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. 

Regards,

Blair

 

Court Disallows Executive's Golden Parachute Benefits

The Ontario Court of Appeal has ruled that a former public company executive is disentitled to receive "golden parachute" benefits under an employment agreement with the corporation as a consequence of the breach of his fiduciary duties.

 

In Unique Broadband Systems, Inc. (Re) 2014 ONCA538, the Court of Appeal reversed the decision of trial judge, Justice R. Mesbur in certain fundamental respects. 

 

Unique Broadband Systems, Inc. (“UBS”) is a public company listed on the TSX Venture Exchange.  In 2002, Gerald McGoey was appointed a director and acting CEO of the company and later became CEO on a permanent basis.  McGoey’s relationship with UBS was governed by a management services agreement between UBS and his personal company.  The agreement contained a “golden parachute provision” which granted McGoey enhanced termination benefits in certain circumstances.

 

UBS had in place an incentive-driven share appreciation rights plan (“SAR Plan”) for its directors and senior management.  Upon certain triggering events, a SAR unit holder would be paid an amount equal to the difference between the market trading price of a UBS share and a strike price identified in the SAR Plan. 

 

In 2003, UBS acquired a controlling equity interest in Look Communications Inc. (“Look”), a telecommunications company.   McGoey was also a director and the CEO of Look.  Look’s primary asset was a band of telecommunications spectrum.  In early 2009, Look engaged in the process of selling the spectrum through a court-supervised plan of arrangement.  Ultimately, the spectrum was sold for $80 million.  McGoey expected that the sale would generate a significantly higher price and was very disappointed with the figure offered by the buyer. 

 

UBS’ board of directors resolved to treat the spectrum sale as a “triggering event” pursuant to the SAR Plan.  Prior to the announcement of the sale, UBS’ shares were trading at approximately $0.15 per share.  The board anticipated that the sale would cause the UBS shares to appreciate however, the anticipated share price increase did not materialize and the shares continued to trade at the $0.15 after the announcement. 

 

McGoey engaged in negotiations to sell the balance of Looks’ assets but the transaction did not materialize. 

 

After the sale of the spectrum, the compensation committee of UBS’ board, which consisted of McGoey and two others, began reviewing the SAR Plan.  Each member of the compensation committee had a considerable number of SAR units. 

 

At a meeting of the board, each director disclosed his conflict of interest regarding their SAR unit holdings.  The directors then unanimously resolved to cancel the SAR units and established a SAR cancellation payment pool of $2.31 million based on a fixed unit price of $0.40 per share.  Under this new arrangement, McGoey and others would receive a SAR cancellation award based on the $0.40 per unit figure. 

 

At a subsequent board meeting, McGoey proposed the establishment of a bonus pool of $7 million.  That proposal was not approved.  However, the board did approve establishing a bonus pool of $3.4 million. 

 

Under the SAR cancellation award, McGoey was allocated to receive $600,000 and under the bonus pool he was allocated to receive $1.2 million.

 

Such awards were resisted by UBS’ shareholders.  Faced with this resistance McGoey caused UBS to advance to him $200,000 for the payment of anticipated legal fees. 

 

At a special shareholders meeting McGoey and the other directors were removed and were not re-elected.  McGoey then resigned as CEO and took the position that he was terminated without cause because he was not re-elected to the UBS board.  McGoey brought an action against UBS seeking payment of enhanced severance in the amount of $9.5 million.  He successfully moved for partial summary judgment before Justice Marrocco. 

 

On July 5, 2011, UBS was granted protection under the Companies’ Creditors Arrangement Act (“CCAA”).  McGoey filed a proof of claim in an amount in excess of $10 million which the CCAA monitor disallowed in its entirety.  The court ordered a trial of the issue. 

 

At trial, Justice Mesbur found that McGoey and the other directors had breached their fiduciary duty to UBS in establishing the SAR cancellation awards and the bonus pool as these actions were driven by the board’s own self-interest and were of no benefit to the UBS shareholders.  She set aside the allocations to McGoey pursuant to the SAR cancellation award and the bonus pool.   However, Justice Mesbur found that the breach of fiduciary duty did not qualify as a default under McGoey’s management services agreement with UBS and that he was therefore entitled to the benefit of the golden parachute provisions of the agreement.  Finally, Justice Mesbur found that UBS had no obligation to indemnify McGoey for his legal fees because he had breached his fiduciary duties. 

