Place Concorde East Limited Partnership v. Shelter Corporation of Canada, 2006 CanLII 16346 (ON CA)

DATE: 20060518

DOCKET: C41123

COURT OF APPEAL FOR ONTARIO

FELDMAN, BLAIR AND LAFORME JJ.A.

B E T W E E N :

PLACE CONCORDE EAST LIMITED PARTNERSHIP BY ITS GENERAL PARTNER 1049015 ONTARIO INC., PLACE CONCORDE WEST LIMITED PARTNERSHIP BY ITS GENERAL PARTNER 1049016 ONTARIO INC., PETER ABBOTT, JOHN D. ABRAHAM, VICTOR ABRAHAM, DR. WALTER AH NOW, BARBARA ANDERSON, LYNNE MARGARET ANDREWS, PETER ARMSTRONG, HARRY BAILEY, PAULA BASSAN, ROBERT BASSAN, DR. GARGI BHATIA, BOSILJKO BOROS, PETER BRADSTREET, C. BUGEYA, EDITH BUNTING, MARK CADMAN, LEONARD CARTER, SALLY CARTER, NOE AND MADELEINE CASTANOS, JAMES CHANG, PHILIP CHANG, JAMES CHARNOCK, FREDERICK CHAPPELL, DONNA CHEN, R. ANTHONY COOK, AN TRIEU DAM, IRENE DAM, STANLEY J. DEUDNEY, DANIEL DULMAGE, ROLAND ESTRABILLO, HELEN EVANS, ROBERT EVANS, JAMES FRASER, THE ESTATE OF HUBERT GALEZKI, PETER GAMBLE, GARY GRADLEY, DICK L. GRANNAN, LEONA GRAY, WILLIAM A. GREENLAW, MARIA-LYRA GREGORIO, BONNIE GRIFFIN, STEPHEN GRIFFIN, KATHERINE GROSS-BROWN, FRANCE GUIMOND, DICK GUTENBERG, DAVID HALCOVITCH, H. CLARK HARNDEN, BERNIE HARTE, MAUREEN HARTLE, MEL A. HARTY, THE ESTATE OF RUDOLF HEIDE, ERNEST HEIN, JAMES O. HEW, LINDA HEW, DAVE HILDRED, SHIRLEY HILL, STEPHEN A. HOLMES, DAVID HOLT, RICK L. HOO, CHARLES E. HOOK, JEFF HUNSBERGER, LUCIO IANIERO, ROSE IANIERO, GARNET JOHNSON, SHAMMIT KAPUR, LLOYD KEMP, BRIAN R. KENNEDY, DONALD P. KIERAN, SUSAN KINSELLA, WILLARD L. KINZIE, STEPHEN KOVACS, RON KWIK, PHILIP KWONG-CHIP, DERICK LAI, PIERRE LEBLANC, JAMES LEE, ARTHUR LEUNG, JOHN LIUZZI, LUCIA LOI, WALTER W. LOMAX, EDWARD AND SYLVIA LUDWIK, MICHAEL LUDWIK, STEVE LUDWIK, NEIL B. MACKINNON, GLENN R. MARSHALL, STEPHEN NG, LLOYD PAYNE, VIET PHONG LUONG, HENRY MAITLAND, POORAN MANMOHANSINGH, GORDON MCARTHUR, CREIGHTON MCCARTHY, HARRY MCDONALD, DAVID MCDOUGALL, GLENN MCINTOSH, JUSTIN A. MCKEAGUE, ADRIAN MENEGALDO, ANTHONIA MEYER, PAUL MIDGLEY, SILVANA MIOR, ERNIE MOLDITZ JR., BERT MOORE, EDWARD MOREWOOD, W.G. MORISON, JOHN E. MUNDY, JOHN MURAKAMI, NESTOR AND CELIO NALUZ, NICOLAE NECHITA, YEM YEM NGHIEM, JOHN NIELSEN, OTTO NOVAK, RAY PARMENTIER, SURESH PATIL, LLOYD PAYNE, BRIAN PEARCY, PAUL J. PICONE, DEREK PRICE, ROSE PUGLIESE, COLIN RAYMAN, C. IAN ROBERTS, WAYNE ROCKWELL, JAMES RUSHBROOK, STEPHEN RUSSELL-HILL, ALBERT SAIKALEY, NORMAN SANTICAN, RHODA SANTICAN, THOMAS SCHONBERG, GORDON SCHWARTZENBURG, ROY SCHWARTZENBURG, PAUL SKORY, BRUCE SMITH, CHING CHING TAI AND JENNIFER TAI, EDWIN TAI, TONY TAM, PAUL TAVARES, JOHN TAYLOR, ALAN THOMPSON, MARY TOLONE, TONY TOLONE, CHRISTOPHER I. TORRES, BRUCE TRIM, CECILE TULL, JAMES TURNER, BARBARA VENUS, WILSON T. WAI, RICHARD C. WHILLANS, ROBERT WICKHAM, SIEGFRIED WIEBE, JOSEPH WONG, KATHRYN WRIGHT, PING FUNG WU, MARIA CAROLYNE YAPP, ANTHONY ZESZUTEK BY HIS LITIGATION GUARDIAN, FEEIAZ ABDUL, SHERIFA ABDUL, ALLEN AGAR, GINO ALBERELLI, TERESITA ALORA, PETER ALTOBELLI, MASA ANDO, ROGER ARCHAMBAULT, LYN C. BAILLIE, FABIO BALDIN, TED J. BANDI SR., JAMES BARRON, ROBERT BASSAN, NOIME BERNAL, WILFREDO BERNAL, PATRICK BIZIER, GEORGE BOUVERAT, SHIELA BOYCE, KEVIN BRAY, BRUCE BROOKER, WILFRED BROWN, WILLIAM BRYCE, GEORGE CAMPBELL, RICHARD CANTON, JANE CARCICH, FELICIA CARMELLY, JOHN CARRINGTON, FRANCISCO CASUPANG, MARILOU CASUPANG, ROBERT CHARKO, BARRIE CHEONG, MELVYN CHIN, SHERYL CHOW, GARY CONNORS, DWIGHT CRUMP, CARMINE D'AGOSTINO, PAUL DANIELS, MIKE DAVIDSON, RAYMOND DEPUIT, JOE V. DIFAZIO, ROCKY DIPIETRO, GWENNETH DOUNA, LENA EISEN, LAURA ELLISON, SONIA ESKEDJIAN, EDWARD EVANS, WILLIAM GALLIE, PETER GAMBLE, ROSS GARTLEY, MIKE GAUVREAU, WILL F. GEERTS, NICOLA GENNARO, FELIZ GIEGER, NORBERT GIEGER, STEPHEN GOODSON, C.R. HARRIS, JOHN HAY, GERJET HINRICHS, ALEXANDER HOTOVEC, ROBERT HOUSE, KEN HUGHES, TONY HUI, WAI HOW HUI, MAURO IGNACIO, RAYMOND JOHNSON, BIJU KARUMANCHERY, OMANA KARUMANCHERY, DIRK KEYSER, HARRY KIEFHABER, WILLIAM KOEN, MARINUS KOK, DR. SHIU LOON KONG, KIRIT KOTHARI, F. ROBERT KROUSE, SAU YING ANTHEA LAW, KEITH LAYTON AND TRISHA CLARKIN, FELISA LAZARO, WILSON LEUNG, KEH-MING LIN, MIKE LJUBISIC, FRANK MABRUCCO, KEN MACPHERSON, MARTIN MAIS, ARSHAD MAJEED, JOHN MARA, SERGIO MARAGNO, HAROLD MARQUIS, REID MCBRIDE, ROBERT MCDOUGALL, BRIAN MCFARLANE, CAROLE MAY MCGUIRE, TERRY MCGURK, KONSTINA DEAN MCLAREN, JAYSHREE MEHTA, ED MEYER, THE ESTATE OF PETER H. MEYER, BY HIS LITIGATION ADMINISTRATOR, ANTHONIA MEYER, GARY MIDWINTER, JAMES MILBURN, CRAIG MISNER, ROBERT MULHOLLAND, BRIAN MURDOCK, DR. IVAN NANCEKIEVILL, JOSEFINA NARCISO, GINA NARDANGELI, ROBERT NICKEL, EARL NORSWORTHY, ROBERT NORSWORTHY, MARY JANE ORCUTT, RICHARD B. OSBORNE, MURRAY PEARSON, GLASSPOLE PICKERSGILL, BRIAN POWERS, CATHERINE POWERS, RUBY RAMESAR, TIMOTHY RAYNER, NORMAN ROSSEAU, MOHAMMEDALI SADIKALI, PAUL SCIASCETTI, JOHN SECA, LYNNE SHANNIK, IAN SHAW, ALAN SHORT, LINO SILVA, MARITA SIMBUL, PETER SIRKO, GEORGE SITTER, THE ESTATE OF ELMARS SPROGIS, KEE SUE, MYRLENE SUNDBERG, LYLE SYLVESTER, DAVID TALBOT, FE TAN, MURAT TANDIRCI, CHRISTOPHER TAVERS, ARNOLD TAYLOR, DAVID TAYLOR, BARBARA THOMPSON, SARAH THOPPIL, PAUL THOPPIL, WILLIAM J. TIDBALL, ANNE VAILLANCOURT, ROGER VAILLANCOURT, ESTATE OF VENNIO VALENTINI, GERRY VAN OYEN, MARINA USHYCKY, ZOLTAN VARGA, ANTONY VAYALUMKAL, JACK AND LORRAINE VIRGIN, JOSEPH WALSH, RON WARBURTON, PETER WIWCZARUK, PATRICK WONG, SHARON WONG, DAVID WOODLEY, KEITH AND MARILYN WORRALL, AND GLEN WRIGHT

