Court of Appeal for Ontario

Date: January 10, 2018 Docket: C62779

Justices: LaForme, Pepall and van Rensburg JJ.A.

Parties

Between

Union Gas Limited Applicant (Appellant in Appeal)

and

The Corporation of the Township of Norwich Respondent (Respondent in Appeal)

Counsel

For the Appellant: Crawford Smith and Emily Sherkey

For the Respondent: Roberto Aburto and Jacob Polowin

For the Intervener, Ontario Energy Board: Philip Tunley

Hearing and Appeal

Heard: August 14, 2017

On appeal from: The order of Justice M.A. Garson of the Superior Court of Justice, dated September 7, 2016.

Decision

van Rensburg J.A.:

Overview

[1] This appeal concerns a dispute between a utility and a rural municipality over the sharing of the utility's costs to relocate parts of a gas pipeline as a result of the rural municipality's construction of certain drainage works. The disposition of the appeal requires the court to consider the terms of a franchise agreement dated September 28, 2004 between the parties (the "Franchise Agreement") and provisions of the Drainage Act, R.S.O. 1990, c. D.17 (the "Act").

[2] Union Gas Limited ("Union") asserts that The Corporation of the Township of Norwich ("Norwich") is required to pay Union 35% of its costs to relocate a gas pipeline necessitated by certain drainage works, in accordance with the Franchise Agreement. Norwich argues that Union should assume the full cost of relocation, as its engineer directed, under s. 26 of the Act.

[3] The application judge held that the cost to relocate gas works when a drain is constructed under the Act is an increase in the cost of "drainage works", and therefore subject to s. 26 of the Act, which provides for the utility to assume the entirety of the increased cost of drainage works caused by the existence of the public utility's works. He held that the cost-sharing provisions of the Franchise Agreement did not "trump and hold priority over" s. 26 of the Act.

[4] Union appeals, arguing that the application judge erred: (1) in interpreting s. 26 of the Act to apply to the cost of relocating gas works; and (2) in concluding that the Act overrides the cost-sharing provisions of the Franchise Agreement.

[5] The Ontario Energy Board (the "OEB") intervened, taking no position on the facts of the appeal, but to provide submissions on the interpretation of the term "drainage works" in the Act and the policy behind the cost-sharing provisions of the Franchise Agreement.

[6] For the reasons that follow, I would allow the appeal. It is unnecessary to determine in this appeal the full scope of s. 26, and in particular whether the reference to the increased cost of "drainage works" could include a utility's cost to relocate gas works. The cost-sharing provisions of the Franchise Agreement apply to the parties' dispute. The application judge erred in law when he refused to give effect to the parties' agreement on the basis that it could not "oust or override" the provisions of the Act.

Facts

[7] Under s. 4 of the Act a landowner may petition a municipality to undertake drainage works. Where the municipality's council decides to proceed with the construction of drainage works, it appoints an engineer under s. 8 to plan the works, including to assess their cost. The engineer is required to submit a report to the municipality. If the council proceeds based on the report, it passes a by-law adopting the report and authorizing the drainage works.

[8] The engineer's report is required to assess landowners and utilities for benefit, outlet liability, injury liability and special benefits (ss. 21 to 24). Section 26 allows all of the increase in the cost of drainage works due to the presence of public utilities to be assessed by the engineer against those utilities. The section provides as follows:

In addition to all other sums lawfully assessed against the property of a public utility or road authority under this Act, and despite the fact that the public utility or road authority is not otherwise assessable under this Act, the public utility or road authority shall be assessed for and shall pay all the increase of cost of such drainage works caused by the existence of the works of the public utility or road authority.

[9] Section 48(1) provides for a right of appeal by a landowner or public utility from an engineer's report, to the Agriculture, Food and Rural Affairs Appeal Tribunal.

