Court File and Parties

CITATION: Drosophilinks Consulting v. Canadian National Railway, 2010 ONSC 5156

COURT FILE NO.: 328/10

DATE: 2010-09-22

SUPERIOR COURT OF JUSTICE – ONTARIO – DIVISIONAL COURT

RE: DROSOPHILINKS CONSULTING INC. et al, Plaintiffs (Responding Parties)

-and-

CANADIAN NATIONAL RAILWAY COMPANY et al, Defendants (Moving Parties)

BEFORE: MOLLOY J.

COUNSEL: Peter Griffin and Orlando Rosa, for the Moving Parties

Evert Van Woudenberg, for the Responding Parties

HEARD: September 13, 2010 at Toronto

Endorsement

Introduction

[1] The defendants seek leave to appeal to the Divisional Court from the Order of Newbould J. dated June 12, 2010, dismissing their motion for summary judgment. The issue before the motion judge involved the interpretation of an agreement of purchase and sale between the plaintiffs (“DCI”) as purchaser and the defendants (“CN”) as vendor. The defendants rely upon Rule 62.02(4)(b) and submit that there is good reason to doubt the correctness of the decision of the motion judge and that the appeal raises issues of general importance such that leave should be granted.

Background

[2] In April 2003, DCI purchased a number of properties from CN located in the City of North Bay. One of the properties, known as the Main Street lands, was allocated a value of $50,000 in the agreement of purchase and sale. Two years later, Aldo Forgione, the principal of DCI discovered a trailer on the Main Street lands that held transformers containing dangerous levels of PCB.

[3] DCI brought this action claiming that under the 2003 agreement CN is required to indemnify DCI for all costs incurred by it to rectify the environmental problems on the Main Street lands. Mr. Forgione also asserted a personal claim for alleged injuries sustained as a result of his contact with the PCB substances.

[4] CN takes the position that under the terms of the agreement DCI is responsible for contamination discovered after closing, regardless of when the contamination occurred. The agreement contains an indemnity clause, which states:

The Purchaser shall be responsible for and hereby indemnifies … the Vendor from any …claims…that may arise as a result of the damage or contamination to the property following closing and the Vendor shall be responsible for and indemnify … the Purchaser from all … claims … either directly or indirectly as a result of the condition of the property before closing.

[5] CN interprets the indemnification clause as making CN responsible for claims made prior to closing and DCI responsible for claims made after closing. CN argues that this is the only interpretation that makes sense in light of other provisions which state the property is sold on an “as is” basis and which provide the purchaser with a 30-day conditional period to satisfy itself as to the condition of the property, including environmental matters. The agreement states that if the Purchaser does not terminate pursuant to that condition, it is deemed to have waived it and to have accepted “full responsibility for all conditions related to the property” including the responsibility to “comply with all orders relating to the condition of the property by any competent government authority, court or administrative tribunal, including any order issued against the Vendor.”

[6] There is also a non-merger clause stating that the indemnification clause survives closing and is a “continuing obligation of the Purchaser.” CN interprets this as supporting its contention that only the purchaser’s indemnification obligation survived closing.

[7] CN brought a motion for summary judgment to dismiss the claim made by Mr. Forgione in his personal capacity and also to dismiss DCI’s claim as being barred by the terms of the agreement.

The Decision of the Motion Judge

[8] The motion judge dismissed the claims asserted by Mr. Forgione. That portion of his decision is not challenged.

[9] However, the motion judge did not accept the interpretation of the agreement put forward by CN and dismissed that aspect of CN’s motion. It is this part of the motion judge’s decision from which leave to appeal is sought.

[10] The motion judge held that the phrase “before closing” in the indemnification clause modifies the words “condition of the property” and therefore applies to require CN to indemnify DCI for any contamination that occurred before closing, regardless of when it was discovered or when a claim was made in connection with it. The motion judge further held that there was no ambiguity in the terms of the agreement that could not be resolved by an interpretation of the agreement as a whole. He found that the other terms of the agreement stipulating that the property was sold “as is” meant only that CN was not prepared to make any representation or warranty about the condition of the property, was prepared to allow DCI to terminate before closing if contamination was found, and was also prepared to indemnify DCI for any problem that arose after closing.

[11] Having found no ambiguity in the terms of the contract, the motion judge ruled that evidence of the prior correspondence and discussions leading to the creation of the contract was not admissible to assist in the interpretation of the agreement. However, he went on to consider how the language in the indemnification clause was arrived at in order to interpret the non-merger clause. In particular, he noted that the indemnification clause was taken in part from a standard form agreement that dealt only if an indemnification by the purchaser. In the course of drafting, further language was added to the clause to include an indemnification to be provided by the vendor. Accordingly, he held this explained why the non-merger clause stated the indemnification clause survived closing, but also referred only specifically to the continuing obligation of the purchaser. He considered this to be an oversight in the drafting and therefore held that it was reasonable to interpret the non-merger clause as referring to the entire indemnification clause, including the obligations of the Vendor.

[12] The motion judge considered it appropriate to consider the fact that the parties took a standard form agreement and added a provision to it as part of the “factual matrix” surrounding the making of the agreement. However, he ruled that no other evidence as to the negotiations or drafting was admissible.

Analysis

[13] In my view, counsel for the plaintiff has presented a compelling argument that there is reason to doubt the correctness of the motion judge’s interpretation of the contract. First, I consider it to be at least arguable that there is ambiguity within the terms of the indemnity clause. Second, I find it difficult to reconcile the motion judge’s interpretation of the language of the indemnity with other provisions of the contract. If, as was found by the motion judge, the reason for those other provisions was that CN was not prepared to provide a representation or warranty with respect to the condition of the property, why would CN be prepared to provide an indemnification with respect to any costs associated with the condition of the property? It seems to me that this amounts to the same thing. Third, there is good reason to believe that the motion judge erred in taking into account, as an aid to his interpretation of the agreement, the earlier drafts of the agreement and what had been added to the indemnification provision. There is considerable authority to support CN’s contention that such evidence is not properly considered as part of the factual matrix, but rather is extrinsic evidence which is only admissible if there is a finding of ambiguity.[^1] Further, it is particularly problematic to take into account only this small part of the extrinsic evidence without any of the other extrinsic evidence that might serve to explain it or put it into context.

