Mandeville et al. v. The Manufacturers Life Insurance Company

[Indexed as: Mandeville v. Manufacturers Life Insurance Co.]

Ontario Reports

Court of Appeal for Ontario,

Gillese, Blair and Strathy JJ.A.

May 22, 2014

120 O.R. (3d) 81 | 2014 ONCA 417

Case Summary

Torts — Negligence — Duty of care — Defendant transferring Barbados participating policies to another life insurer three years before it demutualized and distributed $9 billion in value to its participating policyholders — Plaintiffs bringing class action on behalf of Barbados policyholders for damages for negligence and claiming that defendant should have protected their interests at time of transfer so that they could have shared in value of company on demutualization — Trial judge properly dismissing action — Plaintiffs' claim not falling within pre-existing categories in which recovery for pure economic loss has been recognized — Class members' losses being reasonably foreseeable consequence of defendant's transfer of their policies but relationship between class members and defendant not sufficiently proximate that prima facie duty of care arose.

In 1996, three years before it demutualized and distributed $9 billion in value to its participating policyholders, the defendant transferred its Barbados life insurance business to another life insurance company. The policies of about 8,000 Barbados participating policyholders were transferred as part of the sale. The transfer was approved by both the Canadian government and the Barbadian government. At the time, large cap mutual companies such as the defendant were not permitted to demutualize. The right of such companies to demutualize only came into existence in 1999, when the federal government enacted the Mutual Company (Life Insurance) Conversion Regulations, SOR/99-128 (the "Regulations"). However, the Department of Finance had published a white paper in 1996 proposing that large cap mutual insurance companies be permitted to demutualize, and in 1998, the federal government had published draft regulations to permit such demutualization. The plaintiffs brought a class action on behalf of the former Barbados participating policyholders, seeking damages for negligence on the basis that the defendant should have protected their interests at the time of the transfer so that they could have shared in the value of company on demutualization. The trial judge found a prima facie duty of care based on the foreseeability of harm and proximity, but for policy reasons refused to recognize that the defendant owed the class members a duty of care. He found that, had a duty of care existed, the defendant breached the standard of care because it failed to take reasonable steps to protect the class members' right to share in any future demutualization benefits when it structured the transfer transaction. Had he found the defendant liable, the trial judge would have ordered the defendant to pay damages of approximately $82 million, plus interest. The action was dismissed. The plaintiffs appealed, and the defendant cross-appealed on the issue of damages.

Held, the appeal and cross-appeal should be dismissed.

The plaintiffs' claim was not based on the loss of a proprietary right, but rather was for pure economic loss. At the time of the transfer, the class members did not have a legally recognized right or interest in respect of a possible demutualization by the defendant. The right of large cap mutual companies to demutualize [page82 ]had not yet come into existence. As no right to share in demutualization benefits had been conferred by contract, legislation or regulation, the class members could not have a right to, or interest in, something that did not exist and was not legally possible. The plaintiffs were claiming damages equivalent to the benefits the class members would have received had they been treated as eligible policyholders upon the defendant's demutualization. Their claim did not fall within the pre-existing categories in which recovery for pure economic loss has been recognized. Consequently, it was necessary to determine whether a novel duty of care between a mutual company and its participating policyholders should be recognized in this case.

There was no reason to interfere with the trial judge's conclusion that the harm class members suffered was a reasonably foreseeable consequence of the defendant's transfer of their policies. However, the relationship between the class members and the defendant was not sufficiently proximate that a prima facie duty of care arose. At the time of the transfer, the class members had not legally recognized right, claim or interest to share in the value of the defendant on a future demutualization. At most, they had a hope or mere expectancy that if and when the defendant could and did demutualize, they would still be participating policyholders and therefore have a right to share in that value. The inchoate and tenuous nature of that interest militated against finding that it was just and fair to impose a duty of care on the defendant to prevent harm to that interest. The applicable legislation expressly empowered the defendant to terminate its relationship with the class members without their consent provided it followed a certain process. The transfer, as structured, was lawful under the relevant statutes. It was approved by the regulators in both jurisdictions. After the approval, all of the defendant's rights, title, benefit and obligations arising from the Barbados policies were transferred to the other insurer and the defendant was discharged from any further obligations to the class members who held those policies. Knowing that the legislation permitted the defendant to transfer their policies and end their relationship, it was not reasonable for the class members to expect that the defendant would protect their voting rights. Moreover, from a policy perspective, it was difficult to understand how the defendant could be given the statutory right to end its relationship with the class members and yet be legally obligated to maintain one aspect of that relationship, potentially in perpetuity, by preserving the policyholders' voting or other rights in the company.

The trial judge erred in finding that, had a duty of care existed, the defendant breached the standard of care by failing to structure the transfer in a manner that preserved the class members' voting rights. In the circumstances that existed at the time of the transfer, requiring the defendant to structure the transfer in a way that preserved the class members' voting rights was not reasonable.

Anns v. Merton London Borough Council, [1978] A.C. 728, [1977] 2 All E.R. 492, [1977] 2 W.L.R. 1024, 75 L.G.R. 555, 141 J.P. 527, 5 Build. L.R. 1, 4 I.L.R. 21, 243 E.G. 523 (H.L.); Canadian National Railway Co. v. Norsk Pacific Steamship Co., 1992 CanLII 105 (SCC), [1992] 1 S.C.R. 1021, [1992] S.C.J. No. 40, 91 D.L.R. (4th) 289, 137 N.R. 241, 11 C.C.L.T. (2d) 1, 33 A.C.W.S. (3d) 357; Martel Building Ltd. v. Canada, [2000] 2 S.C.R. 860, [2000] S.C.J. No. 60, 2000 SCC 60, 193 D.L.R. (4th) 1, 262 N.R. 285, J.E. 2000-2272, 3 C.C.L.T. (3d) 1, 5 C.L.R. (3d) 161, 36 R.P.R. (3d) 175, REJB 2000-21224, 101 A.C.W.S. (3d) 410; Ryan v. Victoria (City), 1999 CanLII 706 (SCC), [1999] 1 S.C.R. 201, [1999] S.C.J. No. 7, 168 D.L.R. (4th) 513, 234 N.R. 201, [1999] 6 W.W.R. 61, J.E. 99-357, 117 B.C.A.C. 103, 59 B.C.L.R. (3d) 81, 44 C.C.L.T. (2d) 1, 50 M.P.L.R. (2d) 1, 40 M.V.R. (3d) 1, 85 A.C.W.S. (3d) 208, apld

Sauer v. Canada (Attorney General), [2007] O.J. No. 2443, 2007 ONCA 454, 225 O.A.C. 143, 31 B.L.R. (4th) 20, 49 C.C.L.T. (3d) 161, 159 A.C.W.S. (3d) 306, distd [page83 ]

Other cases referred to

Cooper v. Hobart, [2001] 3 S.C.R. 537, [2001] S.C.J. No. 76, 2001 SCC 79, 206 D.L.R. (4th) 193, 277 N.R. 113, [2002] 1 W.W.R. 221, J.E. 2001-2153, 160 B.C.A.C. 268, 96 B.C.L.R. (3d) 36, 8 C.C.L.T. (3d) 26, REJB 2001-26862, 110 A.C.W.S. (3d) 943; D'Amato v. Badger, 1996 CanLII 166 (SCC), [1996] 2 S.C.R. 1071, [1996] S.C.J. No. 84, 137 D.L.R. (4th) 129, 199 N.R. 341, [1996] 8 W.W.R. 390, J.E. 96-1710, 79 B.C.A.C. 110, 22 B.C.L.R. (3d) 218, 31 C.C.L.T. (2d) 1, 65 A.C.W.S. (3d) 40; Design Services Ltd. v. Canada, [2008] 1 S.C.R. 737, [2008] S.C.J. No. 22, 2008 SCC 22, EYB 2008-132987, J.E. 2008-985, 55 C.C.L.T. (3d) 1, 64 C.C.L.I. (4th) 159, 69 C.L.R. (3d) 1, 293 D.L.R. (4th) 437, 374 N.R. 77, 165 A.C.W.S. (3d) 952; Kidd v. Canada Life Assurance Co., [2010] O.J. No. 658, 2010 ONSC 1097, 83 C.C.L.I. (4th) 136, 54 E.T.R. (3d) 225, 82 C.C.P.B. 42 (S.C.J.); Mandeville v. Manufacturers Life Insurance Co., 2002 CanLII 79684 (ON SC), [2002] O.J. No. 5386, 2 C.C.L.I. (4th) 211, 40 C.P.C. (5th) 182, 133 A.C.W.S. (3d) 440 (S.C.J.); Mandeville v. Manufacturers Life Insurance Co., [2012] O.J. No. 6083, 2012 ONSC 4316, 6 B.L.R. (5th) 132, 11 C.C.L.I. (5th) 71 (S.C.J.); Midleton's Will Trusts (Re), [1969] 1 Ch. 600, [1967] 2 All E.R. 834, [1967] 3 W.L.R. 965 (Ch. Div.); Mustapha v. Culligan of Canada Ltd., [2008] 2 S.C.R. 114, [2008] S.C.J. No. 27, 2008 SCC 27, EYB 2008-133554, J.E. 2008-1083, 55 C.C.L.T. (3d) 36, 293 D.L.R. (4th) 29, 375 N.R. 81, 238 O.A.C. 130, 165 A.C.W.S. (3d) 954; Plan of Reorganization of the Prudential Ins. Co., Order No. A01-153 (N.J. Dep't of Banking and Ins., October 15, 2001)

Statutes referred to

Canadian and British Insurance Companies Act, R.S.C. 1952, c. I-15

Insurance Act, Cap. 310 (Barbados), ss. 34, (1), 35(1), (2) (a), (b), 35A, (1)-(3)

Insurance Companies Act, S.C. 1991, c. 47 [as am.], ss. 2(1), 153 [as am.], 175, 181, 197(2), 198, 224(1), 237 [as am.], (1) [as am.], (1.1) [as am.], (1.5) [as am.], 238(2), 240(1), 248(4)-(5) [as am.], 254, 257(4)-(5), 337(1), 340(1), 464 [as am.], 704 [as am.]

N.J.S.A. 17:17C-1 (New Jersey)

Supreme Court of Judicature Act, Cap. 117A (Barbados), s. 5(1)

Rules and regulations referred to

Mutual Company Conversion Regulations, SOR/93-205 [rep. by SOR/99-128]

Mutual Company (Life Insurance) Conversion Regulations, SOR/99-128

Authorities referred to

Department of Finance, 1997 Review of Financial Sector Legislation: Proposals for Changes (Ottawa: Department of Finance, 1996)

Office of the Superintendent of Financial Institutions Canada, Guideline F-4, "Business Transfers, Purchases and Reinsurance by Canadian Life Companies and Canadian Fraternal Benefit Societies" (October 1992)

APPEAL from the judgment of Newbould J., [2012] O.J. No. 6083, 2012 ONSC 4316, 6 B.L.R. (5th) 175 (S.C.J.) dismissing an action; CROSS-APPEAL from a ruling on damages.