[10] In April 2012, a landowner petitioned Norwich regarding two improvements to the Otter Creek Municipal Drain. Norwich's council appointed an engineer. The engineer prepared one report for both projects, and assessed Union $1,180 under s. 26 of the Act for costs relating to boring steel pipes across the gas main. This assessment was not disputed.

[11] The report also identified a conflict between a Union gas pipeline and the proposed drainage work that would require the gas pipeline to be moved. The report stated that if any utilities required relocation "the extra costs incurred shall be borne by the utility involved in accordance with the provisions of section 26 of the [Act]." In February 2014, the Norwich council adopted a by-law approving the engineer's report.

[12] Union did not appeal the engineer's report. Instead, with respect to the gas pipeline that required relocation, it issued an invoice to Norwich seeking a 35% contribution, relying on a cost-sharing mechanism in the Franchise Agreement.

[13] The Franchise Agreement is based on a model franchise agreement, whose terms were approved by the OEB in accordance with the Municipal Franchise Act, R.S.O. 1990, c. M.55. The Franchise Agreement allows Union to operate its gas infrastructure within Norwich's territorial boundaries.

[14] Section 12 of the Franchise Agreement permits Norwich to request Union to relocate any part of the gas system where such relocation is necessary to alter or improve any highway or municipal work, and provides for cost-sharing. The applicable paragraphs are as follows:

(a) If in the course of constructing, reconstructing, changing, altering or improving any highway or any municipal works, [Norwich] deems that it is necessary to take up, remove or change the location of any part of the gas system, [Union] shall, upon notice to do so, remove and/or relocate within a reasonable period of time such part of the gas system to a location approved by the Engineer/Road Superintendent.

(d) The total relocation costs as calculated above [described in detail in paragraph (c)] shall be paid 35% by [Norwich] and 65% by [Union] except [an exception follows that does not apply here.]

[15] Section 13 of the Franchise Agreement provides:

The Agreement is subject to the provisions of all regulating statutes and all municipal by-laws of general application, except by-laws which have the effect of amending this Agreement.

[16] Norwich did not pay Union's invoice. The work proceeded, and Union brought an application to the Superior Court to determine the rights of the parties.

Decision of the Application Judge

[17] The application judge characterized the issue as whether Union's gas pipeline relocation costs fell within the scope of the Franchise Agreement or s. 26 of the Act.

[18] The application judge characterized the Act as "a complete and comprehensive code" dealing with drainage works. He considered the definition of "drainage works" as including "a drain constructed by any means" and he interpreted the Act as allowing either municipalities or utilities to reconstruct portions of existing gas pipelines. He concluded that moving gas pipelines would fall within the broad definition of "drainage works", and that this cost would accordingly be subject to the cost-sharing mechanism of s. 26 of the Act. He considered that it was the intent of the Act to defer to the engineer's report regarding cost allocation, and that Union was subject to the assessment, which it had not appealed.

[19] The application judge concluded that the Franchise Agreement did not "oust or override" the provisions of the Act. He referred to Seidel v. Telus Communications Inc., 2011 SCC 15, [2011] 1 S.C.R. 531, at para. 91, citing Brand v. National Life Assurance Co. of Canada (1918), 44 D.L.R. 412 (Man. K.B.), at para. 15, as authority that "no mere contract inter partes can take away that which the law has conferred."

[20] The application judge stated that the cost-sharing provisions of the Franchise Agreement did not apply to all costs associated with drains. "Municipal works" is not defined in the Franchise Agreement. Moreover, the Gas Franchise Handbook, to which the Franchise Agreement refers, states that the cost-sharing mechanism will apply "in most circumstances", suggesting it will not always apply. He noted that the Franchise Agreement provides that it is subject to "the provisions of all regulating statutes", which includes the Act.

[21] The application judge ordered Union to pay the full cost of the gas pipeline relocation. The clear and unambiguous language of the engineer's report was that Union would bear the full cost of any utility relocation, and Union did not appeal the report despite a right to do so under s. 48 of the Act.