Timothy Pinos and David S. Ward, for the appellants/respondents by cross-appeal

Catherine Patterson for the respondents/appellants by cross-appeal Shelter Corporation of Canada Limited, also known as 177061 Canada Ltd., 72085 Manitoba Limited, 72092 Manitoba Limited, Shelter Financial Corporation

R. Bruce Smith and Christopher A.L. Caruana

for the respondents/appellants by cross-appeal Barclays Bank of Canada and Household Trust Company

Heard: November 28 and 29, 2005

Plaintiffs /Appellants (Respondents by Cross-Appeal))

• and -

SHELTER CORPORATION OF CANADA LIMITED, ALSO KNOWN AS 177061 CANADA LTD., 72085 MANITOBA LIMITED, 72092 MANITOBA LIMITED, SHELTER FINANCIAL CORPORATION, BARCLAYS BANK OF CANADA AND HOUSEHOLD TRUST COMPANY

Defendants /Respondents (Appellants by Cross-Appeal)

A N D B E T W E E N:

BARCLAYS BANK OF CANADA

Plaintiff (by Counterclaim)/Respondent (Appellant by Cross-Appeal)

• and -

EDITH BUNTING, JAMES CHANG, PHILIP CHANG, PETER GAMBLE, KATHERINE GROSS-BROWN, SHIRLEY HILL, LUCIO IANIERO, WILLARD KINZIE, PIERRE LEBLANC, LUCIA LOI, EDWARD AND SILVIA LUDWIK, MICHAEL LUDWIK, STEVE LUDWIK, VIET PHONG LUONG, ANTHONIA MEYER, SILVANA MIOR, YEM YEM NGHIEM, ROSE PUGLIESE, COLIN RAYMAN, BRUCE SMITH, PAUL THOPPIL, MARY TOLONE, MARIA CAROLYNE YAPP, SHERIFA ABDUL, PETER ALTOBELLI, MASA ANDO, DR. KHALIL ASAYESH, FABIO BALDWIN, PATRICK BIZIER, SHEILA BOYCE, KEVIN BRAY, WILLIAM BRYCE, FRANCISO CASUPANG, MARILOU CASUPANG, MELVYN CHIN, SHERYL CHOW, GARY CONNORS, CARMINE D'AGOSTINO, RAYMOND DEPUIT, GWENNETH DOUNA, EDWARD EVANS, ROSS GARTLEY, WILL GEERTS, DAVE GOEDE, KATHERINE GROSS-BROWN, GERJET HINRICHS, TONY HUI, BIJU KARUMANCHERY, MARTIN MAIS, CAROLE MAY MCGUIRE, TERRY MCGURK, KONSTINA DEAN MCLAREN, THE ESTATE OF PETER MEYER, BY HIS LITIGATION ADMINISTRATOR ANTHONIA MEYER, JOSEFINA NARCISCO, RUBY RAMESAR, TIMOTHY RAYNER, NORMAN ROUSSEAU, MOHAMMEDALI SADIKALI, NORMAN SANTICAN, RHODA SANTICAN, PAUL SCIASCETTI, ALLAN SHORT, MARITA SIMBUL, MARITA & LEZON, RONALD SIMBUL, SUE KEE, THE ESTATE OF VENNIO VALENTINI, AND PATRICK WONG

Defendants (by Counterclaim) /Appellants (Respondents by Cross-Appeal)

A N D B E T W E E N:

HOUSEHOLD TRUST COMPANY

Plaintiff (by Counterclaim)/Respondent (Appellant by Cross-Appeal)

