Court of Appeal for Saskatchewan Citation: Canada (Attorney General) v

Docket: CACV2860 Merchant Law Group LLP, 2017 SKCA 62

Date: 2017-08-09

Between:

Attorney General of Canada

on behalf of Her Majesty the Queen in Right of Canada

Appellant
(Plaintiff)
And

Merchant Law Group LLP

Respondent
(Defendant)

Before: Ottenbreit, Whitmore and Ryan-Froslie JJ.A.

Disposition: Appeal allowed

Written reasons by: The Honourable Madam Justice Ryan-Froslie

In concurrence: The Honourable Mr. Justice Ottenbreit
The Honourable Mr. Justice Whitmore

On Appeal From: 2016 SKQB 25, Regina

Appeal Heard: October 4, 2016

Counsel: Mitchell Taylor, Q.C., Kelly Keenan, Karen Jones and

Courtenay Landsiedel for the Appellant
Gordon Kuski, Q.C., and Holli Kuski Bassett for the Respondent
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Ryan-Froslie J.A.

I. INTRODUCTION

[1] This appeal arises out of Her Majesty the Queen in Right of Canadas agreement to pay
Merchant Law Group [MLG] $25 to $40 million in legal fees and disbursements for work done
in advancing Indian Residential School claims between 1997 and 2005. The agreement formed
part of the Indian Residential Schools Settlement Agreement [IRSSA]. Her Majesty the Queen in
Right of Canada [Canada] alleges its contract with MLG was based on fraudulent
misrepresentations made by Anthony Merchant, Q.C., founder and senior partner of MLG, to
Canadas negotiating agent, The Honourable Frank Iacobucci, Q.C. On January 27, 2015,
Canada commenced action against MLG claiming damages for fraud, deceit and fraudulent
misrepresentation. In response, MLG brought an application pursuant to Rule 7-9 of The
Queens Bench Rules to strike Canadas statement of claim on the bases it disclosed no
reasonable cause of action, was scandalous, vexatious and was an abuse of process.

[2] The Chambers judge who heard the application agreed with MLGs position and struck
Canadas statement of claim in its entirety. Canada now appeals that decision: Canada (Attorney
General) v Merchant Law Group, 2016 SKQB 25 [Chambers Decision].

[3] For the reasons set out herein, I would allow the appeal.

II. BACKGROUND

[4] A brief history of events leading up to the issuing of the statement of claim is required to
provide the necessary context for this appeal.

[5] Between 1997 and 2005, MLG initiated actions against Canada on behalf of Indian
Residential School survivors on both an individual and a class basis.

[6] In 2005, Canada appointed Mr. Iacobucci to act as its agent in negotiating a settlement of
those and similar claims initiated by other law firms across Canada. Negotiations took place
between August and November 2005 and included discussions with respect to the payment of
legal fees and disbursements incurred by the law firms advancing the Indian Residential School
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claims. During those negotiations, Mr. Iacobucci asked Mr. Merchant about the amount of fees
and disbursements MLG had incurred and the number of retainer agreements it had acquired.
Mr. Merchant allegedly represented that MLG had approximately $80 million in unbilled time
and 7,000 to 8,000 retainer agreements (statement of claim at para 11).

[7] Mr. Iacobucci had serious concerns about the information Mr. Merchant had provided
and therefore required a process by which MLGs claim for fees could be verified. Accordingly,
Canada and MLG negotiated a verification agreement (statement of claim at para 12).

[8] An agreement in principle [AIP] settling the Indian Residential School claims and a
verification agreement with respect to MLGs legal fees were signed on November 20, 2005. In
the verification agreement, MLG agreed to provide to Canada its dockets, computer records of
Work in Progress and any other evidence relevant to its claim for legal fees. If Canada and
MLG could not agree on the amount of fees to be paid, the matter was to be determined by
arbitration but that amount was to in no event be more than $40 million or less than
$25 million (Chambers Decision at para 8, emphasis added).

[9] The terms of the verification agreement, except the requirement for arbitration, were
incorporated into the IRSSA by virtue of Article 13.08(2). The arbitration provision was changed
so that Justice Ball or, if he was unavailable another justice of the Court of Queens Bench for
Saskatchewan, would determine what fees were to be paid if Canada and MLG could not agree
on the amount. The IRSSA was signed by all parties on May 8, 2006.

[10] The IRSSA, including the provisions relating to legal fees, was approved by Ball J. on
December 15, 2006: Sparvier v Canada (Attorney General), 2006 SKQB 533, 290 Sask R 111
[Ball Decision]. Canada appealed a portion of that judgment, which found MLGs fees to be
fair and reasonable. On March 30, 2007, this Court dismissed that appeal: Canada (Attorney
General) v Sparvier, 2007 SKCA 37, [2007] 7 WWR 682 [Sparvier Appeal].

[11] On July 2, 2008, Gabrielson J. of the Court of Queens Bench determined MLG was
entitled to $25 million in fees without verification and ordered Canada to pay that amount to
MLG. Justice Gabrielson also ordered that the verification process must be completed: Fontaine
v Canada (Attorney General), 2008 SKQB 271, 321 Sask R 285 [Gabrielson Decision].
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[12] On August 15, 2013, following a series of court applications, MLG provided Canada with
the last of its billing records and retainer agreements as required by the verification process.

[13] Canada had asked Deloitte, an accounting firm, to review MLGs billing records and
retainer agreements and advise of any irregularities. On January 8, 2014, Canada received
Deloittes report, which indicated MLGs billing records were replete with allegedly illegitimate
time entries and excessive disbursements. As a result of that report, Canada commenced the legal
action in issue against MLG. For ease of reference, a copy of Canadas statement of claim is
attached as Appendix A to this judgment.

[14] For clarity, references in this judgment to the fee agreement, the MLG fee agreement
or the fee provision are a reference to Canadas agreement to pay MLG fees that shall in no
event be more than $40 million or less than $25 million with any amount greater than $25
million to be subject to verification.

III. ISSUES

[15] The issues raised by this appeal may be summarized as follows:

(a) Did the Chambers judge err in finding Canadas statement of claim disclosed no
reasonable cause of action? (Rule 7-9(2)(a))

(b) If the statement of claim did not disclose a reasonable cause of action, did the
Chambers judge err in refusing to allow Canada to amend the statement of claim
to address any defects?

(c) Did the Chambers judge err in concluding Canadas claim should be struck as
frivolous and vexatious? (Rule 7-9(2)(b)) and

(d) Did the Chambers judge err in concluding Canadas claim should be struck as an
abuse of process? (Rule 7-9(2)(e))

[16] Given that issues (a) and (b) overlap, I will deal with those issues together.
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IV. ANALYSIS

A. Did the Chambers judge err in finding Canadas statement of claim

disclosed no reasonable cause of action? (Rule 7-9(2)(a))

B. If the statement of claim did not disclose a reasonable cause of action,

did the Chambers judge err in refusing to allow Canada to amend the
statement of claim to address any defects?

[17] The standard of review to be applied by this Court when reviewing the Chambers judges
decision with respect to whether Canadas statement of claim disclosed a reasonable cause of
action is correctness: R.L.T.V. Investments Inc. v Saskatchewan Telecommunications, 2009
SKCA 83 at para 17, 331 Sask R 78; and Hope v Gourlay, 2015 SKCA 27 at para 16, 384 DLR
(4th) 235 [Hope].

[18] Chief Justice McLachlin, writing for the Supreme Court of Canada, in R v Imperial
Tobacco Canada Ltd., 2011 SCC 42, [2011] 3 SCR 45 set out the principles governing such
applications:

(a) it is incumbent on a plaintiff to clearly plead the facts upon which it relies in
making its claim (para 22);

(b) such applications proceed on the basis that the facts pled are true, unless they are
manifestly incapable of being proven (paras 22 and 23);

(c) a claim will only be struck if it is plain and obvious it discloses no reasonable
cause of action, that is, it has no reasonable prospect of success (para 17); and

(d) [t]he law is not static and unchanging, thus, the approach taken in applications
to strike must be generous and err on the side of permitting a novel but arguable
claim to proceed (para 21).

See also Sagon v Royal Bank of Canada (1992), 105 Sask R 133 (CA) at para 16 [Sagon]; and
Filson v Canada (Attorney General), 2015 SKCA 80 at para 19, 388 DLR (4th) 66 [Filson].

[19] In deciding an application to strike a claim on the basis it discloses no reasonable cause
of action, a judge is limited to considering only the statement of claim, any document referred to
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therein, and any response to a request for particulars (Sagon at para 16; Filson at para 20). A
judge is not permitted to consider affidavit or other extraneous evidence.

