Ignoring Court Orders is Not a Great Idea

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As a commercial litigator and a mediator, occasionally I am reminded that all too often, people disregard Court orders in the sincerely held belief that they will get away with it.  Unfortunately, they sometimes do.

For that reason alone, I appreciate those instances in which such people are actually held to account for their sins. 

The recent decision of the Court of Appeal in Canadian Western Bank v Canadian Motor Freight Ltd. et al. is such a case.

In this case, a Receiver was appointed over the assets of a debtor, which was a trucking company.  The Receivership Order required the debtor to turn over its assets, principally a fleet of trucks, to the Receiver without interference.

Instead of doing so, the debtor and its management moved the fleet of trucks to a yard owned by a different entity, United Group.

After unsuccessful negotiations with United Group to recover the trucks, the Receiver obtained an Asset Recovery Order requiring United Group to provide the Receiver with access to its yard so that the Receiver could remove the trucks.  United Group and its management failed to do so and the Receiver made an application to the court to enforce the Order.

The motion judge found that the debtor and its management, and United Group and its management, were in civil contempt of the Receivership Order as well as the Asset Recovery Order.  In a separate hearing, the motion judge sentenced the directing mind of the United Group to four days in prison.  He also ordered others involved to pay significant costs awards.

United Group appealed from the decision, suggesting the motion judge had failed to take into account that there had been negotiations between United Group and its management with the Receiver concerning the Asset Recovery Order.  However, United Group put forward no evidence to contradict the evidence of the Receiver that it had come to United Group’s yard where the trucks were located for the purpose of removing them, but that United Group had refused to allow the Receiver to do so.

For its part, the debtor and its management argued before the Court of Appeal that the movement of the trucks to United Group was undertaken in the normal course of business because there was no room at its own premises to house the trucks.  The Court of Appeal observed that the motion judge, in an earlier Order, had referred to the fact that the implementation of the Receivership Order was being delayed specifically in order to give the debtor’s management time to assemble the trucks at its own premises to allow the Receiver to take possession of them.  At that time, the debtor’s management had made no reference to any need to deliver the trucks to United Group’s yard. 

The Receivership Order had clearly stated that immediate and continued access to the debtor’s property was to be provided and that all such property was to be delivered to the Receiver upon request.  The debtor and its management did not comply with that Order even though the implementation of the Receivership Order had been delayed for that express purpose.

The debtor’s management indicated to the Court that it had not intended to breach the Receivership Order.  The Court of Appeal made it clear that this was not an excuse.  It confirmed well settled law that in order to establish civil contempt, all that is required is proof beyond a reasonable doubt of an intentional act that is in fact a breach of a clear Order of which the person committing the act had knowledge.

In conclusion, the Court of Appeal pointed out that “it is a fundamental principle that orders of a court are to be obeyed.  There are not to be stalled, and they are not to be negotiated.  Serious consequences are to be expected by anyone who willfully fails to obey a Court Order”.  The Appeal was dismissed and presumably, someone spent 4 days in jail.

Call me old fashioned but to me, this was a win for the good guys!

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How Not to Exercise an Option to Purchase Land

The recent Court of Appeal decision in 1785192 Ontario Inc. and 1043303 Ontario Ltd. v. Ontario H Limited Partnership provides useful guidance on the rules around the exercise of options to purchase land where the price to be paid is to be set in accordance with appraisal evidence.

In this case, a tenant under a pair of commercial leases wished to purchase the properties that it occupied.  Each lease contained an option to purchase which provided that the purchase price would be the midpoint of appraisals to be obtained by each party. 

The parties each obtained an appraisal.  They were far apart.  The tenant’s appraiser suggested a value of $11,746,000.  The landlord’s appraiser put the value at $31,200,000. The midpoint, therefore, was $21,473,000.

