COURT OF APPEAL FOR ONTARIO
Laskin, Lauwers and Roberts JJ.A.
BETWEEN
Richcraft Homes Ltd.
Applicant (Respondent)
and
Urbandale Corporation, Urbandale Construction Limited and
Riverside South Development Corp.
Respondents (Appellant)
Benjamin Zarnett and Peter Kolla, for the appellant
K. Scott McLean and D. Elliott, for the respondent
Heard: May 30, 2016
On appeal from the judgment of Justice T.D. Ray of the Superior Court of Justice, dated July 24, 2015, with reasons reported at 2015 ONSC 4725.
1Urbandale Corporation, the appellant, and Richcraft Homes Ltd., the respondent, entered into a limited partnership agreement (“LPA”), with Riverside South Development Corp. as the general partner, on October 23, 2001. On May 9, 2005, the principals of Urbandale and Richcraft signed a document related to the LPA (the “2005 document”).
2Urbandale is a property developer, and is related to homebuilder Urbandale Construction Limited, which is mentioned in the LPA. Richcraft is both a homebuilder and a property developer. The partnership’s purpose is to develop some 3,000 acres of development land in the Riverside south area of Ottawa.
3This case is about the extent of Urbandale’s control of the partnership. Urbandale owns two-thirds of the partnership and Richcraft owns one-third. Issues arose between the limited partners about the interpretation of the LPA and the legal effect of the 2005 document, and this application was brought on a cooperative basis.
4After a hearing that included some live evidence, the application judge made two declarations in the judgment now under appeal. First, he declared the 2005 document is enforceable and affects the way in which the homebuilders Urbandale Construction and Richcraft get access to the building lots that become available through the partnership’s land development activities.
5Second, the application judge declared that actions to be taken by the partnership under Article 8.2 of the LPA, which sets out the consequences of a partner failing to advance funds to the partnership, must be approved by the unanimous consent of both Richcraft and Urbandale, as contended by Richcraft, not merely by an “Ordinary Resolution”, as contended by Urbandale.
6The two declarations frame the two issues on this appeal: first, whether the 2005 document is enforceable; and second, whether partnership decisions under Article 8.2 of the LPA require unanimous consent.
7I would affirm the application judge’s judgment that the 2005 document is enforceable. However, I would allow the appeal on the second issue; Article 8.2 of the LPA does not require unanimous consent.
Issue 1: The Validity of the 2005 Document
8This issue is the heart of this appeal, since its outcome will affect the future dealings of the partners, the operation of the partnership, and the progress of their land development project.
9The 2005 document was signed on May 9, 2005 by the principal of Urbandale, Mr. Herbert Nadolny, and the principal of Richcraft, Mr. Krishnan Singhal. Mr. Nadolny died a few months after the document was signed. The evidence is that his partner Mr. Lyon Sachs learned of the 2005 document within days of it being signed, but raised no concerns about its meaning or application for many years.
10The 2005 document is very brief:
The above parties agree as follows:
The above parties have entered into joint agreements, October 23, 2001 for Riverside South and September 6, 2000 the Kanata Lakes lands.
Richcraft and Urbandale will have first right to purchase available lots in the above projects and will be divided equally at the same price.
In the event that lots in the above two projects are sold to other builders and in return Urbandale and/or Richcraft have the right to purchase lots in other projects belonging to the other builders then any lot(s) acquired by either Urbandale or Richcraft will be shared equally between them if agreeable to both parties.
11It is common ground that “Urbandale” in the 2005 document refers to Urbandale Construction Limited, an entity that is not a party to the LPA, but is identified in the LPA as the related company to which the partnership “shall sell residential building lots”.
12Until this dispute arose, only about 500 lots had been released by the partnership for homebuilding. They were shared equally between Richcraft and Urbandale Construction.