Discussion and Analysis

[22] In my view the application judge erred in his analysis and in the result. First, I address his conclusion that the Act overrides the provisions of the Franchise Agreement.

[23] The foundation of this conclusion is the application judge's interpretation of Seidel as standing for a general principle that "no mere contract inter partes can take away that which the law has conferred". There is no such general principle, and the application judge was not correct in his interpretation of what was said, or quoted from, in Seidel.

[24] In Seidel the court considered whether a provision in a cell phone service agreement requiring arbitration of claims was enforceable when B.C. consumer protection legislation expressly prohibited contracting out of its terms. In the course of the minority judgment, and before turning to the modern approach to arbitration, LeBel and Deschamps JJ. described the courts' traditional hostility towards arbitration, as contrary to public policy, because it was seen to challenge the jurisdiction of the courts. It was in this context that they quoted a passage from the 1918 decision in Brand which stated in part:

The true ground for holding that the jurisdiction of the courts cannot be ousted by an agreement between parties is that the courts derive their jurisdiction either from the statute or common law, and no mere contract inter partes can take away that which the law has conferred.

[25] The traditional view that parties could not, by contracting for arbitration, "oust" the jurisdiction of the courts, has been overtaken by modern authorities, including Seidel itself, recognizing that arbitration clauses will be enforced absent legislative language to the contrary (at para. 42).

[26] The application judge took a part of the quotation noted above out of context as authority that parties cannot contract out of statutory provisions. As discussed below, the law is to the contrary.

[27] In Ontario (Human Rights Commission) v. Etobicoke (Borough), [1982] 1 S.C.R. 202, at para. 19, the Supreme Court endorsed the principle that parties can contract out of benefits conferred by statute, unless it would be contrary to public policy or prohibited by the statute itself. In that case, a provision of a collective agreement that was contrary to the Ontario Human Rights Code, R.S.O. 1970, c. 318, s. 4(6), was unenforceable. Similarly, in Seidel a provision requiring the arbitration of disputes was unenforceable against consumers because of the relevant B.C. consumer protection legislation. See also Fleming v. Massey, 2016 ONCA 70, 128 O.R. (3d) 401, leave to appeal to SCC refused, 2016 CarswellOnt 9353, in which this court stated that courts should exercise "extreme caution in interfering with the freedom to contract on the grounds of public policy" before concluding that employers and workers could not contract out of the workers' compensation regime absent a contrary legislative indication (at para. 34).

[28] Second, the application judge, informed by his first error, did not go on to consider whether the Franchise Agreement cost-sharing provisions applied to the parties' dispute.

[29] The correct approach therefore is: first, to consider whether the Act would prohibit contracting out of s. 26, and whether it would be contrary to public policy to recognize an agreement that does so; and second, to interpret the Franchise Agreement itself, to determine whether there is anything in the contract that would take the parties out of the cost-sharing mechanism to which they have agreed, in the case of drainage works undertaken under the Act.

[30] The first issue, whether the Act prohibits contracting out of s. 26, can be addressed in short course. The application judge characterized the Act as a "complete and comprehensive code with regard to who does what and who pays for what", in support of his conclusion that the provisions of the Act override the parties' agreement. The issue here however is whether the Act expressly, or by necessary implication, would prohibit a utility and a municipality from arriving at their own agreement respecting the sharing of costs, where the construction of the drainage works requires the relocation of a pipeline. I see nothing in the legislative scheme that would preclude such a cost-sharing agreement in circumstances where the utility is required by the municipality to alter its pipeline to accommodate drainage works. Enforcement of the parties' contractual cost-sharing agreement would not undermine the detailed procedures set out in the Act, for the proposal, planning and approval of drainage works, and the sharing of the municipality's own costs. Indeed, as the application judge noted, referring to a 1986 OEB report, the cost-sharing mechanism in s. 12 was developed by the OEB as a disincentive to municipalities to require gas pipeline relocation.