Both parties used reputable appraisers.  This gives rise to the question as to how two reputable appraisers could possibly be so far apart in valuing a commercial property.  As is typically the case, the difference was caused mostly by a difference in assumptions.  The landlord’s appraiser assumed that the highest and best use of the properties would involve having them re-zoned for the development of a residential condominium complex.  The tenant’s appraiser assumed that its highest best use should reflect the current zoning, which was for commercial use.

Perhaps needless to say, both sides accused the other of putting forward appraisals which either artificially devalued or overvalued the properties for the advantage of their respective clients.

In any event, the option to purchase clause in each lease was clear in specifying that the price would be the average of the two appraisals.

The landlord took the position that its appraiser was correct. However, for closing, the landlord ultimately agreed to accept the average amount of about $21,000,000.

The tenant was more obstinate.  After insisting that its appraisal was accurate, it tendered the amount specified by its appraiser but paid over to its lawyer in trust the difference between that amount and the mid-point amount, to be held in trust pending the outcome of future litigation.

The landlord refused to convey title on that basis and had the $11,746,000 that had been tendered by the tenant returned to the tenant’s solicitor. 

The tenant brought an application to the court for an Order requiring the landlord to close at a price of $11,746,000. 

The judge hearing the application concluded that it would have been understood in the lease that each party can seek an appraisal using reasonable assumptions most favourable to that party and that this is what had happened.  As both parties obtained a compliant appraisal, the purchase price was the midpoint between the two.  However, as to whether the tenant had properly tendered at closing, the judge accepted the tenant’s argument that given the dispute about the purchase price the tenant was justified in tendering the undisputed amount while placing the disputed balance with a reputable stakeholder pending a court decision.  Accordingly, the judge required the landlord to convey the property in exchange for the midpoint amount, to be made up of the funds originally tendered by the tenant together with the additional amount held by the tenant’s solicitor in trust.

Note that this would have meant that the landlord would be paid the total amount which it had been prepared to accept before the start of the litigation, namely the midpoint amount.

By this point, however, and for reasons not set out in the initial decision or the subsequent decision of the Court of Appeal, this was no longer satisfactory to the landlord.  The landlord appealed the application judge’s decision to the Court of Appeal on the basis that the tenant had defaulted by tendering only part of the purchase price while sending the balance over to its own lawyer to be held in trust.  The tenant cross-appealed on the basis that the application judge had made a mistake in concluding that the landlord’s appraisal was valid.  The tenant argued that the dramatic difference between the two valuations was not within the realm of reasonable disagreement and one of them had to have been a product of a methodological error.  As the landlord’s appraiser had allegedly incorporated “speculative assumptions”, it was not valid and therefore the only valid appraisal before the court was that of the tenant. 

The Court of Appeal first concluded that there has been no error made by the application judge in dealing with the appraisals.  Whether or not an appraisal is valid is a question of fact and, the judge having decided that they were valid without making any obvious error in the process, that decision had to be respected.

However, the Court of Appeal ruled that the judge had been wrong in finding the tenant’s partial tender of funds to be adequate.  On the contrary, the Court of Appeal decided that this had been a breach of the tenant’s obligation to tender an amount equal to the midpoint of the two valuations.  This was the methodology specified in the option clauses and the parties had a legal obligation to close the transaction on those terms. 

There are cases in which a partial tender may be satisfactory but those are generally restricted to circumstances in which a purchaser wants to close the purchase of a property with an abatement.  In some of those cases, it may be possible to tender the amount which the purchaser feels is appropriate while paying the amount of the claimed abatement into court or in escrow. 

That approach is not appropriate in a case in which a closing is taking place pursuant to an option to purchase.  Options must be exercised strictly and the tenant, not having tendered exactly as required by the option, was in default and therefore no longer entitled to close on any basis.  As the court indicated, the tenant should have tendered the purchase price properly and litigated about it afterwards. 