13The practical issue is whether the LPA, together with the 2005 document, permits Richcraft to take up to half of the building lots released by the partnership as the land development process unfolds. Richcraft asserts that it has that legal right under the LPA and the 2005 document. Urbandale denies the LPA gave Richcraft that right and takes the position that, to the extent the 2005 document gave such a right to Richcraft, it is unenforceable, for three reasons: Richcraft gave no consideration for the 2005 document; the document does not meet the legal requirements for an enforceable option; and the terms of the 2005 document are fatally uncertain.
(1) Is the 2005 document unenforceable because Richcraft did not give consideration?
14The appellant argues Richcraft gave no consideration for the 2005 Agreement. It is accordingly not a true bargain, and therefore not enforceable: see John D. McCamus, The Law of Contracts, 2d ed. (Toronto: Irwin Law, 2012), at p. 215; G.H.L. Fridman, The Law of Contract in Canada, 6th ed. (Toronto, Carswell, 2011), at p. 81-82. The appellant also relies on the proposition of Ontario law that a subsequent agreement that purports to alter the terms of an existing agreement also requires consideration to be enforceable: see Gilbert Steel Ltd. v. University Construction Ltd. (1976), 1976 CanLII 672 (ON CA), 12 O.R. (2d) 19 (C.A.), at p. 24.
15I begin by setting the context for this issue, next I set out the application judge’s holding, then consider the parties’ arguments, and finally address the legal analysis.
(a) Context
16The dispute is over the future allocation of lots. The application judge identified the provoking incident for this application, at para. 20:
In 2013, Mr. Weinstein, Mr. Nadolny's son-in-law asked Mr. Singhal for lots to be sold to his company HN Homes. Mr. Singhal said he told Mr. Weinstein to look to Urbandale's share not his. It seems that was the triggering point for this application. Urbandale has since taken the position that it can make the decisions itself under the agreement without the need for Richcraft's agreement.
17Mr. Sachs is the President of Urbandale. He was in the office when the 2005 agreement was negotiated and signed, and saw it a short time later. The application judge recorded his evidence, at para. 25:
Lyon Sachs is President of Urbandale. He has no role in the Respondent, Urbandale Construction which is controlled by his son. He said that Urbandale had been patient with Richcraft up until now because Richcraft has not disturbed the development of the project or the functioning of RSLP. However, now that they are about to get into serious development, they need to settle the 'lots' and 'control' issues. He did note that in his view the overall success of the RSLP is best served when the owners work collaboratively and cooperate together. He said he interprets the LPA to permit the sale of lots to others because it uses the language "inter alia". He also thought that the "needs" of Richcraft for lots as per the LPA should be given a flexible definition; not necessarily 50-50. He admitted that to date there had been a 50-50 distribution but was of the view that market conditions would soon require sales to others. He thought that at the time of the 2005 agreement, Mr. Nadolny was in failing health and was unable to clearly express his intentions.
18Mr. Sachs was relying on his interpretation of Article 3.4 of the LPA:
3.4 Sale of Lots. The Partnership shall sell residential building lots to, inter alia, Urbandale Construction Limited (“Urbandale Construction”). The partnership will at all times allow Richcraft to purchase from it such residential house lots to meet Richcraft’s needs at the same price, and upon the same terms and conditions, as the partnership sells such residential building lots to Urbandale Construction. All other homebuilders in Riverside South will purchase such residential house lots at prevailing market rates and upon builders’ terms.
19The appellant’s Notice of Appeal highlights a problem with the drafting of Article 3.4. It states that the application judge erred in failing to order that:
i. the definition of “Richcraft’s needs” in Article 3.4 of the LPA is to be based on objective evidence of Richcraft’s “need” for building lots at the time of each allocation of building lots by the Riverside South Limited Partnership (the “Partnership”), and
ii. if there is a dispute between the Limited Partners in the Partnership as to “Richcraft’s needs” at the time of any particular allocation of building lots, the number of lots to meet Richcraft’s needs at that allocation is to be determined by the Limited Partners by way of the passage of an Ordinary Resolution. [Emphasis added.]