[20] In arriving at his decision, the Chambers judge properly confined his analysis to Canadas
statement of claim, the AIP, the verification agreement, and the IRSSA, as well as the three
Court decisions referred to in the statement of claim: the Ball Decision, the Sparvier Appeal, and
the Gabrielson Decision [collectively, the Prior Decisions].

[21] While Canadas statement of claim alleges fraud, deceit and fraudulent misrepresentation,
it is properly viewed as being grounded in the tort of deceit. To plead that tort, Canada needed to
set out facts that, if proven, would establish the following essential elements of the tort as set out
in Bruno Appliance and Furniture, Inc. v Hryniak, 2014 SCC 8 at para 21, [2014] 1 SCR 126,
namely, that: (i) MLG made a false representation; (ii) MLG knew the representation was false
or made it recklessly not knowing whether it was true or false; (iii) the false representation
caused or induced Canada to act (reliance); and (iv) Canada suffered loss as a result (damages).

[22] MLG accepted Canada had successfully pled the first two elements of the tort but argued
Canada had failed to properly plead reliance and damages. The Chambers judge agreed with
MLGs position. Accordingly, I will consider each of those elements reliance and damages in
turn.

1. Reliance

[23] The Chambers judge understood that it was not necessary for Canada to plead
Mr. Merchants misrepresentations were the sole inducement for Canada to enter the fee
agreement, only that they were a material factor in Canadas decision: see C.R.F. Holdings Ltd. v
Fundy Chemical International Ltd., [1982] 2 WWR 385 (BCCA) at 391 [C.R.F.].

[24] The Chambers judge also recognized that reliance is a subjective matter, which in this
case would depend on the mindset of Mr. Iacobucci. The Chambers judge also clearly
understood that reliance can be established either through direct evidence or by inference based
on the evidence as a whole.
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[25] The Chambers judges conclusions with respect to Canadas failure to plead reliance can
be found at paragraphs 5865 of his judgment. By way of summary, the Chambers judge found
Canada had not properly pled reliance because paragraphs 11 and 12 of the statement of claim
read together with the verification agreement are fundamentally inconsistent with the allegation
that Mr. Iacobucci, Canadas agent, had relied on Mr. Merchants alleged misrepresentations
when entering into the fee agreement. In the Chambers judges words:
[59] The meaning of these paragraphs is clear. They say, at a bare minimum, that
Mr. Iacobucci did not know whether he could rely on MLG, and for that reason, Canada
did not do so. Rather, Mr. Iacobucci required that there be a process to verify MLGs
claim for fees.

[26] In my respectful view, the Chambers judge erred in his conclusion. In order to strike
Canadas statement of claim on the basis it disclosed no reasonable cause of action, it had to be
plain and obvious reliance could not be established on the facts as pled. To arrive at that
conclusion, the Chambers judge had to assume the facts set out in Canadas statement of claim
were true.

[27] The Prior Decisions interpreted the MLG fee agreement to mean Canada had agreed to
pay a minimum of $25 million to MLG and that $25 million was not subject to verification (Ball
Decision at para 36; Sparvier Appeal; Gabrielson Decision at para 60). What paragraphs 11 and
12 of Canadas statement of claim say, at a minimum, is that faced with Mr. Merchants
representations, Mr. Iacobucci could not be certain those representations were accurate. That
does not, however, mean Mr. Iacobucci did not to some extent rely on those representations
when entering into the fee agreement. Paragraphs 11 and 12 should be read together with
paragraphs 1317 and paragraphs 37 and 65(a), which collectively form the basis for Canadas
plea of reliance.

[28] Within weeks of Mr. Merchants representations, the AIP was signed. It provided Canada
would pay MLG a minimum fee of $25 million and capped the maximum fee payable at $40
million. On the same day, the verification agreement was also signed. It can be inferred from the
pleadings that Canada (Mr. Iacobucci) had to rely on something to arrive at those agreements.
Presumably the figures used were not pulled out of thin air and thus those figures may bear some
relationship to the representations made by Mr. Merchant. Those representations may also have
contributed to the creation of a level of comfort such that Canada was prepared to agree to the
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figures set out in the AIP and the verification agreement. Moreover, paragraph 60 of the
Gabrielson Decision held the fee of $25 million had to be paid by Canada to MLG without
verification. The Chambers judge did not appreciate the requirement for verification, which
underpinned his reason for finding Canada had not and could not plead reliance, did not extend
to either the minimum fee of $25 million or the range of fees, being $25 million to $40 million.

[29] In paragraph 65 of the statement of claim, Canada asserts it would not have agreed to the
MLG fee agreement if it had known the truth. In the circumstances, it is open to Canada to
establish reliance on MLGs representations with respect to the identified key elements of the fee
agreement, without contradicting the findings of fact in the Prior Decisions relating to the need
for verification. In short, the presence of the verification agreement does not factually prevent a
trial judge from finding reliance. Whether there was reliance and, if so, whether such reliance
was sufficient to establish the tort of deceit is best left to the determination of a trial judge.

[30] Further, as mentioned earlier in these reasons, reliance on MLGs alleged

misrepresentations need not be the sole reason Canada entered into the fee agreement. It is only
necessary that those misrepresentations were a material factor in Canadas decision to enter into
the agreement. As the Chambers judge himself noted, the fact Mr. Iacobucci had serious
concerns about what Mr. Merchant was telling him does not necessarily lead to the conclusion
Mr. Iacobucci had failed to rely on those statements in a material way. As this Court indicated in
the Sparvier Appeal, the MLG fee agreement represented a compromise that allowed the IRSSA
to proceed. None of the Prior Decisions considered or determined what a reasonable fee would
be once all the facts were known.

[31] The Chambers judge went on to conclude at paragraph 62 of his judgment that Canada
was not misled by and did not rely on the illegitimate time entries, the excessive disbursement
entries, the KPMG Report, or MLGs representations about that report when it agreed to the fee
arrangements because none of those things were known to Canada at the time.

[32] While the illegitimate time entries and excessive disbursement records were not revealed
until after the fee provision had been negotiated and agreed to, and so could not have directly
influenced Canada when entering that agreement, the statement of claim read as a whole asserts
those entries and records were fabricated to support Mr. Merchants alleged fraudulent
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misrepresentation as to the amount of MLGs outstanding fees. For example, at paragraph 20 of

its statement of claim, Canada asserts the following:
Unknown to Canada at the time, once settlement of the IRS Litigation had become a
reasonable prospect in the summer of 2005, MLG began entering huge amounts of
purportedly billable time into its billing database that it would later claim reflected work
actually completed by lawyers on IRS Litigation.

(See also paragraphs 2124 of the statement of claim.)

[33] Canada further contends it pled reliance in paragraphs 37 and 65(a) of the statement of
claim. For ease of reference, I will reproduce those paragraphs here:
37. While Canada never conceded that amounts set out in the KPMG Report were
legitimate, Canada had been unable to verify MLGs billing records and therefore did
not know about the Illegitimate Time Entries and Excessive Disbursement Entries.
Canada urged the Courts to certify the actions as class proceedings and approve the
settlement on the basis that the Verification Agreement would ascertain whether
MLGs claim for fees and disbursements was reasonable.

65. Canada has suffered losses and aggravated damages from the Wrongful Acts by:
(a) agreeing in the Agreement in Principle and Settlement Agreement to
pay MLG between $25 million and $40 million when Canada would
not have agreed to those terms had it known the truth about the
Illegitimate Time Entries and Excessive Disbursement Records;

(Emphasis added)

[34] In my view, these paragraphs read in the context of the statement of claim as a whole
properly plead reliance. Paragraph 65 of the statement of claim clearly asserts Canada would not
have agreed to the MLG fees had it known the truth.

[35] Because reliance was properly pled, it is unnecessary for this Court to deal with the
Chambers judges refusal to allow Canada to amend its statement of claim. I would note,
however, while the decision to allow amendment of a pleading is discretionary, such
amendments should generally be allowed so that individuals are not deprived of the opportunity
to have their cases adjudicated in a court of law. This Court has repeatedly stated that a
Chambers judge should only refuse to amend pleadings where the proposed amended pleadings
could be struck pursuant to Rule 7-9 (formerly Rule 173): Rekken Estate v Saskatchewan (Health
 Page 9

Region #1), 2015 SKCA 36 at para 9, 384 DLR (4th) 174 [Rekken]; Boart Longyear Inc. v
Mudjatik Enterprises Inc., 2016 SKCA 22 at para 24, [2016] 5 WWR 40 [Boart].