In my view, the entire issue goes back to the wording in the option clause.  We now know without question that options are going to be enforced strictly in accordance with their wording.  While the wording with this option might seem sensible on its face, this case illustrates how such wording can lead to an unexpected result given that appraisals by their very nature, can lead to very different results depending on assumptions made by the appraisers.  Perhaps the best lesson to be learned from this case has to do with the importance of drafting option clauses of this nature in such a way as to try to limit the possible range of outcomes.

So You’ve Lost Your Arbitration: Now What?

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It has been commonplace to include arbitration clauses in commercial agreements. The benefits of arbitrating disputes rather than litigating over them are well known. Arbitrations are usually considered to be a cheaper and faster way to adjudicate disputes than litigation. Typically, arbitrations are seen to be the better approach particularly when the parties expect to continue to do business with each other after the dispute has been resolved. For example, where a dispute arises during a contract where the performance of obligations by each side is expected to continue on a long-term basis and the dispute is not serious enough for either party to actually terminate the agreement, arbitrations are thought to be a somewhat less acrimonious and certainly more efficient way of handling the issue at hand.

Often, one of the key features of arbitration has to do with the limits on appeal rights. It is not uncommon for an arbitration clause to provide that there simply is no appeal of any kind from the arbitrator’s decision.

A limit on appeals may seem like a good idea at the time the contract is signed. Presumably, neither party actually anticipates there is going to be a dispute during the course of the business relationship and it may provide some comfort to know that if there is a dispute, its resolution will not be dragged out by an appeal process.

However, this feature becomes a lot less appealing when one engages in an arbitration to resolve a dispute and loses. What then?

An arbitration provision that provides that the arbitration’s decision is final will be interpreted by the court in exactly that manner – as final. If it turns out that the arbitrator didn’t understand the evidence or simply got it wrong in the opinion of one of the parties (or perhaps both), that’s simply too bad. That is a risk that one takes when entering into such an agreement. Presumably, the risk cuts both ways.

Having said that, in Ontario, the Arbitration Act does provide for some recourse in certain circumstances. Section 46 of the Act allows an unhappy party to ask the court to set aside an arbitration award on the basis that the arbitrator failed to conduct the hearing in a procedurally fair manner. For example, an award can be set aside by a party who is not treated equally and fairly, was not given an opportunity to present its case or respond to the opponent’s case, or was not given proper notice of the arbitration or the appointment of an arbitrator.

There is often a temptation to bring such a motion on the basis of allegedly unequal or unfair treatment when all that has really happened is that one of the parties does not like the award. In the recent case of Aquanta Group Inc. et al. v. Lightbox Enterprises Ltd., 2023 ONSC 971, Aquanta applied to the court for an order to set aside the award because a few days before the commencement of the arbitration, the arbitrator dismissed its motion to amend its pleading. The arbitrator, a retired trial judge, had considered the arguments on both sides and exercised his discretion to dismiss the motion and require the arbitration to proceed as scheduled.

At the motion to set the award aside, Aquanta argued that the arbitrator’s refusal to allow it to amend its pleading amounted to unfair and unequal treatment. The court disagreed and dismissed the motion.

In doing so, the judge relied on a decision of the Ontario Court of Appeal released in December 2022 called Tall Ships Development Inc. v. Brockville (City), 2022 ONCA 861. In that case, the Court of Appeal made it abundantly clear that the basis for setting aside an award for procedural unfairness is extremely narrow. That provision of the Act “is not concerned with the substance of the parties’ dispute and is not to be treated as an alternate appeal route.”

Accordingly, it appears clear that at a motion to set aside an award, the court will not consider the substantive issues in the dispute. It will only concern itself with matters of a procedural nature. In the Lightbox decision, for example, the issue was not whether or not the arbitrator exercised his discretion correctly or even reasonably. The only issue was whether or not the arbitrator had the jurisdiction to make the decision that he made. As the arbitrator acted within the bounds of the authority granted to him by the arbitration agreement, that ended the matter. Arbitration clauses in commercial agreements have become popular because they offer the possibility of a speedy resolution to disputes. However, an arbitration provision with no appeal rights does present some element of risk which should be considered carefully before the agreement is signed.

