Court File and Parties

COURT OF APPEAL FOR ONTARIO DATE: 20220707 DOCKET: C70043

Brown, Roberts and Paciocco JJ.A.

BETWEEN

Soheil Karkhanechi and Equestrian Court Investments Corporation Plaintiffs (Appellants)

and

Connor, Clark & Lunn Financial Group Ltd. and Connor, Clark & Lunn Financial Group Investment Partnership Defendants (Respondents)

Counsel: Paul Bates and Serge Kalloghlian, for the appellants Brian Kolenda and Vinayak Mishra, for the respondents

Heard: June 13, 2022

On appeal from the order of Justice Peter J. Cavanagh of the Superior Court of Justice, dated September 30, 2021.

Paciocco J.A.:

Overview

[1] In late 2014, the appellant, Soheil Karkhanechi, was recruited to work in an asset management business operating under the umbrella of the Connor, Clark & Lunn Financial Group. His compensation package was structured in a partnership agreement (the “Partnership Agreement”) that he entered into with the respondent Connor, Clark & Lunn Financial Group Ltd. (“CCL FG Ltd.”). The Partnership Agreement between Mr. Karkhanechi and CCL FG Ltd. established the Connor, Clark & Lunn Financial Group Investment Partnership (“CCL IP”), which is also named as a respondent in this appeal.

[2] Mr. Karkhanechi’s association with CCL FG Ltd. was brief. In late 2016, his employment was terminated and a compulsory retirement provision in the Partnership Agreement was triggered, forcing him into retirement. It soon became evident that the post-retirement payments that Mr. Karkhanechi was receiving were less than he believed he was entitled to. It also became clear that the respondents disagreed with Mr. Karkhanechi’s claimed entitlement to receive permanent post-retirement payments based on a 3% interest in CCL IP. In the respondent’s view, the Partnership Agreement provided only for declining payments over a nine-year period based on a 1.2% interest in the partnership as of October 31, 2016, when Mr. Karkhanechi was removed as a partner.

[3] On December 10, 2019, Mr. Karkhanechi sued the respondents, alleging that they were in breach of the post-retirement compensation agreement. On September 30, 2021, a motion judge granted summary judgment against Mr. Karkhanechi after finding that his claims were statute barred under the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B. Mr. Karkhanechi appeals the order granting summary judgment and dismissing his action, arguing that the motion judge erred by failing to apply a rolling limitation period, and by finding his request for a declaration to be statute barred, contrary to s. 16(1) of the Limitations Act, 2002.

[4] The dispositions made by the motion judge depended upon his characterization of the substance of Mr. Karkhanechi’s claim and of the relief he was requesting. For the reasons below, I see no legal or palpable and overriding errors in the motion judge’s reasoning or in the characterizations he arrived at. I would therefore dismiss Mr. Karkhanechi’s appeal.

Material Facts

[5] CCL FG Ltd. entered into the Partnership Agreement with Mr. Karkhanechi in order to provide him with the incentive of an equity interest in the business. The compensation package provided for in the Partnership Agreement was therefore structured so that Mr. Karkhanechi would receive periodic payments quantified according to his share of the equity in CCL IP, measured in “points”. The Partnership Agreement also provided for post-retirement payments to be made to Mr. Karkhanechi each fiscal quarter, for a limited period and on a declining basis. Specifically, Mr. Karkhanechi’s points would decline upon his retirement by 10% per year until they reach zero “on the ninth anniversary of retirement”. Accordingly, his entitlement to compensation would decline over nine years when it too would end (the “Reduction and Elimination Clause”).

[6] On June 20, 2016, the Partnership Agreement was amended to enable a partner to transfer their beneficial interest in CCL IP to a corporation (the “Addendum”). Mr. Karkhanechi exercised this right, transferring his beneficial interest in CCL IP to his personal investment corporation, the appellant Equestrian Court Investments Corporation (“Equestrian”).

[7] It is now evident that the parties disagree about the purpose and implications of this transfer. Suffice it to say that Mr. Karkhanechi claims that the transfer was intended to render the Reduction and Elimination Clause obsolete. In effect, Mr. Karkhanechi relies on the Addendum and the transfer to claim that he now has a permanent right to receive quarterly payments based on the number of points at the time of his retirement, which he claims to be 3% of CCL IP. He contends that this arrangement was made to rectify his “under-compensation” and to ensure that his post-retirement payment scheme would match the post-retirement payment scheme that was provided to a recently hired executive employee.