2. Damages

[36] Canadas claim for damages is set out at the end of its statement of claim:
WHEREFORE, Canada claims as follows:
a) general damages;
b) special damages, including but not limited to:
(i) $25 million in compensation for the payment made to MLG, plus
interest since the date of payment;
(ii) costs on a full indemnity basis for all previous court proceedings that
were premised on, or concerned with, the fees and disbursements
owing to MLG under clause 13.08(2) of the Settlement Agreement;
c) punitive damages;
d) aggravated damages;
e) a declaration that on account of the wrongful and reprehensible
conduct of MLG, it is not entitled to any payment on a quantum meriut
basis for legal fees or disbursements for IRS Litigation;
f) prejudgment interest;
g) costs of this proceeding on a solicitor-client basis; and
h) such further or other relief as to this court may seem just.

[37] The Chambers judge concluded Canada had failed to plead sufficient facts to establish
any loss as a result of Canadas reliance on MLGs alleged misrepresentations. The Chambers
judges conclusion on this point was grounded in the Ball Decision, which had determined the
MLG fee provisions were fair and reasonable, despite concerns being raised as to the
reliability of MLGs representations. That decision was affirmed by this Court. Thus, the
Chambers judge reasoned Canada could not now claim the fee of $25 million was unfair or
unreasonable. The Chambers judges conclusions are found at paragraphs 6769 of the
Chambers Decision. For clarity, I will repeat them here:
[67] In my view, Canada has also failed to plead material facts which support its
claim that it suffered damages. Canada pled that it suffered damages by agreeing to pay
and paying $25 million dollars. However, it also pled that Ball J. who had and
continues to have the authority pursuant to the IRSSA to decide what MLG should be
paid found that the $25 million fee was fair and reasonable. He did so despite finding
only that MLG spent substantial time, and despite his stated concerns as to the
reliability of MLGs representations.
 Page 10

[68] Ball J.s decision in relation to this issue, and that of the Court of Appeal, are res
judicata, and as such, subject to issue estoppel. Canada did not suggest otherwise. It did
not take issue with Ball J.s conclusion, or suggest that he or the Court of Appeal would
have reached a different conclusion if they had known what Canada now knows.
[69] That being so, how could Canada now prove, or properly stated in the context of
this application, what facts have been pled which support the claim, that Canada suffered
damages? The alleged misrepresentations in this case might be compared to fraud on a
sale of property, where the measure of damages is the difference between the purchase
price and the actual value at the time of sale: see, for example, Parna. If that is so,
Canada which is in no position to and has never attempted to unravel the settlement
must prove, and must accordingly plead material facts, which could support a finding that
it paid too much. It has instead, as it must, pled facts which confirm that the $25 million
fee is fair and reasonable based on the applicable legal test.

[38] Canada argues the Chambers judge erred in his conclusion with respect to its claim for
damages because the Ball Decision is not determinative of whether Canada has suffered loss.
This is so because Canadas action is based on the tort of deceit, which was not argued or
considered by Ball J. when he approved the IRSSA. Moreover, Canada contends its damages are
not limited to the return of the $25 million paid to MLG but also include consequential loss
(costs pertaining to court proceedings and verification) and a claim for punitive and aggravated
damages.

[39] In my view, Canadas position has merit. First, Canadas claim for damages is grounded
in tort, not contract. It is based on the allegation that MLG wrongfully induced Canada to agree
to the fee arrangement by fraudulently misrepresenting the number of retainer agreements MLG
had and the work it had done with respect to the Indian Residential School claims. That Canada
can pursue a remedy in tort versus contract was clearly established by the Supreme Court of
Canada in BG Checo International Ltd. v British Columbia Hydro and Power Authority, [1993] 1
SCR 12 [BG Checo] at 26:
In our view, the general rule emerging from this Courts decision in Central Trust
Co. v. Rafuse, [1986] 2 S.C.R. 147, is that where a given wrong prima facie supports an
action in contract and in tort, the party may sue in either or both, except where the
contract indicates that the parties intended to limit or negative the right to sue in tort.

[40] In BG Checo, La Forest J. and McLachlin J. (as she then was), writing for the majority,
described the measure of damages in contract and for the tort of negligent misrepresentation in
these terms (at 37):
Contract: the plaintiff is to be put in the position it would have been in had the contract
been performed as agreed.
 Page 11

Tort: the plaintiff is to be put in the position it would have been in had the
misrepresentation not been made.

[41] While the quantity of damages in concurrent tort and contract cases is often the same, the
majority in BG Checo explained there can be differences:
In the situation of concurrency, the main reason to expect a difference between
tort and contract damages is the exclusion of the bargain elements in standard tort
compensation. In the terminology of L. L. Fuller and W. R. Purdue, as set out in
their article, The Reliance Interest in Contract Damages (1936-37), 46 Yale L.J. 52
and 373, contract is normally concerned with expectation damages while tort is
concerned with reliance damages. The denial of expectation or loss of bargain
damages in a misrepresentation case like the present will occur when it is concluded, for
example, that but for the misrepresentation, no contract would have been entered at all;
this was the situation that the Court found in Rainbow Industrial Caterers Ltd. v.
Canadian National Railway Co., [1991] 3 S.C.R. 3. The Rainbow assessment of damages
can obviously lead to a different quantum of damages because this method frees the
parties from the burden or benefit of the rest of their bargain. The assessment of
damages in a Rainbow situation could be lower or higher than the contract damages
depending on whether the contract was a good or bad bargain; see D. W.
McLauchlan, Assessment of Damages for Misrepresentations Inducing Contracts
(1987), 6 Otago L. Rev. 370, at pp. 37578. We note that a tendency towards similar
damages in tort and contract can be identified even in Rainbow situations; see J. Blom,
Remedies in Tort and Contract: Where is the Difference? in J. Berryman, ed.,
Remedies: Issues and Perspectives (1991), 395, at pp. 4012.
This is not a case like Rainbow. Here the evidence at trial concerning Checos desire
to break into the B.C. market already provides solid support for the conclusion reached
by the Court of Appeal. On the basis of that evidence, and in light of the absence in the
trial judges reasons of a clear conclusion as to what Checo would have done had the
misrepresentation not been made, the Court of Appeal was in our view justified in
making its own finding that Checo would have entered the contract in any event, albeit at
a higher bid. This conclusion having been reached, one would expect that the quantum of
damages in tort and contract would be similar because the elements of the bargain
unrelated to the misrepresentation are reintroduced. This means not giving the plaintiff
compensation for any losses not related to the misrepresentation, but resulting from such
factors as the plaintiffs own poor performance, or market or other forces that are a
normal part of business transactions.
In tort, Checo is entitled to be compensated for all reasonably foreseeable loss caused
by the tort. The Court of Appeal was of the view that Checo, had it known the true facts
(i.e., had the tort not been committed) would have increased its bid by an amount equal to
the cost of the extra work made necessary by the improperly cleared work site plus profit
and overhead. Such loss was not too remote, being reasonably foreseeable. But to
compensate only for the direct costs of clearing is to suggest that the only tort was the
failure to clear. The real fault is that Hydro misrepresented the situation and Checo may
have relied on that representation in performing its other obligations under the contract.
For example, having to devote its resources to that extra work might have prevented
Checo from meeting its original schedule, thereby resulting in Checo incurring
acceleration costs in order to meet the contract completion date. Such costs would also
arguably be reasonably foreseeable. In our view, the matter should be referred back to the
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trial division for determination of whether any such indirect losses were the foreseeable
results of the misrepresentation.
[Underline emphasis in original, bold emphasis added, at 4042]

[42] Second, of significance to the analysis in this case is that Ball J.s conclusion that the $25
million fee was fair and reasonable was made in a very different context than that required to
assess Canadas damages in the tort action. Justice Ball was dealing with the question of whether
the IRSSA a class action settlement agreement should be approved as required by s. 38 of
The Class Actions Act, SS 2001, c C-12.01. MLGs fee agreement formed part of the IRSSA.
Moreover, s. 41(2) of The Class Actions Act requires court approval of fees and disbursements
paid to legal counsel. The test for approving a class action settlement is whether it is fair and
reasonable and in the best interests of the class as a whole: Driediger v Ashley Furniture
Industries Inc., 2010 SKQB 437 at para 11, [2011] 8 WWR 804; Jeffery v Nortel Networks, 2007
BCSC 69 at para 17, 68 BCLR (4th) 317; and Baxter v Canada (Attorney General) (2006), 83
OR (3d) 481 (Sup Ct) at para 9. On the other hand, in a tort action based on deceit, the focus is
on returning the plaintiff to the position he or she would have been in had the fraudulent
misrepresentation not been made. Justice Ball was not asked to determine whether MLG had
misrepresented the number of retainer agreements it had, the disbursements it had paid, or the
time it had spent on the Indian Residential School claims. Nor was he asked to determine
whether MLG would be justified in claiming $25 to $40 million in fees if MLG had committed
the tort of deceit. Rather, his analysis was limited to a broad overview of the reasonableness and
fairness of MLGs fees based on the classs best interests. That analysis was underpinned by a
general acceptance of the fees as portrayed by MLG.