The Latest on the Duty of Good Faith in Real Estate Transactions

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The case of Sarai et al. v. Singh et al., 2023 ONSC 2102 (CanLII) is an important reminder of the duty of parties to a real estate transaction to act in good faith.

In this Application to the Ontario Superior Court of Justice, three applicants entered into an agreement of purchase and sale with three respondents on May 24, 2021, for the purchase of a 14-acre property in Caledon to be used by the applicants to accommodate their growing trucking business. The transaction had a closing date of November 30, 2021.

The agreement provided that the applicants would provide their $100,000 deposit to the respondents’ lawyer in trust within 48 hours of the respondents’ acceptance of their offer.

However, the respondents did not bother to tell the applicants who their lawyer was until May 28, 2021.

Within 24 hours thereafter, the applicants provided that lawyer with a bank draft to satisfy the deposit. The bank draft was accepted by the respondents’ lawyer.

Over five months later, on the day before closing, one of the respondents, a Mr. Singh, notified the applicants that he did not intend to close. Singh’s position was that the delivery of the deposit was too late because it was not within 48 hours of acceptance. The applicants had therefore breached the agreement and thus Singh did not have to close.

The applicants asked the court to declare that the agreement was binding and to require the respondents to close the transaction. They argued that the respondents had conducted themselves as if the agreement was binding until just before closing. Specific performance was the appropriate remedy because the property was so unique that damages would not be an adequate remedy. Finally, they argued that Singh was acting in bad faith by relying on the deposit clause when the respondents had failed to identify their lawyer, to whom the deposit was to be delivered, until after the deadline.

Singh pointed out that the applicants could have delivered the deposit directly to the respondents within the 48 hours and that, having failed to do so, the applicants had breached a fundamental term of the agreement of purchase and sale.

The court had no hesitation in granting the application. The respondents had made strict performance of the deposit condition impossible by delaying in identifying their lawyer. Furthermore, they waived strict compliance with that deadline by accepting the deposit when it was delivered.

The court also considered Singh’s failure to notify the applicants in writing about his position until the very last moment to be completely unreasonable. Singh did not act in good faith and, given the uniqueness of the property and this unreasonable behaviour, the applicants were entitled to specific performance.

There are a number of important lessons to learn from this decision.

Firstly, the court will have no sympathy for behaviour that is patently unreasonable. If a party to a transaction intends to take the position that the agreement has been breached by the other party, it is incumbent upon that party to give timely written notice of that position. A failure to do so may be considered unreasonable and bad faith behaviour.

Secondly, if one wishes to take such a position, it is critical that one not act in a manner that is inconsistent with that position. In this case, acceptance of the deposit after the 48-hour deadline period contemplated by the agreement amounted to a waiver of that deadline so that it could not be relied upon at a later date as a breach of the agreement of purchase and sale. Thirdly, where a party has an obligation to do something, the other party cannot make satisfaction of that obligation impossible and then claim that the agreement has been breached.

How to Ensure that your Case does not Settle at Mediation

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On several occasions over the course of my years participating in mediations both as counsel and as mediator, I have come across a number of lawyers who clearly have no interest in settlement. This post is not directed to those lawyers. It is directed to those lawyers who do have an interest in settlement but, perhaps unwittingly, make mistakes that decrease the chances that their case will settle. 

Here is a list of what I consider to be the most significant of these mistakes:

Raising New Issues

In Ontario, most mediations take place after the discovery process is complete. At that point, both sides should have a good idea of the cases they have to meet. However, it is not always so, and it is certainly not likely if the mediation takes place early in the process. This gives rise to the possibility that one side would be able to raise a completely new issue, for the very first time, at the mediation. Inevitably, it results in a good deal of wasted time and perhaps even the need to adjourn the mediation so that the issue can be fleshed out with the mediation resuming at a later date. 