Paul J. Pape, Shantona Chaudhury, Linda Rothstein and David B. Williams, for appellants.

Sheila Block, David Outerbridge, Crawford Smith and James Gotowiec, for respondent. [page84 ]

The judgment of the court was delivered by

[1] GILLESE J.A.: — In 1999, The Manufacturers Life Insurance Company ("Manulife") demutualized and distributed $9 billion in value to its participating policyholders. Less than three years earlier, Manulife had transferred a group of Barbados participating policies to another life insurance company. The Barbados policyholders received no share of the $9 billion. They claim that Manulife should have protected their interests at the time of the transfer so that they could have shared in the value of the company on demutualization.

[2] In bringing their claim to the courts, the Barbados policyholders assert a novel duty of care. Will the courts recognize such a duty of care on the part of Manulife? This appeal depends on the answer to that question.

Overview

[3] In December 1996, Manulife transferred its Barbados life insurance business to Life of Barbados Limited ("LOB"), a Barbadian insurance company.[^1] As a mutual insurance company, Manulife was governed by the Insurance Companies Act, S.C. 1991, c. 47 ("ICA").[^2] Section 254 of the ICA required Manulife to obtain regulatory approval for the transfer from the Canadian government. Because the block of business in issue was located in Barbados, Manulife also needed the approval of the Barbadian government: Insurance Act, Cap. 310 (Barbados) (the "Barbados Insurance Act"), s. 34(1).

[4] Approximately 8,000 residents of Barbados had participating policies with Manulife that were transferred to LOB as part of the sale (the "Barbados policyholders" or the "class members").

[5] In January 1998, Manulife announced that it would demutualize, which means that it would convert from a mutual insurance company into a stock company. When Manulife demutualized in 1999, its participating policyholders were paid the value of Manulife (in shares or cash) in the amount of $9 billion. Because the class members' policies had been transferred to LOB, they were no longer Manulife participating policyholders and, therefore, were ineligible to share in the value of the company. [page85 ]

[6] The representative plaintiffs (the "appellants") brought a class action, on behalf of the Barbados policyholders, in which they claimed against Manulife for negligence and breach of fiduciary duty. Their negligence claim was founded on their allegation that Manulife knew it was likely going to demutualize when it transferred its Barbados business to LOB and that it ought to have structured the transfer in a way that protected or preserved the class members' rights to share in the value of Manulife on demutualization. The appellants sought damages equal to the amount that the class members would have received had they been treated as eligible policyholders on demutualization.

[7] After a 29-day common issues trial, the trial judge concluded that the causes of action asserted against Manulife failed. Although he found a prima facie duty of care based on the foreseeability of harm and proximity, for policy reasons the trial judge refused to recognize that Manulife owed the class members a duty of care. Had he found Manulife liable, the trial judge would have ordered Manulife to pay damages of approximately $82 million, plus interest.

[8] The appellants had advanced an alternative theory in which they claimed that Manulife should have compensated the class members for the loss of their "ownership" rights at the time of the transfer. The trial judge rejected this theory. However, he went on to determine that if liability had been established on that basis, he would have ordered Manulife to pay damages of $24.5 million, plus interest.

[9] By judgment dated August 1, 2012, the action was dismissed.

[10] The representative plaintiffs appeal. Their appeal is confined to the issue of negligence. They contend that the trial judge erred in failing to find that Manulife was negligent in its treatment of the class members by failing to protect their right to participate in a future demutualization. They do not pursue the alternative theory on the appeal.

[11] Manulife cross-appeals on the issue of damages. It contends that the trial judge made several errors in his reasoning, including on causation, and that when those errors are corrected, the correct quantum of damages is either nil or a substantially reduced amount. Manulife takes the position that if the appeal is dismissed, the cross-appeal is irrelevant.

[12] For the reasons that follow, I would dismiss the appeal and the cross-appeal. [page86 ]

Key Concepts

[13] A basic knowledge of the key concepts involved in this proceeding is essential to understanding the facts giving rise to this appeal and the arguments made by both sides. Thus, I begin with the key concepts.

Mutual company -- A mutual insurance company does not issue shares. Consequently, it is a company with no shareholders. The voting, dividend and other such rights of shareholders in a stock company are exercised by a class of policyholders called "participating policyholders". The ICA permits mutual insurance companies to issue both participating and non-participating policies.

Participating policyholders -- Participating policyholders hold insurance policies in the mutual company. The rights of participating policyholders are of two sorts: contractual and statutory.

Participating policyholders' contractual rights are set out in their policies. In addition to providing life insurance benefits, the policies in this case gave the policyholders the right to share in the mutual insurance company's surplus by way of annual dividends.

Participating policyholders' statutory rights in 1996 included the right to receive a dividend, bonus or other benefit declared by the company (ICA, s. 464); elect and remove a certain number of board members (ICA, ss. 153, 175 and 181); appoint (and revoke the appointment of) the external auditor (ICA, ss. 337(1) and 340(1)); vote on certain matters and approve certain corporate decisions (ICA, ss. 197(2), 198, 224(1), 238(2), 240(1), 248(4)-(5) and 257(4)-(5)).

Participating policyholders have been referred to as the "owners" of a mutual company. Exactly what this "ownership" status means is the subject of long-standing debate, particularly by actuaries. As will be seen, it also plays a role in this appeal.

Mutualization -- Mutualization is the process by which an insurance company, organized as a stock company, converts itself into a mutual insurance company. A stock company accomplishes this by buying back its stock from its shareholders, writing it down to par and retiring it. It is then a mutual insurance company without capital stock whose members are its participating policyholders. [page87 ]

Demutualization -- Demutualization is the reverse of mutualization. It is the process by which a mutual insurance company converts itself into a stock company. There are various ways in which demutualization can be structured. One is "full" demutualization, where the value of the mutual insurance company is allocated to its participating policyholders in the form of shares in the company or cash.

It is useful to distinguish surplus from value. As previously noted, participating policyholders are entitled to share in the mutual insurance company's surplus by means of an annual dividend. Surplus, in this context, means the excess of the company's assets over its liabilities.

The value of the mutual insurance company on demutualization, on the other hand, refers to its total value, including surplus and goodwill, as assessed by outsiders to the company.

Transfer of Policies -- The ICA permitted mutual insurance companies to transfer their participating policies to another company. These policies could be transferred to a third party company, or they could be transferred to a subsidiary of the transferring company. The latter type of transfer is called a "subsidiarization".

Under the ICA, any transfer had to be approved by the Minister of Finance (ss. 2(1) and 254). At the relevant time for this proceeding, the Minister of Finance had delegated this power to the Secretary of State (International Financial Institutions) (the "minister") pursuant to s. 704 of the ICA. The minister acted on the advice of the Office of the Superintendent for Financial Institutions ("OSFI"). OSFI required the transferring company to provide a report from an independent actuary stating an opinion on whether the proposed transfer would treat the transferred policyholders fairly. If the transfer involved business in another jurisdiction, it would be subject to the legal regime of that jurisdiction as well. See Office of the Superintendent of Financial Institutions Canada, Guideline F-4, "Business Transfers, Purchases and Reinsurance by Canadian Life Companies and Canadian Fraternal Benefit Societies" (October 1992), at pp. 4-5.

A Brief History of Demutualization in Canada

[14] In the late 1950s, insurance companies in Canada were concerned about their vulnerability to hostile takeovers. In [page88 ]response to these concerns, Parliament amended the Canadian and British Insurance Companies Act, R.S.C. 1952, c. I-15 (the predecessor to the ICA) to allow stock companies to mutualize.

[15] Most of the major life insurance companies in Canada mutualized by the end of the 1960s, and remained mutual insurance companies until the 1990s. Manulife was no exception. It was a stock company from its creation in 1887 until it mutualized in the late 1950s.

[16] Until the 1990s, the legislation did not permit Canadian mutual insurance companies to demutualize. However, at that time, these companies had begun to see the advantages of converting back into stock companies. For example, it was much easier for a stock company to raise capital to finance acquisitions and expand its operations.

[17] In 1991, Parliament introduced the ICA, which recognized the possibility of the demutualization of federally regulated mutual insurance companies. While the ICA made it clear that any plan of demutualization would have to be approved by policyholders and the minister, the question of how a mutual company would be permitted to structure a demutualization was left to be determined by regulation (ICA, s. 237).

[18] In 1993, regulations came into effect that allowed for the demutualization of mutual insurance companies with capital of less than $7.5 billion ("small cap mutual insurance companies"): Mutual Company Conversion Regulations, SOR/ 93-205 (the "1993 Regulations"). The 1993 Regulations gave small cap mutual insurance companies several options when it came to determining who would receive a share of the value of the company on a demutualization.[^3] They permitted a demutualizing company to distribute benefits to current policyholders or to current and former policyholders. The 1993 Regulations enabled a demutualizing company to avoid distributing benefits to policyholders altogether by permitting it to demutualize through a mutual holding company structure.

[19] Following enactment of the 1993 Regulations, the large cap mutual insurance companies in Canada, including Manulife, took steps to persuade the federal government to permit them to demutualize.

[20] In 1995, OSFI released a paper which explored different ways that large cap mutual insurance companies could be [page89 ]permitted to access capital, including demutualization, and requested industry recommendations and views on these options. Manulife made a submission in response to this paper.

[21] In June 1996, the Department of Finance published a white paper proposing that large cap mutual insurance companies be permitted to demutualize: Department of Finance, 1997 Review of Financial Sector Legislation: Proposals for Changes (Ottawa: Department of Finance, 1996) (the "white paper").

[22] The white paper provided the first clear sign of the federal government's position on the issue of who ought to share in the value of a large cap mutual insurance company on demutualization. The white paper stated that, on a demutualization, a fair value would have to be placed on the company, and this value ought to be allocated to voting policyholders. In contrast to the 1993 Regulations for small cap mutual insurance companies, the white paper did not suggest that a large cap mutual insurance company would be permitted to retain this value by using a mutual holding company structure.

[23] In other words, the white paper signalled that only full demutualization would be available to large cap mutual insurance companies, with the company's value to be "allocate[d] . . . to policyholders" (p. 30). The white paper did not specify whether participating "policyholders" included both current and former policyholders, or only current policyholders.

[24] In August 1998, the federal government published draft regulations to permit large cap mutual insurance companies to demutualize. Unlike the 1993 Regulations, which permitted the distribution of benefits to current and former policyholders, the draft regulations stated that only current, voting policyholders would be eligible to share in the benefits of demutualization.

[25] In March 1999, the federal government enacted regulations permitting large cap mutual insurance companies to demutualize: Mutual Company (Life Insurance) Conversion Regulations, SOR/99-128 (the "1999 Regulations").

[26] Like the draft regulations, the 1999 Regulations did not allow for the use of a mutual holding company structure, thereby permitting only a full demutualization.