[43] Third, while Ball J. had to consider MLGs fee agreement as part of his analysis, his
decision was premised on the existence of a valid contract between Canada and MLG untainted
by fraud or misrepresentation. Indeed, Canada and MLG both supported the approval of the
IRSSA including the provisions relating to MLGs legal fees. Canada and MLG, however, had
different understandings of what the fee provisions meant and, accordingly, Ball J. was called
upon to interpret the agreement (Ball Decision at paras 2729). The main source of contention
(though not the only one) was what portion of the fees agreed to were subject to verification.
Justice Ball found the agreement was not ambiguous and that the requirement of verification was
 Page 13

to apply only to the fees claimed by MLG in excess of $25 million. That interpretation is not
challenged by Canadas action.

[44] Fourth, Ball J. then went on to determine whether the fee agreement should be approved.
He described that task as follows:
[43] The Court must decide whether the fee arrangements, which are part of the
overall settlement, are fair and reasonable. This means that counsel are entitled to a fair
fee which may include a premium for the risk undertaken and the result achieved. It also
means however, that the fees must not bring about a settlement that is in the
interests of the lawyers, but not in the best interests of the class members as a whole.
(Emphasis added)

It is clear Ball J.s focus when addressing MLGs fees was on the best interests of the class.

[45] Canadas interest did not figure into Ball J.s analysis. In assessing whether MLGs fee
agreement was fair and reasonable, Ball J. took into account a number of factors: (i) time
expended; (ii) complexity of the action; (iii) the degree of responsibility assumed by MLG;
(iv) the monetary value of the claim to the class; (v) the importance of the action; (vi) the degree
of skill and competence demonstrated by MLG; (vii) the results achieved; (viii) the ability of the
class members to pay the fee; and (ix) the classs expectations as to the amount of the fees. These
considerations are the same as those generally used to assess a lawyers remuneration on a
quantum meruit basis: Zipchen v Bainbridge, 2008 SKCA 87 at para 90, [2008] 12 WWR 397.
For Ball J., the most important of these factors was the amount of money involved and the results
achieved.

[46] Justice Ball concluded the time spent by MLG on the residential school litigation was
substantial (Ball Decision at para 57) and that the fees payable to MLG would fairly compare
to fees payable to other counsel involved in advancing the Indian Residential School claims. He
based that finding on the number of retainer agreements MLG had, which he found to be 4,823
(Ball Decision at para 51).

[47] While the assessment done by Ball J. will be similar to the assessment of damages
conducted by a trial judge charged with determining Canadas loss, if any, the analysis employed
will not be identical. Justice Ball did not have sufficient evidence to properly consider the
number of claimants represented by MLG, the number of retainer agreements MLG had, or the
 Page 14

time expended by MLG on Indian Residential School claims. Justice Ball understood those
matters would be addressed through the verification process (Ball Decision at para 57). On the
other hand, central to Canadas claim for damages are the very matters Ball J. identified as being
things for which he did not have sufficient evidence. Presumably, given the disclosure that has
now been received by Canada, a trial judge would have evidence with respect to those matters.
Whether that additional evidence would affect the assessment of what is fair and reasonable
remuneration is a question best left to the trial judge.

[48] Finally, it is also significant that Canadas request for damages is not limited to the
$25 million paid to MLG it also includes claims for consequential loss (indemnity for costs
incurred with respect to the court proceedings, which would include the verification process).
The Chambers judge did not consider whether those claims could constitute loss suffered by
Canada as a result of its reliance on MLGs alleged misrepresentations. His failure to consider
that was an error. The Chambers judge may have been led into that error by Canadas assertion
that if it was not able to claim the $25 million paid to MLG, it would not proceed with its action.
However, whether Canada would proceed with its action or not was irrelevant to the analysis of
whether Canada had pled a reasonable cause of action. What was relevant is whether Canada had
pled loss that could be established.

[49] Consequential loss arising as a result of a fraudulent misrepresentation has been granted
in a number of cases. In C.R.F., Craig J.A., writing for the Court, stated at 393:
The cases dealing with deceit state that generally the measure of damages is the price
paid for the property less the actual value. The case usually cited as authority for this
proposition is McConnel v. Wright a decision of the English Court of Appeal, which
was cited with approval by the Supreme Court of Canada in Hepting v. Schaaf and this
court in Zorzi v. Barker . The statement that the normal measure of damages in a deceit
action is the price paid for the property less the actual value might appear to preclude a
consideration of consequential loss. I think that the Hepting case and the Zorzi case do
not preclude us from holding that consequential loss may be a proper consideration
in awarding damages for deceit relating to the sale of land and that, on principle,
consequential loss may be a proper consideration in such a case.
[Emphasis added]

See also: Siametis v Trojan Horse (Burlington) Inc. (1979), 104 DLR (3d) 556 (Ont H Ct J),
affd (1981), 123 DLR (3d) 767n (Ont CA); Sevidal v Chopra (1987), 64 OR (2d) 169 (Ont H Ct
J). Based on these authorities, Canadas damages may not be limited to the difference between
 Page 15

what MLG should have been paid for its services using a quantum meruit analysis and the $25
million Canada actually paid to MLG for those services. Canadas loss may arguably include
damages for consequential loss.

[50] Moreover, because Canadas action is grounded in the tort of deceit, it can successfully
result in a punitive award even if Canadas loss is nominal. As noted in Peter T. Burns, Q.C., and
Joost Blom, Q.C., Economic Interests in Canadian Tort Law (Markham: LexisNexis, 2009) at
452 [Economic Interests]:
Punitive damages are routinely awarded for intentional torts, including deceit,
conspiracy, inducing breach of contract, and unlawful interference with economic
relations.

[51] In Hill v Church of Scientology of Toronto, [1995] 2 SCR 1130 [Hill], the majority
stated:
196 Punitive damages may be awarded in situations where the defendants
misconduct is so malicious, oppressive and high-handed that it offends the courts sense
of decency. Punitive damages bear no relation to what the plaintiff should receive by
way of compensation. Their aim is not to compensate the plaintiff, but rather to
punish the defendant. It is the means by which the jury or judge expresses its outrage at
the egregious conduct of the defendant. They are in the nature of a fine which is meant to
act as a deterrent to the defendant and to others from acting in this manner. It is important
to emphasize that punitive damages should only be awarded in those circumstances
where the combined award of general and aggravated damages would be insufficient to
achieve the goal of punishment and deterrence.

[52] Justice Balls conclusion that the MLG fee agreement was fair and reasonable would
not impact the availability of a punitive damage award. This is so because punitive damages are
premised on punishment and deterrence of the offender as well as denunciation of the action, not
compensation of the victim (see Hill, Whiten v Pilot Insurance Co., 2002 SCC 18 at paras 36 and
68, [2002] 1 SCR 595). Thus, even if Canadas loss is nominal, the ability to award punitive
damages would remain.

[53] In summary, in my view, the Chambers judge erred in finding Canada had not properly
pled loss as a result of reliance on MLGs alleged fraudulent misrepresentations.

[54] Canada had requested that it be allowed to amend its claim for damages if that claim was
found deficient. Given this Courts conclusions, it is not necessary to address Canadas
amendment request.
 Page 16

C. Did the Chambers judge err in concluding Canadas claim should be

struck as frivolous and vexatious? (Rule 7-9(2)(b))

[55] The standard of review to be applied to the Chambers judges decision that Canadas
statement of claim is scandalous and vexatious is correctness: see Hope at para 16; Mann v
Hawkins, 2011 SKCA 146 at para 23, 385 Sask R 59; and Bigstone v St. Pierre, 2011 SKCA 34
at para 14, [2011] 5 WWR 594.

[56] Striking a statement of claim on the basis it is frivolous, vexatious or an abuse of the
courts process engages totally different considerations than an application to strike a pleading as
disclosing no reasonable cause of action. Determining that an action is frivolous, vexatious or an
abuse of process by necessity involves an assessment of the merits of the claim and sometimes
the motives of the claimant in bringing it. As such, evidence extraneous to the statement of claim
or other pleadings may be considered.