Similarly, a mediation is not a good time to bring forward any type of smoking gun for the first time, for the same reason.

Failing to have a Frank Discussion with the Client Prior to the Mediation

It is a serious mistake not to discuss with the client, in advance, the obstacles that he or she faces in achieving a successful result. It is also a mistake not to temper a client’s expectations by painting a realistic picture of how the case is likely to play out, and by not encouraging the client to recognize both the factual and legal challenges that he or she faces. 

The client will certainly hear about all of this at the mediation. If the client is hearing this for the first time, this may lead to a rather embarrassing loss of confidence in his or her counsel, and with it, a severe reduction in the odds of reaching a settlement. 

Failing to Explain the Process to the Client

The typical client will have only a vague idea of what a mediation is about. The client may even be under the impression that the mediator has some kind of authority to impose a result. Obviously, the client has to be disabused of that notion before the mediation. The client has to understand that there will be a great deal of downtime in the course of the exercise, and that when he or she is actively involved, there may be some unpleasant remarks made for which the client has to be prepared. Above all, the client has to understand that the case is almost certainly not going to settle unless some compromise is made.

Coming in to the Mediation with a Bottom Line Drawn in the Sand

In terms of compromise, a realistic assessment of the case should give the client a good idea of what a likely result would look like. Having said that, it is usually unhelpful to formulate, in advance, a bottom line position. It is more helpful to consider the range of possible results. At the top end, the range would consist of clearly acceptable results and obviously better than risking an adverse result at trial. At the other end, the range would consist of results that are likely unacceptable at the outset, but may have to be considered once the process unfolds. This is especially true if it becomes clear that the client’s assessment of the case was overly optimistic. The middle range, which is where most settlements are achieved, involves balancing an immediate and ascertainable result, as opposed to the uncertainty and expense of a trial.

Other Mistakes

Other mistakes I see all too often include:

Any of these mistakes can easily scuttle a mediation and deprive both sides of what is likely the best opportunity to resolve the dispute that they will ever have. 

The Latest on Non-Competition Covenants

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On December 2, 2021, the Working for Workers Act, 2021, came into force. The Act prohibits non-competition clauses in employment or other agreements except in the context of a sale of the business, or if the employee operates at an executive level. The effective date of the Act is October 25, 2021. The Court has held that it does not apply to agreements entered into prior to that date.

Non-competition clauses have always been fertile ground for litigation simply because many employers consider them vital to their business. But, they are also very difficult to enforce. At the end of the day, at common law, the enforceability of such clauses depends on whether or not a court considers them reasonable. For that reason, it is important for both employers and employees to give careful thought to how a Court will make that determination when negotiating the terms of a non-competition clause.

In the recent case of M & P Drug Mart Inc. v. Norton and Whitehead Pharmacy Ltd., the Ontario Court of Appeal took the opportunity to review this process.

Norton, a pharmacist, had been the pharmacy manager of a pharmacy owned by M & P in Huntsville, Ontario. His employment agreement contained a non-competition covenant. The clause in issue provided that for one year after the termination of Norton’s employment for any reason, he would not “carry on, or be engaged in, concerned with, or interested in, directly or indirectly, any undertaking involving any business the same as, similar to, or competitive with the business within the 15 km radius of the business located at 10 Main Street East, Huntsville, Ontario”.

The agreement also provided an acknowledgement on Norton’s part that the clause was necessary to protect M & P’s legitimate business interests and was reasonable in the circumstances.

Norton resigned and became an employee at a pharmacy less than 3 km away.

M & P sued Norton and the matter was determined by Application. The Application judge found the covenant to be unreasonable and therefore unenforceable. The Application was dismissed. The decision was appealed to the Court of Appeal, which dismissed the appeal.