• and -

PETER ABBOTT, JOHN D. ABRAHAM, VICTOR ABRAHAM, DR. WALTER AH NOW, BARBARA ANDERSON, LYNNE MARGARET ANDREWS, PETER ARMSTRONG, HARRY BAILEY, PAULA BASSAN, ROBERT BASSAN, GARGI BHATIA, BOSILJKO BOROS, PETER BRADSTREET, C. BUGEYA, MARK CADMAN, LEONARD CARTER, SALLY CARTER, NOE AND MADELEINE CASTANOS, FREDERICK CHAPPELL, JAMES CHARNOCK, DONNA CHEN, R. ANTHONY COOK, AN TRIEU DAM, IRENE DAM, STANLEY J. DEUDNEY, DANIEL DULMAGE, ROLLAND ESTRABILLO, HELEN EVANS, ROBERT EVANS, JAMES FRASER, THE ESTATE OF HUBERT GALEZKI, GARY GRADLEY, DICK L. GRANNAN, LEONA GRAY, WILLIAM A. GREENLAW, MARIA-LYRA GREGORIA, BONNIE GRIFFIN, STEPHEN GRIFFIN, FRANCE GUIMOND, DICK GUTENBERG, DAVID HALCOVITCH, H. CLARK HARNDEN, BERNIE HARTE, MAUREEN HARTLE, MEL A. HARTY, THE ESTATE OF RUDOLF HEIDE, ERNEST HEIN, JAMES HEW, LINDA HEW, DAVE HILDRED, STEPHEN A. HOLMES, DAVID HOLT, RICK L. HOO, CHARLES HOOK, JEFF HUNSBERGER, ROSE IANIERO, GARNET JOHNSON, SHAMMIT KAPUR, LLOYD KEMP, BRIAN KENNEDY, DONALD P. KIERAN, SUSAN KINSELLA, STEPHEN KOVACS, RON KWIK, PHILIP KWONG-CHIP, DERICK LAI, SAU YING ANTHEA LAW, JAMES LEE, ARTHUR LEUNG, JOHN LIUZZI, WALTER W. LOMAX, HENRY MAITLAND, POORAN MANMOHANSINGH, GLENN R. MARSHALL, GORDON MCARTHUR, CREIGHTON MCCARTHY, HARRY MCDONALD, DAVID MCDOUGALL, GLENN MCINTOSH, JUSTIN A. MCKEAGUE, ADRIAN MENEGALDO, PAUL MIDGLEY, ERNIE MOLDITZ JR., BERT MOORE, EDWARD MOREWOOD, W.G. MORISON, JOHN E. MUNDY, JOHN MURAKAMI, NESTOR AND CELIO NALUZ, NICOLAE NECHITA, STEPHEN NG, JOHN NIELSON, OTTO NOVAK, RAY PARMENTIER, SURESH PATIL, LLOYD PAYNE, BRIAN PEARCY, PAUL J. PICONE, DEREK PRICE, C. IAN ROBERTS, WAYNE ROCKWELL, JAMES RUSHBROOK, STEPHEN RUSSELL-HILL, ALBERT SAIKALEY, THOMAS SCHONBERG, GORDON SCHWARTZENBURG, ROY SCHWARTZENBURG, PAUL SKORY, CHING CHING TAI AND JENNIFER TAI, EDWIN TAI, TONY TAM, MURAT TANDIRCI, PAUL TAVARES, JOHN TAYLOR, ALAN THOMPSON, SARAH THOPPIL, TONY TOLONE, CHRISTOPHER I. TORRES, BRUCE TRIM, CECILE TULL, JAMES TURNER, BARBARA VENUS, WILSON T. WAI, RICHARD C. WHILLANS, ROBERT WICKHAM, SIEGFRIED WIEBE, JOSEPH WONG, KATHRYN WRIGHT, PING FUNG WU, MARIA CAROLYNE YAPP, ANTHONY ZESZUTEK BY HIS LITIGATION GUARDIAN, FEEIAZ ABDUL, ALLEN AGAR, GINO ALBERELLI, TERESITA ALORA, M. LU AMARAL, ROGER ARCHAMBAULT, LYN C. BAILLIE, TED J. BANDI, ROBERT BASSAN, JAMES BARRON, NOIME BERNAL, WILFREDO BERNAL, GEORGE BOUVERAT, BRUCE BROOKER, WILFRED BROWN, GEORGE CAMPBELL, JANE CARCICH FELICIA CARMELLY, JOHN CARRINGTON, ROBERT CHARKO, BARRIE CHEONG, DWIGHT CRUMP, PAUL DANIELS, MIKE DAVIDSON, JOE DIFAZIO, ROCKY DIPIETRO, LENA EISEN, LAURA ELLISON, SONIA ESKEDJIAN, WILLIAM GALLIE, PETER GAMBLE, MIKE GAUVREAU, NICOLA GENNARO, FELIX GIEGER, NORBERT GIEGER, STEPHEN GOODSON, C.R. HARRIS, JOHN HAY, ALEXANDER HOTOVEC, ROBERT HOUSE, KEN HUGHES, HUI WAI HOW, MAURO IGNACIO, RAYMOND B. JOHNSON, OMANA KARUMANCHERY, BRIAN KENNEDY, DIRK KEYSER, HARRY KIEFHABER, WILLIAM KOEN, MARINUS KOK, DR. SHIU LOON KONG, KIRIT R. KOTHARI, ROBERT F. KROUSE, KEITH LAYTON AND TRISHA CLARKIN, FELISA LAZARO, WILSON LEUNG, KEH-MING LIN, MIKE LJUBISIC, FRANK MABRUCCO, KEN MACPHERSON, ARSHAD MAJEED, JOHN MARA, SERGIO MARAGNO, HAROLD MARQUIS, REID MCBRIDE, ROBERT MCDOUGALL, BRIAN MCFARLANE, JAYSHREE MEHTA, ED MEYER, GARY MIDWINTER, JAMES MILBURN, CRAIG MISNER, ROBERT MULLHOLLAND, BRIAN MURDOCK, DR. IVAN NANCEKIEVILL, GINA NARDANGELI, ROBERT NICKEL, EARL NORSWORTHY, ROBERT NORSWORTHY, MARY JANE ORCUTT, RICHARD B. OSBORNE, MURRAY PEARSON, GLASSPOLE PICKERSGILL, BRIAN POWERS, CATHERINE POWERS, JOHN SECA, LYNNE SHANNIK, IAN SHAW, LINO SILVA, PETER SIRKO, GEORGE SITTER, MYRLENE SUNDBERG, LYLE SYLVESTRE, DAVID TALBOT, FE TAN, CHRISTOPHER TAVARES, ARNOLD TAYLOR, DAVID TAYLOR, BARBARA THOMPSON, WILLIAM J. TIDBALL, MARINA USHYCHY, ANNE VAILLANCOURT, ROGER VAILLANCOURT, GERRY VAN OYEN, ZOLTAN VARGA, ANTONY VAYALUMKAL, JACK VIRGIN, JOSEPH WALSH, RON WARBURTON, PETER WIWCZARUK, SHARON S. WONG, DAVID WOODLEY, KEITH WORRALL, GLEN WRIGHT

Defendants (by Counterclaim)/ Appellants (Respondents by Cross-Appeal)

On appeal from the judgment of Justice Sarah E. Pepall of the Superior Court of Justice dated November 26, 2003.

LaFORME J.A.:

OVERVIEW

1The appeal and cross-appeal arise out of a complicated real estate investment scheme involving the acquisition and redevelopment of a Calgary apartment complex known as Place Concorde. The trial judge dismissed the individual plaintiffs' request for rescission of their investment contracts and dismissed their claim for damages of $10,684,000, payable pro rata to the individual plaintiffs, against the defendant property development company, Shelter Corporation (“Shelter”).¹

2The individual plaintiffs were investors in two 1989 public offerings involving the acquisition and redevelopment of an apartment complex in Calgary. Pursuant to the terms of the offerings, they became limited partners in a project to redevelop the complex (the individual plaintiffs are referred to as the “Limited Partners”). Shelter, the promoter of the offerings, ran into serious cash flow problems and by 1994, it lost the project in foreclosure proceedings by the mortgagor of the property (who is not a party to these proceedings). The Limited Partners’ interests in the project were extinguished by judicial order in 1994.

3The trial judge concluded that the Limited Partners’ loss of their units in the project was caused by Shelter’s breaches of numerous contractual commitments in the prospectuses and related documents. However, she also concluded that there was no basis at common law or in equity to justify granting the Limited Partners’ claim for rescission of the contracts. Moreover, she held that the Limited Partners had not suffered any provable damages in the form of loss of capital appreciation, or loss of income. In this regard, the trial judge held that even if Shelter had fulfilled all of its contractual commitments, the project was too heavily leveraged to allow it to be refinanced in the prevailing market conditions. She concluded that the Limited Partners would have to have sold the project in 1994 at an amount that would have been insufficient to cover existing obligations owing from the sale proceeds.

4In addition to dismissing the Limited Partners’ claim for rescission and damages, the trial judge refused their request to deliver up to them certain promissory notes that they had given to Shelter as part of the consideration for acquiring their interests in the project. These notes were sold or assigned by Shelter in 1991 and 1992 to the other defendants in the main action, Barclays Bank and Household Trust (respondents/cross-appellants, the “Financial Institutions”). The trial judge concluded that the Limited Partners were liable on the notes for the final payment due thereon and granted judgment in favour of the Financial Institutions on their cross-claim for the unpaid amounts.

5The Limited Partners appeal the trial judge’s order dismissing their request for rescission and dismissing their claim for damages. They also appeal the trial judge’s order refusing their request that the Financial Institutions redeliver the promissory notes.

6On their cross-appeal, the Financial Institutions seek to vary the judgment in two respects. First, they cross-appeal from the trial judge’s conclusion that if the Limited Partners had established damages, they would have had a right of equitable set-off against the obligations arising under the promissory notes. Their second ground of appeal relates to the trial judge’s conclusion that the default interest rate in the promissory notes should be set aside as an unenforceable penalty and be replaced with the interest rate provided for in the Courts of Justice Act, R.S.O. 1990, c. C-43.

7For the reasons that follow, I would allow the appeal to the limited extent that I would award nominal damages of $1 in favour of each appellant for Shelter’s breach of contract. I would dismiss the cross-appeal.

BACKGROUND

8The trial judge in her reasons set out in detail the facts surrounding the public offerings involving Place Concorde as well as the subsequent events (her reasons are reported at (2003), 2003 49373 (ON SC), 43 B.L.R. (3d) 54). I will outline the facts briefly in order to discuss the issues on appeal.

9Place Concorde was a twin-tower residential apartment complex in downtown Calgary with office, retail and commercial space. The 295 Limited Partners purchased investment units in limited partnerships referred to as the Place Concorde East Limited Partnership (ELP) and the Place Concorde West Limited Partnership (WLP).

10Shelter was the original limited partner of both the ELP and the WLP. Shelter’s business consisted primarily of the acquisition, development and syndication of real estate projects. The ELP and the WLP each had as a general partner a numbered Manitoba company wholly owned by Shelter. These original general partners -- 72086 Manitoba Ltd. and 72092 Manitoba Ltd. -- were co-defendants in the main action and are nominal respondents on appeal.

11In July and October 1989, the ELP and the WLP entered into agreements with a numbered company, 159257 Canada Ltd. (a company in which Shelter had a 50% stake), to purchase Place Concorde for $26,756,544.² The ELP and the WLP agreed to pay the purchase price in part by assuming a pro rata share of 159257’s first mortgage with The Royal Trust Company for $5,480,000. The remaining balance was to be paid from the proceeds of two public offerings of limited partnership interests in the ELP and the WLP.