20Richcraft’s position is that it was entitled, under Article 3.4, to take as many lots as it wanted at the time of an allocation, and its assertion of its needs is determinative. The appellant’s response is that the determination of Richcraft’s needs must be objective. This is inconsistent with the appellant’s other assertion that the number of lots to be allocated to Richcraft is to be determined by Ordinary Resolution of the partnership, which the appellant controls.
21On this controversy, the wording of Article 3.4 of the LPA is not entirely clear. The appellant’s interpretation, as set out in the Notice of Appeal, would leave the determination of Richcraft’s entitlement of lots entirely up to an Ordinary Resolution of the partnership, which the appellant controls. Subject to arguments about good faith, the appellant could shut out Richcraft from an allocation of lots using its superior power in the partnership. This prospect is precisely what, accordingly to the evidence, drove Mr. Singhal to seek clarity through the 2005 agreement, as the application judge found, at paras. 31 and 32. Given the 2013 triggering controversy over the request for an allocation by HN Homes, Mr. Singhal was prescient.
(b) The application judge’s holding
22The application judge, after setting out the evidence, concluded, at paras. 36-37:
The agreement of May, 2005 explicitly provides the parties will divide the lots equally. There is no evidence that Mr. Nadolny was not competent to sign the agreement. In addition the distribution of lots to date has been consistent with that agreement.
I find the conduct of the parties to date to be consistent with the language of the various agreements.
23The judgment contains the application judge’s explanation of the result:
- In answer to the question “Pursuant to Article 3.4 of the LPA can the partnership take a decision to sell residential building lots to entities other than Urbandale Construction Limited (“Urbandale Construction”) and/or Richcraft and if so, under what conditions or circumstances?” the answer is: Yes, but Richcraft is entitled to 50% of residential lots made available. It may decline to exercise its option to purchase these lots however. In other words, if residential lots are to be sold to HN Homes, then in accordance with the May 9, 2005 Agreement, those lots would come from Urbandale’s share and from Richcraft’s share to the extent that it declined to exercise its option, unless the parties agree otherwise. Sales to third parties, including HN Homes would be at the prevailing market value.
24Paragraph 3 of the judgment effectively amends Article 3.4 of the LPA, to provide:
3.4 Sale of Lots. The Partnership shall sell residential building lots to, inter alia, Urbandale Construction Limited (“Urbandale Construction”). The partnership will at all times allow Richcraft to purchase from it up to 50% of such residential lots at the same price, and upon the same terms and conditions, as the Partnership sells such residential building lots to Urbandale Construction. All other homebuilders in Riverside South will purchase such residential house lots at prevailing market rates and upon builders’ terms.
25The appellant attacks this result.
(c) Discussion
26The appellant submits Richcraft gave no consideration for the 2005 document, so it is not a true bargain, and is therefore unenforceable. The only enforceable contract between the parties is the original LPA. The appellant relies on three decisions of this court to argue the law of Ontario precludes enforcement of the 2005 agreement: Gilbert Steel; Gregorio v. Intrans-Corp (1994), 1994 CanLII 2241 (ON CA), 18 O.R. (3d) 527 (C.A.); and Holland v. Hostopia.com Inc., 2015 ONCA 762, 392 D.L.R. (4th) 650.
27The facts of Gilbert Steel bear repeating. The plaintiff contracted with the defendant to supply fabricated steel at a fixed price per ton for the construction of apartment buildings. Steel for the first two of three projects was delivered and paid for at the prices set by the contract. Before construction on the third project started, the plaintiff was notified by the steel mill that the price of unfabricated steel was about to increase, and warned that the price would increase again in the near future. The plaintiff approached the defendant about this price increase, the parties entered a new written agreement for the supply of fabricated steel at a higher price, and construction on the third project commenced.
28The steel mill then notified the plaintiff of another price increase. The plaintiff again approached the defendant about the price increase, and the defendant agreed orally to pay higher prices. Following this discussion, the plaintiff submitted a written contract containing these higher prices to the defendant, but the agreement was never executed. The defendant accepted delivery of the fabricated steel and was invoiced at the higher prices, but paid in rounded amounts that left an amount owing equal to the difference between the prices agreed to orally and the prices set out in the previous written agreement.
