nov. 9. 2020

COURT OF APPEAL SUMMARIES (November 2 – November 6, 2020)

Way v. Schembri, 2020 ONCA 691 (CanLII)

[Huscroft, Nordheimer and Harvison Young JJ.A.]

COUNSEL:

J. C. Lisus, A.J. Winton and N. Holmberg, for the appellants

J.M. Wortzman and S. Malthouse, for the respondents

Keywords: Contracts, Interpretation, Real Property, Joint Venture Agreements, Rights of First Refusal, Restrictive Covenants, Civil Procedure, Summary Judgment, Partial Summary Judgment, Hryniak v. Mauldin, 2014 SCC 7, Butera v. Chown, Cairns LLP, 2017 ONCA 783, Service Mold + Aerospace Inc. v. Khalaf, 2019 ONCA 369, Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53

FACTS:

The parties to this action are both real estate developers. In 2007, they entered into a joint venture agreement. Shortly after, they decided to form a corporation to pursue other development opportunities. In 2008, they executed a shareholders’ agreement for the newly formed corporation, with each of their own numbered companies as shareholders.

The shareholders’ agreement contained a clause, which was under the heading “Non-Competition”, but in substance was essentially a right of first refusal. The clause stipulated that the respondent shareholder was obligated to present any development opportunities to the newly formed corporation and the appellant shareholder first. If the corporation and the appellant shareholder did not decide to pursue the opportunity, then the respondent shareholder would be free to pursue it individually.

The appellant commenced an action in 2012 based on a claim for damages arising out of an alleged breach of this clause. It is also worth noting that the appellants’ action was a companion action to a broader action, and that the parties have been engaged in ongoing litigation since 2010.

Nevertheless, in 2017, the respondents brought a motion for summary judgment to dismiss the appellants’ action on the ground that the clause was an unenforceable restrictive covenant. The motion judge agreed with this submission, and granted summary judgment dismissing the action. The appellants appealed this judgment.

ISSUES:

(1) Did the motion judge err in granting summary judgment?

HOLDING:

Appeal allowed.

REASONING:

(1) Did the motion judge err in granting summary judgment?

Yes. The Court began its analysis by noting that it seemed unusual that a motion judge would consider summary judgment in one action that has already been ordered to be tried together with another action, along with an order for common examinations for discovery. The reality that the facts underlying the two actions were inextricably intertwined made the decision even more unusual. In that sense, the Court was puzzled why this issue was dealt with separately from the other action in the first place, as it could have easily been addressed within the broader action.

The Court agreed with the appellants’ submission that the motion judge effectively granted partial summary judgment. While the judgment technically disposed of the appellants’ action in its entirety, the close relationship with the companion action remained to blur the lines between the two. The Court emphasized that partial summary judgement should only be used sparingly, due to the risk that it might actually further complicate matters instead of simplifying them, contrary to both its intended purpose and the Hryniak objective (Butera v. Chown, Cairns LLP, 2017 ONCA 783; Service Mold + Aerospace Inc. v. Khalaf, 2019 ONCA 369).

In short, this case carried the risk that the conclusions ultimately reached by the trial judge could conflict with the result reached by the motion judge.

Aside from the issue of partial summary judgment, the Court also noted that the motion judge’s findings demonstrated that summary judgment was never appropriate in the circumstances. Based on the motion judge’s findings, a detailed collection of facts producing a solid foundation for analysis was necessary. The motion judge neglected to collect such evidence in an effort to undertake such an analysis. The motion judge should have interpreted the contract in a manner consistent with the surrounding circumstances known to the parties at the time of the contract’s formation (Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53).

Further, the motion judge erred in rejecting the legitimacy of the clause as a mere “agreement to agree”. The Court noted that rights of first refusal always contemplate the need for further agreement, and that acknowledging this need does not invalidate the clause. This would suggest that the motion judge misunderstood the proper application of the “agreement to agree” principle.

Due to the Court’s conclusion that the order granting summary judgment should be set aside and the action reinstated, the Court declined to make any findings or observations as to the actual enforceability of the clause in question.

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