[57] In Sagon, Sherstobitoff J.A. discussed the basis for striking a claim as being frivolous or
vexatious:
[18] Striking out an entire claim on the ground that it is frivolous, vexatious or an
abuse of process of the court is based on an entirely different footing. Instead of
considering merely the adequacy of the pleadings to support a reasonable cause of action,
it may involve an assessment of the merits of the claim, and the motives of the plaintiff in
bringing it. Evidence other than the pleadings is admissible. Success on such an
application will normally result in dismissal of the action, with the result that the rule of
res judicata will likely apply to any subsequent efforts to bring new actions based on the
same facts. Odgers on Pleadings and Practice, 20th Ed. says at pp. 153154:
If, in all the circumstances of the case, it is obvious that the claim or defence
is devoid of all merit or cannot possibly succeed, an order may be made.
But it is a jurisdiction which ought to be very sparingly exercised, and only
in very exceptional cases. Its exercise would not be justified merely because
the story told in the pleadings is highly improbable, and one which it is
difficult to believe could be proved [footnotes omitted by in original].
[Emphasis added]

An action that is totally without merit may fairly be described as frivolous or vexatious.

[58] Where a claim or matter is res judicata (finally determined in a prior proceeding), it may
be struck as being frivolous or vexatious: Royal Bank of Canada v Kadziolka (1999), 172 Sask R
216 (CA) at para 25; Salasel v Cuthbertson, 2015 ONCA 115 at para 8, 381 DLR (4th) 632; and
 Page 17

T & D Roofing Ltd. v Canadian Imperial Bank of Commerce, [1993] 7 WWR 766 (Sask QB) at
para 6.

[59] The Chambers judge struck Canadas statement of claim as being frivolous and vexatious
because in his view the claim was estopped (already determined) by the Ball Decision, the
Sparvier Appeal, and the Gabrielson Decision, all of which had determined MLG was entitled to
$25 million in fees no matter what the outcome of the verification process (Chambers Decision
at para 90; see also paras 9596). This conclusion amounted to a finding of issue estoppel, which
forms a part of the doctrine of res judicata.

[60] The doctrine of res judicata has been described as having two distinct aspects cause of
action estoppel and issue estoppel. Cause of action estoppel bars the rehearing of a cause (claim)
that has been decided or could have been decided in a prior proceeding involving the same
parties or their privies. Issue estoppel, on the other hand, applies where the cause of action may
be different but an issue (the finding of a material fact or mixed fact and law) was decided or
could have been decided in a prior proceeding between the same parties or their privies.

[61] In Angle v M.N.R., [1975] 2 SCR 248 at 253254 [Angle], Dickson J. (as he then was),
writing for the majority, described cause of action estoppel and issue estoppel in these terms:
In earlier times res judicata in its operation as estoppel was referred to as estoppel by
record, that is to say, estoppel by the written record of a court of record, but now the
generic term more frequently found is estoppel per rem judicatam. This form of estoppel,
as Diplock L.J. said in Thoday v. Thoday, [[1964] P. 181], at p. 198, has two species. The
first, cause of action estoppel, precludes a person from bringing an action against
another when that same cause of action has been determined in earlier proceedings by a
court of competent jurisdiction. The second species of estoppel per rem judicatam is
known as issue estoppel, a phrase coined by Higgins J. of the High Court of Australia
in Hoystead v. Federal Commissioner of Taxation [(1921), 29 CLR 537], at p. 561:
I fully recognize the distinction between the doctrine of res judicata where
another action is brought for the same cause of action as has been the subject of
previous adjudication, and the doctrine of estoppel where, the cause of action
being different, some point or issue of fact has already been decided (I may call
it issue-estoppel).
Lord Guest in Carl Zeiss Stiftung v. Rayner & Keeler Ltd. (No. 2), [[1967] 1 AC 853], at
p. 935, defined the requirements of issue estoppel as:
(1) that the same question has been decided; (2) that the judicial decision
which is said to create the estoppel was final; and, (3) that the parties to the
judicial decision or their privies were the same persons as the parties to the
proceedings in which the estoppel is raised or their privies .
[Emphasis added]
 Page 18

[62] The Chambers judge found Canadas action to be frivolous and vexatious on the basis of
issue estoppel.

[63] The requirements necessary to establish issue estoppel were set out by Dickson J. in
Angle at 254, and may be summarized as follows:

(a) the same question has been decided in a prior proceeding;

(b) the decision creating the estoppel was final in nature; and

(c) the parties to that decision (or their privies) are the same as the parties (or their
privies) in the proceeding where estoppel is being raised.

This test was repeated with approval by the Supreme Court in Danyluk v Ainsworth Technologies
Inc., 2001 SCC 44 at para 25, [2001] 2 SCR 460 [Danyluk].

[64] The Chambers judge correctly identified this test in his reasons for judgment. Canada,
however, contends he erred in the application of the test in that the first requirement for
establishing issue estoppel that Canadas action raises a question already determined in the
three prior proceedings was not met in the circumstances of this case.

[65] In Angle, Dickson J. discussed what is meant by the requirement that the same question
must have been decided in earlier proceedings:
Is the question to be decided in these proceedings, namely the indebtedness of
Mrs. Angle to Transworld Explorations Limited, the same as was contested in the earlier
proceedings? If it is not, there is no estoppel. It will not suffice if the question arose
collaterally or incidentally in the earlier proceedings or is one which must be inferred by
argument from the judgment. That is plain from the words of De Grey C.J. in the
Duchess of Kingstons case [(1776), 20 St Tr 355, 538n], quoted by Lord Selborne L.J. in
R. v. Hutchings [(1881), 6 QBD 300], at p. 304, and by Lord Radcliffe in Society of
Medical Officers of Health v. Hope, [[1960] AC 551]. The question out of which the
estoppel is said to arise must have been fundamental to the decision arrived at in the
earlier proceedings: per Lord Shaw in Hoystead v. Commissioner of Taxation, [[1926]
AC 155]. The authors of Spencer Bower and Turner, Doctrine of Res Judicata, 2nd ed.
pp. 181, 182, quoted by Megarry J. in Spens v. I.R.C., [[1970] 3 All ER 295], at p. 301,
set forth in these words the nature of the enquiry which must be made:
whether the determination on which it is sought to found the estoppel is
so fundamental to the substantive decision that the latter cannot stand
without the former. Nothing less than this will do.
[Italic emphasis in original, bold emphasis added, at 254255]
 Page 19

[66] In the appeal at hand, the Chambers judge recognized the Prior Decisions were not
concerned with an allegation of deceit but rather dealt with approval and interpretation of a class
action settlement. That alone, however, would not be determinative of whether issue estoppel
applies in this case. As the Chambers judge correctly pointed out at paragraph 84 of his
judgment, [i]ssue estoppel is not cause of action estoppel. It extends to conclusions of fact and
mixed fact and law that were necessarily determined in the earlier proceedings. It bars re-
litigation of conclusions of that kind regardless of differences in the causes of action.

[67] As noted above, the Chambers judge concluded that a certain finding of fact in the Ball
Decision, the Sparvier Appeal, and the Gabrielson Decision is determinative of Canadas claim,
namely, that MLG was entitled to $25 million no matter what the outcome of the verification
process. The Chambers judge found the judges who made the Prior Decisions were alive to the
fact that MLG may have misrepresented the facts (Chambers Decision at para 92). Despite that,
the courts in all three decisions decided Canada was obligated to pay $25 million to MLG
regardless of the outcome of the verification process. The Chambers judge quoted Richards J.A.
(as he then was) who at paragraph 33 of the Sparvier Appeal stated the MLG fee provisions were
the rational compromise Canada had reached to address its concerns about the integrity of
MLGs representations. In the words of the Chambers judge, Canada knew something might be
amiss. The verification process was designed to generate exactly the information Canada now
relies on to found a claim to recover the legal fees it agreed to pay regardless of what that
process might disclose (Chambers Decision at para 94).

[68] On that basis, the Chambers judge found the interpretation given to the IRSSA and the
verification agreement in the Prior Decisions engaged the doctrine of issue estoppel:
[95] It has been finally determined that MLG was entitled to be paid $25 million,
regardless of the outcome of the verification process. Those decisions mean that MLG
was entitled to that amount even if the verification process disclosed that MLG had made
false representations. There is no basis to find that MLG shall in no event receive less
than $25 million means in no event except in the event the amount verified differs from
the amount represented.

[69] Implicit in the Chambers judges decision is that MLGs fee agreement would stand even
if there had been fraud. With due respect, I cannot agree with that proposition.
 Page 20

[70] In my view, the Chambers judge erred because the question as identified is not so
fundamental to the substantive decision that the latter cannot stand with the former. Let me
explain.