12The ELP and WLP prospectuses dated September 25, 1989 and December 5, 1989 respectively, provided that Shelter, as the promoter of the offerings, proposed to acquire, renovate and manage the complex and register it as a condominium “as soon as practicable”. The prospectuses further stated that the project would be operated as a rental property until the “Maturity Date”, which was defined as “a date, which shall be five years from the Interest Adjustment Date” (i.e., on or about October 31, 1994).

13The objectives for the unit holders as stated in the ELP and WLP prospectuses were to earn income, to provide an opportunity for capital appreciation and to achieve income tax deferral. The prospectuses also provided that by subscribing for an appropriate number of units, a Limited Partner “may acquire future rights to one or more apartment suites … [which] must be selected at the time of subscription”.

14The price per unit for the ELP and the WLP was $100, while the minimum subscription amount per investor was $35,400 for the ELP and $39,400 for the WLP. Each investor had to sign a subscription form stating that he/she subscribed on the terms as described in the prospectus and the Limited Partnership Agreement, which was attached to the prospectus. The Limited Partnership Agreement was between the relevant general partner, Shelter as the “Original Limited Partner” and each investor.

15The Limited Partners paid for their units by assuming a pro rata share of a second mortgage on the project, which was held by Montreal Trust Capital Markets (“Montreal Trust”) for $15,800,000. They also agreed to assume a pro rata share of a third mortgage that Shelter could place on the project under certain circumstances. The Limited Partners paid the remainder of the subscription fee by cash or by cash plus a promissory note payable to the Limited Partnership.

16Under the terms of the promissory notes given by the Limited Partners, four yearly instalments were payable to the Limited Partnership in addition to a last “balloon” payment due on October 31, 1994. The balloon payment consisted of 80% of the principal amount plus accrued interest. The Limited Partnership acknowledged in the note that it intended to assign its interest in the note to Shelter on closing. Shelter agreed to use the notes to partially finance the payment of the obligations of the Limited Partnership as summarized in the prospectus. The Limited Partners also assumed a pro rata share of the first Royal Trust mortgage on the complex.

17In the prospectuses, the attached Limited Partnership Agreement, and in seven other contracts that had been entered into by the general partners and approved by each Limited Partner in the Limited Partnership Agreement (the seven contracts are referred to by the trial judge as the “Material Contracts”), Shelter made a number of commitments to the ELP, the WLP and the Limited Partners. The prospectuses also included detailed financial projections of various costs, predicted vacancy rates, rental price increases and cash flow up to October 31, 1994. In addition, the prospectuses included numerous warnings to investors of the risks associated with the investment.

18The public offerings for the investment units in the ELP and WLP went on the market in October 1989 and December 1989 respectively and both were fully subscribed. Cash consideration generated from the offerings was $16 million, while non-cash consideration was approximately $19.4 million. The non-cash consideration included the promissory notes given by the Limited Partners amounting to $10,405,426 for both the ELP and the WLP. There was a cash shortfall of approximately $9.2 million owing to the vendor, 159257, on the sale price of the project. Shelter assumed all obligations owing to the vendor on the sale price.

Subsequent Developments

19Not long after the offerings closed, Shelter sought additional financing for the project. Shelter’s Executive VP at the time of the offering testified that 1990 was the beginning of a deep real estate recession and that occupancy rates and rents were declining at Place Concorde. He said that real estate credit markets had become increasingly constrained and arranging financing was a challenge.

20On March 15, 1990, Barclays Bank of Canada agreed to provide Shelter with a term loan of up to $3 million to finance Shelter’s obligations connected with the project. Shelter assigned ELP promissory notes³ totalling approximately $3.9 million to Barclays as security for the loan. On June 27, 1990, Shelter obtained additional financing by selling WLP promissory notes to Household Trust Company for approximately $4.5 million. On May 10, 1991, Barclays provided a further term loan to Shelter’s related company, Shelter Financial (a co-defendant and nominal respondent on this appeal), on security of additional promissory notes. On May 23, 1991, Household purchased additional promissory notes from Shelter Financial for approximately $2.1 million.

21Serious cash flow problems were experienced by Shelter from 1990 onwards. As of December 1991, Shelter stopped renovations on the suites. As of April 1992, the operating income of the project was insufficient to cover expenses such as realty taxes and debt service. Shelter did make cash flow loans to the Limited Partnerships initially, however, there came a point when it did not have the finances to continue to make such loans despite its commitment to do so. By December 31, 1992, it had made cash flow loans of $2,398,481.

22In February 1993, Montreal Trust, which had also refinanced the Royal Trust first mortgage for $5.1 million, sent a notice of default to Shelter under the first and second mortgages for failure to pay realty taxes. Montreal Trust retained Regional Group (one of Shelter’s competitors) to prepare a report on the condition of the buildings. The report was very negative and indicated that the complex was in a poor state of repair.

23In response to Shelter’s continuing default under the mortgages, Montreal Trust attorned the rents in July 1993. In August 1993, Montreal Trust delivered a notice of intention to enforce security and commenced foreclosure proceedings. Montreal Trust appointed Regional Group as the receiver manager of the project. On September 1, 1993, it issued a statement of claim to Shelter and the Limited Partners demanding full payment of property tax arrears and the first and second mortgage loans. The project was ultimately sold on October 28, 1994 by a judicially approved sale to Rimrock Investments for $16.5 million. The Limited Partners’ interests in the ELP and WLP were terminated by judicial order. Shelter’s assets were seized by creditors and it ceased being an active company in 1994.

24In September 1998, Rimrock sold the project for $40,590,000 to an arm’s length purchaser.

SUMMARY OF THE TRIAL JUDGE’S REASONS

25In her comprehensive reasons, the trial judge addressed the following seven issues:

1. Did Shelter breach its agreement with the Limited Partners?

2. Did Shelter’s breach cause the Limited Partners to lose their investment?

3. Should the agreement be rescinded?

4. Alternatively, are damages available?

5. Did the Limited Partners mitigate their damages?

6. Relying on the doctrine of equitable set-off, could damages be set-off against the amounts due on the promissory notes held by the Financial Institutions? In this regard, was there a close connection between the transactions and would it be manifestly unjust to permit set-off?

7. Was the default rate of interest contained in the promissory notes a penalty?

26On the first issue, the trial judge held that Shelter breached numerous commitments in the prospectuses, the Limited Partnership Agreement and the Material Contracts. Specifically, she found that Shelter breached the following commitments:

• to make timely payment of obligations of the Limited Partnerships to third parties: for example, it failed to pay property taxes as they came due;
• to provide cash flow loans for operating purposes to the Limited Partnerships during the Commitment Period:⁴ in letters to the Limited Partners in October and November 1993, Shelter acknowledged its inability to continue to provide cash flow loans;
• to complete substantial renovations at a fixed cost on a best efforts basis by January 31, 1991: Shelter failed to pay the entire fixed cost amount that it committed to spend, it renovated fewer than half the suites, and it did not use its best efforts to complete renovations by January 31, 1991;
• to guarantee repayment of the second mortgage until the Maturity Date: Shelter allowed the second mortgage to fall into default and failed to repay principal and interest on the mortgage until the Maturity Date;
• to provide third mortgage financing to cover any shortfall in the final advance under the second mortgage: Shelter did not provide third mortgage financing when certain monies were not released to it by Montreal Trust under the second mortgage;
• to manage the affairs of the Limited Partnerships in a competent and appropriate manner: Shelter failed to provide good property management, failed to complete the renovations, and failed to provide adequate reporting to the Limited Partners; and
• to report significant financial and operational events to the Limited Partners and to hold annual meetings: Shelter held only three meetings, all in 1993, and provided misleading financial statements that did not include comparisons of actual to budgeted results every year, and sent reporting letters that were misleading and silent on numerous material issues.

27The trial judge concluded:

I am satisfied that Shelter did breach its agreement with the Limited Partners. While it is not obvious to me that all of the commitments were in favour of the Limited Partners as opposed to the Limited Partnerships, those that were include the timely payment of partnership obligations, the cash flow loans, the renovations, the second mortgage, and reporting (at para. 194).

