Tuesday, July 21, 2015

Court of Appeal Upholds Substantial Indemnity Costs Award

In the dog days of summer, cases that one might otherwise ignore, suddenly cry out for attention.  One such case is Matthew Brady Self Storage Corporation v. InStorage Limited Partnership 2014 ONCA858 which deals with the exciting issue of the cost consequences of offers to settle.


The principals of Matthew Brady Self Storage Corporation (“Matthew Brady”) jointly purchased with the principal of InStorage Limited Partnership (“InStorage”) a vacant factory in Windsor, Ontario and converted it into a self-storage facility.  InStorage was part of a group of corporations in the business of operating self-storage facilities and had approximately 50 sites in operation at the time.  Matthew Brady was incorporated for the purpose of acquiring and converting the property for the joint venture. 


The plans of the joint venture partners were altered when InStorage ran into financial difficulties.  This circumstance led to further negotiations and a new arrangement whereby the principals of Matthew Brady agreed to put up the entire purchase price so that Matthew Brady would become the sole owner of the Windsor property pending completion of the project.  The parties entered into a put/call agreement under which Matthew Brady could force InStorage to purchase the property through a “put” and InStorage could force Matthew Brady to sell the property to it through a “call” beginning one year following substantial completion of the retrofit and for three years after that.  


The put/call agreement provided that if the parties could not agree on a purchase price, an appraiser would determine the purchase price and in the absence of a manifest error, the appraiser’s determination of “fair market value” as defined, would bind the parties.  The fair market value definition provided that the primary consideration was to be the net cash flow generated from the property.  Matthew Brady exercised the put.  It obtained an appraisal.  However, InStorage refused to accept the appraiser’s determination of the fair market value of the property, taking the position that he had made a manifest error in failing to base his conclusion about fair market value on the income approach. 


Matthew Brady sued.  The trial judge granted a motion by Matthew Brady to exclude the report and evidence of a second appraiser.  In the course of that ruling, the trial judge found that the original appraiser had made no manifest error in arriving at his fair market value conclusion.  The trial judge allowed Matthew Brady’s action.  InStorage appealed to the Ontario Court of Appeal.


The Ontario Court of Appeal (consisting of Justices Doherty, Blair and Tulloch) dismissed the appeal holding that the language of the put/call agreement did not require the appraiser to use the income approach.  Instead, he was required to give that approach “primary consideration”.  Ultimately, it was open to the appraiser to determine that the income approach was not helpful.  For the purposes of the appeal, the court assumed that the trial judge should not have made a finding that there was no manifest error in the appraisal in the course of his admissibility ruling, and that he should have given InStorage a full opportunity to address that issue.  However, that error did not result in any prejudice to InStorage, as InStorage would have been unable to establish manifest error in any event. 


The Court of Appeal held that the trial judge did not err in granting specific performance of the put/call agreement.  Damages are always an adequate remedy where the vendor is the plaintiff.  However, in this case the vendor was intended to be the defendant.  The parties clearly intended InStorage to be the sole owner of the property.   Matthew Brady had renovated the property to InStorage’s specifications and design criteria.  But for InStorage’s commitment to owning the property, Matthew Brady would not have acquired it and done the retrofit.  InStorage occupied, managed and operated the building since the completion of the retrofit.  The Court of Appeal found that it had done a poor job of managing the property – something that would affect its value and impede a steady sale.   The court held that in such circumstances, damages would not adequately compensate Matthew Brady for InStorage’s refusal to abide by the put/call agreement.


Get ready for the kicker.  At the end of the trial, the trial judge made a cost award of $415,000 plus HST in favour of Matthew Brady.  The award was made on a partial indemnity basis to a point that an offer to settle was made by Matthew Brady (and not accepted by InStorage) and on a substantial indemnity basis thereafter.  InStorage submitted that the offer to settle did not qualify as a Rule 49 offer for costs purposes because, although it had been exchanged directly between the parties, it had not been served on InStorage’s lawyers as required by the rules.  The Court of Appeal disagreed. 


The Court of Appeal agreed that Matthew Brady’s offer to settle had not been served on InStorage’s lawyers but that fact did not preclude an award of costs on a substantial indemnity basis.  Service of the offer on InStorage did not create any confusion or difficulty and there was no evidence that InStorage’s lawyers were unaware of the offer.  The court held that the trial judge did not err in awarding substantial indemnity costs that exceeded the multiplier in rule 1.03(1) of the Rules of Civil Procedure on the basis that InStorage’s conduct had unnecessarily prolonged the trial. 




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