DATE: 20050314
DOCKET: C39866
COURT OF APPEAL FOR ONTARIO
GOUDGE, FELDMAN AND LANG JJ.A.
B E T W E E N :
1239745 ONTARIO LIMITED,
ANTREX CORPORATION and
HENGRAVE DEVELOPMENTS LTD.
Martin Teplitsky, Q.C.
and Leonard F. Marsello
for the appellants
Plaintiffs
(Appellants)
Catherine Francis
for the respondent, Royal Bank of
- and -
Canada
BANK OF AMERICA, NATIONAL ASSOCIATION and ROYAL BANK OF CANADA
F.J.C. Newbould, Q.C.
and Aaron A. Blumenfeld
Defendants
(Respondents)
for the respondent,
Bank of America, National
Association
Heard: November 1, 2004
On appeal from the order of Justice John D. Ground of the Superior Court of Justice dated March 14, 2003, and July 10, 2003, as to costs.
GOUDGE J.A.:
[1] The appellants commenced this action in 1998 because of the bankruptcy of Antrex Development Corporation (ADC), which was a real estate development company in which they had an interest. The respondents were ADC’s bankers. The litigation has had more than its share of problems and has yet to proceed beyond the appellants’ statement of claim, a prolix document of more than 120 pages.
[2] On August 26, 1999, Ground J. who has been skilfully case managing this litigation in the face of the difficulties created by this pleading, ordered the trial of the issue of whether a restructuring agreement and a release executed by the parties on December 17, 1992, were unenforceable against the appellants because of economic duress by the respondents. At the same time, he effectively stayed the balance of the claims in the action.
[3] On March 14, 2003, in response to the respondents’ motion, he found that the appellants had not established economic duress and that all of the appellants’ other claims were therefore erased by the release. His order struck out the particulars delivered by the appellants in the trial he had ordered, with leave to amend only in one minor respect. This effectively dismissed the appellants’ entire action. This is an appeal from that order.
[4] In my view, the motion judge erred in not applying the “plain and obvious” test to the pleadings and in excluding the past dealings between the parties as a possible source of economic duress. Thus, for the reasons that follow, I would allow the appeal.
THE BACKGROUND
[5] The respondent banks began to provide financing to both ADC and the respondent Antrex Corporation (AC) with a loan agreement made in October 1989. From that date through December 17, 1992, the financing relationship appears to have been rocky to say the least. AC and ADC repeatedly complained that the banks failed to honour their lending commitments. However, both companies themselves committed numerous defaults under their loan agreement. Several amendments to that agreement were made in an attempt to regularize the relationship, but without success.
[6] By August 1992, AC and ADC were again in default and, after extensive negotiations, the banks and the companies entered into a restructuring agreement called the Amended Restated Credit Agreement (ARCA). As part of the ARCA, AC and ADC acknowledged that they were in default under the existing loan agreement and that the loans were then owing and payable in full, free of any claims, set-offs, defences, deposits, reductions, abatements, or impairments. The ARCA also contained an “entire agreement” clause.
[7] Simultaneously with the execution of the ARCA, AC, ADC, and the appellant Hengrave Developments Ltd. signed a full and final release in favour of the banks in which they acknowledged receiving legal advice and that they were signing the document without duress of any kind.
[8] Following execution, the ARCA was amended on a number of occasions but to no avail. ADC was put into receivership in December 1993 and shortly thereafter into bankruptcy. The appellant 1239745 Ontario Limited purchased its claim against the banks from ADC’s trustee in bankruptcy.
[9] The action, which the appellants commenced in 1998, claims against the respondent banks principally in breach of contract, negligence and breach of fiduciary duty. While the statement of claim is verbose and cumbersome, one of the central allegations is that oral representations were made by the banks in 1989 that they would provide ADC with all reasonably required financial support beyond that called for by the 1989 loan agreement, provided that the banks could do so without unreasonable risk to themselves. The claim is that the banks failed to honour this obligation, causing ADC’s bankruptcy. The appellants sue for their consequent losses, saying that the ARCA, including its “entire agreement” clause and the Release are not a bar, because they were signed under economic duress and accordingly are voidable.
[10] In 1999, the respondents both brought motions before Ground J. seeking, among other things, orders that:
(a) the statement of claim, being prolix and repetitious, should be struck out as frivolous and vexatious and in violation of the rules of pleading;
(b) certain portions of the claim disclose no reasonable cause of action; and
(c) the “entire agreement” clause in the ARCA together with the Release are a complete answer to the appellants’ action.