[8] The respondents disagree. In their view, the Addendum and the transfer by Mr. Karkhanechi of his beneficial interest in CCL IP do not affect the operation of the Reduction and Elimination Clause. They maintain that Mr. Karkhanechi is therefore entitled to declining compensation for a nine-year period until that right expires. The respondents also quantified Mr. Karkhanechi’s points upon retirement as representing only 1.2% of CCL IP.

[9] As indicated, the disagreement between Mr. Karkhanechi and the respondents became apparent after Mr. Karkhanechi was terminated in the fall of 2016, and the compulsory retirement clause in the Partnership Agreement was triggered. On February 28, 2017, Mr. Karkhanechi received his first post-retirement compensation statement. The statement noted that Mr. Karkhanechi’s equity points had decreased from 1.2% to 1.08%, an amount consistent with the application of the Reduction and Elimination Clause. In subsequent correspondence, Mr. Karkhanechi raised concerns about the reduction in his equity interest, which he claimed to be inconsistent with the effect of the Addendum and the transfer. That communication resulted in a March 27, 2017 email to Mr. Karkhanechi from CCL FG Ltd.’s general counsel that read, in relevant part:

You raise the transfer of beneficial ownership in the partnership to your holding company. While we believe that transfer did occur (CCLFG is not party to the transfer agreement), the fact remains that you, in your individual capacity, remained the legal owner of the interest in the CCLFG Investment Partnership notwithstanding the transfer of the beneficial ownership to your company. The beneficial interest which has now been retired will be phased out in accordance with the provisions of the partnership agreement governing the CCLFG Investment Partnership.

[10] On March 29, 2017, Mr. Karkhanechi replied, expressing his disagreement. Yet Mr. Karkhanechi took no action until more than two years later, on December 10, 2019, when he and Equestrian commenced this action.

[11] In their prayer for relief in this action, Mr. Karkhanechi and Equestrian requested a “declaration that the defendants have repudiated the plaintiffs’ rights and interests in the business of [the] defendants as more particularly stated” in the statement of claim. Based on the statement of claim, the motion judge concluded that Mr. Karkhanechi is effectively seeking a declaration that “[Equestrian] has a permanent and ongoing 3% interest in the Partnership” (the “Declaration Claim”).

[12] The prayer for relief also includes requests for orders compelling the defendants to: (1) pay to Equestrian “such amounts as may be found due and owing” and (2) “purchase the partnership interest of [Equestrian] for fair value” (the “Compensation Claims”).

[13] The motion judge relied on ss. 4 and 5 of the Limitations Act, 2002, in granting summary judgment to the respondents. Those sections provide:

Basic limitation period

4 Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.

Discovery

5 (1) A claim is discovered on the earlier of,

(a) the day on which the person with the claim first knew,

(i) that the injury, loss or damage had occurred,

(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,

(iii) that the act or omission was that of the person against whom the claim is made, and

(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

Presumption

(2) A person with a claim shall be presumed to have known of the matters referred to in clause (1) (a) on the day the act or omission on which the claim is based took place, unless the contrary is proved.

[14] The motion judge concluded that the applicable two-year limitation period began to run on March 27, 2017, because on that day the loss, which had begun occurring when Equestrian received payments that were less than those to which it claimed to be entitled, was discoverable. The motion judge concluded that by March 27, 2017:

[T]he [appellants] knew (1) that injury, loss or damage from the [respondents’] refusal to recognize [Equestrian] as having a permanent 3% interest in the Partnership had occurred, (ii) that the injury, loss or damage was caused by the [respondents’] acts or omissions by refusing to recognize [Equestrian’s] claimed interest and by enforcing the retirement provisions of the Partnership Agreement against the [appellants] and paying [Equestrian] less than it was entitled to receive under the Partnership Agreement if its claimed interest was recognized, and (iii) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to remedy it.

[15] In coming to this conclusion, the trial judge rejected the appellants’ submission that a rolling limitation applied such that a fresh cause of action arose with each deficient quarterly payment. I will describe the motion judge’s reasoning in more detail below. Suffice it to say for now that crucial to his reasoning was his characterization of the substance of the action as “the [Respondents’] refusal to recognize [Equestrian] as having a permanent 3% interest in the Partnership”, rather than as a series of separate claims for failed payments that the appellants claim to be entitled to receive.