[71] First, the fact the Ball Decision, the Sparvier Appeal, and the Gabrielson Decision
interpreted the MLG fee agreement to mean Canada had agreed to pay MLG $25 million no
matter the outcome of the verification process cannot be viewed as countenancing fraud. As
stated by Fitzpatrick C.J. in Scheuerman v Scheuerman (1916), 52 SCR 625 at 627, a representor
is not entitled to come into court and ask to be relieved of the consequences of his actions done
with intent to violate the law . Courts will not overlook fraud. The three Prior Decisions did
not consider the issue of fraud or its effect on the fee provisions in issue.

[72] Second, if there was fraud, Canada would have the right to rescind the IRSSA. Canada,
however, has elected not to do that. Instead, it has chosen to seek damages against MLG based
on the tort of deceit. In Bruce MacDougall, Misrepresentation (Toronto: LexisNexis, 2016) at
399400, the author describes the remedies available for fraudulent misrepresentation in these
terms:
Damages are a remedy separate from rescission for fraudulent misrepresentation
and they are independently available. They are a separate cause of action. Where an
individual had been induced to enter into a contract as a result of a fraudulent
misrepresentation by the other contracting party, the claimant can rescind the contract, or
claim damages if there is loss, or both. Damages may, therefore, be available where the
contract cannot be or is not rescinded.

The question of whether there has been a fraudulent misrepresentation, which has resulted in
damages, is far different from the questions of contractual interpretation and approval of the
class action settlement that were the subject of the three Prior Decisions.

[73] Third, while fraud can be waived, such a waiver must be clear, unequivocal and
informed. Economic Interests describes how fraud may be waived in these terms (at 72):
A claim in fraud, like any other private right, can be waived, but anything short of a
clear, express waiver is unlikely to do. In particular, it is very difficult to argue that the
victim of fraud has impliedly given up the claim for the sole reason that he or she
proceeded with the transaction after having learned of the fraud. There may be all kinds
of reasons why the plaintiff does not want to back out, even if it is legally possible to
rescind the contract. There may be effects on business relationships or reputation that
make rescission unattractive, the right to rescind may be unclear, or the plaintiff may
 Page 21

simply be content to proceed and rely on a right to damages, which the plaintiff is free to
do as long as it does not constitute an unreasonable failure to mitigate losses.

[74] While Canada agreed to pay a minimum of $25 million to MLG, that compromise was
achieved to allow the IRSSA to proceed. The verification agreement cannot be seen as
essentially a contract that waives Canadas rights if fraud is later discovered. Moreover, at the
time Canada entered the MLG fee agreement, it did not have all the necessary information to
make an informed waiver. Canada only became fully-informed through the verification process.
Furthermore, the MLG fee agreement makes no mention of fraud, nor does it contain the type of
language necessary to waive fraud.

[75] Fourth, Canadas claim does not require the MLG fee agreement to be interpreted in a
manner different from that determined by the Prior Decisions. Canadas claim is in tort. It is
premised on the allegation Canada would not have entered into the fee agreement it did with
MLG but for Mr. Merchants alleged fraudulent misrepresentations. The determination in the
Prior Decisions that Canada had to pay MLG $25 million no matter the outcome of the
verification process was premised on the existence of a valid fee agreement untainted by fraud.
The underlying basis for that fee agreement is now being challenged by Canadas legal action.

[76] Fifth, as the Chambers judge acknowledged, Canadas allegations of deceit have never
been considered on their merits.

[77] In summary, the Chambers judge erred in concluding issue estoppel applied in the
circumstances of this case because the question identified by the Chambers judge as constituting
issue estoppel is not determinative of the issues raised by Canadas action.

[78] Even if the question identified by the Chambers judge could ground a finding of issue
estoppel, that would not bring an end to the inquiry. If issue estoppel is established, the Court
must go on to determine whether as a matter of discretion it ought to be applied. Binnie J.
stated the following in Danyluk:
33 The rules governing issue estoppel should not be mechanically applied. The
underlying purpose is to balance the public interest in the finality of litigation with the
public interest in ensuring that justice is done on the facts of a particular case. (There are
corresponding private interests.) The first step is to determine whether the moving
party (in this case the respondent) has established the preconditions to the operation
of issue estoppel set out by Dickson J. in Angle, supra. If successful, the court must
 Page 22

still determine whether, as a matter of discretion, issue estoppel ought to be applied:

British Columbia (Minister of Forests) v. Bugbusters Pest Management Inc. (1998), 50
B.C.L.R. (3d) 1 (C.A.), at para. 32; Schweneke v. Ontario (2000), 47 O.R. (3d) 97 (C.A.),
at paras. 38-39; Braithwaite v. Nova Scotia Public Service Long Term Disability Plan
Trust Fund (1999), 176 N.S.R. (2d) 173 (C.A.), at para. 56.
[Italic emphasis in original, bold emphasis added]

[79] Justice Binnie went on to describe this discretion as a very limited one. In doing so, he
quoted, with approval, Finch J.A.s comments in British Columbia (Minister of Forests) v
Bugbusters Pest Management Inc. (1998), 159 DLR (4th) 50 (BCCA) at para 32, and the Ontario
Court of Appeal decision in Schweneke v Ontario (2000), 47 OR (3d) 97 (CA) at para 38:
63 In Bugbusters, supra, Finch J.A. (now C.J.B.C.) observed, at para. 32:
It must always be remembered that although the three requirements for
issue estoppel must be satisfied before it can apply, the fact that they may be
satisfied does not automatically give rise to its application. Issue estoppel is an
equitable doctrine, and as can be seen from the cases, is closely related to abuse
of process. The doctrine of issue estoppel is designed as an implement of
justice, and a protection against injustice. It inevitably calls upon the
exercise of a judicial discretion to achieve fairness according to the
circumstances of each case.
Apart from noting parenthetically that estoppel per rem judicatem is generally considered
a common law doctrine (unlike promissory estoppel which is clearly equitable in origin),
I think this is a correct statement of the law. Finch J.A.s dictum was adopted and applied
by the Ontario Court of Appeal in Schweneke, supra, at paras. 38 and 43:
The discretion to refuse to give effect to issue estoppel becomes relevant
only where the three prerequisites to the operation of the doctrine exist. The
exercise of the discretion is necessarily case specific and depends on the entirety
of the circumstances. In exercising the discretion the court must ask is
there something in the circumstances of this case such that the usual
operation of the doctrine of issue estoppel would work an injustice?

[Emphasis added]

[80] In Insurance Company of the State of Pennsylvania v Global Aerospace, Inc., 2010
SKCA 96, [2010] 10 WWR 426 [Aerospace], Cameron J.A. of this Court described the
discretion in these terms:
[83] That such discretion exists is beyond doubt, though it is very limited in
relation to issue estoppel in the context of a prior decision of a court: General Motors
of Canada v. Naken, [1983] 1 S.C.R. 72. In that case Estey J., who delivered the
judgment of the Court, observed at p. 101 that such a discretion must be very limited in
application, noting that the fact harsh results follow the application of the doctrine has
not deterred its application by the courts. This provides some insight into just how
limited this discretion is in relation to issue estoppel in the context of court proceedings.
 Page 23

[84] The discretion is broader in relation to a prior decision of a tribunal rather than a
court, as explained in Danyluk v. Ainsworth Technologies Inc., supra, but that is beside
the point here. Nevertheless, Danyluk remains instructive. In delivering the judgment of
the Court, Justice Binnie observed at para. 67 that the objective is to ensure that the
operation of issue estoppel promotes the orderly administration of justice but not at
the cost of real injustice in the particular case. This is instructive of the proper
exercise of the discretion, even when it is very limited, for this posits a discretion
controlled by the prescribed standard of real injustice in the particular case.
[Emphasis added]

[81] It is clear that in exercising the discretion a court must ask if there is something in the
circumstances of the case that would result in an injustice if the doctrine of issue estoppel were
applied. In making that determination, the list of factors to be considered is open; although
Binnie J.s comments at paragraph 67 of Danyluk indicate they include many of the same
factors listed in R v Consolidated Maybrun Mines Ltd., [1998] 1 SCR 706 [Maybrun], in
connection with the rule against collateral attack and that a similarly helpful list was proposed
by Laskin J.A. in Minott v OShanter Development Co. (1999), 168 DLR (4th) 270 (Ont CA)
[Minott].

