The Supreme of Canada has upheld the British Columbia Court of Appeal’s decision in Owners, Strata Plan LMS 3905 v Crystal Square Parking Corp. In applying common principles of contract law, the Supreme Court of Canada has shed light on the implications of agreements imposing positive obligations on successors in title, and specifically whether positive obligations can run with the land.  Additionally, the Supreme Court of Canada also contemplated whether the parties, by their conduct post-incorporation demonstrated an intention to be bound by a contract identical to the one their predecessor entered into.

Crystal Square was a large complex in Burnaby, B.C., which held a mixture of both commercial and residential tenants including an officer tower. When Crystal Square was built, its developer signed an Air Space Parcel Agreement with the City of Burnaby. One thing the agreement set out was access to the parking for each air space parcel and the cost associated with same.

The office tower was a strata tower, made up of several units or “strata lots”. Though owned by different people, it has shared ideas. The strata corporation manages and maintains the shared areas and services. The strata corporation did not exist when the Air Space Parcel Agreement was signed. However, its members used the parking garage and paid for it, as directed by the Agreement.

Eventually, the owners wanted to dispute the cost of parking. As they had not signed the Agreement, they disputed whether its terms applied to them. As such, the central question before the Courts was whether the parties, after Strata’s incorporation, entered into a new contract on the same terms as the pre-incorporation contract?

In order to answer this question, the Appellate Court used the test from Heinhuis v Blacksheep Charters Ltd. and Phelps Holding Ltd. v Owners Strata Plan VIS 3420:

• the parties need to show an intention to be bound by a new, and identical post-incorporation contract; and
• that the parties cannot take the benefit of the agreement without accepting the burden that comes with; and lastly
• when the benefit and burden are contemplated pre-incorporation, and then acted upon exactly as contemplated post-incorporation, then there will be a new post-incorporation contract on the same terms.

Ultimately, the Supreme Court of Canada, in agreement with the BC Appeals Court, held that the Agreement between the parties could be enforced. The strata corporation took advantage of all the terms of the Agreement, for many years, after incorporation, it therefore should be obliged to discharge the burden of the Agreement as well. Consequently, the benefit and burden were acted upon by the the strata corporation in the exact manner contemplated post-incorporation.

Interestingly, this case opens the door for the general applicability of Heinhuis in all cases where there is a newly incorporated entity with an intention to be bound by a new, post-corporation contract. Further, it addresses the apprehension of applying Heinhuis because it would bind a party to a positive obligation that does not run with the land.

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by Samah Rahman

The Ontario Superior Court of Justice recently ruled on an insurer’s duty to defend under an errors and omissions policy, where coverage for an insured’s breach of contract was excluded.

In this case, Panasonic Eco Solutions Canada Inc., the insured sought a declaration that its insurer, XL Specialty Insurance Company, owed it a duty to defend an arbitration pursuant to an errors and omissions policy that Solar Flow-Through Fund (“Solar Flow”) commenced against it. The arbitration claim was based on two monetary demands: one for liquidated damages of $92,309.62 arising out the insured’s failure to substantially complete the project; and the second for damages estimated at $1,300,000 arising out of what the parties referred to as the Proceeds Agreement.

The subject policy, excluded coverage for claims arising out of Panasonic’s assumption of liability in a contract or for breach of contract, unless the liability was one that the insured would have in the absence of the contract. XL denied coverage and asserted that Solar Flow’s claims against Panasonic were a result of its breach of contract, and fell within the exclusion, absolving the insurer of its duty to defend the claim. Panasonic in turn, argued that the plaintiff in the underlying action had named various causes of action, including negligent misrepresentation and unjust enrichment; and those were not captured under the ambit of the breach of contract exclusion.

The Court granted the application in part, finding that the insurer had a duty to defend the claim for liquidated damages, while dismissing the duty with respect to the Proceeds Agreement.

In its decision, the Court reaffirmed the following principles applicable to the duty to defend:

(a) The duty to defend is distinct from, and broader than, the duty to indemnify. There may be a duty to defend even if the insurer may not ultimately be required to indemnify the insured.

(b) The Court assumes that the pleaded facts are true.