[16] The motion judge also rejected the appellants’ claim that s. 16(1) (a) of the Limitations Act, 2002 prevented him from finding their request for a declaration to be statute barred. Section 16(1)(a) provides:

No limitation period

16 (1) There is no limitation period in respect of,

(a) a proceeding for a declaration if no consequential relief is sought;

[17] The motion judge concluded that the declaration request made by the appellants is, in substance, a claim by the appellants for a substantive remedy against the respondents. He reasoned that s. 16(1) (a) must be narrowly construed to prevent declarations from being used as a means to circumvent applicable limitation periods. Hence, he concluded that the appellants’ claim for a declaration is statute barred.

Issues

[18] The appellants raise two issues on appeal:

A. Did the motion judge err by failing to apply a rolling limitation period?

B. Did the motion judge err by finding that the request for declaratory relief was statute barred, contrary to s. 16(1) (a) of the Limitations Act, 2002?

[19] As I have said, I would reject both grounds of appeal. Here is my reasoning.

Analysis

A. Did the motion judge err by failing to apply a rolling limitation period?

[20] The appellants argue that the motion judge erred by failing to apply a rolling limitation period that would enable them to sue for: (1) the deficient payments made in the two years prior to the launch of their action on December 10, 2019, and (2) the assessed value of Equestrian’s interest in CCL IP. I do not agree. In my view, the motion judge was correct in concluding that a single breach with continuing consequences occurred on March 27, 2017, when the respondents unequivocally rejected the appellants’ claim to a permanent 3% interest in CCL IP, thereby making a rolling limitation period inapplicable.

[21] The term “rolling limitation period” is used where a new limitation period arises with each breach of an ongoing or recurring contractual obligation. It is important to recognize, however, that not all breaches that lead to the failure to make ongoing or recurring payments provided for in a contract will give rise to rolling limitation periods. As Hourigan J.A. observed in Marvelous Mario’s Inc. v. St. Paul Fire and Marine Insurance Co., 2019 ONCA 635, 147 O.R. (3d) 186, at para. 35, “The jurisprudence suggests that a rolling limitation period may apply in a breach-of-contract case in circumstances where the defendant has a recurring contractual obligation” (emphasis added). This caveat applies, of course, to contracts that contemplate a recurring contractual obligation to make periodic payments. As the majority put it in Pedersen v. Soyka, 2014 ABCA 179, 373 D.L.R. (4th) 372, at para. 17: “Every time that there is a contract which calls for periodic payments, does the limitation period always start running afresh when each payment falls due? The answer is, ‘No, not always.’”

[22] The appellants argue that whether a rolling limitation period applies to a contract that provides for ongoing obligations depends on which of the “three categories” described in Pickering Square Inc. v. Trillium College Inc., 2016 ONCA 179, 395 D.L.R. (4th) 679, at paras. 23-25 that the case falls into, namely: (1) a single “once-and-for-all” breach of contract with continuing consequences; (2) a failure to perform an obligation scheduled to be performed periodically; or (3) a breach of a continuing obligation under a contract. The appellants argue that unless a case falls into category 1, a rolling limitation period applies. As I understood their argument, the appellants submit that the motion judge erred by failing to find this to be a category 2 case, and by finding that no rolling limitation period applied without finding that this is a category 1 case. I will make several observations in order of ascending importance.

[23] First, I do not read Pickering Square as holding that rolling limitation periods apply in all cases that can be placed into category 2. After describing this category, Huscroft J.A. said, at para. 24: “A failure to perform any such obligation ordinarily gives rise to a breach and a claim from the date of each individual breach” (emphasis added).

[24] Second, although the motion judge did not say so expressly, it seems plain from reading his decision as a whole that he did see this as a category 1 case. After describing the three Pickering Square categories, he concluded that “the material facts upon which the [appellants’] claims are founded do not arise on a continuous or periodic basis”, or in other words, that this is not a category 2 or category 3 case. The implication, of course, is that in the motion judge’s view this is a category 1 case.

[25] Third, although I recognize that the three Pickering Square categories provide an illustrative heuristic that assists in understanding the application of rolling limitation periods, I do not understand Huscroft J.A. to have been proposing that the three categories he identified operate as the test for identifying when a rolling limitation period will apply. In Marvelous Mario’s, at para. 34, Hourigan J.A. therefore returned to “first principles” to determine when a court should recognize a rolling limitation period.