[82] Maybrun dealt with a decision emanating from an administrative tribunal and,
accordingly, the factors listed there are not applicable to this appeal. In Minott, however, the
Ontario Court of Appeal dealt with the exercise of the discretion in the context of civil litigation.
Justice Laskin, writing for the Court, stated the following:
[50] Issue estoppel is a rule of public policy and, as a rule of public policy, it seeks
to balance the public interest in the finality of litigation with the private interest in
achieving justice between litigants. Sometimes these two interests will be in conflict,
or, at least there will be tension between them. Judicial discretion is required to achieve
practical justice without undermining the principles on which issue estoppel is founded.
Issue estoppel should be applied flexibly where an unyielding application of it would
be unfair to a party who is precluded from relitigating an issue.
[51] That the courts have always exercised this discretion is apparent from the
authorities. For example, courts have refused to apply issue estoppel in special
circumstances, which include a change in the law or the availability of further
relevant material. If the decision of a court on a point of law in an earlier
proceeding is shown to be wrong by a later judicial decision, issue estoppel will not
prevent relitigating that issue in subsequent proceedings. It would be unfair to do
otherwise.
[Emphasis added]
 Page 24

[83] The Chambers judge concluded that applying the doctrine of issue estoppel would not
result in an injustice because (i) Canada was well aware of the possibility there had been
misrepresentations, yet still agreed to pay $25 million; (ii) Canada had the opportunity on three
prior occasions to address the issue of fraud, and chose not to do so; (iii) the courts on three prior
occasions, knowing of the misrepresentation and false records, confirmed the $25 million fee
must be paid, regardless of the outcome of the verification process; (iv) the $25 million fee has
been found to be fair and reasonable; and (v) the settlement has been implemented for the
benefit of thousands of claimants (Chambers Decision at para 100).

[84] Canada contends the Chambers judge erred in exercising his discretion because he did
not consider all relevant factors, gave insufficient weight to relevant considerations, and
made a decision that was so clearly wrong that it amounts to an injustice. In particular, Canada
submits the Chambers judge failed to consider the most critical factor, namely, whether in the
circumstances of this case the application of issue estoppel would work an injustice. Canada
submits it would because it prevents Canada from pursuing a claim of fraud.

[85] In my view, Canadas submissions have merit in that the Chambers judge failed to
consider the factors relevant to a claim of injustice. Rather, he focused on matters relevant to the
question of whether estoppel had been established. As stated by Binnie J. in Danyluk, it is an
error of principle not to address the factors for and against the exercise of the discretion (at
para 66).

[86] For clarity, I will briefly address the factors the Chambers judge did rely on. First, being
aware of the possibility of misrepresentation is not synonymous with a knowledge of fraud.
Misrepresentations can be innocent, negligent or fraudulent. The ramifications of an innocent or,
indeed, negligent misrepresentation are far different than the ramifications of a fraudulent one.

[87] Second, Canada did not have the opportunity in the prior proceedings to raise the issue of
fraud. As the Chambers judge himself noted, Canada did not have the information that allegedly
establishes fraud when those applications were being dealt with. I will address this matter more
fully when dealing with the issue of abuse of process.
 Page 25

[88] Third, the fact the $25 million fee has been found to be fair and reasonable for the
purposes of approving the class action settlement is irrelevant to the interest of justice question;
as is the fact the IRSSA has been implemented for the benefit of thousands of claimants. The
IRSSA will not be affected by Canadas action.

[89] I turn now to the question of what a court should consider when deciding whether to
exercise its discretion not to apply the doctrine of issue estoppel. As pointed out earlier in these
reasons, the discretion is a very limited one. There is, however, some guidance from the Supreme
Court on how it should be exercised that is particularly relevant to this case. In Toronto (City) v
C.U.P.E., Local 79, 2003 SCC 63, [2003] 3 SCR 77 [Toronto City], Arbour J., writing for the
majority, stated:
52 In contrast, proper review by way of appeal increases confidence in the ultimate
result and affirms both the authority of the process as well as the finality of the result. It
is therefore apparent that from the systems point of view, relitigation carries serious
detrimental effects and should be avoided unless the circumstances dictate that
relitigation is in fact necessary to enhance the credibility and the effectiveness of the
adjudicative process as a whole. There may be instances where relitigation will
enhance, rather than impeach, the integrity of the judicial system, for example:
(1) when the first proceeding is tainted by fraud or dishonesty; (2) when fresh, new
evidence, previously unavailable, conclusively impeaches the original results; or
(3) when fairness dictates that the original result should not be binding in the new
context. This was stated unequivocally by this Court in Danyluk, supra, at para. 80.
53 The discretionary factors that apply to prevent the doctrine of issue estoppel from
operating in an unjust or unfair way are equally available to prevent the doctrine of abuse
of process from achieving a similar undesirable result. There are many circumstances
in which the bar against relitigation, either through the doctrine of res judicata or
that of abuse of process, would create unfairness. If, for instance, the stakes in the
original proceeding were too minor to generate a full and robust response, while the
subsequent stakes were considerable, fairness would dictate that the administration
of justice would be better served by permitting the second proceeding to go forward
than by insisting that finality should prevail. An inadequate incentive to defend, the
discovery of new evidence in appropriate circumstances, or a tainted original
process may all overcome the interest in maintaining the finality of the original
decision (Danyluk, supra, at para. 51; Franco [(2001), 53 OR (3d) 391], at para. 55).
[Emphasis added]

[90] Key to the exercise of the discretion in this case is Canadas allegation of fraud fraud
that was allegedly discovered after the Prior Decisions had been made and that had been
perpetrated both at the time the verification agreement was entered into and when the application
to approve the IRSSA and other subsequent applications relating thereto were made.
 Page 26

[91] Where a prior judgment is based on fraud, an application to set aside that judgment may
be made. In this case, that would include setting aside approval of the IRSSA. Canada, however,
has no desire to set aside the IRSSA: what it seeks, and what it is entitled to seek if fraud is
established, is damages against MLG.

[92] Donald J. Lange in The Doctrine of Res Judicata in Canada, 4th ed (Markham:
LexisNexis, 2015) at 275 [The Doctrine of Res Judicata], states the following:
The discovery of fraud in a proceeding is the discovery of new evidence after the
judgment has been pronounced in the proceeding. Proving fraud in the first proceeding
has always deprived a litigant of the estoppel effect of an entered judgment.
(at 275)

[93] The Doctrine of Res Judicata goes on to state that fraud has been described as an
exception of special circumstances [to res judicata], and cites, as authority for that proposition,
St. Denis v North Himsworth (Township) (1985), 50 OR (2d) 482 (Div Ct) at 491; Johnston v
Barkley (1905), 10 OLR 724 (Div Ct) at 728729; and Hamada v Northguard Mortgage Corp.
(1985), 67 BCLR 115 (SC) at 121 [Hamada]. (Reservations about Hamada were voiced by
Hardinge L.J.S.C., sitting as a local judge of the Supreme Court, in Bank of British Columbia v
Singh (1987), 17 BCLR (2d) 256 (SC) at 265.)

[94] The Doctrine of Res Judicata then continues:

A second proceeding, which seeks to relitigate the subject matter of the first
proceeding based on fraud, will be confronted with the estoppel effect of the first
proceeding. To obviate this effect, the litigant may plead the special circumstances of
fraud in order to relitigate the subject matter of the first proceeding.
(at 276)

[95] In my view, the Chambers judge failed to consider the effect of the alleged fraud on the
integrity of the justice system. In 100 Main Street East Ltd. v Sakas, (1975), 58 DLR (3d) 161
(Ont CA), Estey J.A. (as he then was) stated the process appears to be one of balancing the need
for the Courts to protect the integrity of their process against fraudulent practices before the
Court, on the one hand, against the practical requirement of certainty and finality in litigation on
the other (at 165). Further, Estey J.A. noted the principle of law preserving the sanctity of the
principle of res judicata must give way to the principle recognizing the right and duty of the
 Page 27

Court to protect its own processes so as to ensure that litigants do not profit from their improper
conduct (at 171).

[96] Justice Halletts comments in Sun Alliance Insurance Co. v Thompson (1981), 56 NSR
(2d) 619 (WL) (SC), are apropos. In dealing with an application to dismiss an action on the
grounds of res judicata where fraud was alleged, he stated the following: It is in the public
interest that persons not be able to benefit from fraud and this principle must take
precedence over the doctrine of res judicata (emphasis added, at para 17).

[97] In my view, the circumstances of the case under appeal weighed in favour of the exercise
of discretion not to apply the doctrine of issue estoppel, so that Canadas allegation of fraud
could be heard and adjudicated in the interests of justice.

D. Did the Chambers judge err in concluding Canadas claim should be

struck as an abuse of process? (Rule 7-9(2)(e))

[98] The Chambers judges conclusion that Canadas action was an abuse of process rested on
two bases: (i) the application of the doctrine of issue estoppel, and (ii) a broader aspect of the
doctrine of abuse of process, which can prevent relitigation even when the strict requirements of
the doctrine of issue estoppel have not been met.

