DIVISIONAL COURT FILE NOS.: 441/03; 442/03; 443/03
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
B E T W E E N:
KNP HEADWEAR INC. Plaintiff (Respondent)
- and -
ROBERT J. LEVINSON Defendant (Appellant)
Counsel: D. Gordon Bent, for the Plaintiff (Respondent) James McReynolds, for the Defendant (Appellant)
HEARD at Toronto: November 10, 2005
1The Defendant, Levinson, appeals from the judgment of Deputy Judge Bedard granted June 12, 2003, wherein the Plaintiff, KNP Headwear Inc. (KNP) was awarded $5,248.15 in respect of unpaid invoices addressed to U.R. Workwear Inc. (Action #1) and from the judgment of Deputy Judge Bedard also granted June 12, 2003, wherein the Plaintiff, KNP was awarded $10,000 in respect of unpaid invoices addressed to Millenitex Inc. (Actions #2 and #3). All three related actions were heard at the same time.
2Levinson was the principal of U.R. Workwear Inc. and Millenitex Inc.which retailed uniforms to the public. KNP is a supplier of uniform headgear.
3On October 15, 2001, U.R. Workwear Inc. and Millenitex Inc. made assignments in bankruptcy.
4The claim in Action #1 is based on a personal continuing Guarantee dated April 19, 2001, given by the Defendant to guarantee payment "immediately after demand, of all the debts and liabilities which Uniforms Registered Inc. has incurred or may incur with KNP…as well as any other transactions by which the customer may become liable to KNP in any manner whatever."
5The claims in the two related actions (Actions #2 and #3) are both based on a personal continuing Guarantee dated April 19, 2001, given by the Defendant to the Plaintiff to guarantee payment "immediately after demand, of all the debt and liabilities which Millenitex Inc. has incurred or may incur with KNP…as well as any other transactions by which the customer may become liable to KNP in any manner whatever."
6It is common ground that no written demand has been made on the guarantees.
7In all three actions default judgment was obtained on March 2, 2002, after which an order was obtained by the Defendant on May 9, 2002, setting it aside and permitting the filing of a defence in all three actions.
8By pre-trial order made by Deputy Judge Russell on June 12, 2003, it was ordered that Action #1 would proceed first, and that Action #2 and #3 would be combined with a maximum recoverable amount of $10,000.
9The issues raised on appeal are: (i) was there an improper splitting of the claims in order to remain within the monetary jurisdiction of $10,000 of the Small Claims Court; (ii) was the Guarantee enforceable where there was not a prior written demand delivered to the Defendant before the commencement of the actions?
Issue (i) – Splitting Claims
10The Defendant submits that the three actions brought by the Plaintiff violate rule 6.02 of the Small Claims Court Rules which states:
6.02 A cause of action shall not be divided into two or more actions for the purpose of bringing it within the court's jurisdiction.
11While there is no definition of "cause of action" under either the Rules of Civil Procedure or under the Small Claims Court Rules, Black's Law Dictionary offers two alternate definitions. The first is "a group of operative facts giving rise to one or more basis for suing"; the second is the "legal theory of a lawsuit".
12The Defendant relies on case law interpreting rule 6.02 which characterizes a cause of action as "the factual circumstances which give rise to a right to sue" and in particular Sahota v. Beauchamp, [1994] O.J. No. 466.
13In Sahota, two defendant mortgagors were granted a second mortgage for $17,500.00 by the plaintiff. Upon default, the plaintiff sued one of the mortgagors for $6,000 (the jurisdictional limit at that time) in Small Claims Court and waived the excess. In a second action, he sued the other mortgagor for the same amount. Searle Deputy J. stayed the second action stating that the plaintiff's approach violated rule 6.02.
14First, as to whether there was a single cause of action, Searle Deputy J. stated the following:
[5] The question arises as to whether there is here a single cause of action. In the case of Royal Bank v. Metcalfe (1985), 3 C.P.C. (2d) 228 (Ont. Dist. Ct.) the phrase "cause of action" was defined as being all facts that give rise to a claim. In the Dictionary of Canadian Law published in 1991 the phrase is defined as "the factual circumstances which give rise to a right to sue". Elsewhere the phrase has been referred to as a transaction or occurrence giving rise to a right to sue.
[6] In the two cases at bar there is but one occurrence, transaction or set of facts which give rise to the right to sue, namely default in payment of money owing under a mortgage.
The Deputy Judge concluded:
[7] If there was only one mortgagor there is no doubt Rule 6.02 of this Court would prohibit what has here occurred. The question then arises whether the existence of two mortgagors (and hence two prospective defendants) takes the case out of the ambit of Rule 6.02. The answer is almost certainly in the negative because the number of defendants does not increase the number of causes of action. Rather, there is a single cause of action against more than one person. This Court therefore holds there is a single cause of action which the plaintiffs are attempting, for reasons which have merit to split for the purpose of bringing the case within the Courts monetary jurisdiction of $6,000.00.
