Ferraro v. Neilas, 2023 ONCA 297

COURT OF APPEAL FOR ONTARIO DATE: 20230501 DOCKET: C70774

Hoy, Brown and Coroza JJ.A.

BETWEEN

Maureen Ferraro, Lawrence Hishon, Peter Shannon, Tanja Tudhope and Michael Grove Plaintiffs (Respondents)

and

Jim Neilas, Chad Martin, Neilas Inc., 1249 Queen E. Inc., Neilas (1249 Queen E) Inc., Neilas (799 College St.) Inc., 799 College Street Inc., Hi-Rise Capital Ltd., Jane Doe and/or John Doe Defendants (Appellants)

Anu Koshal and Holly Kallmeyer, for the appellants Julian Binavince, for the respondents

Heard: January 26, 2023

On appeal from the judgment of Justice Donald J. Gordon of the Superior Court of Justice, dated May 12, 2022, with reasons reported at 2022 ONSC 2737.

Brown J.A.:

I. Overview

1The appellants, Jim Neilas and 1249 Queen E. Inc. (“1249”), appeal from the summary judgment granted against them on guarantees they gave as part of a 2012 syndicated first mortgage financing of a small residential condominium project planned at 1249 Queen Street East, Toronto (the “Project”).

2At the centre of the syndicated mortgage scheme stood the appellant, Jim Neilas. As will be detailed later in these reasons, Jim Neilas wore many hats as the directing mind of several corporations involved in the Project and the first mortgage syndication.

3In 2012, the respondents, Maureen Ferraro, Lawrence Hishon, Peter Shannon, Tanja Tudhope, and Michael Grove invested a total of $483,000 in the Project’s syndicated first mortgage. At the time of their investments, they signed Trust Agreements with the appellant, Hi-Rise Capital Ltd. (“HRC”). Attached to each Trust Agreement was a Loan Participation Agreement (“LPA”) made between the investor and HRC.

4The motion judge interpreted the LPAs as incorporating by reference the terms of a July 2, 2012 First Mortgage Loan Commitment (“Loan Commitment”) under which HRC was the Lender and 1249 was the Borrower. He interpreted the Loan Commitment as containing guarantees of the loan by 1249 and Jim Neilas personally.

5The motion judge held that the respondent investors were entitled to the benefit of those guarantees. He gave judgment against Jim Neilas and 1249 for the losses suffered by the respondents in the following amounts: $171,119 to Ferraro and Hishon; $207,405 to Shannon; $71,992 to Tudhope; and $630,365 to Grove. He also awarded pre-judgment and post-judgment interest at an annual rate of 18% (the “Judgment”).

6Although the appellants’ factum identifies several grounds of appeal, at the hearing of the appeal they reduced their challenge to the Judgment to two reversible errors they submit the motion judge made, specifically by:

(i) concluding the investors were entitled to the benefit of the guarantees given by Jim Neilas and 1249 in the Loan Commitment; and

(ii) calculating the respondents’ losses and awarding pre-judgment and post-judgment interest using an 18% annual rate.

7For the reasons that follow, I am not persuaded the motion judge erred in granting the investors summary judgment against the appellants pursuant to the guarantees. However, I would vary the calculation of the losses for which damages were awarded and the rates of pre-judgment and post-judgment interest.

II. First ground of appeal: The motion judge erred in his application of the principles of contract interpretation and trust law in concluding the respondent investors were entitled to the benefit of guarantees contained in the Loan Commitment.

A. Key facts

8At the time the respondents invested in the syndicated mortgage, the Project property was owned by “Neilas (1249 Queen E) Inc.”, which changed its formal corporate name to “1249 Queen E. Inc.” in October 2012, after the respondents had made their investments. Jim Neilas was an officer and director of 1249.

9In June and July 2012, 1249 sought funding for the Project. HRC was used as the vehicle by which to create a syndicate of investors for a $5.5 million first mortgage on the Project’s property. Jim Neilas was an officer and director of HRC.

The Loan Commitment between HRC and 1249

10In July 2012, 1249 accepted the First Mortgage Loan Commitment offered by HRC. As noted, Jim Neilas was an officer and director of both the borrower and lender. Indeed, the only signature that appears on the Loan Commitment is that of Jim Neilas. He signed the Loan Commitment wearing several hats: (i) as “Managing Director” of the lender, HRC; (ii) on behalf of the borrower, 1249; (iii) again on behalf of 1249 as “guarantor”; and, finally (iv) “in a personal capacity” as “guarantor”.

11The Loan Commitment stated that HRC, as lender, was prepared to provide 1249 with a first mortgage of $5.5 million, at an annual interest rate of 18%, with a 24-month term, for the purpose of constructing a 4-storey mixed use residential condominium and to “provide partial equity take out”.

12HRC was to earn certain fees for the loan, which would be syndicated. The Loan Commitment identified those fees as:

• a “Lender’s Fee” of $110,000 that was “deemed earned upon acceptance of this Commitment by the Borrower” (s. 12); and
• an “additional 16% on the loan advance in order to market and to and [sic] compensate third party brokers and referral sources who assist in syndicating the Loan.” (s. 13).

13Section 3 of the Loan Commitment contained the guarantees from 1249 and Jim Neilas. It read:

Guarantor: The Borrower Neilas (1249 Queen EI Inc. (the “Guarantor(s)”) will guarantee the loan. The Guarantor(s) must sign the Lenders usual Guarantor’s documentation standard for transactions of this nature. Jim Neilas to personally guarantee the loan.

14Section 17 of the Loan Commitment specified the “security” the Borrower was required to deliver, which included a first mortgage charge and “Guarantees from the Guarantors.”

The investment documents

15HRC used Chad Martin, a financial advisor or broker, to solicit the respondents’ investments in the syndicated first mortgage. HRC paid Mr. Martin a commission. The respondents discontinued the action against Mr. Martin prior to the summary judgment motion.

16The record discloses that at the time of making their investments the respondents received three documents.

The Disclosure Statement

17The first was an Investor/Lender Disclosure Statement for Brokered Transactions, which used a form issued by the Financial Services Commission of Ontario. It identified HRC as the mortgage brokerage. Jim Neilas signed the declaration of the mortgage broker. The investors signed the document to acknowledge receiving it. The Disclosure Statement stated that: HRC and a related company would make a profit from the Project if it was successful; the borrower was 1249, “a company owned by the same principal” as HRC; and a related company would hold title to the Project’s property.

18The Disclosure Statement also contained a standard form “Caution” that “this mortgage investment cannot be guaranteed by the mortgage brokerage.”