28On the second issue, the trial judge held that Shelter’s breaches caused the Limited Partners to lose their investment in the project. She rejected the Financial Institutions’ argument that the downturn in the economy was the intervening factor that caused the project to fail and not Shelter’s breaches. She stated:

Shelter made certain commitments as to cash flow loans and timely payment of the obligations of the Limited Partnerships both of which were breached. Shelter was also to guarantee the repayment of principal and interest on the second mortgage until October 1994. A strong argument can be made that these commitments ought not to have been given, but having done so, Shelter must bear the responsibility of those commitments. Had those commitments been fulfilled, the Project would not have been lost in August 1993. Accordingly, I am satisfied that the plaintiffs have established that Shelter caused them to lose their investment in the Project (at para. 200).

29Regarding the third issue, the trial judge observed that the Limited Partners were seeking two alternative remedies: rescission and the attendant relief of repayment of monies paid, and damages. She explained the distinction between rescission at common law and equitable rescission. With respect to the former, she noted that the agreement was not voidable at the option of the Limited Partners and thus rescission at common law was not available. Turning to rescission in equity, she said:

[N]one of the traditional grounds such as fraud, misrepresentation or unconscionable conduct which serve to invoke the court’s jurisdiction are present. Additionally, I am not persuaded that the court’s jurisdiction to grant rescission should be invoked on general equitable grounds or that it would be “practically just” to do so (at para. 208).

30The trial judge stated that even if equitable rescission were available, it should not be granted because it was not possible to restore the parties to their pre-contractual positions. She referred to Kingu v. Walma Ventures Ltd. (1996), 10 B.C.L.R. (2d) 15 at 21 (C.A.) for the following three barriers to rescission: lack of prompt action by the plaintiffs; acquisition of rights by innocent third parties; and the impossibility of restoring the parties to their pre-contractual position. In this case, the Limited Partners had derived benefits from the investment in the form of tax relief, which was one of the purposes of the investment. The trial judge concluded:

It seems to me that the claims of the plaintiffs in this case properly sound in damages, not rescission. In any event, I do not view Shelter’s breaches as fundamental or going to the root of the contract as alleged by the Limited Partners (at para. 211).

31Turning to the fourth issue, the trial judge reviewed the law of damages for breach of contract and the line of cases dealing with damages for a loss of opportunity. She concluded:

While I have determined that Shelter’s failure to make the requisite tax payments and to continue to make cash flow loans caused the Project to be lost, it seems to me that at best, the Limited Partners suffered a loss of chance or opportunity to receive income and experience capital appreciation. I must then consider whether the chance constituted “some reasonable probability” of realizing an “advantage of some real substantial monetary value” as described by Griffiths J.A. in Eastwalsh Homes⁵ (at para. 227).

32The main issue concerning damages was whether the Limited Partners suffered a loss of chance to experience capital appreciation as a result of Shelter’s breaches of the various commitments to the Limited Partners. On this issue, the trial judge accepted the opinion of the Financial Institutions’ experts, that in December 1994, there would have been inadequate proceeds of sale such that the Limited Partners’ exposure on the promissory notes would have been reduced. She said that, “[i]n reaching this determination, one must examine the cash outflows before any note repayment and the value of the Project had it been renovated as contemplated in the prospectus” (at para. 228).

33The trial judge accepted the Financial Institutions’ expert opinion that the revenue shortfall suffered by the project was primarily because market conditions were much worse than what had been projected. The trial judge did not put an estimated value on the project had it been renovated as of the Maturity Date of October 31, 1994. Nor did she make a finding on what the net operating income would have been had Shelter not breached its commitments. She was satisfied, however, that the net operating income would not have been sufficient to generate a value in excess of the required outflows:

I conclude that even if the renovations had been completed by February, 1991 as contemplated by the prospectuses, the Project would have continued to suffer significant cash flow shortfalls. It would not have achieved a net operating income in 1994 that would have resulted in a value in excess of the required outflows. This is the case whether a 10% or an 8% capitalization rate is used. Having said that, I accept the opinion of the experts for the Financial Institutions that a 10% capitalization rate was more appropriate.…

I conclude that the Limited Partners suffered no damages as a result of any loss of capital appreciation. It is not credible in my view that the property would have a value that would cover the outflows including the mortgages, Shelter's cash flow loans, commissions, and structural repairs costs⁶. … The Limited Partners showed no proclivity to contribute additional capital and in my view, they would not have done so. Even if Shelter had performed all of its commitments, the only realistic alternative available to the Limited Partners would have been a sale of the Project in 1994 (at paras. 237 and 238).

34She went on to consider whether the Limited Partners could have obtained refinancing of the project in 1994. She concluded that they could not have done so:

Regardless of the balloon payment requirement [on the promissory notes], the cash flow generated from the renovated units would be inadequate to service any new or renewed facilities whether the capitalization rate was 8% or 10%. In addition, there would have had to be financing for the post tension structural repairs. It seems to me that at a minimum, financing would have to cover $1,130,000 on account of post tension structural repairs.... Furthermore, there would have to be a source of funding for future cash flow deficiencies. Shelter's commitment to provide cash flow loans and to guarantee the large Montreal Trust mortgage had expired by 1995 and in any event, the company had failed by 1994. I conclude that financing would not have been available in 1994 and the Project would have been sold in any event. The plaintiffs would be in the same position as they are today. The Project and their investment would be gone with nothing to reduce their exposure on the notes. There was no reasonable probability of realizing an advantage of some real substantial monetary value (at para. 241).

35In addition to holding that the Limited Partners had not lost an opportunity for capital appreciation, the trial judge concluded that there was no loss of income for the years 1991 to 1994: “I accept the opinion of the experts for the Financial Institutions that there would have been no distributions to the Limited Partners” (at para. 242).

36The trial judge held that the fifth issue of mitigation did not need to be addressed because the Limited Partners suffered no damages and thus there was nothing to mitigate.

37Regarding the sixth issue, the trial judge considered whether, had damages been proven, they could have been set-off against the amounts due on the promissory notes. The Limited Partners conceded that they had no cause of action for legal set-off. The trial judge observed that equitable set-off may be available to a debtor even where the debt has been assigned to a third party. She noted that the test for equitable set-off requires a consideration of two components: (i) whether there is a close connection between the obligations involved; and (ii) whether there is a manifest injustice in allowing the plaintiff (creditor) to enforce its obligation without permitting a set-off to the other.⁷ She concluded that both components were satisfied in this case.

38On the issue of close connection she held: “The notes were part of the purchase price and were part of the consideration provided by the Limited Partners for the units and Shelter’s commitments and services… Furthermore, they were specifically related to Shelter’s undertaking to make timely payment of the obligations of the Limited Partnerships pursuant to the prospectuses” (at para. 272).

39On the manifest injustice requirement, the trial judge observed that it was obvious to a reader of the prospectus and the notes that set-off rights had not been excluded. She also pointed out that Shelter was in breach of the commitments to the Limited Partners and that the Financial Institutions as assignees took the notes subject to the equities. Accordingly, she ruled that the Limited Partners would be entitled to their set-off claim, subject to proving damages and mitigation.

40With respect to the seventh issue, the promissory notes provided for an interest rate of the prime commercial lending rate (“Prime”) plus 1.75% before default, and Prime plus 6% after default. Thus, on default, the interest rate was stepped up by 4.25%. The trial judge concluded:

The default rate was in the nature of a penalty. It was not established as any pre-estimate of damages that might be suffered. I consider the Prime Rate plus 6% to be extravagant and unconscionable and I am not persuaded that it was commercially reasonable in the circumstances.…

It seems to me that in the circumstances, the appropriate rate is that set out in the Courts of Justice Act … and I so order (at paras. 292 and 293).

MAIN APPEAL

41On the main appeal, the Limited Partners set out in their factum that the issues on appeal are: (i) whether the trial judge erred in concluding that Shelter’s breaches did not constitute a fundamental breach of the investment contracts; and (ii) whether the trial judge erred in ruling that the Limited Partners were not entitled to damages.

42It is important to note that the Limited Partners argued the first issue differently on appeal than they did at trial. At trial, the Limited Partners’ position was that the breaches by Shelter of the investment contracts entitled them to the remedy of rescission. There was no claim in their pleadings that the defendants had repudiated the prospectuses and Material Contracts, nor was there a specific request to be excused from the future performance of their contractual obligations. The issue of repudiation did not form any distinct part of their position at trial.