(c) The Court applies the pleaded facts to the policy wording.

(d) The duty to defend arises if the underlying complaint alleges any facts that might fall within coverage under the policy.

(e) Where pleadings are not precise enough to determine whether the claims are covered by a policy, the insurer’s obligation to defend will be triggered where, on a reasonable reading of the pleadings, a claim within coverage can be inferred.

Notably, the Court clarified that a duty to defend analysis should focus on facts alleged in the underlying pleading and not on the pleading’s legal characterization of the claim.

Applying these principles to the demand for liquidated damages, the Court held that the damages sought for failure to sufficiently complete the project, could may well be attributable to the insured’s negligence, and thus require coverage. On the other hand, damages with respect to the Proceeds Agreement would not be accrued in the absence of a contract, and thus arose out of a breach thereof. Although the claim was also characterized as negligent misrepresentation, the misrepresentation was pertaining to the intention to pay under the contract. Therefore, the claim pertained to the insured’s assumption of liability in the contract and fell squarely within the contractual exclusion under the policy. In deciding this, the Court relieved the insurer of its duty to defend on this issue.

This case serves as a potent reminder that courts will not necessarily stay bound to a plaintiff’s potentially arbitrary characterization of the claim in determining whether the insurer has a duty to defend, but instead look to the facts of the case to assess whether the duty is triggered.

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In the Absence of Force Majeure Clauses, Frustration Pays Off

Last week we examined force majeure clauses within contracts that may relieve a party’s contractual obligations during unforeseen emergencies, often referred to as “Acts of God”. In this article, we will discuss what happens when a force majeure clause is not expressly provided in the contract.

Canadian courts have not implied a force majeure provision in the absence of one, despite the occurrence of a force majeure event. In such circumstances, the doctrine of frustration also known as the doctrine of discharge, may be relied upon to vacate a contract altogether. This equitable remedy accounts for unforeseen events which have irreparably altered the basis of the contract. The doctrine of frustration can be applied broadly to all types of contracts including commercial or employment disputes. The standard to prove frustration is higher than force majeure, and the implications are also different: a force majeure clause will freeze the contractual obligation as it relates to the unforeseen event, whereas, a finding of frustration will effectively end the contract.

Doctrine of Frustration

The Supreme Court of Canada in Naylor Group Inc. v Ellis-Don Construction Ltd., 2001 SCC 58, describes the appropriate use of frustration where: “a situation has arisen for which the parties made no provision in the contract and the performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract.’”

To establish frustration, the relying party must prove that an unforeseen event has radically changed or interrupted the performance of the agreement, making it impossible, or impractical to execute the contract as originally intended. The new event must have been beyond the reasonable contemplation of the parties when they were contracting, and therefore it would be unjust to hold the parties to the agreement under these altered circumstances.

Considerations when applying the doctrine of frustration

• Is there a Force Majeure clause in the contract?
  The doctrine of frustration operates as a last resort, only to be utilized in the absence of a force majeure clause. In other words, parties cannot double dip to rely on both a force majeure clause and the doctrine of frustration, it must be one or the other.

• Was there a supervening event that occurred?
  The event must not have been foreseeable or within the contemplation of either party when the contract was executed. There may also be cases where the non-performance of an integral party to the contract, frustrates the entirety of the agreement.
• Did the event cause a radically different performance of the contract?
  The event must have rendered the performance of the contract substantially different than what the parties initially anticipated. Courts will consider events: that have rendered the performance of the contract impossible; where performance is possible but the purpose of the contract has been undermined; or, where the temporary impossibility has frustrated the contract itself. The courts have established a threshold of a minimum level of radical difference, for example, a task that has simply become more onerous or expensive since it was originally contemplated will not activate the doctrine of frustration.

Successfully establishing frustration terminates the contract from the date of the supervening event. Additionally, Ontario’s Frustrated Contracts Act, R.S.O. 1990, c. F.34 provides for other recourses such as the recovery of past benefits conferred after a contract has been frustrated. The doctrine of frustration is particularly topical in these days of uncertainty when clients are confronting situations that were beyond their contemplation when finalizing their contracts. At this time, it is incumbent on lawyers to be well versed in these contractual defences so damages are well mitigated.

