google has been ordered to unmask the blogger’s identity, the Plaintiff will presumably take further action against the blogger.

This decision has attracted substantial public attention – not only because of the celebrity of the Plaintiff and the extravagance of the Statements – but because of the legal effect that this decision will likely have on increasing the likelihood that bloggers will be held responsible for their defamatory statements.

This case may turn out to be merely a pyrrhic victory for plaintiffs in online defamation cases. This decision creates an incentive for bloggers to input false information when registering for blogs to avoid revealing their identity in the event of legal action. Although Google will still be forced to reveal the IP of bloggers in cases where the name and email address provided by the blogger is false, the evidentiary challenge of linking an IP to a specific blogger will remain a significant problem for plaintiffs.

Section 230 to the rescue, again

Twitter made news last week when a Chicago apartment leasing and management company sued a former client in defamation for posting a message on Twitter (see: blog posting). Twitter is making news again now that the President of the Board for New York’s Atelier Condos has filed a lawsuit against two condo owners and three former employees for publishing defamatory statements on various websites, blogs, and Twitter. The defamatory statements involve accusations of murder, bribery, extortion, illicit payoffs, and corruption (see: complaint).

Interestingly, the plaintiffs are also suing Twitter and other entities for hosting the defamatory statements. This part of the suit is almost certain to fail by virtue of section 230 of the Communications Decency Act [ “Section 230”], which protects online services from liability for content posted by third parties. The relevant language of Section 230 is as follows:

“No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”

Various commentators have noted that counsel for the plaintiffs (“Counsel”) were probably oblivious to the application of Section 230. Unless Counsel knows something that we don’t, their decision to sue Twitter and other entities is a surprising mistake that will not only waste judicial resources, but also likely generate more public consciousness of the allegedly defamatory statements than would have occurred if the action was confined to the condo owners and former employees. In a world where the public is less likely to sympathize with big business, this mistake is probably not a little one.

Readers may recall that Section 230 came to the rescue of Wikipedia almost precisely one year ago when a New Jersey judge relied on Section 230 to exempt Wikipedia from a defamation suit based on comments posted by its users.

The case against Wikipedia was filed by a literary agent (the “Plaintiff”) that was the subject of ridicule on several blogs and websites. In particular, the blogs often referred to the Plaintiff as “that lunatic,” her colleagues as a “posse of dumbshits,” and their actions as “random nuttiness.” When some of these statements appeared in a Wikipedia entry, the Plaintiff named Wikipedia as a defendant in her law suit.

In this case, Wikipedia successfully argued that the claim should be dismissed because Wikipedia was an interactive computer service  and any defamatory information was provided by another content provider such that Wikipedia was protected by Section 230.

Google not liable for defamatory material in search results

In a recent decision of the English High Court in Metropolitan International Schools Ltd v DesignTechnica Corporation [“Metropolitan International“] (see: case), Justice Eady held that Google, the popular search engine, was not liable for defamatory material that appeared in its search results. More generally, Metropolitan International supports a common law principle that a person cannot be liable for conveying defamatory material to users if the conveyance lacks human intervention.

The claim against Google was brought by Metropolitan International Schools [“Metropolitan”], a company that offers distance learning courses. The litigation arose after an anonymous person posted a message on a website suggesting that Metropolitan’s distance learning courses were a “scam”. To make matters worse, the message began ranking highly in Google search results for searches conducted for Metropolitan. Metropolitan reacted by suing the website operator and Google for publishing the defamatory comments in its search results.

The issue of interest in this case was whether Google was a “publisher” of the defamatory material and thereby liable to Metropolitan. The court began by drawing an interesting distinction between a human compiler of a library catalogue and the automated indexing process employed by Google. The later could not be a “publisher” – Justice Eady concluded – because the search results were generated automatically and without human involvement. Accordingly, Google lacked the requisite knowledge and involvement sufficient to constitute publication [at para. 50 and 53]:

When a search is carried out by a web user via the Google search engine it is clear, from what I have said already about its function, that there is no human input from [Google]. None of its officers or employees takes any part in the search. It is performed automatically in accordance with computer programmes.

(…)

[W]hereas a compiler of a conventional library catalogue will consciously at some point have chosen the wording of any “snippet” or summary included, that is not so in the case of a search engine. There will have been no intervention on the part of any human agent. It has all been done by the web-crawling “robots”.

The court was careful to note that Google, although not liable as a publisher, might be liable on the basis of acquiescence if it permitted the publication to appear in its search results despite having the power to prevent it. On a survey of the facts, the court concluded that Google had acted to restrict access to the message and was thereby not liable on the basis of acquiescence.

This judgment has interesting implications for website operators that exercise human intervention in the process of conveying information to users. The court’s distinction between processes which involve human intervention and those which consist of automated processes suggest that online entities might decrease their legal exposure by automating processes that involve the conveyance of information to users. One may question whether this “incentive to automate” might result in an increase in incidences of internet defamation accompanied by a decrease in the precision and relevance of information conveyed to users.

Cited by Forbes.

Twitter defamation litigation

A Chicago apartment leasing and management company (the “Plaintiff”) has sued a former client (the “Defendant”) in defamation for posting a message on Twitter, a social network that allows users to send and read messages (see: news article; statement of claim). Although the Defendant’s Twitter account was followed by no more than 20 people at the time, the Plaintiff alleges that the message was “published throughout the world” and is seeking damages in excess of $50,000. The message is reproduced below:

Who said sleeping in a moldy apartment was bad for you? Horizon [the Plaintiff] thinks it’s okay.

Commentators have been quick to question the sagacity of the Plaintiff’s decision to commence legal proceedings (see: news article). Regardless of where fault lies, this litigation is illustrative of the paradox that plagues defamation actions: plaintiffs, by acting to assert their legal rights and restore their tainted reputations, risk attracting public scrutiny and aggravating the very reputational effect that they sought to avoid.

Update: The suit was dismissed on January 20th, 2010. Read more here.