Canada: Top 5 Civil Appeals From The Court Of Appeal (September 2011)

1.  Sutherland v. Hudson's Bay Company, 2011 ONCA 606 (Gillese, MacFarland and Rouleau JJ.A.), September 22, 2011

 

For those interested in the basic principles of pension plan surplus law, Gillese J.A.'s judgment provides an excellent primer.  The result was a win for the Simpson's pension plan employees, unlike the outcome in Burke v. Hudson's Bay Co., [2010] 2 S.C.R. 273, in which the same employer prevailed in its claim to the surplus in another pension plan.

 

The Simpson's plan was a "defined benefit plan", meaning that the employer sponsoring the plan promised members a specific level of pension on retirement.  By contrast, in "defined contribution plans," members are simply promised a pension based on whatever the plan's investment experience happens to generate from the contributions.  Of course, every pension plan must be funded by contributions, which can be made by the employer alone or by the employer and the employees.  Only defined benefit plans can generate surpluses or deficits because investment experience can exceed or fall short of what is required to generate the defined benefits.  Defined benefit plans must retain actuaries to ensure that contributions are sufficient to keep the plan on track to meeting its obligations.  When ongoing defined benefit plans are more than able to meet their projected obligations, they are said to be in "actuarial surplus".  If a defined benefit pension plan is wound up and is in surplus, the actuarial surplus becomes a real surplus.

 

One might think that if the members of a defined benefit plan receive the defined benefit, they should have no complaint if the employer gets the benefit of surplus, either through a contribution holiday in the case of an ongoing plan or an actual cash payout in a winding-up.  However, the law is more complicated than that.  The complication arises because pension plans must be funded.  Where the funding mechanism involves a trust, equitable trust principles trump common law contract principles: Schmidt v. Air Products of Canada Ltd., [1994] 2 S.C.R. 611 ("Schmidt").  This means that the provisions of the trust declaration creating the trust fund will prevail over the contractual provisions in the pension plan that embodies the bargain between the employer and the employees.  Hence, depending on the language of the trust agreement, the employees may be entitled to the surplus as well as the defined benefit. 

 

In Schmidt, the Supreme Court set out a framework to determine who is entitled to a surplus:  1) examine the documentation in chronological order; 2) determine if the fund  is impressed with a trust; 3) if  the answer to 2 is "no", the employer wins, but if "yes", equity prevails over common law, with the result that the language of the trust declaration trumps the contractual language in the plan; 4) if the fund is subject to a trust, ask whether the employer explicitly limited the operation of the trust so that it does not apply to surplus (if so, the employer wins); 5) ask whether the employer expressly reserved a power of revocation when the trust was created (if so, the employer wins, but the revocation must be express, not merely implicit from a general power enabling the employer to amend the trust declaration).  Note that step 5 means that, if the original trust declaration did not contain an express reservation of a power of revocation, the employer cannot later amend the trust declaration to access the surplus.

 

The Simpson's trust declaration, which HBC inherited when it acquired that retailer in the 1970's, gave the employer a general power to amend and terminate the trust, but did not contain express language enabling the employer to re-appropriate money contributed to the fund.  To the contrary, the trust declaration provided that any amendment or termination "shall not authorize or permit or result in any part of the corpus or income of the Trust Fund being used for or diverted to purposes other than for the benefit exclusively of members of the Plan and their beneficiaries".  That language was the primary reason why the Court of Appeal held that the employees of the Simpson plan were entitled to the surplus.

 

HBC argued that certain provisions of the pension plan itself made it clear that it was entitled to the surplus.  The court rejected the argument, holding that even if the language was as clear as HBC contended, Schmidt dictates that the language in the trust document prevails.

 

The Court of Appeal saw nothing in Burke to compel the conclusion that the Supreme Court intended to alter the Schmidt framework. It distinguished Burke, in which the plan documents expressly excluded any entitlement of the plan members to any part of the trust fund in excess of the defined benefit.  While the trust agreement in Burke contained "exclusive benefit" language, that document was only created after the plan had been set up and had to be interpreted in the light of the language in the plan. Even more significantly, the language occurred in a discrete provision of the trust document that authorized the plan trustee to make payments for taxes and administration purposes.

 

Thus, the result gave the former Simpson's employees the upside of the fund's investment experience, even though the employer remained liable for providing the defined benefits. In economic terms, one can see the result as converting a defined benefit plan into a defined contribution plan with a "floor" guarantee. Was that the intent of the bargain between the employer and employees when the plan was created? The answer is "probably not".  The "exclusive benefit" language in pension plan trust declarations was aimed at securing tax deductions for employers for their pension contributions, not at giving employees a "floor" guarantee with unlimited upside. However, perhaps such employers should have foreseen that somewhere down the road they would be subject to the law of unintended consequences. After all, to get the tax deduction, they had to irrevocably part with their contributions. Once you give away your property, you usually aren't entitled to get it back.