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Contracts in the Time of COVID-19: Relying on Force Majeure Clauses

In response to the global pandemic of COVID-19, on March 17, 2020, Premier Doug Ford declared a state of emergency in Ontario, effectively banning people from most public spaces and outlawing events of over 50 people. The Federal Government also advised civilians to take extreme precautions by isolating themselves. As the world hinges on the rapidly changing news and national directives, we see a broad sweep of closures across many businesses. The unprecedented impact of this health crisis has permeated throughout almost every industry, leaving clients and lawyers to navigate unfamiliar territories. Clients now want to know how to protect themselves from contractual obligations that they or their vendors are unable to fulfill.

Force Majeure clauses

The principle of Force Majeure, also referred to as “acts of God”, may provide protection for extraordinary or unforeseen circumstances such as COVID-19. The Supreme Court of Canada defines this as follows:

An act of God clause or force majeure clause … generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill, Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp & Paper Co., 1 S.C.R. 580 at para. 4 [Atlantic Paper].

Parties wishing to rely on this clause have the burden of establishing that the Force Majeure event has prevented the fulfillment of the contract. However, to rely on this provision, the contract must of course, contain the clause. Even then, that is only the start of the inquiry.

Considerations when evoking the Force Majeure provision

• Is the clause explicit enough to encompass events like COVID-19?
  Absent words such as “pandemic”, “health emergency”, “disease” and “national emergency” stated within the clause, courts may refuse to classify COVID-19 as a Force Majeure event. It is important to draft such clauses comprehensively.
• Did COVID-19 really cause the non-performance of the contract?
  The party relying on this clause must prove the event was one beyond their control. At this stage of the inquiry, in Atlantic Paper the court asked the following questions:
  1. Was the contract incomplete because of an unexpected event occurring after the date the contract was signed?
  2. Was the change so radical as to strike at the root of the contract?
  3. Were there alternative avenues available to complete the contract?

• What lead up to the need to evoke a Force Majeure clause?
  The courts may assess whether the Force Majeure event predated the contract, or if the clause was relied upon as a scapegoat for other negligence or unsound business decision. If the client contributed to the failure to perform the contract, the use of this clause may be jeopardized. A court may ask:
  1. Was the event foreseeable?
  2. Was performance impossible?

• What steps to mitigate the damage were taken?

Some contracts require a minimum level of effort to mitigate the damage before being able to rely on this clause. The duty to mitigate has a standard of commercial reasonableness.

If a court finds that the Force Majeure is valid, each party may be excused from their contractual obligations, or be entitled to a relief contemplated by the contract itself.

Many legal professionals disregard the importance of this clause because of its infrequent use. However, this epidemic serves as reminder that it is a lawyer’s duty to anticipate the unexpected and protect their client against it. A well-crafted contract should include an explicit Force Majeure clause, broad enough to encompass all unforeseen events; and in addition, contain the specific relief sought, should it occur. Think worst case scenario, and work backwards to the contract!

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Limits on an Employer’s Duty to Accommodate: Frustration of an Employment Contract

When an employee is on long-term disability leave, the employment law regime provides that the employer has a duty to accommodate their employees. One such duty compels employers to preserve the employee’s right to return to work. But, how does the law govern cases where an employee’s absence extends beyond 5 years and the employee has no prospects of returning? How long does the law protect their employment? The Ontario Divisional Court’s recent decision in Katz et al. v. Clark [1] provided insight into such questions. The answer: not indefinitely. The law now dictates that an employer can terminate an employee for frustration of contract, because it is “inherently impossible” to accommodate those who cannot return to work.

In this case, Mr. Clarke had been employed by Katz Group (“Katz”) for 13 years as a Front Store Manager. Due first to depression, and then to a leg injury, he had been on a leave of absence since 2008. In early 2013, when Katz learned that Mr. Clarke was unable to perform essential work duties, and there was no reasonable expectation that he would be capable of performing them in the foreseeable future, Katz advised Mr. Clarke that his employment had been frustrated.

