Oct 25, 2020

Cancelled Condo Projects and Arbitration versus Class Actions

Ritchie v. Castlepoint Greybrook Sterling Inc., 2020 ONSC 3840 (CanLII)

There have been news headlines in Ontario about major condominium construction projects being cancelled, leaving behind hundreds of disappointed buyers. The practice in the condominium industry is to sell the units in a project three or more years before the scheduled completion of construction. Buyers put down substantial deposits that lock them into that project. If it is cancelled two or three years later in a rising market, they will suffer large losses, because the cost of buying an alternative unit will be much higher.

In such situations, the buyers may attempt to group together to launch a class action against the developer. They have been unsuccessful in these attempts, as the class actions have failed to achieve certification by the courts.

The Agreement of Purchase and Sale (“APS”) in these projects is written in a way that is heavily stacked against the buyer, and that results in an inability to pursue a class action. However, I will point out below that there may sometimes be a different alternative, in the form of arbitration based on the Ontario New Home Warranties Plan Act, that can result in a damage award to buyers acting individually.

In the Ritchie v. Castlepoint case, the judge, Justice Perell, may have come to the right conclusion based on the law as it pertains to class actions, but I would respectfully submit that his analysis of the warranty provisions (a matter not properly before the court in any event) was flawed.

Ritchie v. Castlepoint

There was no material dispute about the facts in the case under discussion, Ritchie v. Castlepoint Greybrook Sterling Inc., 2020 ONSC 3840 (CanLII). In the spring of 2016, the defendant Castlepoint had sold 179 units in a condo project in Toronto’s Junction district. The target occupancy date was March 29, 2019. On October 23, 2017, Castlepoint sent letters to the buyers stating that the project was cancelled and it would be refunding their deposits. As observed by the judge:

[37] Castlepoint never did start construction. Castlepoint alleges that by the late summer and early fall of 2017, rising construction costs made the condominium financially unviable. Castlepoint’s financial projections indicated that the project would generate negative returns rather than the minimum level of profit required by project lenders to finance the construction of the condominium.

The buyers had their deposits locked into this project for a period of about 18 months. That happened to be a period of rapid price increases in Toronto’s condo real estate market. The average two-bedroom condo rose from about $440,000 in April of 2016 to about $590,000 in October of 2017.[1] Therefore, the purchaser of a cancelled unit had effectively lost about $150,000.

In ordinary business, when somebody enters into a contract, they are expected to carry through with their promises, barring extraordinary events such as natural disasters. To do otherwise is a breach of contract. The fact that the contracting party regrets the bargain because it now thinks it will be unprofitable is not a valid excuse. The party in breach must compensate the other party in monetary terms, e.g., for the loss of $150,000 per unit. That general principle is evaded by the contract used by the condo industry. They have a very thorough “exclusion clause” that is like the proverbial “get out of jail free card”. It states that under no circumstances is the buyer entitled to claim damages because the developer has terminated the contract.

The Exclusion Clause in the Condo Agreement of Purchase and Sale

An exclusion of liability clause, as its name implies, is a term that excludes liability under a contract if certain things happen. In most types of contracts that have such a clause, it relates to quite specific events, but in the standard condo developer’s Agreement of Purchase and Sale (“APS”) it is very broad and sweeping. It boldly states, in clause 28, that:

In the event that this Agreement is terminated through no fault of the Purchaser, the Deposit shall be returned to the Purchaser …. The Purchaser further acknowledges that the Vendor shall not be liable for any damages or costs whatsoever incurred by the Purchaser resulting from the termination of this Agreement including…. The Purchaser acknowledges and agrees that this provision may be pleaded by the Vendor as a complete defence to any claim which may be made by the Purchaser against the Vendor. [Emphasis added]

The concept of an exclusion clause has a long history in Anglo-Canadian law. In the more distant past, Lord Denning, head of the Court of Appeal in England, propounded a doctrine that limited the scope of exclusion clauses. Based on Lord Denning’s doctrine, an exclusion clause that permitted a fundamental breach of the contract, which made the whole purpose of the contract a nullity, could not be enforced: “it cannot be fair that a contracting party could make a fundamental promise while simultaneously securing the right to have no liability in the event that he or she did not perform the fundamental promise.” Unfortunately for consumers, more conservative judges in the House of Lords later disavowed that doctrine, and this has been followed in Canada.