29The plaintiff sued to recover the difference. The trial judge found that the defendant’s promise to pay higher prices was unenforceable due to a lack of consideration, given that the plaintiff was already obligated to deliver steel at the prices agreed to in the previous written agreement. This court, relying on the rule set out by Ellenborough L.J. in Stilk v. Myrick (1809), 170 E.R. 1168 (K.B), that a promise to perform a pre-existing duty is not consideration for a contractual variation, upheld that finding on appeal.
30The results were similar in both Gregorio and Holland. In Gregorio, this court held that a warranty agreement signed by a purchaser failed for lack of consideration, since the purchase agreement had been executed on a previous occasion and the warranty agreement was unsupported by fresh consideration. In Holland, this court held that an employment agreement limiting an employee’s entitlement to notice on termination to the statutory minimums was unenforceable; it was entered into almost nine months after the employee originally signed an offer letter that was silent on the issue of reasonable notice, and there was no fresh consideration. The court noted, at para. 52: “[i]t is well-settled that a promise to perform an existing contract is not consideration.”
31When Gilbert Steel was issued, it attracted much commentary from academics critical of this court’s application of the doctrine of consideration to the facts of the case: see e.g. J. Swan, “Consideration and the Reasons for Enforcing Contracts” (1976) 15 U.W. Ontario L. Rev. 83; B.J. Reiter, “Courts, Consideration, and Common Sense” (1977) 27 U.T.L.J. 439; S.M. Waddams, “Variations of Contracts and the Requirement of Consideration: Gilbert Steel Ltd. v. University Construction Ltd.” (1977) 2 Can. Bus. L.J. 232. The basic point was made by Professor Reiter, at p. 452, who questioned this court’s rejection of the arguments advanced in favour of enforcing the agreement to pay higher prices: “The effect … was to refuse enforcement to a business promise apparently made for valid commercial reasons, a surprising and seemingly undesirable result.” Professor Swan observed, at p. 91, that,
[T]he doctrine of consideration is a most unsatisfactory tool for deciding what promises are going to be enforced by the courts. There may have been a good reason for refusing to enforce the contract in Gilbert Steel v. University Construction, but the finding of the trial judge that there was no duress would tend to show the contrary and, far more importantly, the justification given for the decision by both courts is quite irrelevant to any valid reason for refusing enforcement.
32Professor McCamus, in The Law of Contracts, at p. 250, comments that the doctrine established in Stilk v. Myrick “produces reasonable outcomes in cases where the promise to provide additional consideration is extracted by a promisee who is exploiting the promisor’s vulnerability” but, referring specifically to Gilbert Steel, also notes that “[t]he doctrine is also applicable … to what appear to be voluntary arrangements entered into by commercial parties with relatively equal bargaining power.” He then argues that “[i]t is thus over-inclusive in the sense that it captures and renders unenforceable many agreements that do not result from an unfair exploitation of vulnerability.”
33The respondent submits that the common law world has moved on since Gilbert Steel. For example, in Williams v. Roffey Bros. & Nicholls (Contractors) Ltd., [1990] 1 All E.R. 512 (C.A.), Russell L.J. stated:
A gratuitous promise, pure and simple, remains unenforceable unless given under seal. But where, as in this case, a party undertakes to make a payment because by so doing it will gain an advantage arising out of the continuing relationship with the promisee the new bargain will not fail for want of consideration.
See also MWB Business Exchange Centres Ltd v Rock Advertising Ltd, [2016] EWCA Civ 553.