[99] As indicated earlier in these reasons, the Chambers judge erred in his application of the
doctrine of issue estoppel to the circumstances of this case. Thus, the only remaining issue, with
respect to abuse of process, is whether the Chambers judge erred in concluding Canadas claim
constituted an abuse of process, even though issue estoppel did not apply.

[100] There is no set test for determining whether something amounts to an abuse of process.
Such determinations involve the exercise of discretion and, accordingly, the standard of review
to be applied by this Court is one of deference: Huerto v Salte, 2015 SKCA 21 at para 3, 457
Sask R 14; Gonzalez v Gonzalez, 2016 BCCA 376 at para 16, 91 BCLR (5th) 221; Hozaima v
Perry, 2010 MBCA 21 at para 17, [2010] 4 WWR 389; and Burcevski v Ambrozic, 2011 ABCA
178 at paras 89, [2011] 9 WWR 120.
 Page 28

[101] The doctrine of abuse of process engages a courts inherent power to prevent the misuse
of judicial proceedings. In Bear v Merck Frosst Canada & Co., 2011 SKCA 152, 345 DLR (4th)
152 [Bear], Richards J.A. (as he then was) described the doctrine as follows:
[36] The doctrine of abuse of process reflects the inherent power of a judge to prevent
an abuse of his or her courts authority. It is a flexible concept not restricted by the
requirements of issue estoppel, such as those relating to privity. The doctrine can be
engaged by a variety of circumstances including what might be called those concerning
the re-litigation of issues or claims.

[102] Dissenting in Canam Enterprises Inc. v Coles (2000), 194 DLR (4th) 648 (Ont CA)
[Canam Enterprises], but approved at 2002 SCC 63, [2002] 3 SCR 307, Goudge J.A. described
the doctrine in these terms:
[55] The doctrine of abuse of process engages the inherent power of the court to
prevent the misuse of its procedure, in a way that would be manifestly unfair to a party to
the litigation before it or would in some other way bring the administration of justice into
disrepute. It is a flexible doctrine unencumbered by the specific requirements of concepts
such as issue estoppel. See House of Spring Gardens Ltd. v. Waite, [1990] 3 W.L.R. 347
at p. 358, [1990] 2 All E.R. 990 (C.A.).
[56] One circumstance in which abuse of process has been applied is where the
litigation before the court is found to be in essence an attempt to relitigate a claim which
the court has already determined.

[103] Abuse of process has been invoked to preclude relitigation in situations where the strict
requirements of the doctrine of issue estoppel do not apply: Toronto City at para 37, Bear, and
Canam Enterprises.

[104] In Toronto City, Arbour J. stated the following:

42 The attraction of the doctrine of abuse of process is that it is unencumbered by
the specific requirements of res judicata while offering the discretion to prevent
relitigation, essentially for the purpose of preserving the integrity of the courts process.
(See Doherty J.A.s reasons, at para. 65; see also Demeter [(1983), 150 DLR (3d) 249
(Ont HC), affd (1984), 13 DLR (4th) 318 (Ont CA)], at p. 264, and Hunter, [[1982] AC
529], at p. 536.)

[105] At the heart of the concept of abuse of process is the need to maintain the integrity of the
adjudicative process. In the context of relitigation, that is where the courts focus should lie,
rather than on the motives or status of the parties. Arbour J. noted the following in Toronto City:
51 Rather than focus on the motive or status of the parties, the doctrine of abuse of
process concentrates on the integrity of the adjudicative process. Three preliminary
observations are useful in that respect. First, there can be no assumption that relitigation
will yield a more accurate result than the original proceeding. Second, if the same result
is reached in the subsequent proceeding, the relitigation will prove to have been a waste
 Page 29

of judicial resources as well as an unnecessary expense for the parties and possibly an
additional hardship for some witnesses. Finally, if the result in the subsequent proceeding
is different from the conclusion reached in the first on the very same issue, the
inconsistency, in and of itself, will undermine the credibility of the entire judicial process,
thereby diminishing its authority, its credibility and its aim of finality.

[106] Abuse of process can also bar relitigation where an issue could have been raised by the
parties in a prior proceeding: Rivet v British Columbia, 2007 BCSC 731 at para 82. This
principle was recognized by the Supreme Court of Canada in Town of Grandview v Doering,
[1976] 2 SCR 621 at 634 and 638639 [Doering], where the Court cited with approval the
following principle from Henderson v Henderson (1843), 67 ER 313 at 319:
In trying this question I believe I state the rule of the Court correctly when I say that,
where a given matter becomes the subject of litigation in, and of adjudication by, a Court
of competent jurisdiction, the Court requires the parties to that litigation to bring forward
their whole case, and will not (except under special circumstances) permit the same
parties to open the same subject of litigation in respect of [a] matter which might have
been brought forward as part of the subject in contest, but which was not brought
forward, only because they have, from negligence, inadvertence, or even accident,
omitted part of their case. The plea of res judicata applies, except in special cases, not
only to points upon which the Court was actually required by the parties to form an
opinion and pronounce a judgment, but to every point which properly belonged to the
subject of litigation, and which the parties, exercising reasonable diligence, might have
brought forward at the time.

This principle has been applied by appellate courts (either as a broader interpretation of issue
estoppel or a more general principle of res judicata) in a number of cases, including, for
example, the following: Canadian Imperial Bank of Commerce v Sylvester, 2002 SKCA 52 at
para 11, [2002] 7 WWR 212; Hoque v Montreal Trust Co. of Canada, 1997 NSCA 153 at
para 38, 162 NSR (2d) 321; and Hill v Hill, 2016 ABCA 49 at paras 2728, 395 DLR (4th) 1.

[107] Justice Arbours comments in Toronto City, quoted earlier in these reasons, bear
repeating here:
53 The discretionary factors that apply to prevent the doctrine of issue estoppel from
operating in an unjust or unfair way are equally available to prevent the doctrine of abuse
of process from achieving a similar undesirable result. There are many circumstances in
which the bar against relitigation, either through the doctrine of res judicata or that of
abuse of process, would create unfairness. If, for instance, the stakes in the original
proceeding were too minor to generate a full and robust response, while the subsequent
stakes were considerable, fairness would dictate that the administration of justice would
be better served by permitting the second proceeding to go forward than by insisting that
finality should prevail. An inadequate incentive to defend, the discovery of new evidence
in appropriate circumstances, or a tainted original process may all overcome the interest
 Page 30

in maintaining the finality of the original decision (Danyluk, supra, at para. 51; Franco
[(2001), 53 OR (3d) 391], at para. 55).
[Emphasis added]

[108] In my view, these comments are dispositive of Canadas ground of appeal with respect to
abuse of process. The Chambers judge failed to consider the matters referred to by Arbour J.
when determining Canadas action constituted an abuse of process. Of particular importance in
the context of this appeal was the new evidence acquired through the verification process,
which raised the question of fraud in a concrete way, the fact Canadas allegations of fraud were
not and could not have been properly addressed in the earlier proceedings, and the fact that
Canadas allegations of fraud have never received a full and robust hearing. Let me elaborate.

[109] First, it appears Canada did not have evidence to support an allegation of fraud until
after the verification process had been completed, which was well after the AIP, the verification
agreement and the IRSSA had been entered into and the three prior court proceedings had been
heard and the judgments relating thereto had been rendered. Thus, Canada could not have
established fraud in those proceedings even if it had been raised. More importantly, all of the
prior proceedings related to a class action against Canada for damages. In such proceedings, the
court could not address Canadas claim for damages against MLG for the tort of deceit.

[110] Second, Canada went as far as it could in the earlier proceedings in terms of raising its
concerns with respect to the alleged misrepresentations. Those concerns related to how the fee
provisions were to be interpreted and, more particularly, what the verification process applied to.
The Prior Decisions interpretation of the fee agreement is not in issue.

[111] Finally, Canadas action raises serious allegations that require a full hearing in the
interests of justice. If the allegations are well-founded, Canada (which represents the people) is
entitled to appropriate compensation. If the allegations are not well-founded, MLG deserves the
opportunity to be vindicated. Allowing the action to proceed will not, in any way, undermine the
IRSSA; nor will it in any way undermine the Prior Decisions.

[112] In my view, the Chambers judge erred in finding Canadas statement of claim should be
struck as an abuse of process.
 Page 31

V. CONCLUSION

[113] The appeal is allowed and the Chambers judges decision is set aside. MLG shall pay to
Canada the costs of the within appeal assessed in the usual way.

Ryan-Froslie J.A.
Ryan-Froslie J.A.

I concur. Ottenbreit J.A.

for Ottenbreit J.A.

I concur. Whitmore J.A.

Whitmore J.A.
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