43On appeal, however, the Limited Partners altered their position. They now assert that there was a fundamental breach by Shelter that excused them from further performance of their contractual obligations pursuant to the doctrine of repudiation. They argue that the trial judge erroneously failed to address this issue in her judgment. They say that repudiation was included in the relief asked for in the statement of claim, that it was alluded to at trial, particularly in closing argument, and that in law, the remedy of rescission can mean repudiation.

44Counsel for the Limited Partners conceded in oral argument before us that the trial judge was correct in holding that they cannot be returned to their pre-contractual position, and hence, they are not entitled to the remedy of rescission. They instead argue that the fundamental breach by Shelter of its contractual commitments absolved them from their future obligations on the promissory notes, in particular, the balloon payments. Indeed, in oral argument the issue of the Limited Partners’ liability for the balloon payments became what this appeal is really about.

45The respondents submit that the Limited Partners did not present their case at trial on the basis of repudiation. That is, the case at trial was not about whether Shelter fundamentally breached the prospectuses and the Material Contracts, thereby entitling the Limited Partners to elect to be relieved from any future performance obligations, most notably their obligations to pay on the promissory notes. On the contrary, the Limited Partners’ case, as pleaded in their statement of claim and argued at trial, was that they were entitled to rescission for fundamental breach.

46The respondents further argue that Shelter’s breaches were not fundamental in that they did not undermine the entire foundation of the investment scheme. They say that the Limited Partners received the opportunity to speculate in the Calgary real estate market and thus obtain the benefits of capital appreciation, should they occur, and second, that they received the tax shelter benefits contemplated by their investment. Shelter, they add, did not deliberately or wilfully breach its obligations such as might warrant a finding of fundamental breach; the breaches occurred because the project did not generate sufficient income.

47In my view, the success of the Limited Partners’ appeal turns on an analysis of whether the trial judge erred in not concluding that the various breaches committed by Shelter were of such a nature that the Limited Partners were entitled to, and did in fact, elect to treat their future obligations under the prospectuses and the promissory notes at an end, pursuant to the doctrine of repudiation.

ANALYSIS

48The Supreme Court of Canada explained the distinction between rescission and repudiation in Guarantee Co. of North America v. Gordon Capital, [1999] 3 S.C.R. 423. Rescission is a remedy available to the innocent party when the other party has made a false or misleading representation. Rescission allows for the rescinding party to treat the contract as if it were void ab initio. Speaking for the court, Iacobucci and Bastarache JJ. endorsed the following definition of rescission from Lord Atkinson in Abram Steamship Co. v. Westville Shipping Co., [1923] A.C. 733 at 781 (H.L.):

Where one party to a contract expresses by word or act in an unequivocal manner that by reason of fraud or essential error of a material kind inducing him to enter into the contract he has resolved to rescind it, and refuses to be bound by it, the expression of his election, if justified by the facts, terminates the contract, puts the parties in status quo ante and restores things, as between them, to the position in which they stood before the contract was entered into.

Iacobucci and Bastarache JJ. went on to explain that the misrepresentation must be “substantial”, “material”, or “go to the root of the contract” for the remedy of rescission to be available (at para. 47).

49In contrast, repudiation occurs by words or conduct that show an intention not to be bound by the contract. Contrary to rescission, which allows the innocent party to treat the contract as void ab initio, the consequences of repudiation depend on the election made by the non-repudiating or innocent party: Gordon Capital, supra, at para. 40. The non-repudiating party can elect to treat the contract as still being in full force and effect, and the contract remains for the future. In this instance, each party would have a right to sue for damages for past or future breaches. Alternatively, the innocent party can elect to accept the repudiation and the contract is terminated. Each party is then discharged from future obligations: Gordon Capital at para. 40.

50Thus, a repudiatory breach does not automatically bring an end to a contract. Rather, it confers a right upon the innocent party to elect to treat the contract at an end thereby relieving the parties from further performance. As a general rule, the innocent party must make an election and communicate it to the repudiating party within a reasonable time: see Chapman v. Ginter, [1968] S.C.R. 560 at 568. However, in some cases the election to treat the contract at an end will be found to have been sufficiently communicated by the innocent party’s conduct: John D. McCamus, The Law of Contracts, (Toronto: Irwin Law Inc., 2005) at pp. 641-42.

51Repudiation occurs in circumstances where the breach deprives the innocent party of substantially the whole benefit that it was intended he or she should have obtained from the contract: Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426 at 499-500. A breach that allows the non-repudiating party to elect to put an end to all unperformed obligations of the parties is an exceptional remedy that is available only in circumstances where the entire foundation of the contract has been undermined, that is, where the very thing bargained for has not been provided: see Hunter Engineering, supra; see also Gordon Capital, supra, at para. 50.

52Various expressions have been used to define the sort of term that, if broken by one party, will excuse the other from future performance. Behind all of these expressions lies the notion of “substantial failure of performance”: see S.M. Waddams, The Law of Contracts, 5th ed. (Toronto: Canada Law Book Inc., 2005), at para. 587. Thus, a breach of contract that rises to the level of a substantial failure of performance can operate as a repudiation of the contract.

53Weiler J.A. in 968703 Ontario Ltd. v. Vernon (2002), 58 O.R. (3d) 215 (C.A.) at para. 16 outlines five factors that provide guidance for the court’s determination of whether or not a breach is a substantial breach such as would justify future non-performance of the innocent party’s obligations. These factors are as follows:

• the ratio of the party’s obligation not performed to the obligation as a whole;
• the seriousness of the breach to the innocent party;
• the likelihood of repetition of the breach;
• the seriousness of the consequences of the breach; and
• the relationship of the part of the obligation performed to the whole obligation.

54In my view, the trial judge did not err in failing to declare that the Limited Partners are entitled to be excused from future performance on the promissory notes. I come to this conclusion for the following reasons.

55First of all, the trial judge was not asked to make such a declaration by the Limited Partners, either in their pleadings, or in their argument at trial. The Limited Partners’ case as pleaded in their statement of claim and as argued at trial was that rescission was available to them because of the fundamental nature of the defendants’ various breaches of the terms of the prospectuses and related contracts. In other words, the plaintiffs relied on fundamental breach as an element of their claim for rescission. Alternatively, the Limited Partners sought damages for breach of contract.

56The various declarations and orders sought by the Limited Partners were designed to return both parties to the position they would have been in had they not entered the agreements. For example, in the statement of claim, the plaintiffs requested:

(a) rescission of the Assignment Agreement,⁸ as hereinafter defined;

(b) an order that the [Shelter defendants] redeliver to the plaintiffs, 1049015 Ontario Inc. as General Partner of [the ELP], and 1049016 Ontario Inc. as General Partner of [the WLP],⁹ the cash and Notes … that those partnerships delivered to the Shelter defendants pursuant to the Assignment Agreement;

(c) a declaration that the East and West Limited Partners … shall pay the balance due under the Notes to the plaintiffs, [the ELP and WLP] respectively, and not to the Shelter defendants or to [the Financial Institutions] …; and

(d) as against the Shelter defendants, damages in the amount of $50,000,000 for breach of contract, breach of trust, misrepresentation, and breach of fiduciary duty and the return of all fees paid to the defendants or related corporations for services not performed in accordance with the Prospectuses … and agreements referred to therein.

The requested remedies are, in my view, consistent only with a claim for rescission.

57The Limited Partners advanced their case on the basis of rescission throughout the trial. In the plaintiffs’ Closing Argument Brief submitted to the trial judge, there was one passing reference to repudiation. The reference is under the heading “Rescission” and follows the submission that rescission is available as a remedy where the breaches “go to the root” of the contract:

In this case, the breaches of Shelter justify rescission of the investment contract of the Limited Partners. The guarantees and commitments of Shelter were a fundamental aspect of the investment. In essence, Shelter said, “rely on us, we won’t let the Project fail.” Further, the breaches led to the loss of the entire object of the investment project, the Place Concorde project. The breaches truly went to the “root of the contract”. Lastly, the number, seriousness, and repetitive nature of the breaches was anything but incidental – it reflected a pattern of conduct that was a complete repudiation by Shelter of the offering and its commitments and guarantees [emphasis added].