34The respondent also points out that the New Zealand Court of Appeal built upon the reasoning in Williams v. Roffey Bros. in Antons Trawling Co. Ltd. v. Smith, [2003] 2 N.Z.L.R. 23 (C.A.). In that case the court held, at para. 93:
We are satisfied that Stilk v Myrick can no longer be taken to control such cases as Roffi Bros [sic], … and the present case where there is no element of duress or other policy factor suggesting that an agreement, duly performed, should not attract the legal consequences that each party must reasonably be taken to have expected. On the contrary, a result that deprived Mr. Smith of the benefit of what Antons promised he should receive would be inconsistent with the essential principle underlying the law of contract, that the law will seek to give effect to freely accepted reciprocal undertakings. The importance of consideration is as a valuable signal that the parties intend to be bound by their agreement, rather than an end in itself. Where the parties who have already made such intention clear by entering legal relations have acted upon an agreement to a variation, in the absence of policy reasons to the contrary they should be bound by their agreement. [Emphasis added.]
35And recently, in Teat v. Willcocks, [2013] NZCA 162, [2014] 3 N.Z.L.R. 129, at para. 54, that same court, upholding the reasoning in Antons Trawling, observed:
[W]e are attracted to the alternative view expressed by this Court in Antons Trawling Co Ltd v Smith that no consideration at all may be required provided the variation is agreed voluntarily and without illegitimate pressure. This seems to us to reflect the reality of what happened in the present case – a variation was proposed and willingly accepted, and the parties proceeded on that basis. In the context of an existing agreement supported by consideration, that seems to us to be sufficient to constitute a binding variation. [Emphasis added, citation omitted.]
36The respondent relies most heavily on Greater Fredericton Airport Authority v. NAV Canada, 2008 NBCA 28, 229 N.B.R. (2d) 238, where the court held, at para. 31, that “a post-contractual modification, unsupported by consideration, may be enforceable so long as it is established that the variation was not procured under economic duress.” The court observed, at para. 28, that existing contracts are often varied and modified in response to contingencies not covered by the original agreement and in the interests of “commercial efficacy” such agreements should be enforceable with the modifications and variations. At para. 30, the court declared that “[t]he doctrine of consideration and the concept of bargain and exchange should not be frozen in time so as to reflect only the commercial realities of another era.”
37The appellant submitted that the court should accept that Gilbert Steel, whatever the doctrinal fate of its premises might be in other jurisdictions, was settled Ontario law and applies squarely to preclude enforcement of the 2005 document.
(d) Analysis
38I first consider and dismiss a procedural argument made by the respondent, and then address the substantive argument about consideration.
Consideration was a live issue before the application judge
39The respondent objects that the issue of consideration was not addressed by the application judge in his reasons because it was not a live issue before him.
40However, the appellant notes the general issue of the 2005 document’s enforceability was raised in the Notice of Application. Further, in Urbandale’s factum before the application judge the issue was raised, albeit somewhat obliquely:
- One needs to understand or characterize what the May 9, 2005 document is. According to Mr. Singhal it was to be a “reconfirmation of Richcraft’s entitlement to building lots from the KNL and RSDC projects.” It accordingly was not intended to create new rights but to confirm rights that have purportedly already existed. There was no consideration passing between the parties as no new rights or benefits were created or intended to be created. As such, one ought not to view this as a stand-alone agreement.
41The respondent points out that it did not address the issue of consideration in affidavits or examination-in-chief and that the appellant asked no questions in cross-examination about the issue. This explains the statement in Richcraft’s factum before this court: “there is no evidence of fresh consideration supporting the 2005 agreement.”
42I would reject the respondent’s argument that this is a new issue on appeal. While it may not have been pursued vigorously, it was raised below and there is sufficient information on the record for this court to dispose of it.
There was consideration for the 2005 document
43While the developing case law outside Ontario suggests that the time might be ripe for this court to re-consider the role that consideration plays in the enforceability of contractual variations, in my view, Gilbert Steel was a fundamentally different case on the facts and its holding has no application to this case.
44The 2005 document lacks the formality of the LPA. As the application judge found, it was intended by Mr. Nadolny and Mr. Singhal to clarify the terms of the LPA. The potential for a dispute between the parties was plain enough on the language of Article 3.4 LPA to cause Mr. Singhal anxiety. On the facts, Richcraft was in no position to exert any kind of pressure on its senior partner, and Urbandale was not in a vulnerable position. The 2005 agreement was not, in my view, entirely one-sided in Richcraft’s favour.
