Damages for Capital Market Liability: The Impact of Mitigation, Valuation, and Market Uncertainty

• Author: Thomas G. Heintzman, Q.C., and Sarah E. Armstrong
• Pages: 351-378

Damages

for

Capital

Market

Liability:

The

Impact

of

Mitigation,

Valuation,

and

Market

Uncertainty

Thomas

G.

Heintzman,

Q.C.

&

Sarah

E.

Armstrong"

A.

INTRODUCTION

This paper will

address

three

aspects

of the law of

damages

in

relation

to the

tort

and

statutory remedies available

to

investors

in

public compa-

nies.1

First,

it

will examine

the

consequence

of the

fact

that those dam-

ages

are

economic losses.

The

plaintiff

must

satisfy

the

narrow test

for

liability

that Anglo-Canadian courts have established

for the

recovery

of

economic loss

(referred

to

herein

as the

"law

of

liability"). Only then

is the

court required

to

examine

the

legal rules relating

to the

nature

of

the

damages that

the

plaintiff

is

entitled

to

recover

(referred

to

herein

as

the

"law

of

damages"). This paper raised

the

question:

How

should

the

evolving test

for

liability

for

economic

loss

influence damage

issues

such

as

foreseeability,

causation,

and

mitigation?

The

second

and

third aspects

of

this paper address

the

appropriate

basis

for

assessing damages when

the

losses

are

claimed

by

shareholders

or

others arise

from

the

stock market. Obviously,

the

damages claimed

by

investor

plaintiffs

are

economic losses,

but

they

are

economic losses

of

a

very particular nature.

The

nature

and

function

of

stock markets

*

Thomas

G.

Heintzman,

O.C.,

Q.C.

is a

partner

and

Sarah Armstrong

is a

student-at-

law

in the

Toronto

office

of

McCarthy

Tetrault

LLP.

i

This

paper

does

not

address

damages

in

contract

nor

under equitable principles

except

as

necessary

to

discuss

damages

in

tort.

35*

352

THOMAS

G.

HEINTZMANN,

Q.C.

&

SARAH

E.

ARMSTRONG

require

a

court

to

give attention

to

dealing

fairly

between

investors,

and

to

decide whether

all

investors should

be

treated

identically,

or

whether

they should

be

treated

differently

according

to

their

own

situation. Fur-

thermore,

the

amount

of

stock market losses

can be so

huge that courts

must also

pay

attention

to the

scope

of

liability

to be

imposed upon

the

defendant

officers,

directors, companies,

and

auditors.

In

this context legislators have intervened

to set

many

of the

rules.

In

particular,

the

federal

and

provincial

Business

Corporations

Acts

and the

provincial

Securities

Acts

have created statutory liability

for

oppression

and

prospectuses during primary distribution

and

take-over bids,

and

the

Ontario legislature

is

about

to

impose

new

liability

for

secondary

market

misrepresentation.

But

there

are

still

issues

for

courts

to

address: What

are the

char-

acteristics

of

shares

and the

capital markets?

Do

those characteristics

require

the

courts

to

change their normal damages rules, particularly

with respect

to

mitigation?

And

should

the

common

law and

statutory

law of

damages

be the

same?

Most

of the

damage issues relating

to

capital markets liability arise

from

two

questions: When should

the

damages

be

calculated?

And

should

the

sale

of the

securities

by the

plaintiff

well

after

that date

be

taken into consideration? This paper suggests that

the

principles

of

miti-

gation

are the

most suitable

to

answer those questions.

B.

DAMAGES

FOR

ECONOMIC

LOSS

-L)

Duty

of

Care

in

respect

of

Economic Loss

The law

relating

to

tortious liability

for

economic loss

has

recently under-

gone

significant

development both

in

Canada

and the

United Kingdom.

Typically,

there

has

been

a

tension between liability

and

damage

principles.

The

latter acts

as an

additional mechanism whereby

the law

can

arrive

at the

just result between

the

plaintiff

and the

defendant.

If

the

principles

of

liability widen

the

basis

of

recovery, then

the

principles

of

damages

can

restrict that basis

by

ensuring that causation

and

other

principles relating

to

damages shield

the

defendant

from

an

unduly

burdensome award. Similarly,

if

liability

is

restricted, then

the

ambit

of

damages

can be

widened

to

ensure that

plaintiffs

are not

unduly pre-

vented

from

obtaining just

compensation.2

2

Harvey McGregor,

McGregor

on

Damages,

i/th

ed.

(London: Sweet

&

Maxwell,

2003)

at

paras. 4-003

and

4-006

to

4-008.