The Trust Agreement

19The second document was a Trust Agreement between HRC as “Trustee” and a respondent investor as “Beneficiary”. Jim Neilas signed the Trust Agreements as “Managing Director” of HRC. Each investor also signed the agreement. [1]

20The Trust Agreement recited that: the Trustee would hold an interest in the first mortgage on the Project’s property; the Trustee would hold the amount advanced by a Beneficiary “as trustee for the Beneficiaries”; and the following:

AND WHEREAS the rights and obligations of the parties are more particularly set out in the attached Loan Participation Agreement #07-1068-0 and the Beneficiary is known as the “Participant”.

The Loan Participation Agreement

21The third document was a Loan Participation Agreement (“LPA”) between HRC and an investor, whom the LPA described as the “Participant”, that is the “Person(s) and/or Entity as per the Trust Agreement to which this Agreement is Attached.” The document stated the relationship between HRC and a Participant would be governed by the terms and conditions set out in the LPA. The terms and conditions in the LPA material to this appeal are the following:

Participant’s Participation

As per the attached Trust Agreement (First Page).

Use of Funds

HRC agrees to advance the Participant’s Participation to the Borrower upon the terms and conditions contained in the Loan Commitment issued by HRC to the Borrower.

Relationship of Participant to HRC

It is expressly understood and agreed that the Participant’s Participation is in no way to be deemed an investment in HRC, or any of its affiliates, subsidiaries, employees or officers, or a borrowing by HRC or any of its affiliates, subsidiaries, employees or offices (sic) from the Participant, and repayment of the Participant’s Participation is in no way, either directly or indirectly, guaranteed by HRC or any of its affiliates, subsidiaries, employees or officers, other than any (sic) the corporate guarantee for the amount of the Participant’s Participation being provided by HRC. The parties hereto further acknowledge and agree that the Participant’s decision to participate in the Loan has not been induced by, nor does the Participant rely upon or regard as material, any representation or promise whatsoever with respect to the Loan, whether oral or otherwise, by whomsoever made, except as set out in this document, and the Investor/Lender Disclosure required under FSCO Regulations the Trust Agreement executed between HRC and the Participant.

Loan Documentation

The Parties hereto agree that all relevant documents pertaining to the Loan and the Participant’s Participation shall remain in the possession of HRC and shall be held by HRC for and on behalf of HRC and all the Participants in the Loan, subject to the terms of this Agreement. It is understood and agreed that the Participants in the Loan shall be entitled to examine said documents at the office of HRC during normal business hours and upon giving reasonable advance notice of their desire to examine such documents. HRC, as part of its reporting to Participants as asset manager shall forward a closing book containing, among other things, all security documentation executed by the Borrower. [Emphasis added.]

22There is no dispute that HRC never forwarded to the respondent investors the closing book referred to in the Loan Documentation clause. As well, the respondent investors were not provided with copies of the Loan Commitment between HRC and 1249 at the time they advanced their first mortgage funds. Indeed, HRC only disclosed the existence of the Loan Commitment (and therefore the guarantees) after the Project had been sold.

The fate of the Project

23Although the investors received some payments on their investments, the Project never proceeded. The property was sold at a loss, with the investors receiving part of the sale proceeds around October 2017. The respondent investors commenced this action to recover the losses on their investments.

B. Reasons of the motion judge

24In granting summary judgment on the guarantees, the motion judge made several key findings:

• The initial Trust Agreements governed the relationship between the parties, and the principles pertaining to trust relationships were “critical to the issues raised”;
• HRC, as trustee, owed a fiduciary duty to the respondent investors, which included the obligation “to make complete disclosure of all relevant factors and documents.” The disclosure made by HRC was incomplete because it did not provide the investors with the Loan Commitment. Had such disclosure been made, the investors would have been provided with more complete information regarding the conflicts of interest between HRC and its principal, Neilas;
• The LPA and Loan Commitment were incorporated by reference into the Trust Agreement;
• Jim Neilas signed the Loan Commitment on behalf of HRC and “as trustee for the beneficiaries”;
• The motion judge rejected the appellants’ argument that the Loan Commitment was merely an internal document between HRC and 1249 since it was created before some of the investors signed Trust Agreements. The motion judge observed that two of the respondent investors signed Trust Agreements before the Loan Commitment was executed; he continued, at para. 100:

[The defendant’s submission] fails to consider the purpose of the syndicated loan. The loan commitment is part of the package as investors are invited to contribute funds for this specific loan. [HRC] never intended on being the actual lender. Rather, the company was always acting as trustee on behalf of beneficiaries who had already invested and those that would invest in the future. Clearly, the intention was to create a trust from the outset. While there are several documents involved, not all executed at the same time, I have no difficulty in concluding they represent one transaction or package.

• Guarantees of the loan by 1249 and Jim Neilas were terms of the Loan Commitment and their wording was “clear and unambiguous”. The motion judge expressly rejected the evidence of Jim Neilas that the Loan Commitment did not include a personal guarantee but only contemplated that Neilas would provide a future guarantee document, which he never did;
• The investors’ lack of knowledge about the guarantees did not mean that the guarantees, as terms of the Loan Commitment, were not incorporated by reference into the Trust Agreement. The investors’ lack of knowledge resulted from the Trustee’s failure to fulfill its disclosure obligations. As the motion judge stated, at para. 98:

The guarantee is a term of the loan commitment. The investors lack of knowledge as to the specific loan commitment is not relevant as such resulted only due to non-disclosure. The trustee, [HRC], and Mr. Neilas, its principal, signed the loan commitment. The trustee was acting on behalf of beneficiaries. Notice to the trustee is deemed notice to the beneficiaries. Liability cannot be avoided based upon the trustee’s breach of the duty it owed to the beneficiaries; and

• When the loan went into default, HRC, as trustee, was obligated to enforce the terms of the Loan Commitment, including the guarantee, but failed to do so. Given the trustee’s failure, the beneficiary investors were entitled to take action to enforce the terms of the Loan Commitment.

25The motion judge held that applying the relevant legal principles to the documentary record led to the conclusion that there was no genuine issue requiring a trial regarding the liability of 1249 and Jim Neilas to the investors based on their guarantees in the Loan Commitment.

26The appellants advance four main arguments about why the motion judge erred in reaching that conclusion. I shall deal with each in turn.

First argument: The guarantees could not be incorporated by reference into the Trust Agreements and LPAs because the investors did not know about the guarantees when they made their investments

27The appellants’ primary argument starts with the proposition that the proper approach to contractual interpretation is to discern what the parties intended at the time of contract formation, having regard to the language of the agreements and the factual matrix in which they were signed. Drawing on this principle, they continue:

The fact that 1249 Queen and Mr. Neilas guaranteed the Loan Commitment to HRC (not to the Investors) does not (and cannot) mean that the Investors, at the time they signed the LPAs, understood and agreed that their investments were guaranteed. The Investors were not privy to the Loan Commitment, the guarantee was not made for their benefit, and indeed they had no knowledge of any such guarantee at the time.