45The observations of Angela Swan & Jakub Adamski, in Canadian Contract Law, 3d ed. (Markham: LexisNexis Canada, 2012), at para. 2.31, have merit here:
What is common to each type [of commercial exchange] is that the parties are exchanging commercial equivalents and that the reliance of each on the other permits needs to be satisfied and plans made. Because these relations are commercial exchanges, each party can obtain a benefit from the other’s performance and each may incur a detriment from its own performance.
46Certainty in a long-term, ongoing business relationship is of value to the contracting parties because it avoids disputes and allows the parties to plan both their own affairs and also the orderly and reasonable unfolding of their business relationship. In Gilbert Steel, the respective obligations of each of the contracting parties were already clear: Gilbert Steel was supplying fabricated steel; University Construction was purchasing it at an agreed-upon price. Therefore, it was also clear to see that when University Construction promised to pay a higher price than it had previously agreed, it received nothing in return over and above the steel to which it was already entitled under the contract.
47The appellant’s assertion that the 2005 document represented a compromise of its entitlement to a greater than equal share of the lots, or in other words, a promise for which it received no consideration, assumes that it was in fact originally entitled to a greater than equal share. However, in my view, under the original terms of the LPA it was far from clear how many lots Urbandale Construction and Richcraft were each entitled to under Article 3.4. That article entitled Richcraft to “such residential house lots to meet Richcraft’s needs”, with no limitation. The 2005 document clarified the issue of quantum: Richcraft was entitled to share equally in the available lots with Urbandale Construction. Clarifying an unclear term in a long-term contract, in order to create certainty and to avoid future costly disputes, enures to the parties’ mutual benefit, and is something of value that flows from and to each contracting party. It thus serves as a functional form of consideration.
(2) The 2005 document is not an option agreement
48The appellant submits that the 2005 agreement is no more than an option agreement and does not meet the legal requirements to be enforceable. This argument builds on the language of para. 3 of the judgment, excerpted more fully above, which states in part: “Richcraft … may decline to exercise its option to purchase those lots”, and that lots sold to third parties “would come from Urbandale’s share and from Richcraft’s share to the extent that it declined to exercise its option” (emphasis added).
49The appellant argues that an option agreement is required by law to have certain elements, none of which are found in the 2005 document: see Mitsui & Co. (Canada) Ltd. v. Royal Bank, 1995 CanLII 87 (SCC), [1995] 2 S.C.R. 187, at paras. 26-27.
50I would reject this submission. The application judge did not formally characterize the 2005 document as an option agreement, but only used the term to point out that Richcraft could decide to take up to half of the lots available on any particular allocation of lots by the partnership. Richcraft could take no lots or as many as half; that is the choice the application judge referred to as an “option” in a non-technical sense. In my view, the law relating to option agreements does not apply on these facts.
(3) The terms of the 2005 document are not fatally uncertain
51The appellant argues the 2005 agreement does not specify certain essential terms, including: how long Richcraft has to decide whether it will take up lots before the partnership can sell them to a third party builder; the terms on which Richcraft would purchase lots it decided to take; and, particularly, how such terms would “relate to those available from a third party builder.”
52I would reject this argument. The trial judge did not see the 2005 agreement as a stand-alone agreement, but as clarifying the LPA, in particular Article 3.4, as discussed above.
53The issue of the timing of a response by Richcraft as to how many lots it would need out of any given allocation was not addressed in the original version of Article 3.4 of the LPA. In this regard it should be noted that among the items to be discussed at regular meetings of the partnership under Article 7.2 of the LPA are the following:
a. the entering into of any agreements for the sale of residential building lots on the Partnership Lands;
f. all other issues relating to the development and sale of residential building lots on the Partnership Lands.