Justice Perell briefly surveyed the history of the legal approach to exclusion clauses. The leading case on this in Canada is the Supreme Court’s decision in Tercon Contractors Ltd. v. British Columbia (Minister of Transportation and Highways:

[53] In Tercon, discussed further below, the Supreme Court of Canada established a three-step approach to the application of exclusion clauses: (a) the first step is to determine whether as a matter of interpretation the exclusion clause applies to the circumstance of the case; (b) if the exclusion clause applies, the second step is to determine whether the clause was unconscionable at the time the agreement was made; and, (c) if the exclusion clause applies and it was not unconscionable, then the third step is to determine whether the court should refuse to enforce the cause because of the presence of an overriding public policy.

After conducting his analysis, Justice Perell concluded that the exclusion clause in this APS did not violate the Tercon principles and was therefore enforceable:

[90] Viewing the enforcement of Clause 28 as a matter of interpretation or considering its application or non-application as a matter of public policy, in my opinion, enforcing the clause is not contrary to the existence of an overriding public policy.

The plaintiffs have filed an appeal, and so will have another chance to argue about the enforceability of that clause.

The Role of the Tarion Addendum from the Ontario New Home Warranties Plan Act

The Ontario New Home Warranties Plan Act (“ONHWPA”) is a consumer protection statute that aims to protect buyers both against physical defects in the construction and also against breaches related to the timing of completion. Regulation 273/04 under ONHWPA designates the Tarion Corporation as the administrator of the ONHWPA. Other regulations state that Tarion can specify various forms of “Addendum” that are to be mandatory additions to the APS for a new home purchase.

The Tarion Addendum requires the vendor to state the factors which will give it the right to terminate the agreement, such as the inability to obtain financing or zoning permission. If the vendor has made an honest effort to obtain financing, and has been unable to get it, the Addendum does allow it to terminate the agreement. The principles of contract interpretation imply that there must have been a good faith effort, and the vendor cannot get out of the agreement by merely pretending that it was unable to obtain financing and using it as an arbitrary excuse.

The role of the Tarion Addendum to the APS in Ritchie v. Castlepoint was raised by the plaintiffs, but quickly dismissed by Justice Perell, who decided that it did not make a difference in this case:

[83] Clause 28 is in some respects a codification of paragraph 11 of the Addendum, but if paragraph 11 is a different termination provision, it is was agreed to by the parties [sic] and the parties agreed that the Vendor shall not be liable for any damages or costs whatsoever incurred by the Purchaser resulting from the termination of this Agreement.

The important point that was not discussed here is that the Tarion Addendum has the power to override any provision in the APS, including the exclusion clause. Section 13 of the Addendum states:

13. Addendum Prevails

The Addendum forms part of the Purchase Agreement. The Vendor and Purchaser agree that they shall not include any provision In the Purchase Agreement or any amendment to the Purchase Agreement or any other document (or indirectly do so through replacement of the Purchase Agreement) that derogates from, conflicts with or is inconsistent with the provisions of this Addendum, except where this Addendum expressly permits the parties to agree or consent to an alternative arrangement. The provisions of this Addendum prevail over any such provision. [Emphasis added]

There is an additional provision in the Addendum stating that, if the vendor terminates the agreement, the purchaser who disputes the termination is entitled to seek arbitration. (Moreover, the vendor is required to pay for the costs of the arbitration.) There would be no point in having such a right to go to arbitration if the exclusion clause is a complete defence against paying damages. The exclusion clause is inconsistent with the Tarion Addendum, and therefore is repudiated by it.

Developers appear to be aware of this. In one case in which the author participated, where the termination by the vendor was clearly without merit, the vendor made a substantial settlement payment to the purchaser in order to avoid the risk of going to arbitration.