Accordingly, it could not have been the intention of the Investors that their investments were guaranteed by 1249 Queen or Mr. Neilas.

28I am not persuaded by this argument.

29The principles of Canadian contract law focus on determining the objective, not subjective, intentions of the parties, as expressed by the language of an agreement, understood in light of the surrounding circumstances or factual matrix. As summarized in the dissenting reasons (although not on this point) in Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, [2019] 4 S.C.R. 394, at para. 74:

This Court has described the object of contractual interpretation as being to ascertain the objective intentions of the parties. It has also described the object of contractual interpretation as discerning the parties’ “reasonable expectations with respect to the meaning of a contractual provision”. In meeting these objects, the Court has signalled a shift away from an approach to contractual interpretation that is “dominated by technical rules of construction” to one that is instead rooted in “practical[ities and] common-sense”. This requires courts to read a contract “as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract”. [Citations omitted.]

30In the present case, the objective intentions of the parties included the reasonable expectation that HRC, as Trustee, would loan the syndicated funds to the borrower, 1249, “upon the terms and conditions contained in the Loan Commitment,” as stipulated by the LPAs’ “Use of Funds” clause. This follows from the plain language of the two agreements to which both HRC, as Trustee, and the respondent investors were privy: the Trust Agreements and LPAs.

31Provisions of both documents link them together to form a single contract. Once again, recital 5 of the Trust Agreement states:

AND WHEREAS the rights and obligations of the parties are more particularly set out in the attached Loan Participation Agreement #07-1068-0 and the Beneficiary is known as the “Participant”.

32On its part, the LPA describes the counter-party to HRC as: “Person(s) and/or Entity as per the Trust Agreement to which this Agreement is Attached”, and the Participant’s Participation is described: “As per the attached Trust Agreement (First Page)”.

33The plain language of the LPAs then incorporates by reference terms of the Loan Commitment into the contractual arrangement between HRC and the respondent investors:

• The LPAs’ “Use of Funds” clause states: “HRC agrees to advance the Participant’s Participation to the Borrower upon the terms and conditions contained in the Loan Commitment issued by HRC to the Borrower”; and
• The LPAs’ “Loan Documents” clause provides: “HRC, as part of its reporting to Participants as asset manager shall forward a closing book containing, among other things, all security documentation executed by the Borrower.”

34On their plain language, the Trust Agreement was expressly linked to the LPA which, in turn, was expressly linked to the terms and conditions of the Loan Commitment, incorporating them by reference: Chitty on Contracts, 34th ed., vol. 1 (London: Sweet & Maxwell, 2021), at p. 1114:15-016. [2] And, of course, running through all three documents was the ubiquitous signature of Jim Neilas, who acted on behalf of the trustee, lender, borrower, and guarantors.

35Pausing at this point in the analysis, the plain language of the Trust Agreements and LPAs supports the motion judge’s interpretation that the reasonable expectations of the parties to the LPAs, as expressed by their language, objectively viewed, were that HRC, as Trustee, would advance the investors’ funds to the borrower, 1249, on the “terms and conditions contained in the Loan Commitment.” Those terms and conditions included the guarantees from Jim Neilas and 1249. [3]

36But, the appellants argue, such an interpretation ignores critical features of the factual matrix. First, at the time they advanced their funds the investors did not know the guarantees were one of the specific terms in the Loan Commitment on which HRC, as trustee, loaned their funds to the borrower. Their knowledge of that specific term post-dated their investment advances. The result, the appellants argue, is that the guarantee term could not be incorporated by reference into the contract between HRC and the investors. Second, the limiting language in the Disclosure Statements and LPAs’ “Relationship” clause made it clear that their investments were not guaranteed.

37Given those aspects of the factual matrix, the appellants contend the motion judge erred in interpreting the contract to which the investors were party as including the benefit of the guarantees in the Loan Commitment. I propose to deal with these arguments in the following order: (i) the investor’s lack of knowledge of the guarantees; and (ii) the effect of limiting language in the Disclosure Statements and the LPAs’ Relationship clause.

Second argument: The appellants’ lack of knowledge about the guarantees

38I am not persuaded that the investors’ lack of knowledge about all the details of an incorporated document undermines the motion judge’s interpretation of the Trust Agreements and LPAs as incorporating by reference the “terms and conditions contained in the Loan Commitment”, including the guarantees. That interpretation was open to the motion judge at least on the plain language of the contractual documents.

39The motion judge explained why the investors lacked specific knowledge of the guarantee term: “[t]he investors’ lack of knowledge as to the specific loan commitment is not relevant as such resulted only due to non-disclosure.” That explanation was fully supported by the record. There is no dispute that at the time of the investments HRC, as Trustee, did not inform the beneficiary investors about the existence of the guarantees contained in the Loan Commitment.

40HRC disclosed some of the terms and conditions of the Loan Commitment through information included in the Disclosure Statements and LPAs, but not the existence of the guarantee term. [4] What the appellants’ position essentially comes down to is the proposition that only those terms and conditions of the Loan Commitment that they disclosed to the investors could be incorporated by reference through the Use of Funds clause.

41Such a proposition does violence to the plain language of the Use of Funds clause. As well, it would result in great commercial unfairness. The Neilas-group of companies “controlled the pen” in the syndication transaction. It was open to them to avoid linking all the terms and conditions of the Loan Commitment to the obligations HRC owed the investors as part of the LPAs and Trust Agreements. The Neilas-group chose not to do so. In those circumstances, it is not open to them to attempt, after-the-fact, to roll-back the plain language they chose in the Use of Funds clause, arguing that it should not apply to an obligation in the Loan Commitment – the guarantees – they chose not to disclose.

42I do not see that analysis as deviating from the standard principles of contract interpretation by either relying on after-the-fact conduct of the parties to interpret the contract or conflating the contract interpretation exercise with HRC’s breaches of post-execution disclosure obligations.

43The record certainly indicates that HRC, as Trustee under the Trust Agreements, was subject to and failed to fulfill two disclosure obligations:

• HRC’s contractual obligation set out in the “Loan Documents” section of the LPA which stated, in part, that “HRC, as part of its reporting to Participants as asset manager shall forward a closing book containing, among other things, all security documentation executed by the Borrower.” Section 17 of the Loan Commitment specified that the security the Borrower was to deliver to the Lender, HRC, included the “Guarantees from the Guarantors”, namely from Jim Neilas and 1249. There is no evidence that HRC fulfilled its contractual obligation to deliver to the investors a closing book that contained “all security documentation executed by the Borrower” or the Loan Commitment, which would have enabled the Investors to know and understand the security the Borrower was giving for the loan; and
• HRC’s common law obligation as trustee to disclose to beneficiaries their interests and entitlements under the trust instrument, including the trust’s (or beneficiaries’) rights of action against third parties: Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8, [2018] 1 S.C.R. 224, at paras. 15, 19 and 27; Peter Cotton-O’Brien, “A Trustee’s Fiduciary Duty to Disclose the Existence of a Trust” (2018) 37:3 Est. Tr. & Pensions J. 251, at pp. 258-259.