 

2.  TA & K Enterprises Inc. v. Suncor Energy Products Inc., 2011 ONCA 613 (Goudge, MacFarland and Watt JJ.A.), September 27, 2011

 

Section 5 of the  Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000 ("the Act") requires franchisors to provide franchisees with pre-contractual disclosure.  Failure to comply enables the franchisee to sue for rescission and the return of moneys paid to the franchisor.  However, the disclosure requirement contains several exemptions, including

 

5.(7) This section does not apply to,...

(g) the grant of a franchise if,...

(ii) the franchise agreement is not valid for longer than one year and does not involve the payment of a non-refundable franchise fee...

 

To secure the benefit of this exemption, Suncor was careful to ensure that its Retail Franchise Agreements ("RFA's") with its gas stations had terms of less than a year with no option to renew.  Also, payments by gas stations to Suncor were solely in the form royalties for product sold.  There was no upfront fee for the right to sell Suncor product.

 

The RFA between Suncor and TA&K was signed on November 11, 2008 and the term was for November 15, 2008 to November 14, 2009, a year less a day.  When Suncor's parent was acquired by Petro-Canada in early 2009, the Competition Bureau ordered Suncor to divest itself of a number of gas stations.  Thus, in October, 2009, Suncor advised TA&K that when the RFA expired, it would only be extended on a month-to month basis.  In early 2010, Suncor advised TA&K that there would be no extensions after August, 2010.  TA&K responded to the bad news by bringing a class action based on the proposition that Suncor's failure to provide pre-contractual disclosure enabled gas stations in the same boat as it to claim rescission and the return of moneys paid under the RFA.  Suncor successfully moved for summary judgment and TA&K appealed.

 

TA&K advanced several clever but unsuccessful arguments for the proposition that the exemption did not apply.  First, it contended that even though the RFA had a term of a year less a day, it was signed four days before the term began and was thus "valid" for a year and three days.  TA&K argued that if Suncor had repudiated the RFA between the time it was signed and the beginning of its term, it had the right to sue Suncor for "anticipatory breach" and thus had a right of action over a period longer than a year.

 

The Court of Appeal agreed with the motion judge that the exemption was aimed at franchisees at minimal risk and defined the period of risk at a year.  It noted that TA&K conceded that the exemption would apply to a stall at a three week autumn fair that signed up more than a year in advance.  As for the point that TA&K could sue for anticipatory breach, the court noted the observation by Professor John D. McCamus in his book, The Law of Contracts (Toronto: Irwin Law, 2005), at pp. 651-52 that "anticipatory breach" might be more aptly worded as "anticipatory repudiation", with the result that it was not accurate to say that the obligations under the RFA were valid for more than a year.  The court also rejected arguments that since certain confidentiality provisions in the RFA continued after its expiry and the lease also continued on a month-to-month basis after its expiry, the RFA was valid for more than a year.

 

Stressing the French version of "franchise fee" in s.5(7)(g)(ii) ("redevances de franchisage non remboursables"), TA&K also argued that the royalty payments were "franchise fees".  It maintained that the word "redevances" meant "any amount required to be paid at fixed intervals".  The court gave this argument short shrift, noting that if it were right, no franchise agreement would ever qualify for the exemption.  It also noted that the 1971 report by Samuel Grange, Q.C. (later Grange J.A.) that eventually led to the passage of the Act excluded royalty payments from the concept of "franchise fees."

 

Despite the result in this case, one may still wonder about the fairness of the exemption itself because of the apparent ease with which franchisors are able to engage it by limiting the terms of their agreements to a year less a day.  The gas stations in this case are not in the same position as vendors at country fairs.

 

3.  The Sovereign General Insurance Company v. Walker, 2011 ONCA 597 (O'Connor A.C.J.O., Laskin and MacPherson JJ.A.), September 19, 2011

 

Section 132 of the Insurance Act, R.S.O. 1990, c.I.8 ("the Act") allows a third-party to recover against an insurer where its insured has failed to satisfy a judgment for damages.  However, under s.132, a third party has no greater rights than the insured because the third party is "subject to the equities" between the insured and the insurer.  Thus, if the insured does something to nullify coverage, the third party can be out of luck.  In this case, the insured failed to inform the insurer of the claim.  However, the insurer did get notice of the claim from the insured's landlord, which was also liable to the third party.  Is the insurer entitled in these circumstances to sit back and watch the claim unfold secure in the knowledge that its insured's failure will insulate it from liability?  Also, in these circumstances, should the court grant relief from forfeiture under s.129 of the Act?