[27] Also, with certain minor exceptions for lapsed policies and policies that had been applied for but not yet issued, the 1999 Regulations restricted eligibility for demutualization benefits to those who were a "holder of a voting policy" of a large cap mutual insurance company on the "eligibility day" designated by that company. By default, the eligibility day was the day the company publicly announced its decision to prepare a demutualization [page90 ]plan. As will be seen, in Manulife's case, that date was January 20, 1998.

Background

1990-1996: Manulife sells its business in the Caribbean

[28] In 1990, Manulife decided to sell its life insurance business in the Caribbean-Atlantic region because the business was too small to operate effectively and its growth prospects were poor. On June 11 of that year, it announced that it had agreed to sell its business in the region to a subsidiary of Life of Jamaica, a Caribbean life insurance company.

[29] Due to regulatory and other constraints, Manulife could not sell all of its Caribbean-Atlantic business at once. It had to transfer the business in blocks. Manulife eventually sold all of its blocks of business in the Caribbean, except for its business in Barbados.

[30] None of these transactions included preservation of policyholder rights of the sort claimed by the appellants in this action.

[31] In Barbados, an insurance company wishing to transfer all or part of its business to another company had to obtain the sanction of the supervisor of insurance (the "Barbados supervisor"). The Barbados supervisor's sanction is discretionary. S/he may refuse to sanction a transfer if not satisfied that it is in the public interest. The transfer can be done without the approval of the person insured. See Barbados Insurance Act, ss. 34 and 35A.

[32] In December 1991, the Barbados supervisor, Wismar Greaves, refused to sanction the sale of the Barbados business to Life of Jamaica. Mr. Greaves is one of the representative plaintiffs in this class action.

[33] In his capacity as the Barbados supervisor, Mr. Greaves told Manulife that he would sanction the sale to Life of Jamaica only if Manulife made a payment either to the Barbados policyholders directly or to Life of Jamaica for the policyholders' benefit. This payment was to represent the portion of the surplus in Manulife that Mr. Greaves believed belonged to the Barbados policyholders.

[34] Manulife did not agree to Mr. Greaves' terms. It took alternative steps to disengage itself from its business in Barbados. In 1992, Manulife stopped offering new contracts of insurance in Barbados. It also terminated the employment of all of its employees in Barbados and appointed LOB to provide local service to its policyholders. As a result, while the Barbados [page91 ]policyholders were still policyholders of Manulife, their policies were managed by LOB.

[35] By 1995, Mr. Greaves was no longer the Barbados supervisor.

[36] Manulife made another attempt to sell its Barbados business, culminating in an agreement in May 1996 to sell to LOB. The transfer was to occur by way of assumption reinsurance, with Manulife transferring all the Barbados participating policies to LOB and LOB assuming all of Manulife's rights and obligations under those policies.

[37] The transfer agreement between Manulife and LOB included the following terms:

-- Manulife transferred to LOB all of its Barbados policies;

LOB paid Manulife B$9 million (CDN$5.7 million) to acquire the business;

LOB agreed, subject to certain conditions, not to lower the transferred policyholders' dividend scales below those maintained by Manulife in 1994, and further guaranteed that any increase in the dividend scales for existing LOB policies would be matched by a commensurate increase in the scales applicable to the transferred policies; and

-- Manulife agreed to transfer to LOB sufficient assets, when combined with future premium payments, to meet all future obligations under the transferred policies.

[38] As previously explained, the proposed transfer from Manulife to LOB required regulatory approval from both Canada and Barbados to become effective. I will return to the approval process after describing events that occurred prior to the transfer to LOB and which pointed toward Manulife's future demutualization.

1993-1996: Demutualization gains momentum at Manulife

[39] After the 1993 Regulations were enacted, the large cap mutual insurance companies in Canada, including Manulife, took steps to persuade the federal government to permit them to demutualize. However, the movement towards demutualization at Manulife began with a false start.

[40] At a Manulife board meeting in 1993, the then-chairman of the board, Tom DiGiacomo, proposed that the company be guided by the assumption that "demutualization is inevitable". At Mr. DiGiacomo's request, the executive committee established a committee to study demutualization (the "mutuality committee"). [page92 ]

[41] Manulife's board of directors did not share Mr. DiGiacomo's enthusiasm for demutualization. It felt that Mr. DiGiacomo was focusing too heavily on remote possibilities, and that he should pay closer attention to current realities. The board removed Mr. DiGiacomo as chairman later that year, and ultimately replaced him with Dominic D'Alessandro, who became CEO and chairman of the board in February 1994. The mutuality committee appears to have shut down soon after. That committee concluded that it would be premature to decide on whether to demutualize and that Manulife should keep its options open.

[42] It will be recalled that in 1995, OSFI released a paper on demutualization and that Manulife made a submission to the government in response. At the same time, Manulife began to study the costs and benefits of pursuing demutualization. Although Mr. D'Alessandro's documented personal non-financial objectives for 1996 did not mention demutualization, he scheduled sessions for the board and senior management on the subject of mutuality in 1996. At trial, Mr. D'Alessandro testified that, by early 1996, he had reached the view that demutualization was a topic that the board should know more about.

[43] At the end of June 1996, Mr. D'Alessandro organized a strategic planning session for Manulife senior executives at the Langdon Hall hotel in Cambridge, Ontario. The minutes indicate that Mr. D'Alessandro "plans to initiate a strategy to the Board to pursue demutualization" and that the time frame for doing so is "probably . . . fairly soon, before rating agencies and [the] market forces us".

May-July 1996: OSFI requires Manulife to give an undertaking in sale to Aetna

[44] The prospect of demutualization for large cap mutual insurance companies also appears to have guided the North American regulators charged with approving transfers of participating policies from one company to another.

[45] For example, in May 1996, Prudential Insurance Company of America, domiciled in New Jersey, publicly announced that it was selling its Canadian block of business to London Life Insurance Company. London Life was a stock company. The governance and dividend rights enjoyed by Prudential's Canadian policyholders would not carry on after they were transferred to London Life.

[46] Both the New Jersey superintendent of insurance and OSFI required Prudential to give an undertaking to the effect that, if it later decided to demutualize, it would deem its Canadian policyholders to be eligible to receive demutualization [page93 ]benefits, provided that it was fair and equitable to do so, and provided that doing so was permitted under the laws of New Jersey.

[47] In July 1996, Manulife publicly announced that it was selling a block of participating disability policies to Aetna Life Insurance Company of Canada. Aetna was a stock company. OSFI requested that Manulife provide an undertaking to give some protection to the transferred policyholders in the event of a demutualization. The undertaking provided by Manulife stated:

In the event of a future demutualization of Manulife, management has confirmed that the proprietary interests of the transferred policyholders in the then market value of the company would be taken into account in a manner which would be considered fair and equitable by an Independent Actuary reviewing the demutualization, or as may be required by regulation. Given the financial history of this business and the proprietary interests of the policyholders determined using the contribution principle, these rights would not have any material value. Additionally, Manulife's management has confirmed that the company has no intention of demutualizing at the present time or of making an extraordinary distribution of accumulated surplus to the policyholders. Therefore, the likelihood of the transferred policyholders receiving any material value for these proprietary interests is remote.

[48] It is useful to note how the protections that OSFI requested in the Prudential and Aetna transactions differ from the protections that Manulife gave its participating policyholders in two earlier transactions, both of which had been approved by OSFI. The first such transaction was in Hong Kong and the other was in the U.S. Both involved transfers to subsidiaries. These transactions, which reorganized certain aspects of Manulife's business, were undertaken for tax and regulatory reasons.

[49] In 1994, Manulife transferred its Hong Kong life insurance business to a subsidiary. The Hong Kong transaction proceeded by way of indemnity reinsurance. Thus, the policies remained with Manulife but all responsibility for their administration, including the right to receive premiums and the obligation to pay insurance benefits, was transferred to the receiving subsidiary. Since the Hong Kong participating policies remained with Manulife, their holders retained their statutory rights in respect of Manulife.

[50] The 1996 U.S. subsidiarization was by way of assumption reinsurance. Unlike indemnity reinsurance, assumption reinsurance involves the transfer of the policies from the transferring company to the receiving company. (It was this form of transfer that occurred between Manulife and LOB.) Although this form of transfer would normally result in the [page94 ]transferred policyholders losing their rights in Manulife, Manulife structured the transaction so as to explicitly preserve the transferred policyholders' voting rights in Manulife.

[51] As explained above, the 1999 Regulations made eligibility to share in the value of Manulife on demutualization dependent on a person holding voting rights on the eligibility date. Because of the manner in which the Hong Kong and U.S. transactions were structured, the Manulife participating policyholders affected by those transactions were entitled to share in the benefits of Manulife's subsequent demutualization.

April-November 1996: Manulife's actuarial reports for the LOB transfer

[52] At roughly the same time as the Aetna and Prudential transactions were announced, Manulife began preparing to obtain the regulatory approvals necessary to close the sale and transfer of its Barbados policies to LOB. As previously noted, Manulife needed to secure the approval of two regulators: the Barbados supervisor and the minister.

[53] To this end, Manulife prepared an internal actuarial report and retained an external actuary to prepare an independent actuarial report. Both reports stated that the proposed transfer would treat the transferred policyholders fairly.

Internal actuarial report of Geoff Guy

[54] Manulife's chief actuary, Geoff Guy, prepared an actuarial report dated April 24, 1996.

[55] Mr. Guy's report concluded that the transfer to LOB was "in the best long-term interests of all of Manulife's policyholders, including those being transferred and those remaining [with Manulife]". The report indicated that the most significant benefits the transferred policyholders would receive were the guarantees: (i) that their dividend scales generally could not be reduced below 1994 levels; and (ii) that any increase in dividend scales for LOB policies in force as of December 31, 1994, would have to be accompanied by a commensurate increase in the dividend scales for the transferred policies.

[56] At trial, Mr. Guy testified that, in his view, Manulife would not have been able to sustain these dividend scales in the long run, given that Manulife had closed its Barbados block of business and, as a result, this block would constitute an ever-shrinking portion of Manulife's business.

[57] Mr. Guy further testified that his report did not address the fact that the policyholders would lose their voting, [page95 ]dividend, and other rights in Manulife on being transferred to LOB because he did not believe that these rights had any material value.

Michael McGuinness' report

[58] Manulife retained Michael McGuinness to act as an independent actuary. At the time, Mr. McGuinness was a partner with the actuarial firm Eckler Partners Ltd. His report, dated July 19, 1996, concluded that the transfer would, on balance, be beneficial to the transferred policyholders.

[59] Mr. McGuinness circulated drafts of his report to officials at Manulife, including Mr. Guy. After reviewing one of Mr. McGuinness' draft reports, Mr. Guy suggested that Mr. McGuiness should discuss the implications the transfer could have for any entitlement on the part of the Barbados policyholders to participate in a demutualization. Mr. Guy approved of the following draft language concerning this issue, which was submitted to Mr. McGuinness for his consideration:

The transferred policyholders also lose their rights under the special circumstances of Manulife undergoing a demutualization. It is doubtful what, if any, portion of surplus the participating policyholders would be entitled to in the event of a demutualization. Furthermore, the management of Manulife have stated that the company has no intention of demutualizing at present and that demutualization is not contemplated in any of its business plans. Under the circumstances, the likelihood of demutualization is remote and these rights have no material value.