44While those post-execution breaches by HRC supported the motion judge’s holding that the investors, as beneficiaries, could enforce the guarantees when HRC, as trustee, failed to do so, those breaches are analytically distinct from HRC’s undisputed failure to disclose the guarantees at the time of the execution of the contracts. By taking the position that the contract with the investors should be interpreted as excluding the benefit of the guarantees because the investors did not know about them, HRC sought to advance an interpretation of the contract that was contrary to the plain language of the contract and commercially unfair. It was open to the motion judge to reject such an interpretation.

45Accordingly, in the specific factual circumstances of this mortgage syndication, the motion judge did not err in concluding that “[t]he investors’ lack of knowledge as to the specific loan commitment is not relevant as such resulted only due to non-disclosure.”

Third argument: The limiting language in the Disclosure Statements and Relationship clause

46The appellants further submit that the motion judge’s interpretation failed to take into account, as part of the factual matrix and as part of the interpretation of the contract documents as a whole, what they contend is absolute “no guarantee” language contained in the Disclosure Statements and Relationship clause. I am not persuaded by this argument.

47While the Disclosure Statement indeed states that “[t]his mortgage investment cannot be guaranteed by the mortgage brokerage”, that statement applies only to the possibility of a guarantee by HRC, as the mortgage brokerage. HRC, as mortgage broker, could not provide a guarantee and did not provide a guarantee. However, the language in the Disclosure Statement does not encompass the two guarantees actually given to HRC, which were by Jim Neilas and 1249.

48The appellants further contend that the motion judge erred by failing to give effect to the limiting language in the LPA’s “Relationship of Participant to HRC” clause. Recall that the first sentence of that clause states:

It is expressly understood and agreed that the Participant’s Participation is in no way to be deemed an investment in HRC, or any of its affiliates, subsidiaries, employees or officers, or a borrowing by HRC or any of its affiliates, subsidiaries, employees or offices [sic] from the Participant, and repayment of the Participant’s Participation is in no way, either directly or indirectly, guaranteed by HRC or any of its affiliates, subsidiaries, employees or officers, other than any [sic] the corporate guarantee for the amount of the Participant’s Participation being provided by HRC. [Emphasis added.]

49The appellants argue that this clause expressly states that the respondents’ investments were not guaranteed, yet the motion judge read the term out of the LPA, rendering it ineffective.

50In his reasons, the motion judge appeared to give effect to the Loan Commitment’s “Guarantors” clause in preference to the LPA’s “Relationship” clause by applying the contra proferentem principle, giving a sequential priority to the Loan Commitment, and applying the principle that the specific overrides the general.

51With respect, I do not agree with motion judge’s method of interpreting the interplay between the LPA’s “Relationship” clause and the incorporation by reference of terms of the Loan Commitment through the LPA’s “Use of Funds” clause. Nevertheless, I agree with his ultimate conclusion that the “Relationship” clause does not prevent the investor beneficiaries from enforcing the guarantees against Jim Neilas and 1249.

52The “Relationship” clause is a limitation of liability clause. As such, its meaning and effect fall to be determined in accordance with the analytical approach summarized in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at paras. 62 and 122-123. The Tercon analysis requires a court to consider first whether, as a matter of interpretation, the exclusion clause even applies to the circumstances established in evidence. This will depend on the Court’s assessment of the intention of the parties as expressed in the contract: at para. 122. When interpreting whether an exclusion clause applies in the circumstances, the key principle of contractual interpretation is that the words of one provision must not be read in isolation but should be considered in harmony with the rest of the contract and in light of its purposes and commercial context: at para. 64.

53In my view, when read in light of the Tercon principles the LPA’s “Relationship” clause does not apply to prevent the respondent investors from taking the benefit of and seeking to enforce the guarantees contained in the Loan Commitment. The clause seeks to clarify the relationship between the Investors and HRC, in its capacity as loan syndicator and Trustee under the Trust Agreements. It stipulates that: HRC is not borrowing money from the investors; the investors are not investing their money in HRC; and HRC is not guaranteeing repayment of the investors’ monies.

54Of course, the guarantees the respondent investors seek to enforce were not given by HRC, but by 1249 and Jim Neilas in the Loan Commitment. Are those two entities protected by the Relationship clause’s limitation of liability language that “repayment of the Participant’s Participation is in no way, either directly or indirectly, guaranteed by HRC or any of its affiliates, subsidiaries, employees or officers”? The appellants say they are; I disagree. The expansive interpretation of the clause they advance would result in a commercial absurdity as it arguably would relieve 1249, the borrower/mortgagor of the first mortgage and an “affiliate” of HRC, of its obligation to repay the loan.

55In my view, the interpretation more consistent with the language of clause when read in the context in which it arose is to treat the Relationship clause as regulating the interconnection between HRC, as Trustee of the syndicated first mortgage, and the investors in the first mortgage. In that context, the extension of the clause’s protection to HRC’s officers, employees or affiliates is limited to acts they perform on behalf of HRC as Trustee, not in some other capacity. Just as the clause states that the Trustee, HRC, does not guarantee repayment of a Participant’s Participation, so too an employee of the Trustee, acting as such, does not guarantee repayment.

56In giving his guarantee in the Loan Commitment, Jim Neilas patently was not acting in his capacity as an employee of the Trustee. He was acting to assist the borrower, 1249, to secure first mortgage financing for its Project. So, too, with 1249: although an affiliate of HRC, it gave its guarantee to benefit the borrower, not in the course of acting for the Trustee. Accordingly, when interpreted in the larger contractual context, the Relationship clause does not operate to limit the liability of Jim Neilas or 1249 on their guarantees given in the Loan Commitment.

57This interpretative result is not unfair to Jim Neilas. He was heavily conflicted in this transaction, and he failed to disclose material information to the respondent investors. He cannot rely on language designed to protect HRC in its capacity as Trustee to avoid liability on his personal guarantee given to support the borrower.

58Given my conclusion that the Relationship limitation of liability language does not apply in the circumstances, there is no need to proceed beyond the first step of the Tercon analysis.

