Feb 14, 2019

AREAS OF LAW: Torts; Breach of contract; Negligent design and construction; Corporate veil; Bar to recovery

Globalnet Management Solutions Inc. v. Cornerstone CBS Building Solutions Ltd., 2018 BCCA 303 (CanLII)

A tortfeasor should not be able to rely on an owner’s sale of property to a non-arm’s length party as a bar against recovery.~

BACKGROUND: In 2005 the Appellant, Globalnet Management Solutions Inc., contracted with the Respondents, Cornerstone CBS Building Solutions Ltd. and Linwood Homes Ltd., for the Respondents to build a house for use by the Appellant’s two principals and their families. About a year later, water egress problems were discovered along with cracks in the retaining wall. Then, in November 2008, the Appellant transferred the property to two trusts established for the benefit of the families of the principals. This was done on a “roll-over” basis for “fair market value” in the amount of $1,385,000. There was very little evidence in the proceedings as to why this transaction happened, or why it happened when it did. Nor was there much evidence regarding how the price was determined. The Appellant continued with overseeing the remediation of the defects and paid for the remediation in the amount of over $500,000. In October 2009, the Appellant and the trusts brought a proceeding against Cornerstone for breach of contract and negligence, and against Linwood for negligence. The trial judge considered all of the evidence, including expert opinions, and examined the legal and factual questions raised while considering the applicable standard of care, causation, the effects of the defects in the house, mitigation, and the reasonableness of the remedial steps taken by the Appellant. Generally, the judge resolved all these issues in favour of the Appellant and the trusts. However, he went on to find that no loss had been proven. He noted that the Appellant was no longer the owner of the property when the remediation costs were incurred, as it had already transferred the property to the two trusts. The Appellant had received “fair market value” for the property. Furthermore, the trusts received a property that was now defect free, and so the judge also found that the trusts suffered no loss. He declined to lift the corporate veil or treat the plaintiffs as one economic unit for the purpose of recovery.

APPELLATE DECISION: The appeal was allowed. The Court of Appeal noted at the outset that this was a factually unusual case and that there was limited applicable jurisprudence. The Court disagreed with the trial judge’s fundamental and final conclusions that the Appellant was a “volunteer” under no obligation to pay for the repairs and that the trustees suffered no loss. The Court noted that by the time the sale was effected, the water leakage problems had been noticed and cracks had appeared in the retaining walls. The leakage and retaining wall problems would have affected the fair market value of the property. Based on the evidence, the Court concluded that the trusts received a defective building in return for a purchase price which was calculated without regard for the need to repair the defects. An arm’s length purchaser in the open market would not pay that “full” price for a defective building and would want to have the expected cost of repairs reflected in the price. It followed from this that the trusts did effectively have a loss, being the difference between $1.385 million and the price the building would command on the open market with the defects disclosed. On the other hand, the Appellant would have received the full amount for a house that was worth less. In this context, the Appellant was not a “volunteer” but was rather obligated to pay for the repairs. In the alternative, if $1.385 million did reflect the defects, then the Appellant would have suffered a loss in the sale. Because the sale was not arm’s length, the parties appeared to have assumed that the Appellant could simply be authorized to carry on the remediation work, and the costs would be adjusted between them. The Court found it doubtful that either expected or should reasonably have anticipated that as a result of this transaction a court would rule that any right of recovery against tortfeasors would be lost. A tortfeasor should not be able to rely on an owner’s sale of property to a non-arm’s length party as a bar against recovery. The Court granted judgment in favour of the Appellant in the amount of $320,174.05 with court order interest.