The Court of Appeal began its analysis by observing that, as a general rule and on public policy grounds, a non-competition clause is unenforceable unless it is reasonable considering the interests of the parties and the public based on the circumstances at the time that the covenant is made. In order to determine whether the clause is reasonable, the Court will consider the extent of the activity to be prohibited, the geographic coverage of the restriction, and its duration. The covenant must be clear as to activity, time and geography. If it is ambiguous on any of these factors, it is likely to be considered unenforceable simply because the ambiguity will make it impossible to show that it is reasonable.

If the covenant is clear and unambiguous, it will then be assessed for reasonableness. The Court will not rewrite the covenant in accordance with what it thinks is reasonable. If it is unreasonable, the Court will simply decline to enforce it.

In this case, M & P argued that the clause merely restricted Norton from working as a pharmacist for a pharmacy or a store that includes a pharmacy. However, the words contained in the clause went well beyond this restriction. In the view of the Court, the covenant would have prohibited Norton from working in a job at a supermarket, for example, that included a pharmacy department, even if his job was in a completely different department and he was not employed as a pharmacist. Furthermore, Norton would have been prevented by the clause from being a passive investor in any such business.

As it happens, Norton did become re-employed as a pharmacist. Nevertheless, as the clause included activities beyond working as a pharmacist, it was considered overly broad and, therefore, unenforceable.

The jurisprudence is filled with cases in which a non-competition clause was found to be unenforceable. This is because historically, employers have insisted on protections well beyond what is truly necessary, thinking that inclusion of an acknowledgment by the employee that the employer’s concerns are reasonable will preserve the clause.

While the number of such cases will start to decrease given the new legislation, the vast majority of contracts existing today that include such clauses will not be subject to the legislation. They will continue to be litigated, and Courts will continue to be vigilant in protecting the ability of employees to make a living elsewhere unless the clause restricting the new employment is eminently reasonable.

Even with the new legislation, the common law will apply to “executive” employees. In addition, this issue will arise in the context of the sale of businesses. In the latter cases, while the attitude of the Court has always been more generous to parties seeking to enforce non-competition covenants, the issue of reasonability will continue to be one to which attention must be paid.

Virtual Mediations and Arbitrations: The New Opportunities Presented to Disputants

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The new world of virtual court attendances, arbitrations, and mediations has now been our reality for well over one year. There is no reason to believe that this will not continue, regardless of our progress in reducing the impact of the coronavirus on the population. In fact, users of Ontario’s justice system have already been told that virtual court hearings will be the new normal.

This news is far from all bad. Actually, there are some very positive aspects to virtual litigation. This may be particularly true for parties to disputes seeking to either arbitrate or mediate their disputes.

Common to both arbitration and mediation is the fact that the parties select their own neutral. In the past, as a general rule, parties and their counsel were usually restricted to neutrals residing near locations where the parties lived or did business. This did not ordinarily represent a serious obstacle for parties located in highly populated areas. However, this posed a serious problem for those in smaller centres where there are fewer trained and qualified mediators and arbitrators. The only solution was to pay the additional expense involved in bringing in or going out of town to see the selected neutral.

Furthermore, in disputes involving highly technical fact patterns or complex legal principles, the search for a local qualified neutral is more complicated and far less likely to be fulfilled adequately.

In the virtual world, these restrictions do not exist. Parties are now able to locate and engage neutrals literally anywhere in the world. The restrictions of living or working in small markets no longer apply, as neutrals anywhere can be engaged at no additional cost. Where specific expertise, whether legal, factual, or scientific, is required, the availability of neutrals with such expertise opens up dramatically. For an arbitration matter involving a complex area of knowledge, it is now possible to engage a panel consisting of a trained arbitrator and industry experts, from wherever they happen to be located, and all without the burden of travel costs to bring such individuals together in a room for days, weeks, or more.
In the world of virtual mediation and arbitration, there are almost no limits to the extent that imaginative counsel can accommodate the needs of their clients at far less expense than before.

The experience of the pandemic has been brutally difficult for almost everyone, but here is one example of a silver lining that should be exploited where possible.