Fourth argument: The motion judge erred by failing to follow case law regarding similar syndicated mortgages

59The appellants next submit the motion judge’s interpretation of the contractual documentation is contrary to other Superior Court of Justice cases interpreting contracts for syndicated mortgages.

60They first point to the decision in Orwinski v. Hi-Rise Capital, 2019 ONSC 3975, in which HRC also acted as trustee of a syndicated mortgage. In that case, a claim by investors in the syndicated mortgage against HRC and the mortgagor/borrower was dismissed. The appellants submit the facts in Orwinski “are nearly identical to this case.”

61In fact, they are not. Orwinski involved the interpretation of an early redemption clause in the loan participation agreements between HRC and the investors. The LPAs in the present case do not contain such a clause. The reasons in Orwinski disclose that the LPAs in that case also contained different terms than those found in the present case. As well, there was no issue about the relationship between the LPAs in that case and any contract between the lender and the borrower. The analysis and result in Orwinksi have no relevance to the present case.

62The appellants also rely on the decision in Khwaja v. Jinnah, 2021 ONSC 4614. They present the case as one holding that an investor in a syndicated mortgage could not enforce against a mortgage trustee a personal guarantee provided by the principal of the project developer. That is not quite how I read the case: the facts are more nuanced and, again, differ materially from those in the present case. In Khwaja, the principal of the real estate project developer (against whose lands the syndicated second mortgage would be registered) gave a personal guarantee to Khwaja of her investment in the syndicated second mortgage, which was made through a syndicator/trustee called 53 Puccini Mortgage Corp.

63Khwaja also named as a defendant the syndication trustee, 53 Puccini. The court did not accept her argument that the existence of the personal guarantee from the developer’s principal somehow changed her beneficiary/trustee relationship with 53 Puccini into one of lender and borrower. The court held that the plain language of the subscription agreement did not create a lender/borrower relationship between Khwaja and 53 Puccini. However, the court went on to find that 53 Puccini had breached its obligations under the subscription agreement and awarded Khwaja damages against it.

64The decision in Khwaja, like that in Orwinski, turned on its specific facts, which are materially different than those in the present case. The motion judge was asked to consider Orwinski; he did so; he distinguished it; and he was correct in so doing.

C. Summary on first ground of appeal

65For the reasons set out above, I see no reversible error in the motion judge’s interpretation of the Trust Agreement, LPAs, and Loan Commitment, or in his conclusion that Jim Neilas and 1249 are jointly and severally liable to the respondent investors on the guarantees they gave in the Loan Commitment. I would dismiss that part of their appeal.

III. Second ground of appeal: The motion judge erred in the interest rate he used to calculate damages and pre- and post-judgment interest

66The appellants submit the motion erred in using an 18% per annum interest rate to calculate the respondents’ losses on their investments as well as the pre- and post-judgment interest rates.

67I accept their submission.

68The amount the Judgment awarded to each respondent was based on damage calculation spreadsheets they submitted showing their losses from November 30, 2014 until November 30, 2020: Reasons, at para. 9. The losses shown were a blend of principal and accrued interest. The spreadsheets used an annual interest rate of 18%.

69In his reasons, the motion judge also used an annual rate of 18% for his award of pre-judgment and post-judgment interest to the respondents.

70Each LPA contained a clause titled, “Fixed Interest Rate”, which stated that “HRC agrees to pay the Participant a fixed rate of [x]% per annum as and when received from the Borrower.” All but one of the LPAs specified an interest rate of 10%; the LPA for the investment by Maureen Ferraro and Lawrence Hishon stipulated at 12% interest rate.

71Although the respondents deposed in their affidavits that they understood they would receive 18% interest on their investments, none of them explained how that understanding could be reconciled with the rates of 10% or 12% contained in their LPAs.

72Further, the motion judge’s reasons are silent on why he applied an 18% interest rate to calculate the judgment amounts when the LPAs specified interest at 10% or 12%. The record discloses that the interest rate payable by the Borrower, 1249, to HRC on the syndicated first mortgage was 18% but the reasons are silent on whether or why the motion judge might have applied that rate.

73As discussed above, by their terms the LPAs were attachments to the Trust Agreements signed by the respondents. The respondents rely on provisions in the LPAs to ground their argument that the guarantees were incorporated by reference into their contractual arrangement with HRC. Given that position, it follows that the interest rates applicable to calculate the respondents’ losses and pre-judgment and post-judgment interest should be those contained in the LPAs. The motion judge committed a palpable and overriding error by applying a different interest rate of 18%.

IV. Disposition

74I would dismiss the appeal in respect of the motion judge’s finding of joint and several liability of Jim Neilas and 1249 on their guarantees for the amount of the respondents’ losses.

75However, I would vary the amount of the losses to which the respondents are entitled to judgment. The parties must re-calculate those losses using the spreadsheets filed by the respondents with their affidavits but substituting the interest rate specified in each respondents’ respective LPA.

76From the state of the record, I would expect that to be a simple, straight-forward exercise. If the parties are unable to agree on the amount of the losses, they may file brief written submissions with the court no later than May 26, 2023.

77I would also vary the Judgment’s rate of pre-judgment and post-judgment interest to that specified in each respondents’ respective LPA.

78Although there has been mixed success on this appeal, the liability of the appellants remains undisturbed. Consequently, I would not vary the costs awarded below. I also would award the respondents their costs of the appeal fixed in the amount of $10,000, inclusive of disbursements and applicable taxes.

“David Brown J.A.”

“I agree. Coroza J.A.”

Hoy J.A. (dissenting):

A. Introduction

79This appeal arises out of a failed condominium project.

80Investors advanced an aggregate of $483,000 in a syndicated mortgage against the property municipally known as 1249 Queen St. East, Toronto (the “Property”). Each investor executed a trust agreement with Hi‑Rise Capital Ltd. (“HRC”), the mortgage brokerage that syndicated the loan. Pursuant to the terms of the trust agreements, HRC held the amount advanced by each investor, and an undivided beneficial interest in the mortgage, as trustee for the investors.

81Ultimately, the borrower, Neilas (1249 Queen E) Inc. (the “Borrower”), was unable to obtain all the needed financing and the condominium project was never developed. The Property was sold with the approval of the investors, who recovered part of their investments from the sale proceeds. They sought to recover the shortfall from the appellant, Jim Neilas, who is the principal and an officer of both HRC and the Borrower.

82The Borrower is a special-purpose company, created to acquire the Property for, and develop, the failed project. Practically, the investors’ hope for further recovery rests on Mr. Neilas.

83All agree that, in this case, whether the investors are entitled to claim against Mr. Neilas personally turns on a question of contractual interpretation, namely whether it is a term of the trust agreements that Mr. Neilas personally guarantee their loans.