[60] Mr. McGuinness adopted this language in his final report.

[61] Mr. McGuiness was unable to testify at trial for health reasons. He passed away in August 2013.

November-December 1996: The transfer is approved

1. Regulatory approval in Barbados

The Barbados approval process

[62] To obtain the sanction of the Barbados supervisor, Manulife had to follow the procedure laid out in the Barbados Insurance Act. This process required Manulife to submit an application to the Barbados supervisor for approval of the transfer (s. 35(1)); publish notice of its intention to make the application (s. 35(2)(a)); and serve a copy of the notice on the Barbados policyholders, unless the Barbados supervisor dispensed with this requirement (s. 35(2) (b)). Any person likely to be affected by the transfer had the right to object and present their objections to the Barbados supervisor in a public hearing, in person or though legal counsel (ss. 35A(1)-(3)). [page96 ]

[63] Eight Barbados policyholders, one of whom was Mr. Greaves, filed letters of objection. Mr. Greaves' objection related to the surplus in Manulife. He asserted that, as a participating policyholder in Manulife, he had the right to share in its surplus funds and should be compensated for the loss of that right.

Mike Arnold's report

[64] In June 1996, the Barbados supervisor retained his own independent actuary, Mike Arnold, to provide him with actuarial advice. Mr. Arnold was a partner with the U.K. investment and actuarial consultancy firm, Hymans Robertson. The Barbados supervisor provided Mr. Arnold with a copy of the Guy report and a draft of the McGuiness report.

[65] Mr. Arnold circulated a draft report to Manulife, Eckler Partners and the Barbados supervisor on October 22, 1996. In it, Mr. Arnold expressed concerns about the fairness of the transaction to the Barbados policyholders. He noted that "it is necessary to question whether the transferring policyholders might reasonably expect any enhancement of their benefits following the transfer". He recommended that the transferred Barbados policyholders receive a special dividend amounting to B$2.2 million (approximately CDN$1.5 million), which he believed "would considerably mitigate any concerns or reservations that there may be regarding loss of security, loss of mutuality and the assets retained by Manulife".

[66] Manulife and Kenneth Clark, a partner at Eckler Partners, tried to convince Mr. Arnold to change his position.

[67] In Mr. Arnold's final report, dated November 8, 1996, he softened the language of his draft report, saying that he believed that it would be equitable to "enhance the dividend".

[68] A subsequent letter from Hymans Robertson to the Barbados supervisor explained that a decision had been made to not suggest a particular amount of compensation so as to give the parties "room for manoeuver", but maintained that the amount should be "preferably in excess of B$2 million".

[69] At trial, Mr. Arnold testified that his suggested dividend was not intended to compensate the Barbados policyholders for the loss of any benefits on a demutualization by Manulife. Rather, the dividend was intended to compensate the Barbados policyholders for the rights that they held as policyholders in Manulife and, in particular, their right to participate in the future profits of Manulife through dividends. [page97 ]

The Barbados hearing

[70] On November 14, 1996, the Barbados supervisor held the required public hearing regarding the proposed transfer. Objecting Barbados policyholders and Manulife representatives were both present at the hearing. The objecting policyholders were given the opportunity to be heard. Mr. Greaves expressed his objections to the transfer, arguing for compensation for the loss of the Barbados policyholders' rights in Manulife.

[71] Mr. Guy appeared at the hearing on behalf of Manulife. He said that "[m]y role as the company's chief actuary is to ensure that the interests of the policyholders are protected". He also assured the Barbados Supervisor of LOB's financial security and gave two main reasons for why the transfer was beneficial to the Barbados policyholders: first, the dividend guarantees offered by LOB; and second, the improved service that would follow from having a local company administer the policies.

[72] Mr. Guy directly addressed the issue of demutualization, stating:

Now, in the case of Manulife, first of all we do not have any plans to demutualize, and I would feel very uncomfortable talking to you today about you know the fact that sometimes in some countries policyholders get to share a surplus under demutualization if I felt that in the not-too-distant future Manulife is going to demutualize shortly after transferring this business, that's not going to happen -- we have no plans to do that.

(Emphasis added)

[73] Mr. Guy did not discuss the white paper, the undertaking Manulife had given in the Aetna transaction, or the protections that Manulife had given its Hong Kong and U.S. policyholders in the subsidiarizations carried out earlier in the 1990s.

[74] After the hearing, LOB faxed the Barbados supervisor a statement indicating that in recognition of the concerns of the objecting Barbados policyholders, it would pay a special dividend of B$7.2 million (approximately CDN$5 million), payable to the beneficiaries of the Barbados policies on the death of the insured or the maturity date of the policy.

Barbados sanctions the transfer

[75] On November 25, 1996, the Barbados supervisor sanctioned the transfer agreement subject to the condition that the special dividend offered by LOB be paid to the beneficiaries of the Barbados policyholders. This amount was to be paid by LOB, rather than Manulife. [page98 ]

[76] No appeal was taken from the decision of the Barbados supervisor nor did anyone seek to have the decision judicially reviewed.[^4]

2. Regulatory approval in Canada

[77] Manulife then sought approval of the transfer from the minister in Canada. It submitted the McGuinness and Arnold reports, along with the decision of the Barbados supervisor sanctioning the transaction, to OSFI for consideration.

[78] OSFI recommended that the minister approve the transfer. The minister signed the approval of the transfer on December 20, 1996. The transfer became effective on December 31, 1996.

January 1997-January 1998: Manulife decides to demutualize

[79] In January 1997, Manulife executives wrote statements setting out their personal objectives for the coming year. Mr. D'Alessandro's documented personal non-financial objectives said nothing about demutualization. Mr. Guy's personal objectives, prepared the same month, stated that he should begin a study on demutualization, with the goal of preparing a "workable demutualization plan" that could "see the company demutualized" in two to five years.

[80] In May 1997, Mr. Guy sent a memorandum to Mr. D'Alessandro stating that, in his view, Manulife should "press forward with demutualization". Mr. Guy also stated that any demutualization should be a "classical" one, where the value of the company is allocated to the policyholders (i.e., a full demutualization).

[81] In June 1997, Manulife held a strategic planning session at the Langdon Hall hotel in Cambridge, Ontario. It was agreed that by September 1 of that year, Manulife should decide whether to actively research a structure for raising capital other than full demutualization.

[82] According to Mr. D'Alessandro, the turning point for him occurred in August 1997, when the Great-West Life Assurance Company announced it would be acquiring London Life. Manulife [page99 ]had also considered bidding for London Life, but it lacked the capital to do so. For Mr. D'Alessandro, this missed opportunity convinced him that Manulife would need to demutualize to compete.

[83] Manulife's board of directors still needed to be convinced, however. The board's subcommittee on corporate governance met in October 1997. Mr. Guy presented six possible financial restructuring models to the subcommittee, one of which was full demutualization. The subcommittee agreed that it would look to management for its recommendation as part of its review.

[84] In December 1997, the full board met. Management recommended that it be allowed to focus its research on full demutualization.

[85] The board met again in January 1998, and passed a resolution authorizing management to submit to the board a plan for full demutualization. The board stated that eligible policyholders should be limited to those policyholders with participating policies in force on the date of the first public announcement of the resolution.

[86] On January 20, 1998, Manulife publicly announced that it had asked management to prepare a plan to convert it from a mutual company to a publicly traded stock company -- that is, it announced that it intended to demutualize.

[87] It bears repeating that at this point, large cap mutual insurance companies were not permitted to demutualize. Although the white paper had signalled the federal government's intention to permit such companies to demutualize, the federal government had yet to promulgate regulations prescribing how those companies could structure a demutualization.

1999: Manulife demutualizes

[88] In March 1999, the 1999 Regulations permitting large cap mutual insurance companies to demutualize came into effect. The 1999 Regulations, it will be recalled, permitted only a full demutualization. Thus, unlike the situation for small cap mutual insurance companies under the 1993 Regulations, large cap mutual insurance companies were not permitted to demutualize through the use of a mutual holding company.

[89] In May 1999, Manulife's board of directors approved a plan of demutualization to be presented to eligible policyholders for approval. In accordance with the 1999 Regulations, the only policyholders to be permitted to receive benefits on demutualization were those who were current, voting policyholders in Manulife as of the date that Manulife first announced its intention to demutualize, namely, January 20, 1998. [page100]

[90] Manulife's Hong Kong and U.S. policyholders were eligible to receive demutualization benefits. The Hong Kong policyholders were eligible because their policies had stayed with Manulife, which meant that they had retained their voting rights. The U.S. policyholders were eligible because although their policies had been transferred to a subsidiary of Manulife, the terms of the transaction preserved their voting rights in Manulife.

[91] The Barbados policyholders, however, were not eligible to share in the benefits because their voting rights in Manulife had been terminated on the transfer to LOB.

[92] The policyholders that Manulife had transferred to Aetna in 1996 were also ineligible to participate because their voting rights in Manulife had been terminated on their transfer to Aetna. Manulife's undertaking to consider their interests had been rendered ineffective, since the 1999 Regulations precluded Manulife from allocating benefits to former policyholders.

[93] Note, however, that when Prudential demutualized, the undertaking that it had given in respect of its former Canadian policyholders (whose policies had been transferred to London Life) proved effective and led to those former policyholders receiving benefits. This was because Prudential was domiciled in New Jersey, a jurisdiction that permitted the distribution of value to former policyholders on a demutualization: see N.J.S.A. 17:17C-1; and Plan of Reorganization of the Prudential Ins. Co., Order No. A01-153 (N.J. Dep't. of Banking & Ins. Oct. 15, 2001).

[94] In July 1999, Manulife's eligible policyholders voted on, and approved, Manulife's plan of demutualization.

[95] Manulife's demutualization became effective on September 23, 1999.

The Certification Decision

[96] On September 30, 2002, this proceeding was certified as a class action by Nordheimer J.: Mandeville v. Manufacturers Life Insurance Co., 2002 CanLII 79684 (ON SC), [2002] O.J. No. 5386, 40 C.P.C. (5th) 182 (S.C.J.).

[97] Justice Nordheimer concluded that the regulatory approval given by the Barbados supervisor did not automatically bar the Barbados policyholders' action. He concluded that the fact that the Barbados policyholders had not sought judicial review of the Barbados supervisor's decision did not make their subsequent action for damages an abuse of process, adding that an application for judicial review "would necessarily have to fail" because the transfer "could not possibly be undone at this time" (para. 57). He also concluded that it was far from clear that the special dividend ordered by the Barbados supervisor was [page101] intended to compensate the Barbados policyholders for the loss of their mutuality rights or for the loss of their chance to participate in a demutualization of Manulife.