15The Defendant submits that the relevant factual circumstances in this case is that the Defendant, albeit through two corporate entities has engaged in a continuing business transaction with the Plaintiff characterized by unpaid invoices with respect to the Plaintiff's goods. Under these circumstances it is submitted the Plaintiff was confined to one cause of action and limited to a recovery of $10,000 and accordingly, the Deputy Judge erred in awarding a total of $15,248.15 damages from two causes of action.
16The Plaintiff submits that the two claims are based on two different guarantees granted against the loans of two independent legal entities. In these circumstances the Plaintiff asserts that while there may be a similarity in the factual transactions which gives rise to the two claims, each claim is based on a separate guarantee with respect to a separate legal entity and accordingly is enforceable against the Defendant by separate causes of action.
17In support of his position the Plaintiff relies on the decision of Lane J. in Kent v. Conquest Vacations Co., [2005] O.J. No. 312. Mrs. Kent had booked a holiday for her and her husband. Pursuant to the provisions of the contract, each person for whom a holiday was booked became a party to the contract. As a result Lane J. held that each of the Kents had a cause of action against the defendant and were not obliged to sue as joint plaintiffs. Lane J. stated the following at paras. 7-9 of his decision:
[7] This is Conquest's language, inserted by it in its own interest and it clearly provides that not only the person booking the holiday, here Mrs. Kent, but also those for whom she booked, here Mr. Kent, become party to the contract. Why then cannot each party to the contract assert his or her damages for a breach of it in an action? "The right to sue for damages for breach of contract does not arise out of the contract itself, that is, it is not a matter of agreement but is an independent right given by the law." [See Note 1 below]
Note 1: G.H.L. Fridman: The Law of Contract 4th edition, (Scarborough: Carswell, 1994) at 702-3.
[8] While the damages of the individual parties arise out of a common transaction, they need not be asserted in a single action. Rule 5 of the Rules of the Superior Court, although not directly applicable to the Small Claims Court, is instructive. It provides that two or more plaintiffs, if represented by the same solicitor"may" join as the plaintiffs in the same proceeding where their claims arise out of the same transaction. The joinder is voluntary.
[9] The Kents have not split their case, as prohibited by Rule 6.02. This rule prevents a single plaintiff from dividing an action to come within the court's jurisdiction. This is not so in the case at bar, as both Mr. Kent and Mrs. Kent were parties to the contract and had the right to bring separate actions against Conquest.
18While I acknowledge that Kent, supra, is distinguishable on the basis that there were two plaintiffs, I am nevertheless persuaded that the reasoning in Kent is to be preferred over that of Sahota. The right to sue does not arise simply from the failure of the Defendant to pay invoices submitted by the Plaintiff for goods received but is based on two separate Guarantees given by the Defendant with respect to different corporate entities. The Defendant arranged his affairs in two separate corporate entities presumably in order to take advantage of limited liability – essentially in order to legally separate the claims. The guarantees were for two different loans on two different contracts. Having arranged his affairs in this manner for his benefit, I am persuaded that he should be held to this arrangement for the purposes of rule 6.02 of the Small Claims Court. I would not give effect to the first ground of appeal.
Issue (ii) – Demand for Payment
19The Defendant's position is that Deputy Judge Bedard erred in holding that the respective statements of claim constituted a written demand as required by the guarantees given by the Defendant and that accordingly the Deputy Judge erred in law in finding that the guarantees were enforceable against the Defendant.
20The Defendant relies on the decision of Russell J. of the Newfoundland Supreme Court in T.S.C. Shannock Corp. v. Dial-A-Video Ltd., [1992] N.J. No. 123 (T.D.). In Shannock, the Court was not directly concerned with whether a statement of claim would be considered a demand letter, but whether a letter relating to the payment was sufficiently precise to constitute a demand letter.
21However, in Shannock at page 4 of the judgment, the Court cites the decision of Goodridge J. also of the Newfoundland Supreme Court in Bank of Nova Scotia v. Battiste which is directly apposite to the situation here as follows:
The question of failure to prove a demand for payment on a guarantee before commencement of an action was dealt with by Goodridge J. in Bank of Nova Scotia v. Battiste. There, unlike in this matter, the terms of the guarantee required a demand for payment to be made in writing. In this matter there is no requirement that the demand be made in writing only that payment is to be made on demand. However, the principle applied by Goodridge J. in that case in relation to a demand applies with equal force in this case. (Irving Oil Limited v. Luby, 1983, 39 Nfld. & P.E.I.R. 295).