84On the summary judgment motion brought by the investors, the motion judge found that it was; Mr. Neilas had guaranteed the loans, and because HRC failed to take action to enforce his guarantee for their benefit, the investors were entitled to do so. The motion judge granted judgment against Mr. Neilas and the Borrower in an amount intended to represent the investors’ loss, plus pre- and post-judgment interest.

85The Borrower, Mr. Neilas and HRC appeal. They argue that the motion judge misapprehended and misapplied the legal principles governing the interpretation of the trust agreements and that, applying the correct principles, it is not a term of the trust agreements that Mr. Neilas guarantee the loans. Mr. Neilas, the Borrower and HRC further argue that the motion judge granted the investors a windfall in damages and interest.

86Unlike my colleague, I would allow this appeal on the first issue. Accordingly, it is unnecessary for me to address the second issue.

B. The Contractual Framework

87As noted above, each of the investors signed a one-page trust agreement which provided that HRC held the amount advanced by the investor, and an undivided beneficial interest in the mortgage, as trustee for the investor. Mr. Neilas signed on behalf of HRC. One of the recitals to the trust agreements provided that “the rights and obligations of parties are more particularly set out in the attached Loan Participation Agreement…and the Beneficiary is known as the “Participant”.”

88Two provisions of the attached Loan Participation Agreement (the “LPA”) are relevant to the analysis.

89First, a paragraph entitled “Use of Funds” provides as follows:

HRC agrees to advance the Participant’s Participation to the Borrower upon the terms and conditions contained in the Loan Commitment issued by HRC to the Borrower.

90Second, a paragraph entitled “Relationship of Participant to HRC” (sometimes referred to in these reasons as the “Relationship clause”) provides, in relevant part, as follows:

…repayment of the Participant’s Participation is in no way, either directly or indirectly, guaranteed by HRC or any of its affiliates, subsidiaries, employees or officers, other than any [sic] the corporate guarantee for the amount of the Participant’s Participation being provided by HRC. The parties hereto further acknowledge and agree that the Participant’s decision to participate in the Loan has not been induced by, nor does the Participant rely upon or regard as material, any representation or promise whatsoever with respect to the Loan, whether oral or otherwise, by whomsoever made, except as set out in this document, and the Investor/Lender Disclosure required under FSCO Regulations [sic] the Trust Agreement executed between HRC and the Participant.

91The Loan Commitment referenced in the Use of Funds clause in the LPA is dated July 2, 2012. It provided that HRC was prepared to provide a first mortgage loan for the property “on the terms and conditions set out in this Commitment.” Those terms and conditions included the following:

3. Guarantor: The Borrower Neilas (1249 Queen E. Inc. (the “Guarantor(s)”) will guarantee the loan. The Guarantor(s) must sign the Lenders [sic] usual Guarantor’s documentation standard for transactions of this nature. Jim Neilas to personally guarantee the loan.

4. Security: The Borrower will deliver and/or execute all reasonable security documentation (the “Security”) required by the Lender and its solicitors in a form, scope and substance satisfactory to the Lender and its solicitors which shall include but not be limited to:

v. Guarantees from the Guarantors.

92The Loan Commitment contemplated that HRC would syndicate the loan. Mr. Neilas signed the Loan Commitment on behalf of HRC, the Borrower and in his personal capacity.

93The investors did not receive a copy of the Loan Commitment and were unaware of the provision requiring Mr. Neilas to personally guarantee the loan. The record did not include a stand-alone guarantee signed by Mr. Neilas and his evidence was that he never executed a guarantee.

94As required by the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29, and its regulations, HRC provided each investor with an Investor/Lender Disclosure Statement for Brokered Transactions. Each investor signed a Disclosure Statement and Mr. Neilas signed the Disclosure Statements on behalf of HRC.

95The Caution on the Disclosure Statement included, in part, the following:

All mortgage investments carry a risk. You should very carefully assess the risk of this mortgage investment before making a commitment.

You are strongly advised to obtain independent legal advice before committing to invest.

96The Disclosure Statements also disclosed that the Borrower and HRC were owned by the same principal.

C. The Motion Judge’s Reasons

97The motion judge found that Mr. Neilas provided a guarantee. [5] Essentially, he concluded that Mr. Neilas’ covenant in the Loan Commitment to provide a guarantee constituted an enforceable guarantee in favour of HRC.

98The motion judge held that, “[t]he investors [sic] lack of knowledge as to the specific loan commitment is not relevant as such resulted only due to non‑disclosure… Liability cannot be avoided based upon the trustee’s breach of the duty it owed to the beneficiaries.”

99With respect to the various documents at issue, he concluded:

While there are several documents involved, not all executed at the same time, I have no difficulty in concluding they represent one transaction or package.

100At paragraph 102 of his reasons, he engaged in the interpretation of the trust agreement:

There are conflicting terms, particularly as to the guarantee. The [Borrower and Mr. Neilas] rely on the LPA, the [investors] on the loan commitment. Both are part of the trust agreement. There are several principles to assist:

• The documents were prepared by or on behalf of [the Borrower and Mr. Neilas] and, hence, the contra proferentem rule applies;
• The sequence of the terms, with the loan commitment being first by virtue of the “Use of Funds” clause; and
• The specific overrules the general.

101This analysis led him to conclude that the guarantee referred to in the Loan Commitment was an essential term of the trust agreement.

D. Analysis

102I conclude that the motion judge made several errors in his interpretation of the trust agreement that justify appellate intervention.

103First, and most significantly, contrary to what the motion judge concluded, the investors’ lack of knowledge about the guarantees is relevant in interpreting the terms of the trust agreement.

104In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 47, the Supreme Court of Canada held that the objective of contractual interpretation is to determine “the intent of the parties and the scope of their understanding” at the time they entered into the agreement. This requires a consideration of the language of the agreement as well as the surrounding circumstances or “factual matrix” in which the agreement was made:

Regarding the first development, the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine “the intent of the parties and the scope of their understanding” [….] To do so, a decision-maker must read the contract “as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract”. [Emphasis added.]

105As my colleague stresses, the focus is on ascertaining the objective intentions of the parties: Resolute FP Canada Inc v. Ontario (Attorney General), 2019 SCC 60, [2019] 4 S.C.R. 394, at para. 74; Sattva, at para. 55.

106The motion judge did not advert to the principle that the overriding aim is to determine the objective intention of the parties at the time the contracts were signed. He resolved what he characterized as conflicting terms without regard to, and in a manner inconsistent with, the surrounding circumstances known to HRC and the investors at the time the trust agreements were signed.