54Under the LPA, as clarified by the 2005 agreement, the partnership would make an allocation of lots available at a particular time by Ordinary Resolution. Section 7.2 authorizes the partnership, by way of Ordinary Resolution, to make an allocation of lots and offer it to Urbandale Construction and to Richcraft. There is no reason why such a resolution could not establish a reasonable time frame within which both Urbandale Construction and Richcraft must identify the number of lots each wishes to take up. Once that is done, and the period expires without the lots being taken up by either Urbandale Construction or Richcraft, then the allocation could be offered on the open market. The terms upon which Urbandale Construction and Richcraft can acquire lots are to be the same. Whether these terms are advantageous, as compared to “prevailing market rates and upon builders’ terms” on which Article 3.4 obliges the partnership to offer lots to “other homebuilders in Riverside South”, is for the partnership to decide.
55There is, in my view, no difficulty in applying the LPA as clarified by the 2005 document. There is, in other words, no lack of certainty in the 2005 document.
Issue 2: Does Article 8.2 of the LPA require unanimous consent?
56Article 8.2 comes into active force only if one of the partners has failed to advance funds to the partnership. No such instance has arisen in the many years of the partnership’s operation. The issue is whether the application judge was correct in deciding that the partnership could not take action against a defaulting partner under Article 8.2 without unanimous consent.
57I begin with a brief overview of the governing principles of law, next summarize the application judge’s reasons, and then apply the principles.
(1) The Governing Principles
58This court summarized the principles applicable to the interpretation of commercial contracts in Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust (2007), 2007 ONCA 205, 85 O.R. (3d) 254 (C.A.), at para. 24:
Broadly stated ... a commercial contract is to be interpreted,
(a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;
(b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the "cardinal presumption" that they have intended what they have said;
(c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties; and (to the extent there is any ambiguity in the contract),
(d) in a fashion that accords with sound commercial principles and good business sense, and that avoids a commercial absurdity. [Citations omitted.]
See also SimEx Inc. v. IMAX Corp. (2005), 2005 CanLII 46629 (ON CA), 11 B.L.R. (4th) 214 (Ont. C.A.), at paras. 19-23; Dumbrell v. The Regional Group of Companies Inc., 2007 ONCA 59, 85 O.R. (3d) 616, at paras. 51-56; and 3869130 Canada Inc. v. I.C.B. Distribution Inc., 2008 ONCA 396, 45 B.L.R. (4th) 1, at para. 31; and Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 64.
59This court has recognized that “it is an extricable error of law to read a provision of a contract in isolation rather than construe the contract as a whole”: see 1298417 Ontario Ltd. v. Lakeshore (Town), 2014 ONCA 802, 122 O.R. (3d) 401, at paras. 7-8, leave to appeal refused, 2015 CarswellOnt 10068, 2015 CarswellOnt 10069; see also Sattva, at para. 64.
(2) The Application Judge’s Reasons
60The relevant provisions of the LPA set the context for the application judge’s analysis.
(a) The relevant contractual provisions
61As noted earlier, the LPA defines “Ordinary Resolution” to mean “a resolution passed by more than 50% of the votes cast at a duly constituted meaning of Limited Partners or a written resolution signed in one or more counterparts by Limited Partners holding more than 50% of the outstanding Units entitled to vote at a meeting.” Since Article 2.2 gives Urbandale 66.66% of partnership interest and Richcraft 33.33%, the parties intended Urbandale to have control of the partnership in relation to matters that could be addressed by Ordinary Resolution.
62Section 8.2 provides:
8.2 Failure to Advance Funds. If at anytime the Partners agree, by way of Ordinary Resolution, that they shall advance funds to the Partnership and thereafter any Limited Partner (the “Defaulting Limited Partner”) fails to advance its portion of such funds (the “Defaulted Advance”), then the other Limited Partner (the “Non-Defaulting Limited Partner”) shall be entitled to advance to the Partnership the Defaulted Advance on behalf of the Default Limiting Partner and thereafter [is entitled to certain remedies]. [Emphasis added.]
(b) The application judge’s interpretation of Article 8.2
63The application judge explained his interpretation of Article 8.2 at para. 46:
What is the meaning and application of Article 8 of the LPA?