[14] That does not mean I would necessarily have reached a different result than the motion judge did. Although I believe there is much to be said for CN’s interpretation of the agreement, I certainly would not consider his decision to be “clearly wrong.” Of course, that is not the test—“good reason to doubt correctness” is the test. I do think the correct interpretation is sufficiently unclear that it can be said to be open to serious dispute, as is required to meet the first branch of the test for leave.

[15] However, there are two branches of the test for leave to appeal under Rule 62.02(4)(b), and both branches must be satisfied. In order to meet the second branch, the moving party must establish that the appeal raises issues of importance that go beyond the interests of the immediate parties to the dispute. Such matters will usually involve issues of broad public importance or matters relevant to the administration of justice or the development of the law.[^2]

[16] What is at issue here is the interpretation of specific terms of a specific agreement between specific parties. The interpretation of this agreement, while important to these parties, does not in my opinion raise issues of broad public importance sufficient to meet the test under Rule 62.02(4)(b).

[17] In this case, Mr. Griffin, for CN, argues that the motion judge went beyond his mandate under the summary judgment rule. He submits that instead of confining himself to whether the plaintiff had shown there was no genuine issue requiring a trial, the motion judge went on to actually interpret the terms of the agreement at the heart of the dispute between the parties. He further submits that in light of the significant changes to the summary judgment rules which came into effect on January 1, 2010, appellate guidance is important for the development of the law on the scope of the new Rule.

[18] I do not agree that anything in this appeal turns on the recent amendments to Rule 20. On this issue of contract interpretation, the motion judge did not even refer to the provisions of Rule 20. There was nothing in his analysis under the current Rule that would have been any different if the previous version of the Rule had been applied. I do not, therefore, consider that the amendments to Rule 20 provide any basis for finding that the issues in this case raise matters of importance beyond the interests of the parties to the litigation.

[19] I also do not agree that the motion judge went beyond his mandate under the summary judgment rule. The real concern of CN is that the motion judge made definitive rulings on the terms of the agreement that will be binding on the trial judge. That is not so. It is important to remember the limited issue that was before the trial judge and to bear in mind the order that he made. The motion judge did not make a declaration as to the meaning of the various provisions of the agreement, and he did not issue summary judgment in favour of DCI, endorsing the DCI’s interpretation of the agreement. Rather, his order simply dismisses CN’s summary judgment motion.

[20] When two possible interpretations of an agreement are presented, it is a difficult task to reject one interpretation without accepting the other. Perhaps the motion judge could have been more careful in that regard, but the fact that he stated his acceptance of one interpretation does not constitute a final determination as to its meaning, binding on the parties. It is the order of the motion judge which is the subject of an appeal or leave to appeal, not his reasoning or conclusions on particular points. The motion judge’s order on this issue is clear in its terms and is obviously interlocutory, which is why leave to appeal is required.

[21] In its factum filed on this motion, DCI took the position that leave to appeal should be refused because the motion judge was entitled to determine the question of law raised as to the interpretation of the contract, there was no reason to doubt the correctness of that determination, and, in any event, no issue of general importance was raised as required to warrant leave to appeal. It is noteworthy that DCI did not take the position that the leave motion should be quashed because the motion judge had made a final order, such that there was an automatic right of appeal to the Court of Appeal. Notwithstanding that position, in the course of argument, counsel for DCI took the position that the motion judge’s findings were final and would be binding on the trial judge. With respect, I do not see how counsel can have it both ways. If the order was final, the parties affected are entitled to a full right of appeal as to whether the judge making that order was correct. It is not necessary for parties to establish the existence of an important issue of general importance in order to have a right of appeal on a conclusive determination against them. If leave to appeal is required because of the interlocutory nature of the motion, thus severely restricting the appeal rights of the parties, it cannot also be the case that the rulings are final and conclusive of the substantive issues involved in the case.

[22] In my view, this was an interlocutory order. Leave to appeal is required. The test for leave is not met. That means there has been no determination on the ultimate merits of the defendants’ position as to the meaning of the contract and the trial judge is not bound by the conclusion of the motion judge in that regard. The trial judge may well have a substantially different record before him or her when it comes time to make that determination.

Conclusion and Order

[23] In the result, this motion for leave to appeal is dismissed. The parties agreed that an appropriate award for the quantum of costs would be $5000. Costs of $5000 shall be payable by CN to DCI forthwith.

MOLLOY J.

Date: September 22, 2010

[^1]: Water Street Pictures Ltd. v, Forefront Releasing Inc. (2006), 2006 BCCA 459, 57 B.C.L.R. (4th) 212 (B.C.C.A.); Orbus Pharma Inc. v. Kung Man Lee Properties Inc. (2008), 2008 ABQB 754, 3 Alta. L.R. (5th) 157 (Alta.Q.B.); Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129, Indian Molybdenum Ltd. v. The King, [1951] 3 D.L.R. 497 (S.C.C.) at 503; Prenn v. Simmonds, [1971] 3 All E.R. 327 (H.L.) at 240.

[^2]: Greslik v. Ontario Legal Aid Plan (1988), 65 O.R. (2d) 110 (Div.Ct.); Rankin v. McLeod, Young, Weir Ltd. (1986), 57 O.R. (2d) 569 (H.C.J.).