[11] The motion judge found that, although badly drafted, the statement of claim contained the constituent elements of the action. He ordered the respondents to deliver a blacklined copy of the claim indicating the offending parts of it and then the appellants to deliver an amended statement of claim. He stayed this procedure pending the trial of the issue of economic duress.
[12] Next the motion judge dismissed the respondents’ request to strike out the claims for breach of contract, negligence, and breach of fiduciary duty. He found that it was not plain and obvious that any of these claims would fail.
[13] Finally, the motion judge found that it was not plain and obvious that the appellants’ entire claim would fail at trial because of the ARCA and the Release. The appellants’ claim of economic duress, if proven, could render both unenforceable. However, given its potential dispositive effect on the myriad of other issues in the action, he ordered this issue to be tried first. He therefore directed the trial of whether there was economic duress exercised against AC and ADC when the Release and the ARCA were negotiated.
[14] The appellants unsuccessfully sought to appeal this order and its validity is not in question in this appeal.
[15] Because the motion judge gave no directions about the delivery of pleadings for the issue to be tried, both respondents sought particulars of the acts of economic duress relied on by the appellants. In response, the appellants repeated the allegations of economic duress that they had argued in the motion in 1999, and pleaded that the economic duress they were under when the ARCA and the Release were negotiated and executed was caused by the various breaches of obligations by the respondents over the course of their dealings together, all as described in the statement of claim.
[16] The respondents then brought the motion that resulted in the order under appeal. As the affidavit filed by the respondent Royal Bank of Canada makes clear, they sought to challenge the adequacy of the appellants’ particulars and to confine them to one narrow allegation in the statement of claim alleging that in 1992, during the actual negotiation of the ARCA and the Release, the respondents used the appellants’ trade creditors to create economic pressure forcing the appellants to sign both agreements.
[17] The appellants’ response was that the various actions taken by the respondent banks in relation to the appellants from 1989 until the ARCA and the Release were unjustified and meant that these documents were executed under economic duress.
[18] The motion judge rejected this position. He excluded the history between the parties prior to negotiations as a possible source of economic duress and found that the appellants did not establish any acts of economic duress during the course of negotiation of the ARCA and the Release. He also found that the appellants had affirmed both agreements after executing them.
[19] As a result, he struck out the appellants’ replies to the demand for particulars and confined the appellants’ claim for economic duress to the single narrow allegation of pressure during the actual negotiations but only against Royal Bank of Canada, and then only if they could deliver better particulars of it. The appellants’ claim of economic duress against Bank of America was dismissed in its entirety. The practical consequence of the order is that the “entire agreement” provision of the ARCA and the Release effectively erase the appellants’ entire action.
[20] The motion judge put the essence of his conclusion this way:
As stated above, I am of the view that the Plaintiffs have not established that the Defendants “caused” the economic situation in which the Plaintiffs found themselves at the time of the negotiation and execution of the ARCA and the Release. In any event, there does not appear to be any Canadian authority for the proposition that, if the past dealings between the parties could be viewed as having caused the economic distress of the Plaintiff at the time it entered into an agreement with the Defendant, this can constitute economic duress so as to vitiate such agreement. I am further of the view that in the case at bar, all claims based on the actions of the Defendants vis-à-vis the Plaintiffs in the period prior to the negotiation and execution of the ARCA and the Release have been erased by virtue of the provisions of the ARCA and the Release and, as stated in my earlier Reasons, as a matter of law, based on those provisions, I would dismiss all of the claims of the Plaintiffs in the within action unless the Plaintiffs could establish economic duress when the ARCA and the Release were negotiated. The Plaintiffs have failed to do so with the possible exception of the actions of RBC referred to in paragraphs 258 and 300 of the Statement of Claim referred to above.
[21] It is this core finding and the resulting order, with its effect of dismissing the appellants’ entire action, that gives rise to this appeal.
ANALYSIS
[22] The order under appeal resulted from what were in essence pleadings motions brought by the respondents. The appellants’ replies to the respondents’ demands for particulars plead the basis for the claim that they were under economic duress caused by the respondents when they negotiated and signed the ARCA and the Release. These replies took the place of a statement of claim in the trial of the issue ordered by the motion judge in August 1999. The motions attacking these pleadings were not motions for summary judgment under Rule 20 of the Rules of Civil Procedure. They were pleadings motions under Rule 21.
[23] The test for determining whether these pleadings could be properly struck out for failing to disclose a viable claim of economic duress is the well-known “plain and obvious” test elucidated in Hunt v. Carey Canada Inc., 1990 90 (SCC), [1990] 2 S.C.R. 959. The pleadings are to be read generously and the facts pleaded are to be taken as proven. The question to be asked is whether it has been shown to be plain and obvious that the claim will fail and the fact that the claim may raise a novel legal proposition should not prevent the appellants from proceeding with it.