 

UBS appealed and McGoey cross-appealed.

 

The Court of Appeal held that UBS’ appeal should be allowed and McGoey’s cross-appeal should be dismissed.

 

Justice Hourigan wrote the decision of the Court of Appeal.

 

The Court of Appeal held that Justice Mesbur had reasonably concluded that the board’s actions were driven by self-interest and therefore that McGoey had breached his fiduciary duties to UBS.  The $0.40 share price was unjustified and unrealistic.  The board did not seek any expert advice on an appropriate bonus structure and did not have any comparable or other data regarding executive compensation in the marketplace.

 

The Court of Appeal also found that there was no documentation that stipulated the performance factors or criteria by which McGoey’s performance would be evaluated, and there was no documentation that showed how the bonus pool was quantified.  The breach was not incomplete because McGoey was removed from office before he could be paid.  The court held that it would be a remarkable result if a fiduciary could be allowed to act in a manner contrary to his duty with impunity on the basis that he was prevented by the beneficiaries' vigilance from receiving a personal benefit.

 

The Court of Appeal held that McGoey’s actions were not undertaken with the assistance of independent legal advice.  His actions were not protected by the business judgment rule as he did not satisfy the rules' preconditions of honesty, prudence, good-faith and a reasonable belief that his actions were in the best interests of the company.  Accordingly, because McGoey had breached his fiduciary obligations, UBS was not required to indemnify him for his legal fees.

 

The Court of Appeal disagreed with Justice Mesbur’s interpretation of the management services agreement.  It held that her interpretation had ignored section 134(3) of the Ontario Business Corporations Act (“OBCA”) which provides that no provision in a contract relieves a director or officer from the duty to act in accordance with the OBCA or from his or her liability for a breach thereof.  The Court of Appeal held that Justice Mesbur’s interpretation had led to a commercially absurd result.  Interpreting the provisions of the agreement which defined a "default" which would disentitle McGoey to an enhanced severance payment as including a serious breach of fiduciary duty that was materially injurious to UBS would give effect to the entirety of the words used in the definition in their context.  Such an interpretation was also commercially sensible and was not inconsistent with the OBCA.

Regards,

Blair

Supreme Court Limits Appeals from Commercial Arbitration Awards

One of the benefits of commercial arbitration is finality.  Parties to a commercial arbitration agreement have the ability to contract out of any appeal.   The giving up of appeal rights is one of the most significant factors that a party should consider when entering into an arbitration agreement.    Many provincial arbitration acts provide that a party to an arbitration agreement may appeal the decision of the arbitrator on a question of law only and that leave to appeal must be granted.  This supervisory role of the courts was recently tested in a case – Sattva Capital Corp. v. Creston Moly Corp. 2014 S.C.C. 53 – that went all the way to the Supreme Court of Canada.

 

In this case, Creston was obliged to pay a finder’s fee to Sattva as a result of Sattva introducing Creston to an opportunity to acquire a molybdenum mining property in Mexico.  According to the agreement, the finder’s fee of US$1.5 million would be paid in Creston shares.  The dispute between the parties concerned which date should be used to determine the price of the Creston shares and thus the number of shares to which Sattva was entitled.   Sattva argued that the share price was dictated by the market price definition in the agreement, i.e. the price of the shares “as calculated on close of business day before the issuance of the press release announcing the acquisition”.  Creston claimed that the agreement's “maximum amount” proviso meant that Sattva would receive shares on the date the fee was payable.  

 

The difference in interpretation amounted to approximately 9 million shares.

 

The parties entered into arbitration pursuant to the British Columbia Arbitration Act (“Act”).  The arbitrator found in favour of Sattva.  Creston sought leave to appeal the arbitrator’s decision pursuant to the appeal provisions of the Act.   Leave was denied by the BC Supreme Court.  Creston successfully appealed that decision and was granted leave to appeal the arbitrator’s decision by the BC Court of Appeal.  

 

A BC Supreme Court judge heard the appeal and upheld the arbitrator’s decision.  Creston again appealed that decision to the BC Court of Appeal which once again overturned the motion judge and found in favour of Creston.  Sattva appealed that decision and the Court of Appeal’s decision to grant leave to the Supreme Court of Canada.