Answer: The provision speaks for itself. Neither party has taken the position that there are or have been irreconcilable differences between the parties. In the event either party takes the position that the facts or factual matrix exists such as to come within Article 8, the provision sets out a procedure to follow. If necessary at that time, then judicial intervention may be sought on the facts as they may exist at that time; and after the parties have complied with the provision in Article 8 so there is a Record for the court to consider. I do note however, that article 8.2 contemplates that the parties agree by ordinary resolution (emphasis added [by application judge]). That is a departure from an ordinary resolution that does not require the agreement of the parties, and is similar to Article 9.1.
64Article 9.1 of the LPA provides:
9.1 Amendments. This Agreement may be amended only in writing and only with the written consent of both of the Limited Partners given by Ordinary Resolution.
(1) The Principles Applied
65The application judge’s logic for interpreting Article 8.2 to require unanimous consent depends on his finding that the language in Article 8.2 was unique, in his words, “a departure”, when it used the words: “If at anytime, the Partners agree, by way of Ordinary Resolution….”
66With respect, this is not an accurate description of the LPA’s use of language. The same phrasing is used in Article 7.1 dealing with a general meeting of the partners, which provides: “At such meetings all matters will be discussed and agreed to by the Partners by way of Ordinary Resolution” (emphasis added). In addition, Article 7.2 provides for regular meetings and states: “At such meetings the following matters will be discussed and agreed to by the Partners by way of Ordinary Resolution” (emphasis added). There is nothing unique about the language of Article 8.2 that compels a different approach to the concept of “Ordinary Resolution” so as to require unanimity in taking steps against a defaulting partner.
67Moreover, the LPA contemplates disagreement. Article 7.4 provides: “All Ordinary Resolutions shall be binding on all Partners and whether or not such Partner voted against such resolution.” But, if the phrase, “agree, by way of Ordinary Resolution”, in Article 8.2 requires there to be unanimous consent as the application judge found, then resolutions at general meetings of the partners, and at their regular meetings would also require unanimous consent. In short, Article 7.4 would have no meaning or purpose.
68Finally, I note Article 9.1, which the application judge pointed to as being similar to Article 8.2, applies in an entirely different context and performs a very different function. It is concerned with amendments to the LPA. Without the requirement in Article 9.1 for “the written consent of both of the Limited Partners”, Urbandale could unilaterally amend the LPA to its advantage by Ordinary Resolution, which is what the Article seeks to prohibit.
(2) Conclusion on the Interpretation of Article 8.2
69While the application judge instructed himself properly, at para. 30, on the obligation to interpret individual provisions in light of the entire contract, he failed to do so. It is an error in principle to adopt an interpretation that renders meaningless a provision of an agreement, in this case Article 7.4. Further, if the application judge’s interpretation was correct, then Richcraft could resist a partnership capital call under Article 8.2 with impunity. Such an outcome would not be commercially reasonable. The application judge’s interpretation of Article 8.2 of the LPA is contrary to both commercial principles and good business sense.
Disposition
70I would affirm the application judge’s judgment that the 2005 document is enforceable. However, I would allow the appeal on the second issue. In light of the errors made by the application judge in interpreting Article 8.2 of the LPA, I would delete the last two sentences of para. 8 of his judgment, so that para. 8 would instead read:
- In answer to the question “What is the meaning and application of Article 8 of the LPA” the answer is: The provision speaks for itself.
The parties agreed that the successful party would be entitled to costs in the amount of $30,000 inclusive of disbursements and applicable taxes. The respondent was successful on the main issue, but not on the secondary issue. I would leave it to the parties to resolve costs. If they are unable to do so, then cost submissions limited to five pages should be filed within 10 days of the date of release of these reasons, followed by reply submissions within an additional 10 days.
Released: August 11, 2016 “PL”
“P. Lauwers J.A.”
“I agree John Laskin J.A.”
“I agree L.B. Roberts J.A.”