107It is undisputed that at the time the investors entered into the trust agreements they believed that they were investing in a first mortgage on the Property. The document which they were aware of – the LPA – provided that there was no guarantee. As I will discuss below, contrary to my colleague, applying the principles in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at paras. 62 and 122-23, I conclude that the Relationship clause of the LPA providing that “… repayment of the Participant’s Participation is in no way, either directly or indirectly, guaranteed by HRC or any of its affiliates, subsidiaries, employees or officers…” is both clearly applicable and enforceable. The investors were unaware of the Loan Commitment and did not believe or know that they had a personal guarantee from Mr. Neilas. Objectively, they intended to make loans secured only by the mortgage on the Property. They specifically acknowledged in the Disclosure Statements that their investments carried a risk. The high rate of interest payable to them reflects that risk.

108And Mr. Neilas and the Borrower did not deliver guarantees, as the Loan Commitment letter had contemplated. HRC would have known this. In my view, objectively, the parties to the trust agreement – HRC and the investors – clearly intended that the mortgage on the Property was to constitute the investors’ only security. There is no unfairness to the investors in interpreting the trust agreement in a manner consistent with the parties’ mutual intention at the time the contract was entered into.

109HRC’s failure to provide the Loan Commitment to the investors is relevant to whether it breached its contractual and fiduciary duties to the investors – claims they elected not to advance in this litigation. It is not relevant to the interpretation of the terms of the trust agreement. Interpreting a contract differently because a party to it has breached its contractual duties is a novel proposition.

110Second, as Zarnett J.A. stated in Fuller v. Aphria Inc., 2020 ONCA 403, at para. 59, “[w]here a contract contains apparently inconsistent terms, the court must first endeavour to reconcile them. This requires applying principles of contractual interpretation to discern which term the parties intended apply to the situation at issue, and which term ought to be read in such a way as to be inapplicable, thereby removing the apparent inconsistency.”

111The contra proferentem rule is only to be invoked as a rule of last resort: Frenette v. Metropolitan Life Insurance Co., [1992] 1 S.C.R. 647, at pp. 667-68; Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. 2016 SCC 37, [2016] 2 S.C.R. 23, at para. 51. The motion judge erred by resorting to the contra proferentem rule before attempting to resolve the apparent inconsistency.

112Third, the motion judge failed to consider the headings to the paragraphs in the LPA in attempting to resolve the apparent inconsistency. Absent an indication to the contrary in an agreement, the headings form part of the agreement and are to be considered in interpreting it: Neely v. MacDonald, 2014 ONCA 874, at para. 11; Cathcart Inspection Services Ltd. v. Purolator Courier Ltd. (1981), 34 O.R. (2d) 187 (S.C.), at p. 193, aff’d , 39 O.R. (2d) 656 (C.A.); Toronto (City) v. Toronto Railway, [1907] A.C. 315 (P.C.); Solway v. Lloyd’s Underwriters (2006), 80 O.R. (3d) 401 (C.A.), at para. 44; Geoff R. Hall, Canadian Contractual Interpretation Law, 4th ed. (Toronto: LexisNexis, 2020), at p. 24: 2.2.7.

113The apparent inconsistency can be resolved by giving effect to the heading “Use of Funds” in the LPA. That heading suggests that the provisions of the Loan Commitment are not incorporated by reference and that the purpose of referring to the Loan Commitment is to describe the nature and purpose of the loan; that is, the use of funds. The nature and purpose of the loan is not disclosed in the one-page trust agreement or in the LPA. It is only disclosed in the Loan Commitment: “[t]o construct a 4 story mixed used residential condominium consisting of 24 residential units and 1 retail unit at grade and provide partial equity take out.”

114Fourth, if all the terms and conditions of the Loan Commitment are incorporated by reference (and, in my view, properly interpreting the trust agreement, they are not), the motion judge failed to give effect to the principle that when terms are incorporated into a contract by terms that do not give the incorporated terms priority, the terms of the host contract (here, the LPA with its Relationship clause) prevail over any inconsistent terms incorporated by reference (here, the provisions of the Loan Commitment regarding Mr. Neilas’ guarantee). Spina v. Shoppers Drug Mart Inc., 2012 ONSC 5563, at paras. 141-42; Fuller, at paras. 63-65; Pass Creek Enterprises Ltd. v. Kootenay Custom Log Sort Ltd., 2003 BCCA 580, at para. 15, citing Adamastos Shipping Co. v. Anglo-Saxon Petroleum Co., [1958] 1 All E.R. 725 (H.L.); Chitty on Contracts, 34th ed., vol. 1 (London: Sweet & Maxwell, 2021), at pp. 1153-54:15-081. [6]

115In my view, this principle has particular force where, as here, the parties to the contract incorporated by reference (Mr. Neilas, the Borrower and HRC) are not the same as the parties to the host contract (the investors and HRC). [7] The LPA does not employ the expression “subject to” or any other terms which suggest the Loan Commitment is to be given priority. Accordingly, the Relationship clause in the LPA specifically providing that “…repayment of the Participant’s Participation is in no way, either directly or indirectly, guaranteed by HRC or any of its affiliates, subsidiaries, employees or officers…” prevails over the provisions of the Loan Commitment, with the result that the apparent inconsistency is resolved.

116Fifth, the motion judge misapplied the principle that where there is an apparent conflict between a general term and a specific term, the terms may be reconciled by taking the parties to have intended the scope of the general term not to extend to the subject-matter of the specific term: BG Checo International Ltd. v. British Columbia Hydro & Power Authority, [1993] 1 S.C.R. 12 (S.C.C.), at p. 24; Fuller, at para. 60. That principle should have been applied to the terms of the LPA. The Relationship clause of the LPA specifically provides that repayment was not guaranteed by any officer. If the LPA incorporates the Loan Commitment by reference (and, as stated above, in my view it does not), the “Use of Funds” paragraph is more general: the Loan Commitment references includes a host of terms in addition to the guarantee provision.

117In my view, reading the trust agreement as a whole, considering the language of the agreement and the surrounding circumstances known to the parties at the time of formation of the trust agreement, it is clear that the guarantee by Mr. Neilas contemplated by the Loan Commitment is not a term of the trust agreement. [8]

118As noted above, Mr. Neilas is an officer of HRC. My conclusion rests on my view that the language of the Relationship clause of the LPA which provides that “…repayment of the Participant’s Participation is in no way, either directly or indirectly, guaranteed by HRC or any of its affiliates, subsidiaries, employees or officers…” is both applicable to the guarantee in issue and enforceable.

119The motion judge did not consider the principles in Tercon. Nor did the parties advert to them on appeal. However, I agree with my colleague that the “Relationship” clause is a limitation of liability clause and its meaning and effect must be determined in accordance with the three-step analytical approach summarized in Tercon: at paras. 62 and 122-23.