 

The Supreme Court of Canada overturned both decisions of the BC Court of Appeal and restored the arbitrator’s award.  

 

Questions Answered By The Court

 

In reaching its decision the Supreme Court asked: when is contractual interpretation to be treated as a question of mixed fact and law and when should it be treated as a question of law?;  How is the balance between reviewability and finality of commercial arbitration awards under the Act to be determined?; and  Can findings made by a court granting leave to appeal with respect to the merits of an appeal bind the court that ultimately decides the appeal?

 

In answering these questions, the Supreme Court overturned its historical approach to contractual interpretation. 

The Court held that appeals from commercial arbitration decisions are narrowly circumscribed.  Under the relevant section of the Act, appeals are limited to questions of law, and leave to appeal is required if the parties do not consent to the appeal.  The court may grant leave if it determines that the result is important to the parties and the determination of the point of law may prevent a miscarriage of justice.

 

The Supreme Court held that the BC Court of Appeal had erred in finding that the construction of the finder’s fee agreement constituted a question of law.  The issue raised a question of mixed fact and law and therefore the Court of Appeal erred in granting leave to appeal.  

 

In reaching its decision, the Supreme Court said that the historical approach to contractual interpretation, according to which determining the legal rights and obligations of the parties under a written contract was considered a question of law should be abandoned.   It held that contractual interpretation involves issues of mixed fact and law because it is an exercise in which the principles of interpretation are applied to the words of the written contract, considered in light of the factual matrix of the contact.  

 

While it may be possible to identify an "extricable" question of law from the exercise, such circumstances will be rare.  The goal of contractual interpretation, which is to ascertain the objective intentions of the parties, is inherently fact specific.  Accordingly, courts should be cautious in identifying “extricable” questions of law in disputes over contractual interpretation.

 

Legal errors made in the course of contractual interpretation include the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor.  In this case, Creston’s application for leave to appeal did not raise a question of law. 

That finding in and of itself was sufficient to dispose of the appeal.  However, the Supreme Court continued with its analysis.

 

The Court also held that:

a)  In order to rise to the level of a miscarriage of justice for the purposes of the Act, an alleged legal error must pertain to a material issue in the dispute, which, if decided differently, would affect the result of the case.  According to this standard, a determination of a point of law “may prevent a miscarriage of justice” only where the appeal itself has some possibility of succeeding.  An appeal with no chance of success will not meet the threshold of “may prevent a miscarriage of justice” because there would be no chance that the outcome of the appeal would cause change in the final result of the case.

 

b)  At the leave stage, it was not appropriate to consider the full merits of the case and make a final determination regarding whether an error of law was made.  However, preliminary consideration of a question of law by the court granting leave is necessary to determine whether the appeal has the potential to succeed and thus to change the result in the case.  The Court held that the appropriate threshold for assessing the legal question is whether it has “arguable merit” meaning that the issue raised by the applicant cannot be dismissed by a preliminary examination of the question of law.

 

 Assessing whether the issue raised by an application for leave to appeal has arguable merit must be done in light of the standard of review in which the merits of the appeal will be judged.  The leave court’s assessment of the standard of review is only preliminary and does not bind the court which considers the merits of the appeal.

 

c)  The words “may grant leave” in the Act, confer on the court a residual discretion to deny leave even where the requirements of the Act are met.  However courts should exercise such discretion with caution.

 

d)  Appellate review of commercial arbitration awards is different from judicial review of a decision of a statutory tribunal, thus the standard of review framework developed for judicial review by the court in the case of Dunsmuir v. New Brunswick, 2008 S.C.C. 9 is not entirely applicable to the commercial arbitration context.   However, because judicial review is analogous in some respects to arbitral appeals, aspects of the Dunsmuir framework are helpful in determining the appropriate standard of review to apply in the case of commercial arbitration. 

 

In the context of commercial arbitration, where appeals are restricted to questions of law, the standard of review will be reasonableness unless the question is one that would attract the correctness standard, such as constitutional questions or questions of law of central importance to the legal system as a whole and outside the adjudicator’s expertise.  The question at issue here did not fall into one of those categories and therefore the standard of review in this case was reasonableness.