 

On a cold winter's day, Marie Walker emerged from a movie theatre in a suburban mega-mall with her family.  The conditions in the parking lot were so treacherously icy that, despite taking due care, she lost her footing and smashed her head, sustaining a serious injury.  She sued the landlord and the maintenance company.  The landlord responded to the claim.  The maintenance company went bankrupt and failed to defend.  The landlord knew that Sovereign was the maintenance company's insurer and forwarded all the pleadings (including its crossclaim) to the insurer, albeit five years after the accident.  On legal advice, the insurer maintained its silence.  The Walkers settled with the landlord and obtained default judgment against the maintenance company.  They then sued Sovereign under s. 132 of the Act and obtained summary judgment.  Sovereign appealed.

 

Although the insurer demonstrated that the motion judge erred in his interpretation of one provision of the insurance policy, the Court of Appeal dismissed the appeal for two reasons.  First, it held that the insurer received notice under the following policy provision:

 

3(a) In the event of an accident or occurrence, written notice containing particulars sufficient to identify the Insured and also reasonably obtainable information with respect to the time, place and circumstances thereof, and the names and addresses of the injured and of available witnesses, shall be given promptly by or for the Insured to the Insurer or any of its authorized agents.

 

The court held that a purposive interpretation of the words "by or for the Insured" enabled notice to be given by a party in sufficient proximity to the insured to have knowledge of the claim.  At the very least, the court said, the provision was sufficiently ambiguous to construe it against the insurer.

 

The most significant aspect of this decision, however, was the court's treatment of s.129 of the Act:

 

129. Where there has been imperfect compliance with a statutory condition as to the proof of loss to be given by the insured or other matter or thing required to be done or omitted by the insured with respect to the loss and a consequent forfeiture or avoidance of the insurance in whole or in part and the court considers it inequitable that the insurance should be forfeited or avoided on that ground, the court may relieve against the forfeiture or avoidance on such terms as it considers just.

 

First, because Sovereign had received actual, albeit late, notice of the claim, the court held that this was a case of "imperfect compliance" within the meaning of s.129, as opposed to non-compliance:  see Falk Bros. Industries Ltd. v. Elance Steel Fabricating Co., [1989] 2 S.C.R. 778.  Therefore, the motion judge had the discretion to grant relief.  His exercise of discretion was justified by two factual findings.  First, there was no bad faith by the maintenance company, the landlord or the Walkers.  Second, even if Sovereign had received more timely notice, there was nothing it could have done differently.

 

Despite the outcome in this case, one can easily imagine circumstances where injured people will not be able to obtain recovery in similar circumstances. The Walkers would have been out of luck if the landlord had not sent the pleadings package to Sovereign. There may be a story here that did not make its way into the record.  It would be interesting to know the circumstances of the settlement with the landlord and whether there is any connection between the settlement and the landlord's decision to provide the insurer with notice of the claim.

 

One other fact is worth mentioning – the slip and fall occurred on January 30, 1999.  It took a dozen years for litigation to conclude.  Assuming a life span of 80 years, the case consumed a full one sixth of a lifetime. So, be very careful the next time you are in an icy parking lot. The hurt can last a long time.

 

4.  Morsi v. Fermar Paving Limited, 2011 ONCA 577 (MacPherson, Juriansz and Karakatsanis JJ.A.), September 8, 2011

 

Although the statutory duty of municipalities to maintain their roads has an affinity with the common law duty of care, this tragic case reminds us that the duties are different.  The statutory duty is found in s. 44 of the Municipal Act, 2001. S.O. 2001, c.25:  it requires municipalities to keep highways under their jurisdiction "in a state of repair that is reasonable in the circumstances".  A long line of cases, including decisions of the Supreme Count of Canada, holds that this means that the road must be kept in a state that allows people to use it safely by exercising ordinary care: see, e.g., Housen v Nikolaisen, 2002 SCC 33  at para.60.

 

In June, 2005, York Region was resurfacing Major Mackenzie Drive just west of Highway 27.  About 400 metres to the west of the intersection, the fresh asphalt ended and westbound drivers had to negotiate a transition to a road surface that was still in the process of being treated.  The speed limit was 60 km/h and signs indicated a construction zone.  Just before the transition point, there was a curve with a posted advisory speed of 40 km/h.  About 385 metres from the transition point, back near Highway 27, there was a "Pavement Ends" sign.  Unfortunately, Mr. Morsi, who was driving at 117 km/h, lost control of his Volkswagen Jetta at the transition point and fatally crashed into a utility pole.

