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Court of Appeal Applies “Flexible Approach” to Assessment of Defamation Pleadings

The Court of Appeal recently overturned a motion judge’s ruling to strike a claim for defamation for not pleading the requisite material facts. The plaintiffs, Catalyst Capital Group Inc. and Callidus Capital Corporation, commenced an action against Veritas Investment Research Corporation and West Face Capital Inc. (the “defendants”) for civil conspiracy, intentional interference with economic relations and defamation. The defendants moved to strike the pleadings against them, respectively. The motion judge granted the motion to strike with respect to the plaintiffs’ claim for conspiracy to publish defamatory statements due to the plaintiffs’ failure to plead the requisite particulars.

Facts

Catalyst Capital and West Face Capital are competitors in the investment industry. Both parties specialize in providing lending services to distressed and undervalued companies that would otherwise not have access to credit. The action arises out of two reports produced by West Face and Veritas Investment Research, which are alleged to have contained false and defamatory statements about the plaintiffs for the purpose of short selling stock in Callidus Capital Corporation, a subsidiary controlled by Catalyst Capital.

West Face is alleged to have encouraged Veritas to produce a negative report about Callidus and distribute it to Callidus’ subscribers in order to create the impression that a negative consensus was building against Callidus among the investment community. If successful, these reports would have the result of reducing Callidus’ share price allowing West Face to execute their short-selling strategy.

The plaintiffs pleaded, among other things, that the defamatory reports were distributed to “…third parties, the identities of which are known to West Face.” The motion judge struck this portion of the pleading because it failed to contain the requisite particulars necessary for a defamation action.

The Court of Appeal applied a flexible approach in interpreting the plaintiffs’ pleadings, allowing the action in defamation to proceed despite the lack of particulars. Traditionally, actions in defamation attract a high level of scrutiny by the courts at the pleadings stage, requiring the plaintiff to reference the defamatory statements and the people to whom those statements were made. The high level of scrutiny is due in part to the serious nature of such allegations and because of the significance of context in defamation actions. Nevertheless, in specific circumstances, Ontario courts have been willing to apply a more generous approach towards defamation pleadings.

Ontario Courts have allowed defamation pleadings to survive scrutiny in situations where the plaintiff has revealed all the particulars within their knowledge and where the plaintiff has established a prima facie case of defamation. Applying the more flexible approach, R.A. Blair J.A. of the Court of Appeal found the pleadings were valid and should be allowed to proceed.

Our Thoughts

When ruling on a motion to strike in the context of defamation, the court is inherently involved in preventing a “fishing expedition” while also preserving the plaintiffs’ right to justice. In allowing defective pleadings to proceed, the court is concerned that a plaintiff may sue prior to having actual knowledge of the material facts necessary to sustain such an action. The plaintiff could later rectify any gaps in knowledge through the discovery process. This would allow parties to sue on a “gut feeling,” subjecting defendants to legal costs and discovery processes which may or may not later reveal civil liability. Doing so would increase the amount of frivolous and vexatious actions brought through the civil court system and in certain situations, result in abuse of process.

On the other hand, the action of defamation does not always lend itself to the production of particularized pleadings. Often, defamatory statements are made between the defendant and a third party of which the plaintiff has no knowledge. Such statements may in turn damage a plaintiff’s reputation, warranting legal action. The fact that the plaintiff does not know when, where and to whom the statement a defamatory statement was made, therefore, should not preclude them from seeking justice.

In this case, the plaintiffs had properly pleaded actions in intentional interference with economic relations, civil conspiracy. In any event, the defendants would be subject to discovery on the material facts relating to the impugned reports, thereby rendering any concerns with respect to a “fishing expedition” unwarranted. As such, the facts of this case were particularly appropriate for the application of the more flexible approach to scrutinizing pleadings in the context of defamation. It will be interesting to see how the Ontario courts will apply this approach moving forward.
 
See: The Catalyst Capital Group Inc. v. Veritas Investment Research Corporation, 2017 ONCA 85

The above article is for general information purposes only and does not constitute legal advice. If you have concerns with regard to the foregoing issues, please make an appointment with one of our lawyers or a qualified legal practitioner elsewhere.