[31] And there is nothing in the legislative scheme to suggest that the ability to contract for the allocation of relocation costs between a municipality and a utility is contrary to public policy. In approving this specific Franchise Agreement, the OEB explicitly found that the agreement was "in the public interest" in a Decision and Order dated September 16, 2004. The Act is not a public policy statute, a point that was acknowledged in argument by the respondent.

[32] Once it is determined that the Act does not prohibit contracting out of its cost-allocation provisions, and that contracting out would not be contrary to public policy, the question is whether the Franchise Agreement applies to the current dispute.

[33] The Franchise Agreement provides for the sharing of the utility's costs occasioned by municipal works. "Municipal works," which is not defined in the Franchise Agreement, is a broad term that, given its ordinary meaning, would include drainage works undertaken by a municipality. Municipal drainage works are approved, constructed, repaired and maintained by a municipality (see ss. 4, 5, 8, 58 and 74 of the Act). Section 5(g) of the Franchise Agreement specifically refers to gas systems affecting a "municipal drain", and accordingly contemplates that drainage works are part of the municipal works covered by the agreement. There is nothing in the Franchise Agreement that would exclude drainage works from "municipal works", or that would remove from its cost-sharing provisions the drainage works undertaken by Norwich in this case.

[34] The Franchise Agreement describes the cost-sharing mechanism in clear language and it unambiguously applies when a municipality requests relocation of a gas system to accommodate any municipal works. Section 13 does not assist Norwich in its argument that the Act, and not the Franchise Agreement, would apply to this dispute. That section provides that the Franchise Agreement is subject to the provisions of all "regulating statutes" and municipal by-laws of "general application," but specifically excludes "by-laws which have the effect of amending [the] Agreement." The appellant says, without relying on any authority, that the Act is a regulating statute to which the Franchise Agreement is subject, and therefore overrides the provisions of the agreement. I disagree. I would interpret "regulating statute" in the context of this agreement, as referring to health and safety, environmental and other like statutes that would regulate the construction of and work on a gas system by the utility within the regional municipality. Section 13 does not exempt the parties from the cost-allocation provisions to which they have agreed. As for by-laws, the intention is clear (and the respondent acknowledges) that any by-law (including the one passed in this case approving the engineer's report), would be unenforceable if it sought to impose an assessment of costs other than that to which the parties agreed. As such, the Franchise Agreement would override Norwich's by-law approving the engineer's report to the extent it purported to assess Union for the entire cost of relocating its pipeline.

Conclusion and Disposition

[35] The appellant argued forcefully that s. 26 would apply to the increased cost of the drainage works to the municipality, but not to the relocation of a gas system required as a result of drainage works, which work could only by statute be performed by the utility. It is not necessary for the disposition of this appeal to determine this issue. The cost-sharing mechanism in the Franchise Agreement prevails over any assessment that was or could have been made under the Act, against the utility, as a result of the relocation of its pipeline to accommodate the municipal work undertaken here.

[36] For these reasons I would allow the appeal, and substitute for the application judge's order an order declaring that Norwich is required to pay Union 35% of the total costs to relocate Union's gas system; declaring that Union is not subject to an assessment under s. 26 of the Act for such costs; and directing Norwich to pay Union $26,808.39 plus prejudgment and post-judgment interest in accordance with ss. 128 and 129 of the Courts of Justice Act, R.S.O. 1990, c. C.43. I would set aside the application judge's order for costs in favour of Norwich, and substitute an order requiring Norwich to pay Union the costs of the application in the sum of $18,000 inclusive of HST and disbursements. I would order costs of the appeal to Union, to be paid by Norwich, in the agreed sum of $23,000, also inclusive of HST and disbursements, with no costs sought by or awarded to the OEB.

"K. van Rensburg J.A."

"I agree H.S. LaForme J.A."

"I agree S.E. Pepall J.A."

Released: January 10, 2018