[24] In my view, the reasons of the motion judge do not reflect this approach. He did not ask whether the respondents had shown that it was plain and obvious that the appellants’ claim for economic duress would fail. Rather the passage quoted above reflects an analysis more consistent with a disposition at the conclusion of the trial of the issue. It is not the plain and obvious test used when pleadings are attacked under rule 21.01.
[25] The order under appeal struck out the appellants’ claim of economic duress and precluded the pleading of the history between the parties prior to the actual negotiation of the ARCA and the Release, with the consequence that these two documents were found to be binding on the appellants and to have erased their entire action. Had the plain and obvious test been used, the result would have been different.
[26] The respondents argue that the prior order of the motion judge, which directs the trial of the issue, confines the appellants to economic duress created by acts done during the actual negotiation of the ARCA and the Release. Because that order is not now challenged by the appellants, a claim based on the history between the parties prior to that will inevitably fail.
[27] I cannot agree. Although the issue directed to be tried is whether there was economic duress exercised against AC and ADC when the ARCA and the Release were negotiated, I do not read the 1999 order or the reasons for it as confining the acts creating that economic duress to the period of the negotiations. Nor do I think that the motions judge considered his prior order to have done so. Rather he analyzed the Canadian and American law and concluded that there was no Canadian authority for the proposition that past dealings between the parties can be the sources of economic duress. Had he viewed his prior order as excluding these past dealings in any event, he would undoubtedly have said so, and would not have needed to engage in any jurisprudential review.
[28] Nor does the stay imposed by the 1999 order have the effect advanced by the respondents. That order stayed the procedure to rewrite the unduly prolix statement of claim (although not the entire action) pending the trial of the claim for economic duress. Although this clearly postpones proceeding with the appellants’ other claims until after the trial of the issue, there is nothing in either the 1999 order or the reasons for it to suggest that proof of facts said to support economic duress is stayed just because those facts may also support the appellants’ other claims. Thus I do not think the 1999 order has the effect contended for, either in directing the trial of the issue or in staying the rewriting of the statement of claim.
[29] Equally, I do not think that the Canadian law relating to economic duress makes it plain and obvious that the appellants’ claim will fail particularly in light of the caution concerning novel legal propositions in Hunt, supra. The appellants claim that past acts by the respondents constituted illegitimate economic pressure, leaving them no realistic alternative but to submit to the negotiation and execution of the ARCA and the Release. Although it may be the very rare case where acts considerably separated in time from the negotiation and execution of an agreement can amount to economic duress sufficient to vitiate it, it is not plain and obvious that as a matter of law such a claim must fail.
[30] Finally, despite such an unfocused statement of claim, I do not think it is plain and obvious that the pleading of economic duress is so lacking that the claim will certainly fail. Remembering that at this stage the facts pleaded must be taken as true, the respondents’ alleged acts over the history of the relationship between the parties are said to be illegitimate and to constitute pressure leaving the appellants no choice but to negotiate and execute the ARCA and the Release. Moreover, the appellants allege that this economic duress persisted so that no act or statement subsequent to the execution of these documents could constitute affirmation of either of them. In my view the claim as pleaded is enough to withstand the plain and obvious test.
[31] Indeed, the motion judge clearly reached a similar conclusion in 1999. It was not plain and obvious to him that as pleaded the appellants’ claims of economic duress would fail. Hence he ordered the trial of that issue.
[32] In summary therefore, it is not plain and obvious that the appellants’ claim of economic duress will fail. I would therefore allow the appeal and set aside the order below.
[33] However, the appellants’ statement of claim together with their replies to the respondents’ demands for particulars are a woefully inadequate pleading foundation on which to build the trial of this issue. Hence, although I would set aside the order appealed from, I would substitute an order dismissing the motions but requiring that within 30 days of this order the appellants must serve and file a statement of claim setting out the facts, drawn from within the four corners of their existing pleadings, upon which they rely for their claim of economic duress. The trial of the issue can then proceed as if it were a properly constituted action. I would otherwise dismiss the respondents’ motions.
[34] Although we heard no submissions about costs, it seems to me that this is not a case where costs of the appeal or of the motion should follow the event. Although the appellants have been very largely successful they are also very largely the authors of their own misfortune. Had the statement of claim or even the replies to the demands for particulars been properly focused, these difficulties might well have been avoided. I would therefore order no costs either here or below.
Released: March 14, 2005 “STG” “S.T. Goudge J.A.”
“K. Feldman J.A.”
“Susan E. Lang J.A.”