[98] Justice Nordheimer certified the following common issues for trial [at Appendix A]:

1. Did Manulife have the power to extinguish the Ownership Rights[^5] held by the members of the Class? Did it do so?

2. Does either the Certificate of Sanction dated November 26, 1996 issued by the Supervisor of Insurance in Barbados and/or the approval of the Minister of Finance, Canada dated December 20, 1996 extinguish the rights of the members of the Class to make any claim against Manulife, including the causes of action asserted in this action?

3. Were the members of the Class Eligible Policyholders and entitled to participate in Manulife's Plan of Demutualization?

4. Was Manulife negligent? If so, when, how and why?

5. Did Manulife owe a fiduciary duty to the members of the Class? If so, did it breach this fiduciary duty? If yes, when and how?

6. Is each member of the Class entitled to be paid damages? If so, should damages be in an amount equal to the amount that he, she or it would have been paid if he, she or it was considered by Manulife to be an Eligible Policyholder and participated in the Plan of Demutualization? If no, what is the measure of damages?

7. Is an award of punitive damages appropriate? If so, in what amount and why?

8. Is Manulife obligated to pay prejudgment interest? If so, at what annual rate? Is the rate to be compounded?

9. Should Manulife pay the costs of administering and distributing any monetary judgment? If so, what amount should Manulife pay?

The Trial Decision

[99] The common issues trial began on March 5, 2012, and concluded on May 18, 2012, after 29 days of hearing. The trial judge issued his reasons for decision on August 1, 2012: Mandeville v. Manufacturers Life Insurance Co., [2012] O.J. No. 6083, 2012 ONSC 4316, 6 B.L.R. (5th) 132 (S.C.J.). The reasons run for almost 100 pages. In them, the trial judge makes exhaustive findings of fact and provides a thorough analysis of the legal issues. [page102]

[100] Only common issues two through six were resolved at trial. The rest were either abandoned or deferred by agreement.

[101] The trial judge answered common issues two and three by stating that, following the transfer to LOB, all of the class members' rights in Manulife were extinguished, thereby rendering them ineligible to participate in the demutualization. He added that this did not affect their right to bring the present action against Manulife.

[102] The trial judge answered common issue five by finding that Manulife did not owe a fiduciary duty to the class members to protect their right to participate in a future demutualization.

[103] Of the trial judge's responses to the common issues, only his responses to common issues four and six, namely negligence and damages, are the subject of this appeal and cross-appeal. After setting out the trial judge's key findings on Manulife's intention to demutualize at the relevant time, I will summarize his reasoning on those issues.

1. Key findings on Manulife's intention to demutualize

[104] The trial judge provided a detailed review of the evidence concerning when Manulife formed the intention to demutualize. He considered, in particular, Manulife's two public statements made in 1996 regarding the prospects of demutualization.

[105] The first statement was the draft language, approved by Mr. Guy, that Manulife sent to Mr. McGuiness and which Mr. McGuiness included in his final report provided to the regulators. For ease of reference, I set that statement out again now.

The transferred policyholders also lose their rights under the special circumstances of Manulife undergoing a demutualization. It is doubtful what, if any, portion of surplus the participating policyholders would be entitled to in the event of a demutualization. Furthermore, the management of Manulife have stated that the company has no intention of demutualizing at present and that demutualization is not contemplated in any of its business plans. Under the circumstances, the likelihood of demutualization is remote and these rights have no material value.

(Emphasis added)

[106] The second public statement was that made by Mr. Guy at the Barbados hearing in which he said that Manulife had no plans to demutualize in the "not-too-distant future".

[107] The trial judge found that these statements were not a fair characterization of the prevailing thinking at Manulife at the time they were made (para. 104).

[108] He acknowledged that "while no decision to demutualize had been taken by management or the board of directors" at the time the Barbados transfer was carried out, "there was [at that [page103] time] a recognition by . . . Manulife senior management that it was likely that in due course Manulife would demutualize" (para. 105).

[109] He also found that Manulife understood that it was "more likely than not" that demutualization "would involve a full demutualization with the value of Manulife being paid out to the participating policyholders" (para. 105).

[110] The trial judge concluded that the statement that the likelihood of demutualization was remote and that the Barbados policyholders' rights had no material value did not comport with the evidence (para. 106). He gave lengthy reasons for finding that, at that time, "[t]he possibility of Manulife demutualizing was not remote" (para. 106).

[111] He also found that Manulife recognized that any right to demutualize would carry with it the obligation to allocate the value of the company to its participating policyholders (para. 131). This finding was based largely on the white paper, which in his view indicated that "the [Canadian] government intended to require a full demutualization model "for large cap mutual companies, and would not permit demutualization through a mutual holding company model (para. 131).

[112] The trial judge also rejected Mr. Guy's evidence that dividends for the Barbados policyholders would have been reduced but for the transfer to LOB, noting that they had not been cut when the Barbados supervisor had refused the earlier proposed transfer and that documents prepared by Manulife during the negotiations with LOB indicated that no reduction would occur (paras. 233-35).

2. Duty of care

[113] The trial judge then addressed the appellants' submission that Manulife was legally obliged to structure the transfer to LOB in a way that protected the class members' proprietary right to participate in a future demutualization.

[114] He began by applying the test in Anns v. Merton London Borough Council, [1978] A.C. 728, [1977] 2 All E.R. 492 (H.L.), as restated in Cooper v. Hobart, [2001] 3 S.C.R. 537, [2001] S.C.J. No. 76, 2001 SCC 79, to determine whether to recognize a novel duty of care, owed by Manulife to the Barbados policyholders.

[115] As required by the Anns test, the trial judge first considered whether the transfer to LOB created a reasonably foreseeable risk of harm to the Barbados policyholders. He found that in 1996 "[t]here was a real risk that Manulife would in due course demutualize and that the statutory regime in place would require that the value in Manulife be paid to its [participating] [page104] policyholders", thus rendering the Barbados policyholders not eligible to participate in the benefits of demutualization (para. 163).

[116] In addition to finding that the foreseeability requirement was met, the trial judge also found that there was sufficient proximity to establish a prima facie duty of care owed by Manulife to the class members. He relied on a number of factors in making his proximity finding, including the following: (i) the participating policyholders of Manulife were entitled, as owners of Manulife, to the value of the company on demutualization; (ii) the class members' status as owners of Manulife was a key factor in determining proximity; (iii) the Barbados policyholders were not an indeterminate class; (iv) there were statutory rights to protect participating policyholders and statutory obligations of the chief actuary of a life insurance company to ensure the fair and equitable treatment of participating policyholders; and (v) Mr. Guy's stated role as Manulife's chief actuary at the time of the transfer was "to ensure that the interests of the policyholders are protected" (paras. 172-75).

[117] The trial judge concluded, however, that policy factors required him to decline to impose a duty of care. He noted that the Barbados policyholders had no legal right to remain as policyholders of Manulife, since "[t]he statutory regimes in both Barbados and Canada authorized the transfer of the Barbados business to LOB" (para. 206). He also noted that the Barbados policyholders had not sought to set aside the regulatory authorizations granted by Barbados and Canada nor had they contested the validity of these authorizations, and the authorizations had the effect of extinguishing their rights as policyholders of Manulife (para. 210).

[118] The trial judge ended his duty of care analysis with the following observation (at para. 212):

This is not a case in which Manulife decided to sell the Barbados business out of some ulterior or improper motive. Manulife was selling its business in the Caribbean for legitimate reasons and the Barbados business was the last piece of its Caribbean business that was sold. While there is no doubt that Manulife could have sold this business in a manner that retained the Barbados policyholders as policyholders of Manulife . . . the fact is that Manulife chose not to do so for legitimate business reasons and the regulatory regimes in both countries authorized it to do so.

3. Standard of care

[119] The trial judge found that if Manulife did owe the class members a duty of care, it breached the standard of care because it failed to take reasonable steps to protect the class members' right to share in any future demutualization benefits when it structured the transfer transaction (para. 258). Specifically, he [page105] concluded that Manulife failed to structure the transaction in a way that protected the Barbados policyholders' voting rights in Manulife (para. 251).

[120] The trial judge pointed out that there was no evidence of any actual difficulty that would be caused by Manulife retaining the Barbados policyholders' voting rights after the transfer to LOB. The Barbados policyholders constituted a tiny fraction of the Manulife participating policyholders, being approximately 8,000 out of 750,000 (para. 252).

[121] The costs of maintaining the class members' voting votes would have been minimal, compared to the benefits which they would have received on demutualization. Any corporate governance problems arising from Manulife's retention of the Barbados policyholders' voting rights were "more apparent than real" (para. 256).

4. Damages

[122] Had he found liability, the trial judge found that the Barbados policyholders would have been eligible to receive $81,784,641, plus interest, on demutualization.

[123] The trial judge found that had he accepted the appellants' alternative theory of the loss suffered -- that Manulife failed to compensate the Barbados policyholders for their lost ownership rights at the time of the transfer to LOB -- they would have been entitled to damages of $24.5 million, plus interest.

The Issues

[124] In my view, the appellants raise a single issue on appeal:

(1) Did the trial judge err in refusing to recognize that Manulife owed the class members a duty of care at the time of the transfer?

[125] The appellants' factum raised, as well, the issues of the appropriate standard of care and whether Manulife breached it. However, the trial judge found that if Manulife did owe the class members a duty of care, it had breached the standard of care. I do not understand the appellants to be arguing that the trial judge was incorrect in finding a breach of the standard of care. Rather, the thrust of the appellants' submissions is that the trial judge conflated the questions of duty, standard and breach, and it was that improper conflation which led him to find that Manulife did not owe the class members a duty of care. Accordingly, in my view, the sole question that the appellants raise on this [page106] appeal is, as I have indicated, whether Manulife owed the class members a duty of care.

[126] Manulife's cross-appeal raises the following issues:

(2) Did the trial judge err in concluding that if Manulife were negligent, this negligence caused the Barbados policyholders to suffer damages?

(3) If Manulife were negligent, and this negligence entitled the Barbados policyholders to recover damages from Manulife, did the trial judge err in his quantification of damages on the appellants' alternative theory?

[127] The second issue raised on the cross-appeal (i.e., the quantification of damages) applies only to the trial judge's calculation of damages on the alternative theory of loss. That alternative theory was not pursued on appeal.

Analysis

[128] The duty of care analysis requires a clear understanding of the nature of the appellants' claim. In most cases, that matter will be straightforward. Not so in this case.

[129] In fact, the nature of the appellants' claim is one of the central points in dispute between the parties. Moreover, it was not squarely addressed by the trial judge. Given the critical role that the nature of the appellants' claim plays in the duty of care analysis, I will begin by exploring that matter.

The Nature of the Appellants' Claim

[130] There are two aspects of the appellants' claim that warrant exploration. First, what is the nature of the right which the appellants claim was affected by the transfer of the class members' policies to LOB? Second, is the appellants' claim for pure economic loss?