Mandatory Arbitration under ONHWPA Precludes a Class Action

Section 17 of ONHWPA states that “every agreement between a vendor and prospective owner shall be deemed to contain a written agreement to submit present or future differences to arbitration,” and this requirement to go to arbitration is laid out in the Tarion Addendum.[2]

Therefore, while I would argue that the Tarion Addendum does confer rights that override the exclusion clause, this cannot be enforced in court. Therefore, a class action cannot be used to enforce the provisions of the Addendum.

ONHWPA explicitly ousts the jurisdiction of the courts in this area in favour of private arbitration. This usually takes place before a retired judge, whose fees are paid by the parties, at no expense to the government. Arbitration has some efficiency advantages, but one of the major downsides from the viewpoint of consumer protection is that arbitral decisions are not publicly reported. They do not create precedents, and consumers are often unaware of their right to make use of arbitration.

As the jurisdiction of the court is ousted, there cannot be a class proceeding, which must take place in court. There are a number of significant areas in which class proceedings are prevented by statutory provisions that mandate a different forum. For example, the Expropriations Act, RSO 1990, requires that claims for “injurious affection” (e.g., loss of business due to a major construction project blocking access) are required to be made before the Local Planning Appeals Tribunal. Therefore, when business owners sought damages for lost business due to construction of the streetcar right of way along St. Clair Avenue, their claim failed to achieve certification. That also happened to be a decision by Justice Perell, which was upheld by the Court of Appeal in Curactive Organic Skin Care Ltd. v. Ontario, 2012 ONCA 81 (CanLII):

[3] Contrary to the appellants’ assertion, the court’s jurisdiction can indeed be ousted in favour of an administrative tribunal through clear, explicit and unambiguous language in a statute…

Class actions are intended to provide access to justice where individual claims are too small to be feasible. Perhaps this is not so much a problem in the case of cancelled condo projects or expropriations, where the individual claims are more likely to be larger. Nevertheless, they are not always large enough to proceed individually, and a class action would often still be more efficient.

The pitfalls in this can be seen in British Columbia, where the principle of ousting the jurisdiction of the court has been taken to an extreme in the case of employment disputes. That province’s Employment Standards Act, RSBC 1996, provides that an employee whose rights (e.g., to overtime pay or vacation pay) have been violated shall complain to the Ministry of Labour. BC’s Court of Appeal has therefore ruled that no such claims can be brought by way of a class action: Macaraeg v. E Care Contact Centers Ltd., 2008 BCCA 182 (CanLII). Ontario’s Employment Standards Act is similar to BC’s, but Ontario’s Court of Appeal has nevertheless ruled that class actions are permissible for claims for unpaid overtime and vacation pay.

The Tarion Addendum cannot be enforced directly in court, but it may still have a role to play in a class action. On appeal, the plaintiffs can argue that the Tarion Addendum should be taken into consideration in determining the public policy issue under the Tercon criteria regarding the enforcement of exclusion clauses.

Conclusion

This case, and others before it, have found that plaintiffs face difficult challenges in bringing a claim of this type via a class action. Recent amendments to Ontario’s Class Proceedings Act in Bill 161, which raise the standards that must be met for certification, will only make things more difficult. In such a situation, individuals who have suffered losses may be well advised to pursue individual claims under the Tarion Addendum, which may offer a better chance at claiming damages for the lost opportunity from a cancelled condominium project.

Peter Spiro is the principal of Spiro Law P.C. He acts as occasional counsel to Goldstein Law in expropriation and real estate litigation. This article is provided for general information, and not intended to apply to any individual case. You should seek legal advice pertaining to the facts of your particular case.


[1] https://toronto.listing.ca/condo-price-history.htm

[2] This was a key issue in yet another of the prolific Justice Perell’s decisions, where he ruled that a class action could not be used because of a mandatory arbitration clause found in a private contract, Heller v. Uber Technologies Inc., 2018 ONSC 718 (CanLII), <http://canlii.ca/t/hq4hk>. In that case, the Court of Appeal ruled that the arbitration clause was unconscionable and therefore unenforceable, upheld by the Supreme Court in Uber Technologies Inc. v. Heller, 2020 SCC 16 (CanLII), <http://canlii.ca/t/j8dvf>.