58The Limited Partners immediately went on to argue: “A person who rescinds a contract is entitled to be restored to the position he or she would have been in had the contract not been made. In this case, restoration entails the return of the Notes, and all amounts paid on the Notes... Rescission is available even when a party has gained some benefit from a contract…”

59The trial judge was not asked to consider whether Shelter’s breaches of the terms of the prospectuses and related contracts amounted to a substantial breach such as would justify future non-performance of the Limited Partners’ obligations. She was therefore not asked to consider, nor did she consider, the five factors that guide a court’s determination of this issue as set out by Weiler J.A. in Vernon, supra. Furthermore, the trial judge was not asked to decide whether the Limited Partners by their words or conduct had elected to accept Shelter’s repudiation. The Limited Partners are attempting to reargue their case in a way that was not advanced at trial and to achieve under the guise of “fundamental breach entitling them to treat the contract as terminated”, the same relief they failed to achieve through their claim for rescission.

60In Vernon, supra, at para. 20, this court concluded that where a party failed to plead or argue at trial that a contract was too vague to be enforceable, it would not be appropriate for the court to address the argument on appeal, even if it may have merit. In my view, it would similarly not be appropriate for the court to allow the appeal on the basis of the doctrine of repudiation where the appellants did not advance their case on that footing at trial or in their pleadings. As Doherty J.A. for the Court stated in Rodaro v. Royal Bank of Canada (2002), 59 O.R. (3d) 74 at para. 60, “It is fundamental to the litigation process that lawsuits be decided within the boundaries of the pleadings.”

61Another reason for rejecting the Limited Partners’ argument that they should have been excused from future performance of their obligations based on repudiation is that, in my view, they have not established the unreasonableness of the trial judge’s conclusion that Shelter’s breaches were not fundamental. In dismissing the Limited Partners’ claim for rescission, the trial judge observed that, “[i]n any event, I do not view Shelter’s breaches as fundamental or going to the root of the contract as alleged by the Limited Partners” [emphasis added]. The trial judge came to this conclusion having found that Shelter breached various commitments owed to the Limited Partners, including the following: to make timely payment of partnership obligations to third parties, to make cash flow loans for operating purposes, to perform substantial renovations, to guarantee repayment of the second mortgage, and to fulfil various reporting obligations. The trial judge found that Shelter’s breaches caused the Limited Partners’ to lose their investment in the project. She rejected the Financial Institutions’ argument that the downturn in the economy was the intervening factor that caused the project to fail.

62Clearly, Shelter’s breaches were very serious. However, in my view, the trial judge’s holding that Shelter’s breaches were not fundamental and did not go to the root of the contract was available to her on the evidence and I would not interfere with it. Her conclusion on this issue applies to defeat the new claim asserted by the Limited Partners on this appeal that Shelter repudiated the investment contracts. I would point to three discrete areas that support the trial judge’s finding.

63First, the trial judge accepted that Shelter paid all proceeds of the promissory notes against authorized expenses for the project as set out in the prospectuses, namely, building, land and development costs. She further accepted that the proceeds from the two offerings were used to pay for closing and development costs and that insufficient funds were available after closing to pay all expenses and fees in full. The evidence supported these findings.

64Second, as found by the trial judge, Shelter made sizable expenditures and cash flow loans in respect of the project, until Shelter failed financially due to a serious downturn in the local and national economies. The risks of a serious market decline on a heavily-leveraged project and of Shelter’s own financial failure were assumed by the Limited Partners on the terms of the prospectuses and did not constitute a substantial failure of performance. There were numerous warnings to investors of the risks associated with this investment in the prospectuses, including that the Limited Partners were relying on Shelter’s continuing ability to honour its commitments with respect to the management and operation of the Limited Partnership and that the Limited Partners were fully liable on the promissory notes and severally liable on the second mortgage in the event of default.

65Third, and significantly, Shelter indicated in the prospectuses that the investment was an opportunity for the Limited Partners to earn income, participate in capital appreciation, and take advantage of income tax deferrals. The project did not earn income because of Shelter’s breaches. However, the Limited Partners did receive an interest in the project that entitled them to benefit from capital appreciation in value if the market went up. Unfortunately the market did not go up. Nonetheless, this benefit was a significant element of which the plaintiffs bargained for and got. Finally, the Limited Partners admitted that they took whatever tax benefits were available to them. By 1993, those Limited Partners in the top marginal tax bracket were “not significantly out of pocket” as a result of their investment in the project (at para. 119). There was thus ample evidence to support the trial judge’s findings that “the investment was developed in part as a tax shelter and the Limited Partners derived benefits in that regard” (at para. 210). In light of these circumstances, it cannot be said that the entire foundation of the contract was undermined.

66Moreover, even assuming that Shelter’s breaches of the prospectuses and related contracts were fundamental and thus amounted to an act of repudiation, in my opinion, it cannot reasonably be inferred from the proven circumstances, including the conduct of the Limited Partners, that they elected to accept the repudiation and to treat the contractual arrangements at an end. The Limited Partners did not address in their written submissions at trial or on appeal what words or conduct of the Limited Partners, either on an individual or collective basis, constituted an election to accept Shelter’s repudiation; they were seeking rescission and damages.

67On appeal, counsel for the Limited Partners submitted in oral argument that the service of the statement of claim on the respondents provided timely notice of the Limited Partners’ election to accept Shelter’s repudiation. I am prepared to assume without deciding that an election to accept a repudiation can be made through the issuance or service of a statement of claim by the non-repudiating party. However, even with that assumption, there is nothing in the wording of the claim that indicated an election to accept the respondents’ repudiation. The various orders requested by the Limited Partners reflect their position that the prospectuses and related contracts were void ab initio on the basis of the doctrine of rescission.

68In paragraphs 1(g)(ii)&(iii) of their statement of claim, the Limited Partners requested interlocutory and permanent injunctions restraining the defendants from commencing any proceedings in respect of the Limited Partners’ obligations on the promissory notes “apart from this action”. However, it would strain any reasonable interpretation to conclude that this pleading constituted an election to treat the prospectuses or the promissory notes at an end and to be released from future obligations. Indeed, paragraph 1(c), cited above at para. 56, is inconsistent with such an election. The Limited Partners did not seek to be excused from future performance on the notes, but rather sought an order permitting them to pay the balance due to the ELP and WLP instead of to the Shelter defendants or to the Financial Institutions.

69For these reasons, the trial judge did not err in failing to declare that the Limited Partners are excused from future performance of their contractual obligations, including the obligation to make the balloon payments on the promissory notes. This ground of appeal is dismissed.

Are the Limited Partners entitled to damages?

70The trial judge found that while Shelter’s breaches caused the project to be lost, “at best, the Limited Partners suffered a loss of chance or opportunity to receive income and experience capital appreciation” (at para. 227). She went on to consider whether the chance constituted “some reasonable probability” of realizing “an advantage of some real substantial monetary value” as described by Griffiths J.A. in Eastwalsh Homes, supra, at p. 687. She was satisfied that the net operating income of the project would not have been sufficient to generate a value in excess of the required outflows and that there was no loss of income for the years 1991 to 1994.

71The Limited Partners’ primary position in this regard is that, in the “unlikely event” that the project could not have been refinanced on the Maturity Date of October 31, 1994, Shelter would have had to repay the Montreal Trust mortgage pursuant to its guarantee. This argument ignores the fact that under the terms of the prospectuses, as well as in the Agreement to Assume Second Mortgage and the Limited Partnership Agreement, the Limited Partners assumed a pro rata share of the Montreal Trust second mortgage for $15,800,000. Thus, had Shelter performed its guarantee to repay the second mortgage, it would have had a right of subrogation against the Limited Partners for the amount paid: Canadian Financial Co. v. First Federal Construction Ltd. (1982), 34 O.R. (2d) 681 at 688 (C.A.), leave to appeal to the Supreme Court of Canada refused, [1982] 1 S.C.R. viii.

72The Limited Partners’ secondary position is that the project could have been refinanced in 1994 had Shelter performed its commitments. They say that the trial judge erred in finding that the required amount of refinancing would have had to cover over $27 million in cash outflows on the Maturity Date, including an allowance for the cost of repairing structural problems affecting the project, the cash flow loan amount owed by the Limited Partners to Shelter, as well as sales commissions owed to Shelter and third parties. In their view, the only debts that needed to be refinanced were the previously refinanced first mortgage in the amount of $5.1 million and the Montreal Trust mortgage of $15,252,400, for a total refinancing amount of $20,352,400.