[131] The appellants say that their claim is based on the loss of a proprietary right in Manulife and it is not a claim for pure economic loss. They argue as follows. Prior to the transfer of their policies to LOB in 1996, they -- in combination with Manulife's other participating policyholders at that time -- were the owners of Manulife. Thus, prior to the transfer, they had a proprietary right to share in the value of Manulife when it demutualized. At the time of the transfer to LOB, Manulife knew that it was going to demutualize. Therefore, by failing to take steps to preserve the class members' right to share in the value of Manulife on a future demutualization, Manulife deprived them of a proprietary right. [page107]

[132] Accordingly, the appellants say, their claim is for loss of a property right and not for pure economic loss. In the words of the appellants:

The day before the transfer, [the Barbados policyholders] were part-owners of Manulife; the day after the transfer, [they] were not. This is something different -- something more -- than a purely economic loss.

[133] For the reasons that follow, I do not accept the appellants' submission on the nature of the claimed right. Further, in my view, the claim advanced by the appellants is for pure economic loss.

1. What is the nature of the right allegedly affected by the transfer of the class members' policies to LOB?

[134] I accept that in normal parlance, immediately prior to the transfer to LOB, it could be said that the class members, in conjunction with Manulife's other participating policyholders, were the owners of Manulife. Because Manulife was a mutual company, it had no shareholders. It was the participating policyholders who had the right to vote and to receive the company's surplus, by means of annual dividends. Those rights are incidents of ownership.

[135] However, using the term "ownership" obscures a precise legal characterization of the right that the appellants seek to have protected by the law of negligence and muddies the duty of care analysis.

[136] The question is not whether participating policyholders can or should be described as the owners of a mutual insurance company. Rather, the question is whether at the time of transfer to LOB, the class members had a legally recognized right or interest in respect of a possible demutualization by Manulife. In my view, they did not.

[137] At the time of the transfer to LOB in 1996, large cap mutual companies like Manulife were not permitted to demutualize. The right of such companies to demutualize only came into existence in 1999, when the federal government enacted the 1999 Regulations. The terms of the class members' policies did not refer to any right to receive benefits on a demutualization. Moreover, there was no such right afforded by statute or regulation. Because Manulife had no right to demutualize in 1996, the appellants could have had no right to share in the benefits of demutualization.

[138] In short, as no right to share in demutualization benefits had been conferred by contract, legislation or regulation, the [page108] class members could not have had a right to, or interest in, something that did not exist and was not legally possible.

[139] At its highest, what the class members had immediately before their policies were transferred to LOB was the hope or mere expectancy that if and when Manulife were allowed to demutualize and it did demutualize, their then-existing rights as participating policyholders would entitle them to receive the benefits of that demutualization.

[140] A hope or mere expectancy is not a legally enforceable right or interest, however. In this regard, the nature of the class members' "interest" can be seen to be akin to the concept of a spes successionis in estate law. A spes is a mere expectancy or hope of becoming a member of a class that has been designated to receive property; it is not a vested or even a contingent interest in property. See Midleton's Will Trusts (Re), [1969] 1 Ch. 600, [1967] 2 All E.R. 834 (Ch. Div.), at pp. 607-608 Ch.; Kidd v. Canada Life Assurance Co., [2010] O.J. No. 658, 2010 ONSC 1097, 54 E.T.R. (3d) 225 (S.C.J.), at paras. 34-35.

[141] The class members' hope or mere expectancy in the present case is also helpfully contrasted with the contingent interest of Manulife's participating policyholders that arose when the 1999 Regulations came into effect.

[142] It will be recalled that the 1999 Regulations gave the right to share in the value of Manulife on a demutualization to those persons holding voting policies in the company on January 20, 1998, the date on which Manulife announced its decision to demutualize. Accordingly, when the 1999 Regulations came into effect, Manulife's participating policyholders gained a contingent interest in the value of Manulife on demutualization. This interest was contingent on the happening of a number of events, including Manulife's board approving the plan of demutualization (ICA, s. 237(1.1)); the policyholders approving the plan of demutualization (ICA, s. 237(1.5)); and the minister's approval of the plan (ICA, s. 237(1)). Nonetheless, as a contingent interest, it is recognized by the law.

[143] In 1996, the class members had no such contingent interest. Manulife was not legally permitted to demutualize and, thus, the class members had no interest -- contingent or otherwise -- in the benefits flowing from a demutualization.

[144] As will be seen below, the absence of a legally recognized right or interest on the part of the class members plays a critical role in the duty of care analysis. [page109]

2. Is the appellants' claim for pure economic loss?

[145] In my view, the appellants' claim is for pure economic loss.

[146] Pure economic loss is loss suffered by an individual that is not accompanied by physical injury or property damage: Martel Building Ltd. v. Canada, [2000] 2 S.C.R. 860, [2000] S.C.J. No. 60, 2000 SCC 60, at para. 34; D'Amato v. Badger, 1996 CanLII 166 (SCC), [1996] 2 S.C.R. 1071, [1996] S.C.J. No. 84, at para. 13; and Design Services Ltd. v. Canada, [2008] 1 S.C.R. 737, [2008] S.C.J. No. 22, 2008 SCC 22, at para. 30.

[147] In the present case, the appellants are claiming damages equivalent to the benefits the class members would have received had they been treated as eligible policyholders upon Manulife's demutualization. The damages sought are "not causally connected to physical injury to their persons or physical damage to their property": Design Services, at para. 30. The injury or damage complained of consists of alleged harm to the class members' economic interests, rather than any physical harm or damage to their person or property. As such, the claim is seeking recovery for pure economic loss.

[148] What difference does it make to this action that the appellants' claim is for pure economic loss? The Supreme Court answered these questions in Martel, at para. 35, saying that such claims require greater scrutiny when the court is deciding whether to recognize a duty of care:

As a cause of action, claims concerning the recovery of pure economic loss are identical to any other claim in negligence in that the plaintiff must establish a duty, a breach, damage and causation. Nevertheless, as a result of the common law's historical treatment of economic loss, the threshold question of whether to recognize a duty of care receives added scrutiny relative to other claims in negligence.

(Emphasis added)

[149] At para. 37 of Martel, the court set out the policy reasons underlying the common law's traditional reluctance to permit recovery for pure economic loss:

First, economic interests are viewed as less compelling of protection than bodily security or proprietary interests. Second, an unbridled recognition of economic loss raises the spectre of indeterminate liability. Third, economic losses often arise in a commercial context, where they are often an inherent business risk best guarded against by the party on whom they fall through such means as insurance. Finally, allowing the recovery of economic loss through tort has been seen to encourage a multiplicity of inappropriate lawsuits.

[150] Nonetheless, the Canadian jurisprudence shows that there is no automatic bar to recovery for pure economic loss. [page110] Over time, recovery for pure economic loss has been permitted in five categories of negligence claims:

(1) the independent liability of statutory public authorities;

(2) negligent misrepresentation;

(3) negligent performance of a service;

(4) negligent supply of shoddy goods or structures; and

(5) relational economic loss.

See Canadian National Railway Co. v. Norsk Pacific Steamship Co., 1992 CanLII 105 (SCC), [1992] 1 S.C.R. 1021, [1992] S.C.J. No. 40, at p. 1049 S.C.R.; and Martel, at para. 38.

[151] The appellants have not suggested that their claim falls within any of the five established categories. Accordingly, little need be said in order to demonstrate that it does not.

[152] It is self-evident that the claim cannot fall within either the first or the fourth category -- Manulife is not a statutory public authority and no goods or structures are involved.

[153] The second category is not engaged because the appellants have not sued for negligent misrepresentation, nor do they allege detrimental reliance on Manulife's documents or statements.

[154] The third category involves defendants who are held liable for the negligent performance of, or the negligent failure to perform, a service. In the present case, the appellants' allegations of negligence relate to Manulife's failure to protect their alleged right to participate in a future demutualization. There is no suggestion that Manulife undertook to provide a service to protect the class members' alleged ownership rights.

[155] The fifth category is not implicated because, as Rothstein J. explained in Design Services, at para. 34: "From its origin, relational economic loss has always stemmed from injury or property damage to a third party." Nothing in the claim relates to an allegation that Manulife caused physical injury or property damage to a third party.

[156] Since the appellants' claim of negligence does not fall into a pre-existing category, it is a novel claim. That, by itself, does not preclude the claim from being recognized. As the Supreme Court explained in Martel, at para. 40: "[T] his Court has looked beyond the traditional bar against recovery of pure economic loss in favour of a case-specific analysis that seeks to weigh the unique policy considerations which arise." The [page111] categories are not closed -- they are merely analytical tools: Martel, at para. 45.

[157] When a claim does not fall within a pre-existing category of pure economic loss, the court must determine whether a new category of pure economic loss should be established, based on the analysis mandated in Anns: Design Services, at para. 45.

[158] Consequently, I now turn to the Anns test to determine whether a novel duty of care between a mutual insurance company and its participating policyholders should be recognized in the present case.

Did Manulife Owe the Class Members a Duty of Care?

1. Introduction

[159] Anns is a two-stage test for determining whether a duty of care arises. The trial judge found that the first stage in the Anns test was met and, thus, a prima facie duty of care arose. As a result of policy considerations in the second stage, he declined to recognize such a duty.

[160] The trial judge recognized that policy considerations inform both stages of the Anns test. However, he stated, at para. 177 of his reasons, that it was "difficult to discern" whether the policy considerations that Manulife had raised were properly dealt with in the first or second stage of the analysis. In the result, he considered all of the policy considerations in the second stage.

[161] I agree with the trial judge that policy considerations militate against the recognition of a duty of care in this case. However, in my view, those policy concerns operate to negate the alleged duty at the first stage of the Anns test, as well as at the second stage.

[162] Before applying the Anns test, I will consider it more fully, paying particular attention to the role of policy in both stages of the test when a claim for pure economic loss is advanced.

2. The Anns test considered

[163] In Cooper, at para. 30, the Supreme Court explained the Anns test in the following terms, making it clear that policy considerations arise at both stages of the analysis:

At the first stage of the Anns test, two questions arise: (1) was the harm that occurred the reasonably foreseeable consequence of the defendant's act? and (2) are there reasons, notwithstanding the proximity between the parties established when answering the first question, that tort liability should not be recognized? The proximity analysis involved in the first stage focuses on factors arising from the relationship between the plaintiff and the [page112] defendant. These factors include questions of policy, in the broad sense of that word. If foreseeability and proximity are established, a prima facie duty of care arises. At the second stage of the Anns test, the question still remains whether there are residual policy considerations outside the relationship of the parties that may negative the imposition of a duty of care.

(Emphasis in original omitted)

The first stage of the Anns test

[164] As indicated in the above quote, the first stage of the Anns test focuses on the relationship between the plaintiff and the defendant. The overarching question at this stage is whether the circumstances disclose the reasonable foreseeability of harm and proximity sufficient to establish a prima facie duty of care: Cooper, at para. 31.

