COURT OF APPEAL FOR ONTARIO

CITATION: Mandeville v. The Manufacturers Life Insurance
    Company, 2014 ONCA 417

DATE: 20140522

DOCKET: C55953

Gillese, Blair and Strathy JJ.A.

BETWEEN

Richard Mandeville, Wismar
    Greaves, Marcus Jordan and Anthony Bowen

Plaintiffs (Appellants)

and

The Manufacturers Life
    Insurance Company

Defendant (Respondent)

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

Sheila Block, David Outerbridge, Crawford Smith and
    James Gotowiec, for the respondent

Heard: December 2, 3 and 5, 2013.

On appeal from the judgment of
    Justice Frank J.C. Newbould of the Superior Court of Justice, dated August 1,
    2012, with reasons reported at 2012 ONSC 4316, 6 B.L.R. (5th) 175.

Gillese
    J.A.:

[1]

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 (the “
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), s. 34(1) (the “Barbados
Insurance Act
”
).

[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.

[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.

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.

·

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 take-overs.  In 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
, S.O.R./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 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
,
    S.O.R./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 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’s 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 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 (C$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”).

[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 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 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, 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’s 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’s
    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)).

[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 C$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.

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 C$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.

[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 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.

[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), 40 C.P.C.  (5th) 182 (Ont. S.C.).

[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 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:

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 Company
, 2012 ONSC 4316, 6 B.L.R. (5th) 175.  The
    reasons run for almost one hundred pages.  In them, the trial judge makes
    exhaustive findings of fact and provides a thorough analysis of the legal
    issues.

[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 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 (H.L.), as
    restated in
Cooper v. Hobart
, 2001
    SCC 79, [2001] 3 S.C.R. 537,
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 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 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 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.

[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 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
Re Midleton’s Will Trusts
, [1969] 1 Ch. 600,
    at pp. 607-8;
Kidd v. The Canada Life Assurance Co.
, 2010 ONSC 1097,
54 E.T.R. (3d) 225,
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.

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 SCC 60, [2000] 2 S.C.R. 860, at para. 34;
D’Amato
    v. Badger
, [1996] 2 S.C.R. 1071, at para. 13; and
Design Services Ltd.
    v. Canada
, 2008 SCC 22, 1 S.C.R. 737, 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.  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] 1 S.C.R. 1021, at p. 1049; 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 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:

In 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 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, “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:
    “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, 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, 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. 30.  The court
    must also consider at this stage questions of policy, insofar as they pertain
    to the relationship between the parties:
Cooper
, at para. 30.
    This approach ensures “a principled, 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.

[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, 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 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.

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 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 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 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.

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 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; 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] 1
    S.C.R. 201.

[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 SCC 27, [2008] 2 S.C.R. 114, 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 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 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.

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 fourteen days from the date of the release of these reasons in which
    to make brief written submissions, to a maximum of four pages.

Released: May 22, 2014
    (“E.E.G.”)

“E.E. Gillese J.A.”

“I
    agree. R.A. Blair J.A.”

“I
    agree. G.R. Strathy J.A.”

[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”.