The future of class actions in Canada has been thrown into doubt by a recent decision of the Quebec Superior Court. The Quebec court refused to enforce in Quebec an Ontario court judgment that approved a national settlement in a case involving HSBC Bank of Canada.

The decision could have an impact on a pending class-action suit filed in December against I.G. Investment Management Ltd., CI Mutual Funds Inc., Franklin Templeton Investments Corp. and AGF Funds Inc. Among other things, the lawsuit alleges that the fund companies, by permitting certain institutional investors to engage in market-timing, breached their fiduciary duty to non-market-timing unitholders by not managing the funds in a manner that would protect the best interests of all investors. Toronto lawyer Joel Rochon, a partner in Rochon Genova LLP, who filed the suit, has declined to comment on the Quebec decision.

The class-action case of Hocking v. HSBC Bank Canada was based on HSBC’s overcharging of interest penalties when mortgages were paid off before their maturity dates. Such prepayments can occur, for example, when homeowners sell their properties before mortgages come due or if they change mortgage lenders.

Instead of giving mortgagors an interest credit for the amount of their annual prepayment privilege — in the Hocking case, up to 20% of the original amount of the mortgage — HSBC based its prepayment penalty on the entire principal balance owing.

As a result, many homeowners who prepaid an HSBC mortgage overpaid by hundreds or even thousands of dollars.

The action was brought on behalf of all Canadians, with Robert Hocking as the “representative plaintiff.”

In June 2005, the Ontario Superior Court certified the action and approved a settlement between the parties. In August, HSBC filed a motion in the Quebec court seeking recognition of the Ontario decision.

Justice Claudine Roy gave several reasons for refusing to recognize the Ontario judgment. For example, she said, the Ontario court had no jurisdiction over Quebec mortgagors because their overpayments had taken place in Quebec, not Ontario.

She also determined Ontario lacked jurisdiction because there was no “real and substantial connection” between each of the individual claims covered by the class action and the province of Ontario.

A lawyer involved in the case suggests that British Columbia might have been the proper place to start the class action because HSBC’s head office is located there.

A decision has not yet been made on whether the case will be appealed.

A leading class-action lawyer, Mathieu Bouchard of the Montreal office of Davies Ward Phillips & Vineberg, calls the Quebec judgment “a serious warning to all parties involved in national or even international class actions across Canada.

“Unless there is a real and substantial connection between each and every class member and the jurisdiction in which the action was instituted, Quebec courts will not recognize judgments rendered by courts outside of Quebec,” he says.

Enforceability issue

This judgment “makes clear that parties outside Quebec who may choose to ignore the jurisdiction of Quebec courts over class actions involving residents of that province will do so at their own risk,” he says.

According to Nick Rodrigo, Bouchard’s partner at Davies, the decision is also important because it addresses a question that has not really been dealt with before — namely, “the enforceability of a judgment relating to a national class that emanates from one province.”

The issue arises because the courts in Ontario have been liberal in approving settlements that would purport to cover a national class, he says. In contrast, lawyers in Quebec have been more restrained in defining classes.

He gives the example of a class action started in Illinois against fast-food giant McDonald’s Corp. When a similar class action was filed in Ontario, McDonald’s objected, taking the position that the Illinois action covered all of North America. The Ontario court concluded it is possible for a class action to cover all of North America, but the rights of all members of the class have to be respected. As many Ontario residents would not have been aware the action had been started on their behalf, they would not be able to decide whether to participate in the settlement or opt out of it. So, the action was not enforceable in Ontario.

Rodrigo also points out that the HSBC decision is a benefit for plaintiffs’ lawyers. He says defendants such as McDonald’s want “to be able to settle with everyone in one shot.” But lawyers who represent class-action plaintiffs want the opportunity to partake in profitable class-action suits. By refusing to recognize out-of-province certifications, Quebec has opened the door for more class actions to be filed.

@page_break@“A lot of plaintiffs are rubbing their hands,” he says. “Their turf has been protected. No one is going to steal their lunch.” IE