[165] While the first stage of the Anns test involves a consideration of both reasonable foreseeability and proximity, the Supreme Court has made it clear that proximity remains the foundation of the modern law of negligence: Design Services, at para. 25. As McLachlin J. stated in Norsk, at p. 1152 S.C.R., "Proximity is the controlling concept which avoids the spectre of unlimited liability."

[166] When an overt act of the defendant causes physical injury to the plaintiff or the plaintiff's property, proximity is indicated by the fact of the physical injury. As McLachlin J. stated in Norsk, at p. 1153 S.C.R.: "if one is close enough to someone or something to do physical damage to it, one is close enough to be held legally responsible for the consequences".

[167] How does the analysis change when the claim that is being advanced is one for pure economic loss? McLachlin J.'s reasons in Norsk assist in answering this question.

[168] First, at p. 1152 S.C.R., McLachlin J. emphasized that there must be "sufficient proximity between the negligent act and the loss". That is, the court must pay special attention to the proximity between the defendant's conduct and the loss suffered.

[169] Second, at p. 1153 S.C.R., McLachlin J. stated that, in the absence of the usual indicator of proximity -- the infliction of physical injury or property damage -- the court must take a probing look at the relationship between the parties, and "insist on sufficient special factors to avoid the imposition of indeterminate and unreasonable liability" before recognizing a new duty of care. These factors can include "expectations, representations, reliance, and the property or other interests involved": Cooper, at para. 34. The court must also consider at this stage questions of policy, insofar as they pertain to the relationship between the parties: Cooper, at para. 34. This approach ensures "a principled, [page113] yet flexible, approach to tort liability for pure economic loss . . . [which] allow[s] recovery where recovery is justified, while excluding indeterminate and inappropriate liability": Norsk, at p. 1153 S.C.R.

[170] If the court finds that the foreseeability and proximity are established, a prima facie duty of care arises. The court must then move to the second stage of the Anns test.

The second stage of the Anns test

[171] At the second stage, the court must determine "whether there are residual policy considerations outside the relationship of the parties that may negative the imposition of a duty of care" (emphasis added): Cooper, at para. 30. The court is concerned, at this stage, with "the effect of recognizing a duty of care on other legal obligations, the legal system, and society more generally": Cooper, at para. 37.

[172] In Norsk, at pp. 1154-55 S.C.R., McLachlin J. explained that while proximity is critical to establishing the right to recovery for pure economic loss, it does not always indicate liability. Proximity is a necessary, but not necessarily sufficient, condition of liability because there may be residual policy considerations that call for a limitation on liability. These residual policy considerations permit the courts to reject liability for pure economic loss for policy reasons that are not taken into consideration in the proximity analysis.

[173] When dealing with claims for pure economic loss, the court must be mindful of the more generalized policy reasons for precluding liability, including the "spectre of indeterminate liability" and the potential for encouraging "a multiplicity of inappropriate lawsuits": Martel, at para. 37. Both of these policy considerations have social implications that extend beyond a particular tort relationship. At paras. 63-69, Martel pointed to several other policy considerations that apply at the second stage of the Anns test. Recognition of a duty of care that might tend to deter socially useful commercial activity is an example of one such policy consideration: Martel, at para. 64.

3. The Anns test applied

Stage 1 of the Anns test: Is there a prima facie duty of care?

Reasonable foreseeability

[174] The trial judge concluded that it was reasonably foreseeable that the class members would suffer harm as a result of Manulife's transfer of their policies to LOB. This conclusion [page114] rested on his factual findings that at the time of the transfer Manulife knew that it was likely that it would demutualize; it was more likely than not that it would be a full demutualization, with the benefits being paid out to its participating policyholders; and, after the transfer, the Barbados policyholders would not be eligible to participate in any future demutualization.

[175] Manulife submitted that the trial judge's factual findings are inconsistent with the evidence. It pointed out that at the time of the transfer to LOB, Manulife was operating in an uncertain regulatory environment. The federal government had yet to draft regulations governing how large cap mutual insurance companies like Manulife would be permitted to demutualize. There were a number of possibilities in that regard, including the one which ultimately came to pass: that Manulife would be permitted to demutualize, but would be required to distribute benefits only to current policyholders and, therefore, that it could not allocate benefits to former policyholders.

[176] However, it was also possible at the time of the transfer to LOB that regulations would be enacted allowing Manulife to distribute its value to both current and former policyholders, in which case it would have been possible to distribute benefits to the Barbados policyholders despite the transfer of their policies to LOB. Had the 1999 Regulations taken the same form as the 1993 Regulations, this would have been the case. It was also possible that Manulife could have decided not to demutualize or that the board of directors or voting members would not approve a proposed demutualization.

[177] I accept that there are possible scenarios in which the transfer to LOB would not have caused harm to the Barbados policyholders. However, the question at this stage of the analysis is not whether harm was certain but, rather, whether the harm that occurred was the reasonably foreseeable consequence of Manulife's act of transferring the Barbados policies. Given the trial judge's findings, he was amply justified in finding that at the time of the transfer in 1996, Manulife knew that there was a real risk that it would demutualize and that as a result of the transfer, the Barbados policyholders would not share in the benefits of that demutualization.

[178] Accordingly, I see no basis on which to interfere with the trial judge's conclusion that the harm the class members suffered was a reasonably foreseeable consequence of Manulife's transfer of their policies to LOB. [page115]

Proximity

[179] The appellants say that there is sufficient proximity between participating policyholders and a mutual insurance company to ground a duty of care. In making this argument, they address the four policy reasons for the courts' traditional reluctance to allow recovery for pure economic loss.

[180] First, they argue, the proprietary nature of the participating policyholders' interest in a mutual insurance company compels protection. Second, they say that this proprietary interest avoids the spectre of indeterminate liability because it defines the precise number of class members and places an inherent limit on the scope of the defendant's liability. Third, they contend that unreasonable interference with this interest is not an inherent business risk against which the policyholders could guard. To the contrary, in the context of a transfer of business, the policyholders must rely on the company to ensure that their interests are taken into account. Fourth, the recognition of a duty of care would not give rise to the risk of a multiplicity of lawsuits because the duty is particular to the unique relationship between a mutual insurance company and its participating policyholders.

[181] I do not accept these submissions. In my view, the relationship between the class members and Manulife was not sufficiently proximate that a prima facie duty of care arose. I reach this conclusion for two reasons. The first reason relates to the specific nature of the right which the participating policyholders claim was affected by the transfer. The second relates to the relevant legislation governing the transfer. I deal with the appellants' first and third arguments on this issue in this section. Because the second (indeterminate liability) and fourth (multiplicity of lawsuits) arguments are policy considerations outside of the parties' relationship, they are dealt with below, in the second stage of the Anns test.

[182] As for the first reason, proximity cannot be assessed in the abstract. As we have seen, at the proximity stage of the analysis, the court must look at factors particular to the relationship between the parties, including the property or other interests involved. See Cooper, at para. 34; and Design Services, at para. 50. It is not sufficient to focus on the general nature of the participating policyholders' interest in a mutual insurance company, as the trial judge did. It is necessary to look at the very interest that the claimants assert was harmed.

[183] I explain above that at the time of the transfer, the class members did not have a right to, or interest in, something that [page116] did not exist and was not legally possible. Thus, at the time of the transfer, the class members had no legally recognized right, claim or interest to share in the value of Manulife on a future demutualization. At most, they had a hope or mere expectancy that if and when Manulife could and did demutualize, they would still be participating policyholders and therefore have a right to share in that value.

[184] It is self-evident that this is an extremely tenuous interest. In my view, the inchoate and tenuous nature of the interest militates against finding that it is "just and fair" to impose a duty of care upon Manulife to prevent harm to this interest.

[185] I agree with the appellants that they could not guard against interference with this hope or mere expectancy, but that is because of the legislation which governed the transfer to LOB. That legislation is a consideration that arises in the first stage of the Anns test and is the second reason I find a lack of sufficient proximity.

[186] As I explained above, both the ICA and the Barbados Insurance Act expressly empowered Manulife to transfer the Barbados block of policies to LOB, so long as it followed a certain process. That is, the legislation empowered Manulife to terminate its relationship with the class members without the consent of the class members. Therefore, the class members had no right to remain as policyholders of Manulife.

[187] The transfer, as structured, was lawful under the relevant statutes. It was approved by the regulators in both jurisdictions. After the transfer was approved and became effective, a statutory novation ensued. All of Manulife's rights, title, benefit and obligations in respect of the Barbados policies were transferred to LOB and Manulife was discharged from any further obligations to the class members who held those policies. So, too, the transfer extinguished the class members' rights under their policies with Manulife. Consequently, the class members ceased to have any contractual or statutory rights against Manulife, including any rights on a future demutualization. After the transfer, their contractual and statutory rights existed in respect of LOB alone.

[188] This consideration speaks to the class members' expectations, a factor going to the court's evaluation of proximity. Knowing that the legislation permitted Manulife to transfer their policies and end their relationship, was it reasonable to expect that Manulife would protect their voting rights? In my view, it was not.

[189] Moreover, from a policy perspective, it is difficult to comprehend how Manulife could be given the statutory right to end [page117] its relationship with the class members (so long as it followed certain processes and obtained regulatory approvals) and yet be legally obligated to maintain one aspect of that relationship, potentially in perpetuity, by preserving the policyholders' voting or other rights in the company.

[190] The appellants say that this is a case like Sauer v. Canada (Attorney General), [2007] O.J. No. 2443, 2007 ONCA 454, 225 O.A.C. 143, where this court explained that a defendant's compliance with regulations went to the issue of standard of care and not to the issue of whether a duty of care arose. I do not agree that this case is like Sauer. What is in issue here is not whether Manulife complied with the applicable regulations. Rather, in this case, the relevant legislative provisions prescribe a key aspect of the relationship between a mutual insurance company and its participating policyholders -- namely, by establishing a method by which the company can end the relationship. As it goes to a foundational aspect of the relationship between the parties, the legislation is relevant to the issue of proximity.

[191] The appellants also argue that Manulife's misleading conduct in the process of obtaining regulatory approval for the transfer to LOB is a strong policy reason favouring the imposition of a duty of care. They argue that this conduct illustrates a gap in the regulatory regime that justifies imposition of a duty of care. Again, I disagree. When OSFI recommended that the minister approve the transfer, OSFI officials were well aware of the white paper and the prospect of demutualization by Canadian large cap mutual insurance companies. They would also have been alive to the possibility that by virtue of the transfer, the Barbados policyholders might become ineligible to share in benefits flowing from a future demutualization. I see no indication that OSFI lacked the information it required to execute its role within the regulatory framework that governed Manulife's relationship with its policyholders. I see no compelling evidence of a gap that tort law should attempt to fill in this instance, particularly given the nature of the interest at stake here and the absence of any reasonable expectation on the part of policyholders to remain part of Manulife.

[192] In conclusion, given the tenuous and inchoate nature of the "interest" that the Barbados policyholders seek to have protected through the recognition of a duty of care and the legislation that empowered Manulife to transfer the Barbados policies, in my view, the proximity requirement has not been satisfied.