 

In this case, the arbitrator’s reasoning met the reasonable threshold of justifiability, transparency and intelligibility. 

 

e)  A court considering whether leave should be granted is not adjudicating the merits of the case.  It decides only whether the matter warrants granting leave, not whether the appeal will be successful, even where the determination of whether to grant leave involves a preliminary consideration of law at issue.  For this reason, comments by a leave court regarding the merits cannot bind or limit the powers of the court hearing the actual appeal.   

Regards,

Blair

 

The Supreme Court of Canada Weighs in on Contract Interpretation Principles

The Supreme Court of Canada recently released an important decision (Tercon Contractors Ltd. v. British Columbia (Transportation and Highways) dealing with two issues:
1. principles of contractual interpretation; and
2. interpretation of exclusion of liability clauses.

The province of British Columbia (the "Province") issued a request for expression of interest for the design and construction of a highway. Six parties responded with submissions, including Tercon and Brentwood. A few months later, the Province informed the six respondents that it intended to design the highway itself and issued a request for proposals ("RFP") for constructing the highway. Under its terms, only the six original respondents were eligible to submit a proposal. The RFP also included an exclusion of liability clause which provided:
"Except as expressly and specifically permitted in these instructions to proponents, no proponent shall have any claim for any compensation of any kind whatsoever, as a result of participating in this RFP, and by submitting a proposal each proponent shall be deemed to have agreed that it has no claim."

Brentwood had no experience in drilling and blasting. Accordingly, it entered into a pre-bidding agreement with another construction company which was not a qualified bidder. Brentwood submitted a bid in its own name with its partner construction company listed as a "major member" of its team. Brentwood and Tercon were the two short-listed proponents and the Province selected Brentwood for the project.

Tercon sued the Province for damages. The trial judge found that the Brentwood bid was submitted by a joint venture of Brentwood and its partner and that the Province, which was aware of the situation, had breached the express provisions of the tendering contract with Tercon by considering an ineligible bid and by awarding it the work. The trial judge also held that the exclusion clause did not prevent recovery of damages to Tercon because the Province's breach was fundamental and that it was not fair or reasonable to enforce the exclusion clause in the circumstances. She held that the clause was ambiguous and resolved the ambiguity in Tercon's favour.

The British Columbia Court of Appeal set aside the decision. It held that the exclusion clause was clear and unambiguous and barred compensation for all the Province's defaults.

The Supreme Court of Canada ("SCC") allowed the appeal by a surprisingly close 5 to 4 decision. Justice Cromwell wrote for the majority.

He held that the questions for the SCC were whether Brentwood, as the successful bidder was eligible to participate in the RFP and if not, whether Tercon's claim for damages was barred by the exclusion clause. He held that the trial judge had reached the right result on both issues.

In respect of the first issue, the SCC accepted the trial judge's reasoning that the Province not only acted in a way that breached the express and implied terms of the contract by considering a bid from an ineligible bidder, it did so in a manner that was "an affront to the integrity and business efficacy of the tendering process."

Secondly, as for the exclusion clause, the SCC found that it did not protect the Province from Tercon's damage claim which arose from the Province's dealing with an ineligible party and from its breach of the implied duty of fairness to bidders. The key principle of contractual interpretation was that the words of one provision must not be read in isolation but should be considered in harmony with the rest of the contract and in light of its purposes and commercial context. Further, tendering contracts have a special commercial context which called for treating parties participating in the process fairly so that all bidders would be treated on an equal footing. It was particularly true in the context of public procurement where there was a need for transparency for the public at large.

Justice Cromwell wrote that:
"It seems to me to make even less sense to think that eligible bidders would participate in the RFP if the Province could avoid liability for ignoring an express term concerning eligibility to bid on which the entire RFP was premised and which was mandated by the statutorily approved process. "

Both the integrity and the business efficacy of the tendering process supported an interpretation that would allow the exclusion clause to operate compatibly with the eligibility limitations.
Implying an obligation to treat all bidders fairly and equally meant that clear language was necessary to exclude liability for a breach of such a basic requirement of the tendering process, particularly in the case of public procurement.

Justice Cromwell held that the clause was also ambiguous and that any ambiguity was resolved in the favour of Tercon.

Regards,

Blair