120As my colleague notes, the first step of the Tercon analysis asks whether, as a matter of interpretation, the exclusion clause applies in the present circumstances: at para. 122. I do not agree with my colleague that the Relationship clause only regulates “the interconnection between HRC, as Trustee of the syndicated first mortgage, and the investors in the first mortgage” and that the clause’s protection is “limited to acts [affiliates, subsidiaries, employees or officers] perform on behalf of HRC as Trustee, not in some other capacity”.

121In interpreting this clause, regard must be had to the commercial context – the surrounding circumstances known to the parties. These include the Disclosure Statement signed by the investors. As noted above, the Caution on the Disclosure Statement included, in part, the following:

All mortgage investments carry a risk. You should very carefully assess the risk of this mortgage investment before making a commitment.

You are strongly advised to obtain independent legal advice before committing to invest.

122Moreover, and very significantly, the Disclosure Statement also disclosed that the Borrower and HRC were owned by the same principal. The investors were aware both that their investments could be lost and of the close interrelationship between HRC and the Borrower. HRC’s return for acting as the vehicle to syndicate the first mortgage was entirely tied to the Borrower. The Disclosure Statement expressly disclosed that HRC would make a profit from the project if it is successful. A more sensible and realistic view of the Relationship clause is that the parties expected that the clause would operate to shield employees and officers of HRC, whether acting in relation to HRC or the Borrower. In my view, as a matter of interpretation, the Relationship clause is clear and unambiguous and applies in the present circumstances.

123Contrary to my colleague’s view, the interpretation I advance would not result in a commercial absurdity. The Relationship clause only speaks to guarantees. It would not relieve the Borrower from its obligations qua primary obligor.

124The second step of Tercon’s three-part test requires me to consider whether the Relationship clause was unconscionable at the time of contract formation: at para. 122. The Disclosure Statement is also relevant at this step of the analysis. As stated above, the investors were cautioned that their investments carried a risk and that the Borrower and HRC were owned by the same principal and were strongly advised to obtain independent legal advice.

125Moreover, each investor completed an Investor Profile. Each investor represented that they had the requisite risk tolerance level and experience appropriate for participating in the syndicated mortgage. Each was asked to choose and tick a box that best described their investment knowledge, ranging from “Novice” to “Sophisticated”, and to indicate which categories of investment products they had at the time of their investments. All investors indicated their investment knowledge was either fair or good, and that they had previously invested in other investment products. They knew or should have known what they were doing. I am not persuaded that the Relationship clause was unconscionable at the time of the contract formation.

126The final step of the Tercon analysis requires me to consider whether, even if the Relationship clause is not unconscionable, there is an “overriding public policy” that outweighs the very strong public interest in the enforcement of the contract: at para. 123. Proof of such an overriding public policy lies on the party seeking to avoid enforcement of the clause: Tercon, at para. 123. The investors did not advance any overriding public policy concerns. They did not allege that Mr. Neilas was the alter-ego of HRC and sue HRC and Mr. Neilas for breach of contract or of HRC’s fiduciary duty. Nor did they allege any fraud. They relied solely on the theory that Mr. Neilas had provided a personal guarantee, and that such a guarantee was a term of the trust agreements between each of them and HRC. It is not the court’s job to rescue the investors from their decision to participate in risky mortgage investments which they knew involved related parties without the independent legal advice they were strongly advised to obtain.

E. Disposition

127I would allow the appeal and set aside the judgment below. I would award the appellants their costs of the appeal fixed in the amount of $25,000, inclusive of HST and disbursements, and permit the parties to make submissions regarding the appropriate disposition in relation to the costs below.

Released: May 1, 2023 “A.H.”

“Alexandra Hoy J.A.”

[1] Peter Shannon and Tanja Tudhope signed Trust Agreements on June 25, 2012; Maureen Ferraro and Lawrence Hishon on August 7, 2012; and Michael Grove on August 31, 2012. [2] Chitty on Contracts states, at §15-016: “Incorporation by express reference. The terms of a contract may be contained in more than one document. In such a case, the terms set out in one document may incorporate into the contract terms to be found in another document.” [3] Jim Neilas gave evidence that the “Guarantor” language of the Loan Commitment did not constitute a personal guarantee on his part because he never got around to signing a separate guarantee document. In taking that position, he pointed for support to the phrase in the “Guarantor” clause that “[t]he Guarantor(s) must sign the Lenders usual Guarantor’s documentation standard for transactions of this nature.” While the appellants did not specifically abandon that position on appeal, one certainly could read para. 49 of their Factum as acknowledging the validity of the guarantees.

In any event, I see no merit in their reservation that no guarantees may have been given. First, I see no error in the motion judge’s conclusion that the language of guarantee in the Loan Commitment was clear. It satisfied the definition of a guarantee as a promise to answer for the debt of another person: Kevin McGuiness, The Law of Guarantee, 3rd ed. (LexisNexis: Toronto, 2013), at §3.2. Second, this was not a situation where the guarantor lacked knowledge about the risk of the debt he was guaranteeing: Jim Neilas signed the Loan Commitment on behalf of the lender, borrower, and himself. The knowledge of the lender and borrower was his knowledge. Finally, given the multiple hats he was wearing, Jim Neilas would have known the content of HRC’s “usual Guarantor’s documentation standard for transactions of this nature” if in fact, any such document existed. [4] The information HRC disclosed in the LPAs and Disclosure Statements about the “terms and conditions of the Loan Commitment” included: the borrower’s name; the amount of the loan from HRC to 1249; the term of the loan; the interest rate payable on the loan; the appraised value of the Project property; the fees payable by the borrower to HRC and others in respect of the syndication; and the existence of borrower’s security documents for the loan, which HRC was to provide to the investors. [5] Mr. Neilas maintains that he did not provide a guarantee, but, given the standard of review applicable to this finding of the motion judge, on appeal focuses on what he argues is the motion judge’s error in principle in interpreting the trust agreement. [6] Chitty on Contracts at §15-081: “Clauses incorporated by reference. If clauses are incorporated by reference into a written agreement, and those clauses conflict with the clauses of the agreement, then, in the ordinary way, the clauses of the written agreement will prevail.” [7] I recognize that HRC and the Borrower are controlled by Mr. Neilas, and Mr. Neilas signed on behalf of both entities. However, the investors did not seek to pierce the corporate veil. [8] Because of what, practically, is at issue is the ability of the investors to recover from Mr. Neilas personally, I have focused on the guarantee by him contemplated by the Loan Commitment. However, the same analysis and result apply to the guarantee by the Borrower contemplated by the Loan Commitment. That said, whether or not the Borrower’s guarantee is a term of the trust agreement, the Borrower is liable on the mortgage covenant.