[193] Accordingly, a prima facie duty of care did not arise. [page118]

Stage 2 of the Anns test: Are there residual policy considerations that negative the imposition of a duty of care?

[194] Having found no prima facie duty of care at the first stage of the Anns test, it is unnecessary to continue to the second stage and consider whether there are residual policy considerations -- outside of the parties' relationship -- that would negate the imposition of a new duty of care. However, there are two such policy considerations that warrant mention in this case.

[195] First, the policy reasons for the common law's traditional reluctance to permit recovery for pure economic loss are engaged. In particular, imposing a duty of care on a mutual insurance company in respect of participating policyholders' hope or mere expectancy of receiving a future financial benefit "raises the spectre of indeterminate liability". Recognizing a duty of care in respect of such an inchoate interest may also encourage a "multiplicity of inappropriate lawsuits". It will be recalled that these concerns -- indeterminate liability and inappropriate lawsuits -- are the second and fourth policy reasons identified in Martel, at para. 37, auguring against recovery in claims for pure economic loss.

[196] Recognition of such a duty of care could lead to claims by participating policyholders in other mutual insurance companies who are similarly situated to the Barbados policyholders. It might also lead to claims for economic loss by participating policyholders of mutual insurance companies that decided not to demutualize. These individuals could claim that their hope or mere expectancy of receiving demutualization benefits was harmed by the company's decision not to demutualize.

[197] Further, recognition that Manulife had a duty to take steps to protect a hope or mere expectancy held by some of its policyholders could have significant and uncertain implications for corporate law more generally. An array of corporate stakeholders could potentially sue in tort claiming that the corporation failed to act according to their hopes or mere expectancies.

[198] These examples give substance to the concerns articulated in Martel that recognition of such a duty of care would give rise to indeterminate liability and a multiplicity of inappropriate lawsuits.

[199] Second, the law of negligence generally seeks to remedy the destruction of value, rather than grievances about the way in which value is distributed. When value is destroyed, as is the case when a person causes physical injury to another or [page119] damages another's property, society as a whole suffers and intervention is justified to remedy and deter the behaviour that caused the destruction. Where the wrong that is asserted is simply about the transfer of wealth between parties, however, society as an economic whole is not worse off, a factor weighing against recovery: Martel, at para. 63.

[200] This case is not about the destruction of value. Rather, it is about the distribution of value. As I have explained, the class members' claim is for pure economic loss: they maintain that they should have received some share in the value of Manulife on its demutualization. Had they received some part of that value, those policyholders remaining with Manulife on January 20, 1998, would have received less. Thus, the class members' claim is about the distribution of value, not the destruction of value.

[201] These residual policy considerations, which arise at the second stage of the Anns test, reinforce my view that no duty of care arose in this case.

The Cross-Appeal

[202] Manulife submits that the cross-appeal is irrelevant if this court finds either that no duty of care arose or that the standard of care was satisfied. I agree. However, while I have concluded that no duty of care arose, the question of whether Manulife breached the standard of care has not been addressed. Thus, I turn to that now.

[203] It will be recalled that the trial judge concluded that if Manulife had owed the Barbados policyholders a duty of care, he would have found that Manulife breached the standard of care. He described the standard of care as the taking of reasonable steps to avoid the harm that the class members suffered as a result of the transfer. Specifically, the trial judge found that the standard of care required Manulife to structure the transfer to LOB in a way that preserved the class members' voting rights because then they could have shared in the demutualization benefits.

[204] I agree with the trial judge's general articulation of the standard of care, namely, as the taking of reasonable steps to avoid the harm that the class members suffered as a result of the transfer.

[205] I also accept the trial judge's findings of fact that underlie his standard of care analysis, namely that (1) Manulife knew at the time of the transfer that it was likely that it would demutualize; (2) Manulife knew that it would likely be a full demutualization, with the value being paid out to participating policyholders; [page120] and (3) Manulife could have protected the Barbados policyholders' rights to share in the demutualization benefits had it wished to do so. On the record, these findings were fully open to the trial judge.

[206] However, I do not agree with the trial judge that by failing to structure the transfer to LOB in a manner that preserved the class members' voting rights, Manulife breached the standard of care. To explain why, I begin with the Supreme Court's discussion of the standard of care in Ryan v. Victoria (City), 1999 CanLII 706 (SCC), [1999] 1 S.C.R. 201, [1999] S.C.J. No. 7.

[207] At paras. 28-29 of Ryan, the court explained that the standard of care is that which would be expected of an ordinary, reasonable and prudent person in the same circumstances. The measure of what is reasonable depends on the facts of each case, including

-- the likelihood of a known or foreseeable harm;

-- the gravity of that harm; and

the burden or cost that would be incurred to prevent the injury.

In addition, the court may look to external indicators of reasonable conduct, such as custom, industry practice, and statutory and regulatory standards.

[208] In my view, requiring Manulife to structure the transfer in a way that preserved the class members' voting rights does not meet the reasonableness measure articulated in Ryan for two reasons.

[209] First, Ryan tells us that the measure of what is reasonable must take into consideration the likelihood of the foreseeable harm. The likelihood of the foreseeable harm is not to be confused with the notion of reasonable foreseeability in stage one of the Anns test. When considering reasonable foreseeability in stage one, the court is asking whether the harm that occurred was the reasonably foreseeable consequence of the defendant's act. The likelihood of the foreseeable harm actually coming to pass is a different matter. For example, an outcome can be reasonably foreseeable, but relatively unlikely to occur: Mustapha v. Culligan of Canada Ltd., [2008] 2 S.C.R. 114, [2008] S.C.J. No. 27, 2008 SCC 27, at para. 13.

[210] Accordingly, the fact that the harm that occurred here was reasonably foreseeable does not answer the question of its likelihood. The likelihood of that foreseeable harm must be [page121] assessed in light of what Manulife knew at the time of the transfer in 1996.

[211] At the time of the transfer, the federal government had yet to promulgate regulations setting out who would be eligible to participate in the demutualization of a large cap mutual insurance company. Manulife knew of the 1993 Regulations for small cap mutual insurance companies. Those regulations allowed former policyholders to participate in a demutualization.

[212] Manulife also knew of the white paper, which stated that the value of a large cap mutual insurance company should be distributed to "policyholders" on demutualization. However, the white paper did not specify whether the company would be able to include former policyholders in a distribution of value.

[213] Further, Manulife knew of the undertakings given at OSFI's request in the Prudential and Aetna transactions. Those undertakings, it will be recalled, provided that if the mutual insurance company were to later demutualize, it would deem the transferred policyholders to be eligible to receive demutualization benefits, provided it was fair and equitable to do so and such a distribution was permitted by law.

[214] In these circumstances, was requiring Manulife to structure the transfer in a way that preserved the class members' voting rights a reasonable measure? In my view, it was not. Such a measure means that an ordinary, reasonable and prudent person in Manulife's position would have foreseen that the federal government would pass regulations barring former policyholders from receiving benefits on demutualization. But the 1993 Regulations and the undertakings OSFI requested in the Aetna and Prudential transactions indicated the opposite: they indicated that it was likely that the federal government would allow for the inclusion of former policyholders in any demutualization. Accordingly, the first factor listed in Ryan militates against imposing a standard of care that requires that voting rights be preserved.

[215] Second, as Ryan indicates, industry practice is to be taken into account when deciding what is reasonable. On the record, requiring the transfer to be structured so as to maintain the transferred policyholders' voting rights appears to be without precedent in the industry. The transferred policyholders' voting rights were not preserved in either the Aetna or the Prudential transactions. The only transactions the appellants have pointed to where the voting rights of the transferred policyholders were preserved are the U.S. and Hong Kong subsidiarizations. In both those cases, however, the transferred [page122] policyholders remained part of the same corporate family following the transfer.

[216] I would add a final comment. Ryan directs the court, when deciding what is reasonable, to consider the burden or cost that would be incurred to prevent the injury. The trial judge found that the burden to Manulife of maintaining the transferred policyholders' voting rights would be low. Even assuming that the direct financial costs associated with such a measure is low, I query whether the overall burden would be low when the broader corporate governance implications of such a requirement are considered.

[217] The trial judge's finding explicitly flows from the small number of class members compared to the total number of participating policyholders. However, this ignores the effects such a requirement might have more generally. What are the legal implications of transferring a group of policyholders to a third party for some but not all purposes? How are the transferred policyholders to be treated for regulatory and compliance purposes? Would maintaining the rights of the transferred policyholders to vote on demutualization be fair to Manulife's other policyholders, who had the full range of rights and who continued to pay premiums to Manulife?

[218] Questions such as these would have to be answered on a fuller record before a court could be satisfied as to the reasonableness of the burden or cost of such a measure.

[219] In conclusion, in my view, the trial judge erred by holding Manulife to an unreasonable measure, when determining whether it was in breach of the applicable standard of care.

[220] Further, as Manulife submitted, even if the standard of care had required that it give an undertaking similar to the one that it gave in the Aetna transaction, the class members still would have received no benefits on the demutualization. As was the case for the Aetna policyholders, such an undertaking would have proved ineffective because the 1999 Regulations barred former policyholders from receiving such benefits. Thus, even on this articulation of the standard of care, the harm that the class members suffered was not caused by Manulife's breach (i.e., failure to give the undertaking) but, rather, by the eligibility requirements for receiving benefits contained in the 1999 Regulations.

[221] Accordingly, even if Manulife were found to have breached the standard of care by having failed to give an undertaking such as that which it gave in the Aetna transfer, the requisite causal connection between the breach and damages was not made out. [page123]

Disposition

[222] Accordingly, I would dismiss the appeal and the cross-appeal.

[223] If the parties are unable to resolve the matter of costs, I would allow them 14 days from the date of the release of these reasons in which to make brief written submissions, to a maximum of four pages.

Appeal and cross-appeal dismissed.

Notes

[^1]: LOB was a stock company.

[^2]: The ICA has been amended a number of times since it was enacted in 1991. Unless otherwise specified, all references to the ICA are to the legislation as at the time of the transfer in 1996.

[^3]: For ease of reference, I will also refer to the share of the value of the company on demutualization simply as "benefits" or "benefits on demutualization". This is consistent with the language used in the 1993 Regulations.

[^4]: Under the laws of Barbados, anyone dissatisfied with the Barbados supervisor's approval of the transfer to LOB was entitled to appeal to a judge of the Barbados High Court within 15 days of the date of the approval, with a further right of appeal, on leave, to the Barbados Court of Appeal, and, with leave, from there to the Judicial Council of the Privy Council. See Barbados Insurance Act, s. 35(3); Supreme Court of Judicature Act, Cap. 117A (Barbados), s. 5(1).

[^5]: "Ownership Rights" are defined in the statement of claim as "the membership rights, ownership rights, Voting Rights, property, proprietary and other rights, including the right to participate in the event of demutualization and those rights . . . arising out of the Insurance Companies Act as a result of being the holder of a Participating Policy".