In September 2013, Mr. Clarke’s counsel wrote to Katz that Mr. Clarke “has been working very hard to get well so that he can return to his former employment and perform the essential duties of his position.” In response, Katz requested updated medical information outlining Mr. Clarke’s estimated date of return and prognosis for recovery. Mr. Clarke failed to respond or provide the requested particulars. In December 2013, Katz requested these documents once again. In the absence of a response, Katz terminated Mr. Clarke’s employment. Mr. Clarke commenced an action for wrongful dismissal under the Ontario Human Right’s Code. Katz moved to have the claim dismissed summarily, and the judge dismissed the motion.

On appeal to the Divisional Court, the court found in favour of Katz and held that an employer’s duty to accommodate ends when the employee is no longer able to fulfil the basic obligations associated with the employment in the foreseeable future. If there is evidence that the employee’s disabling condition is permanent, the doctrine of frustration of contract applies.

While this case imposes limits on an employer’s duty to accommodate, those relying on this principle should be advised that there still remains a high threshold to demonstrate that a contract has been frustrated. Without proof that an employee will permanently be unable to discharge their duties, the court may well preserve the employee’s right to return to work despite a long absence.

[1] 2019 ONSC 2188

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The decision in Acadia University v Acadia University Faculty Association, 2019 CanLII 47957 serves as word to the wise and humble boaster that confidentiality provisions in a settlement agreement preclude all bragging rights. It also serves as a reminder to the carefully diligent counsel to draft agreements with clear and unequivocal confidentiality provisions.

In this case, the Acadia University Faculty Association filed grievances for the termination of a tenured professor. The parties voluntarily entered into a settlement agreement, which stipulated that this matter was resolved without any admission of liability or culpability on either side. The agreement also required the minutes be kept strictly in confidence. Following the settlement, the professor took to Twitter, tweeting, among other things, that he was “a vindicated former professor.” Arbitrator Kaplan ordered these tweets be deleted in compliance with the settlement, but the professor continued tweeting, this time about his “severance pay” being withheld.

The employer asked the arbitrator to decide whether these tweets breached the confidentiality provisions of the agreement. Arbitrator Kaplan determined that they had, and reasoned that words like “vindicated” and “severance” inferred wrongdoing on the part of the University, when this was specifically not the case. The Arbitrator explained that settlements in labour law are sacrosanct. Given the repeated and continuing breaches to the terms of the settlement, together with the absence of any mitigating circumstances, Arbitrator Kaplan held that the University was no longer required to honour the payment of the settlement funds.

This case showcases both the prowess and enforceability of clearly drafted confidentiality provision.

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Commit it to paper. Sign it. Seal it. Shake on it. This sums up the best practice to transact a contract in the legal community. Why? Because, the coveted realm within the four corners of a document is a confirmation binding one to their word.

With the Ontario Divisional Court’s recent decision in Shete, Lada, and Chung v. Bombardier Inc.,[1] however, it is now clear that verbal or unsigned agreements may be enforceable if there was a meeting of minds.

Bombardier terminated three employees, and offered them a termination package, with a Release precluding any future legal actions. The employees stated that they would accept the package if an additional $2,500 was added to each package to cover the cost of legal fees. Bombardier consented and returned the revised offers for the employees to sign. The employees never executed the offers. Two months later, the employees brought an action against Bombardier for wrongful termination.  Bombardier tried to dismiss the case by relying on the Releases.

The motions judge held the Releases were unenforceable because Bombardier’s revised offer constituted a new agreement that the employees had not accepted.

On appeal, the court ruled in favour of Bombardier, resolving that the Releases were enforceable even without the signatures of the employees. The court found that it was clear from the sequence of events that the parties had reached a settlement. The employees represented that they accepted the Releases conditionally, as long as Bombardier paid the additional $2,500 each. Bombardier conceded, and no other terms were added or modified; nor were any such requests made by the employees. Even though the employees may have reconsidered their position, an enforceable contracted existed nonetheless.

This case has opened up inquiries as to what now constitutes a preliminary agreement; at what point a contract is binding without a signature, and finally, what happens when there is a brief meeting of minds, but a party has reconsidered their position, thereafter? Until such questions are clarified, don’t throw caution to the wind: just get the signature.

[1] 2019 ONSC 4083

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