 

The trial judge found that Mr. Morsi was largely to blame but still imposed liability on the municipality: see 2010 ONSC 3851.  First, he held that the municipality failed to inspect the road properly and was not fully aware of the slippery nature of the surface of the portion of the road under treatment. Second, he found that the "Pavement Ends" sign was inadequate on two grounds. First, such a sign only indicates a change from pavement to gravel, as opposed to a change from pavement to fresh treated surface.  There was evidence that "fresh treated surface" signs were recommended in the Ontario Provincial Standard Specifications (OPSS) 304 beginning in 2006. He also held that the sign should have been posted 30 metres, not 385 metres, from the transition point.

 

However, the trial judge also made another finding, which resulted in the Court of Appeal's reversing his judgment: if Mr. Morsi had been driving at the speed limit or even "modestly above it," he would not have lost control.  As the Court of Appeal noted, this finding clearly implied that drivers using ordinary care could have safely negotiated the transition point.  It therefore followed that the road was in a state of repair that was reasonable in all of the circumstances.

 

Although the trial judge had referred to the statutory wording and correctly enunciated the test in the Supreme Court cases, the Court of Appeal found that he failed to apply that test. An examination of the trial judge's reasons reveals that he also cited a number of common law negligence cases, including road maintenance cases from British Columbia, where the road authority's duty is a common law duty.

 

This case, therefore, highlights the difference between the statutory and common law duties. The trial judge here found negligence on the basis that the municipality could have reasonably done more to improve the safety do the road. However, the statutory test only requires the municipality to do as much as is necessary to ensure that ordinary drivers using ordinary care can negotiate it safely. The difference between the two tests may be subtle, but it is real.

 

The paving company in this case was governed by the common law, not the statute.  However, the court also allowed its appeal.  The trial judge had found that the paving company ought to have foreseen that drivers would speed over the transition point.  The Court of Appeal held that the company was not obliged to foresee that Mr. Morsi would drive over it at almost twice the posted speed limit and three times the advisory speed.  The court concluded that the sole cause of the tragedy was Mr. Morsi's own "reckless" driving.

 

5.  Clark v. Werden, 2011 ONCA 619 (Doherty, Feldman and Epstein JJ.A.), September 30, 2011

 

Is there anything left in Ontario of the ancient law of maintenance and champerty other than An Act Respecting Champerty, R.S.O. 1897, c. 327, which, although never repealed, was not included in the last version of Ontario's revised statutes?  This case suggests "probably not."

 

Clark, Werden and Muller were once friends.  Clark and Werden, however, had a falling out.  Muller loaned Werden $120,000 but Werden defaulted.  Muller and Clark then agreed that Muller would assign the debt to Clark.  Clark paid nothing to Muller for the assignment, but they agreed that they would talk later about how to divide the money once it was collected.  Clark then sued Werden.  Werden attacked the assignment, alleging maintenance and champerty.  Clark obtained judgment.  Werden appealed.

 

Werden's position was that Muller would not have pursued him on the debt, and that it was Clark who sought the assignment with no previous interest other than bad feeling toward him.  Clark had been an employee of Werden's and then left to start a competing business which triggered litigation in which Werden succeeded.

 

At trial and on appeal, Werden relied on NRS Block Brothers Realty Ltd. v. Minerva Technology Inc. (1997), 145 D.L.R. (4th) 448 (B.C.C.A), which sets out the indicia of maintenance: "element of officious intermeddling; no previous commercial connection; the assignee is speculating on a personal gain from the lawsuit; there is a stirring up of strife; the assignee initiates or promotes the commencement of the lawsuit."

 

The trial judge held that all of the indicia were irrelevant because, as long as the assignment of the debt complied with s. 53(1) of the Conveyancing and Law of Property Act, R.S.O. 1990, c. C.34, the motives of the assignee are of no concern to the law.  The assignee was simply asserting a property right.

 

The Court of Appeal agreed.  It relied on the judgment of McLachlin J. A. (now C.J.C.) in Fredrickson v. I.C.B.C, [1986] 3 B.C.L.R. (2d) 145 (C.A.), which the Supreme Court adopted at [1988] 1 S.C.R 1089.  In that case, however, the assignee was a judgment creditor who took an assignment of his debtor's cause of action against a third party in satisfaction of the debt.  The assignee thus had a pre-existing commercial interest.  By contrast, Clark had no such pre-existing commercial interest.  He only had an axe to grind. In Frederickson, however, McLachlin J.A. referred to Fitzroy v. Cave, [1905] 2 K.B. 364 (C.A.) in which Cozens-Hardy L.J. likened the transfer of a debt, which is a chose in action, to the transfer of property in a "bale of goods" and said that it was "not easy to see" how maintenance and champerty have any application to assignments.

 

Indeed, a century later, it is "not easy" to see how the law of maintenance and champerty has any application to anything any longer.