The Supreme Court of Canada has authorized a Quebec class action against an investment fund dealer and investment fund manager. The class members are customers who allege they were insufficiently informed about the risk profile of two investment products. See Desjardins Financial Services Firm Inc. v Asselin, 2020 SCC 30.
The decision to authorize the class action does not confirm the merits of the allegations. The Supreme Court reaffirmed that “the threshold for authorizing a class action in Quebec is a low one.” The Court’s role is “to filter out frivolous claims, and nothing more.” The case involved two investment products. Both products guaranteed capital at maturity corresponding to the original value of the deposit and a variable potential return. The plaintiff advanced funds through a deposit agreement entered with his credit union (caisse populaire), and purchased the investment products. The plaintiff earned a 0% return in 2009, prompting him to bring this action.
The fund was designed and managed by Desjardins Global Asset Management Inc. (the “Manager“). The plaintiff claims the Manager breached its duties of competence with regard to design and management of the investments by using risky investment strategies including asset‑backed commercial paper. All nine Justices authorized the class action as against the Manager.
The plaintiff claims he would not have invested in these products if he was told about their risks. He claims Desjardins Financial Services Firm Inc. (the “Firm“) systemically failed to inform its financial planners and mutual fund representatives about the risks, who then, in turn, failed to inform the plaintiff and the other class members. He alleges this amounts to a breach of the Firm’s contractual duty to inform. Six Justices authorized the class action as against the Firm, and three Justices dissented.
The Quebec Civil Code provides a duty to inform that applies to all contracts. It is an “obligation to reveal to another facts that the latter, in order to adjust his or her conduct, may legitimately expect to receive.” The scope of the obligation is governed by three factors: (1) whether the party owing the duty has knowledge of the information (actual or presumed); (2) whether the information is of decisive importance; and (3) whether it was impossible for the party owed the duty to inform itself of the information, or whether that party is relying on the other to inform. The Firm was presumed to have actual knowledge of risks associated with the two investment products. The plaintiff pleaded that he would not have invested if the risks were disclosed, and that it was impossible for him to otherwise discover those risks (such as the use of asset-backed commercial paper).
While the above test appears individualistic and context-specific, this case is not based on individual failures of financial advisors or fund representatives to inform the class members. Instead, the plaintiff alleges a systematic failure to inform. He claims the Firm provided misleading or incomplete information to all of its financial advisors and fund representatives, and thereby failed to inform all class members. The case alleges an “omission that was identical and generalized across the group.” The six Justices forming the majority found the test for class action authorization had been met, including the commonality requirement (namely, “a common question that can advance the action in a not insignificant manner”).
Three Justices partially dissented, finding that the class action should not be authorized as against the Firm. The dissenting Justices found the plaintiff had failed to establish a sufficient basis for the systematic breach, in part because he admitted to having “no idea” whether other class members were in the same situation as him. Without a viable allegation of systematic failures to inform, the case would turn on individual failures to inform, which does not justify a class action.
The dissenting Justices also held that the deposit agreements governing the investment were between the class members and their individual credit unions, not the Firm. The class members did enter into contracts for services with the Firm, however those contracts primarily created a duty to advise under the Quebec Civil Code. In these circumstances, the duty to inform became even more “individualistic” because it arose in the “broader context of the provision of a financial adviser’s services, which varies in accordance with several factors, including the length of the relationship and the client’s goals and level of expertise.” The dissenting Justices found it “clear that the clients’ specific circumstances are of significant importance” and, accordingly, found “no commonality to the question of whether the duty to inform was breached.” Overall, these Justices held that “[t]he liability of financial advisers for a breach of the duty to inform and the duty to provide advice is not well suited to a class action because of the highly individual nature of the relationship between a client and an adviser in the context of a contract for investment services.”
This case does not speak to the common law obligations of investment firms to inform their clients, and much of the decision turns on contractual duties and class proceedings law unique to Quebec. However, the Supreme Court’s willingness to authorize common issues involving allegations of systematic failures will be carefully studied across the country. Client interactions in financial services and other industries may be highly individualistic in nature. Nevertheless, Canadian courts may greenlight class actions about systematic conduct that similarly impacts all such interactions.