73The Limited Partners have failed to demonstrate that the trial judge erred in including amounts beyond the refinanced first mortgage and the second Montreal Trust mortgage as part of the required refinancing amount had Shelter performed its commitments. The Limited Partners, in my view, have premised their submissions on an unrealistically low refinancing amount and thus have failed to show that the project could have been refinanced in 1994 if Shelter had performed its commitments.

74The Limited Partners also dispute the various ratios and values used by the trial judge, including the capitalization rate, the loan to value ratio required by the lender, the debt service coverage required by the lender, the interest rate charged by the lender, and the net operating income of the project. In my view, however, they have failed to demonstrate any palpable and overriding error in the trial judge’s factual findings on these values, which were fully supportable on the expert evidence before her.

75Finally, the Limited Partners argued that the trial judge erred in failing to award nominal damages. They submit that nominal damages of $1,000 per Limited Partner should be awarded, as it was in Eastwalsh Homes, supra, at p. 694.

76The general rule is that nominal damages may be given in all cases of breach of contract and in torts actionable per se: see H. McGregor, McGregor on Damages, 17th ed., (London: Sweet & Maxwell, 2003) at para. 10-006. Thus, while nominal damages for a proven breach might follow, it is open to the court in an appropriate case to decline to award even nominal damages where there is a proven breach of contract: Serban v. Egolf & Anas Associates (1983), 43 B.C.L.R. 209 at 214 (S.C.).

77In this case, the trial judge held that the Limited Partners failed to prove any damages. She did not go on to consider whether nominal damages should be awarded because the Limited Partners were successful in proving that Shelter breached the investment contracts. In my view, the trial judge erred in failing to consider whether to make such an award. Given the egregious nature of the breaches, albeit that no general damages flowed therefrom, this was an appropriate case for doing so.

78As found by the trial judge, Shelter breached the majority of the commitments that it made to the investors in the prospectuses and related contracts. An award of nominal damages is appropriate in these circumstances because the Limited Partners successfully made out their claim for breach of contract. I agree with the view expressed by Professor Waddams that the amount to be awarded should be $1: see S.M. Waddams, The Law of Damages, 4th ed. (Toronto: Canada Law Book Inc., 2004) at para. 10.30. Such an award recognizes that the Limited Partners successfully established a breach of contract. In light of this limited success, the Limited Partners should be entitled to their costs of the trial of their action: see The Law of Damages, supra, at para. 10.10 and Marsh v. Royal Bank of Canada (1922), 63 D.L.R. 659 at 662 (Sask. C.A.). Since I would award nominal damages, as opposed to true damages, the Limited Partners should be entitled to their costs of the action regardless of any offers to settle that may have been made.

CROSS-APPEAL

79There are two distinct grounds to the cross-appeal of the Financial Institutions: (i) was equitable set-off available to the Limited Partners; and (ii) was the default rate of interest in the promissory notes an unenforceable penalty? The trial judge answered both questions in the affirmative and the Financial Institutions say she erred in so doing.

Was equitable set-off available?

80In my opinion, there is no merit in this ground of the cross-appeal. It relates to the trial judge’s obiter statement that she would have allowed the Limited Partners to set-off their damages against the amounts due on the promissory notes had she found any damages.

81The trial judge of course found that no damages were proven, and I have concluded that she committed no error in coming to this conclusion. Her order does not include any declaration in respect of set-off and an appeal or cross-appeal is from the trial judge’s order, not the reasons. My conclusion that the Limited Partners are entitled to nominal damages of $1 has no practical implication in the context of a right of set-off against the Financial Institutions’ multi-million dollar claim on the promissory notes.

82This ground of appeal is accordingly denied.

Was the default rate of interest an unenforceable penalty?

83The promissory notes provided for an interest rate of Prime plus 1.75% before default, and Prime plus 6% after default. Thus, on default, the interest rate was stepped up by 4.25%. The trial judge relied on the House of Lords decision in Dunlop Pneumatic Tyre Co. v. New Garage and Motor Co., [1915] A.C. 79 for the principle that a contractual provision that is a genuine pre-estimate of damages will be enforced, but one in the nature of a penalty is unenforceable.

84The trial judge held that the default rate of interest in the promissory notes was in the nature of a penalty because she was not persuaded that it was commercially reasonable in the circumstances. She went on to hold that the appropriate rate is that set out in the Courts of Justice Act.

85The Financial Institutions have not pointed to any clear evidence to support a conclusion that a 4.25% step-up was commercially reasonable in the circumstances. Even accepting that the trial judge could have decided this issue the other way, in my view her decision is not so unreasonable as to warrant intervention.

86The Financial Institutions submit that the court has discretion whether to enforce a penalty, citing s. 98 of the Courts of Justice Act¹⁰ and 869163 Ontario Ltd. v. Torrey Springs II Associates Ltd. Partnership (2004), 243 D.L.R. (4th) 502 at 506-507 (Ont. S.C.J.). They submit that the court should only refuse to enforce a penalty where this is necessary to provide relief against oppression.

87In the appeal from the decision relied on by the Financial Institutions, Peachtree II Associates – Dallas L.P. v. 857486 Ontario Ltd. (2005), 76 O.R. (3d) 362 (C.A.), this Court held that the default clause in issue was not a penalty, but a forfeiture, and thus declined to determine if the court retains a residual discretion to enforce a penalty clause (at para. 36). This question, which was left open in Peachtree II, was not argued at trial, nor did the Financial Institutions plead or rely on s. 98 of the Courts of Justice Act. Moreover, it is implicit in the trial judge’s decision that she would not have enforced the penalty, having found that the default rate was extravagant and unconscionable.

88The Financial Institutions go on to argue that if the default rate is found to be an unenforceable penalty, the trial judgment should be varied to award interest to the Financial Institutions at the rate specified in the notes before default rather than the rate specified in the Courts of Justice Act. They rely on this court’s decision in Pizzey v. Crestwood Lake Limited (2004), 69 O.R. (3d) 306 at 318 per Laskin J.A. and at 319 per Weiler J.A., leave to appeal to S.C.C. refused, [2004] S.C.C.A. 459 in support of this view.

89That case is distinguishable. It did not involve a situation where a post-default interest rate was struck out as being unconscionable. Rather, it raised the issue of what rate of interest applied to money owing on a promissory note after the maturity date, where the note only specified the interest rate up to the maturity date. This decision accordingly does not support the argument that the trial judge erred in substituting the default rate of interest, which she adjudged was a penalty clause, with the rate of interest provided by the Courts of Justice Act.

90I would therefore reject the other ground of the cross-appeal.

DISPOSITION

91For these reasons, I would grant the appeal to the extent that I would allow the Limited Partners’ actions for damages each in the nominal amount of $1. I would dismiss the cross-appeal. Given this result, I would make no order as to the costs of the appeal and cross-appeal.

Footnotes

1. 1Shelter ceased being an active company in 1994 and is only a nominal respondent on the appeal.
2. 2159257 had purchased Place Concorde in May 1989 in an arms’ length transaction for $21.6 million.
3. 3The parties to this action have agreed that the notes are not “bills of exchange” within the meaning of the Bills of Exchange Act, R.S. 1985, c. B-4. Accordingly, the principles relating to “holders in due course” do not apply.
4. 4The “Commitment Period” was defined as the time from the closing date of the offering to the Maturity Date.
5. 5Eastwalsh Homes Ltd. v. Anatal Developments Ltd. (1993), 12 O.R. (3d) 675 at 687 (C.A.), application for leave to appeal to the Supreme Court of Canada refused, [1993] 3 S.C.R. vi.
6. 6The apartment towers and parkade of the complex were constructed with post-tensioned concrete slabs and the cables had been exposed to moisture, which necessitated structural repairs.
7. 7P.I.A. Investments Inc. v. Deerhurst Ltd. Partnership (2000), 20 C.B.R. (4th) 116 at 123 (Ont. C.A.).
8. 8“Assignment Agreement” is subsequently defined in the pleadings as “the prospectuses, the agreements referred to therein and the promissory notes”.
9. 9On October 31, 1993, new general partners replaced the original general partners owned by Shelter.
10. 10Section 98 provides: “A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.”