In that case Goodridge J. at p. 201-202 stated:
"The law is that where there is a collateral obligation as opposed to a demand obligation and the instrument creating the collateral obligation provides that there shall be no liability under that instrument until a demand or request for payment is made, then there is no cause of action unless and until such demand or request is made."
(See: In re Browns Estate v. Brown, [1893] 2 Ch. 300 per Chitty J. at pp. 304-5)
That case also held that the issuance of the statement of claim itself could not be construed as a sufficient demand.
…A guarantor is entitled to insist upon rigid adherence by the creditor to the terms of the guarantee and a guarantee must be construed strictly. (Bank of Nova Scotia v. Battiste).
22In their text, Law of Guarantees (Sweet and Maxwell, 4th ed., 2005), Andrews and Millett state the following at 7-005:
The parties to the contract may, of course, agree that the surety is only to be liable if a demand is made on him, or notice is given to him of the relevant default. Modern bank guarantee forms contain an express provision for the guarantor to discharge his liability to the bank on service of a written demand on him (thus avoiding the need, in most cases, to investigate when the underlying liability arose). If the surety promises to pay "on demand", the creditor cannot sue him until after a demand has been made on him. 1
23The sole authority relied on by the Plaintiff is Canada Trustco Mortgage Co. v. 1122293 Holdings Ltd., 1984 ABCA 102, [1984] A.J. No. 126 (Alta. C.A.) wherein the court cited with approval the following propositions:
[5] The case of Royal Bank of Canada v. Dwigans, [1933] 1 W.W.R. 672 and the cases there cited, a decision of this Court, establish that a debt due on demand is due at the date of execution of the instrument and without formal demand having been made. Formal demand is not a condition precedent to the action. …
[7] Even if a demand were required to make the debt due in this case, and we do not so hold, the Dwigans decision is also authority that the issuance of a statement of claim is the most emphatic means of making the required demand.
24It must, however, be noted that in the Dwigans case, and the case law it relies upon, such as Union Bank v. MacCullough, [1912] 2 W.W.R. 403, the defendant was the borrower on a promissory note, not the guarantor of a different loan.
25The divergence in the approach taken by the Defendant and the Plaintiff in this case mirrors precisely the distinction drawn by Chitty J. in Browns Estate v. Brown where at pp. 304-305 he stated:
…it is plain that a distinction has been taken and maintained in law, the result of which is, that where there is a present debt and a promise to pay on demand, the demand is not considered to be a condition precedent to the bringing of the action. But it is otherwise on a promise to pay a collateral sum on request, for then the request ought to be made before action brought.
26In my view, there is no conflict in the authorities submitted by the Defendant and Plaintiff respectively. The requirement that a demand be made before an action can be commenced depends on the nature of the financial instrument. Battiste requires that in the case of a guarantee which contains a requirement that a written demand be made, the demand must be made before an action can be brought. The authorities cited by the Plaintiff, i.e. Canada Trustco and Dwigans are all distinguishable as they all deal with a "present debt" and not a collateral debt or guarantee and accordingly, the demand is not a condition precedent to the bringing of the action even though there is a promise to pay on demand.
27I conclude that the Defendant in this case is correct in his position that the Plaintiff was required to demand payment before a cause of action arose. It is common ground that no demand for payment with respect to any of the guarantees has been made.
28For these reasons, the appeals are allowed, the decision of the Deputy Judge must be set aside and the actions on each of the guarantees must be dismissed.
29If the parties cannot agree on costs, they may submit brief written submissions as to costs within 30 days of the receipt of this decision.
___________________________
Then J.
Released: December 16, 2005
COURT FILE NO.: 441/03; 442/03; 443/03 DATE: 20051216
ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT
B E T W E E N:
KNP HEADWEAR INC. Plaintiff (Respondent)
- and -
ROBERT J. LEVINSON Defendant (Appellant)
REASONS FOR JUDGMENT
THEN J.
Released: December 16, 2005
Footnotes
- The authors cite: The authors cite: Re Browns Estate, [1893] 2 Ch. 300; Sicklemore v. Thistleton (1817), 6 M. & S. 9; Bradford Old Bank v. Sutcliffe, [1918] 2 K.B. 833; Duchess Theatre Co. v. Lord, [1993] N.P.C. 163; Romain v. Scuba T.V. Ltd., [1997] Q.B. 887 at 895; Hampton v. Minns, [2002] 1 W.L.R. 1; see also Esso Petroleum Co. v. Alstonbridge Properties Ltd., [1975] 1 W.L.R. 1474; General Financial Corporation of Canada v. Le Jeune, 1918 234 (SK KB), [1918] 1 W.W.R. 372, Sask. S.C.