[26] Those first principles begin with the guidance that Huscroft J.A. provided in Pickering Square, immediately before he introduced the three categories: “In order to determine the discovery date for the claim, the nature of the breach must first be determined”: at para. 22. The need to characterize the nature of the breach is the obvious place to begin since it is not possible to determine whether a plaintiff has discovered a breach until the relevant breach is identified.

[27] What is it about the nature of the breach that would attract a rolling limitation period? Hourigan J.A. gave assistance in Marvelous Mario’s, at para. 35: “The question is not whether the plaintiff is continuing to suffer a loss or damage, but whether the defendant has engaged in another breach of contract beyond the original breach by failing to comply with an ongoing obligation” (emphasis added). The material distinction is therefore between those cases where, in substance, the cause of action alleges a breach that gives rise to continuing loss or damage, and those cases where, in substance, more than one breach is being alleged leading to separate damage claims. This distinction matters because entitlement to rolling limitation periods is premised on the notion that with each new breach a “fresh cause of action” arises that “sets the clock running for a new two-year limitation period”: Pickering Square, at paras. 37-38. Put simply, without a “new breach”, there is no justifiable basis for applying a rolling limitation period.

[28] Other first principles also inform this analysis. Since the Limitations Act, 2002, focuses on discoverability, discoverability considerations assist in determining whether rolling limitation periods apply. In Marvelous Mario’s, at para. 36, Hourigan J.A. cited with approval a passage from Richards v. Sun Life Assurance Company of Canada, 2016 ONSC 5492, [2016] I.L. 1-5911, at para. 26, where Bale J. helpfully explained that where a loss has occurred and the material facts of the breach ought to be known to the plaintiff, it would be unfair to require a defendant to litigate those facts for a potentially unlimited time, but where the material facts are arising on a periodic basis, “it will not be unfair to require a defendant to litigate those facts during the applicable limitation period following the date upon which an individual payment became due.”

[29] In this context, it is important to remember that “a cause of action accrues once damage has been incurred, even if the nature or the extent of the damages is not known”: Pickering Square, at para. 33. That being borne in mind, once the plaintiff has sustained a loss from a breach of contract, and the plaintiff knew or had the means of knowing that there would be ongoing damage arising from that breach, there is no basis for applying rolling limitation periods relating to that ongoing damage. This is in keeping with the aim of limitation periods to “balance the right of claimants to sue with the right of defendants to have some certainty and finality in managing their affairs”: York Condominium Corp. No. 382 v. Jay-M Holdings Ltd. et al, 2007 ONCA 49, 84 O.R. (3d) 414, at para. 2.

[30] As I read his decision, these are the first principles that Hourigan J.A. applied in Marvelous Mario’s. He also derived assistance, at para. 36, from further comments made by Bale J. in Richards, at para. 26:

A rolling limitation period may apply to claims for periodic payments, in cases where the issue is whether certain payments to which the plaintiff is entitled have been made (e.g. payments of rent), as opposed to cases where the issue is whether the plaintiff was entitled to the periodic payments in the first place [the “Richards distinction”].

[31] I am not persuaded by the appellants’ able submissions that we should reject the Richards distinction. Not only has the Richards distinction already been approved of by this court, but in my view, it provides a useful measure of whether, in substance, a cause of action alleges a breach that gives rise to continuing loss or damage, or more than one alleged breach, each of which leads to separate damage claims. I appreciate that there are decisions not binding on this court that are not easily explained based on the Richards distinction, but in my view the distinction provides a helpful analytical tool.

[32] Nor do I accept the appellants’ suggestion that the law I have just described is inconsistent with common law principles relating to anticipatory breach of contract. An anticipatory breach occurs when a party repudiates a contractual obligation before it falls due: Fram Elgin Mills 90 Inc. v. Romandale Farms Limited, 2021 ONCA 201, 32 R.P.R. (6th) 1, at para. 258. Where this occurs, the innocent party need not sue immediately, but can wait before suing until the promised performance fails to materialize: Elgin Mills, at paras. 259-260. In contrast, the principles I have described apply after a breach has occurred, where a party has already sustained a loss from that breach, and that party has or ought to have the material knowledge required to commence an action that will encompass the loss or damage that will arise from that breach. In my view, the law of anticipatory breach was never intended to arm plaintiffs with the option of purportedly rejecting a breach of contract that has already occurred in the expectation that this will extend limitation periods to allow for delayed lawsuits relating to identifiable damages that arise from the breach but have yet to materialize.

[33] Finally, the appellants argue that the principles I have described cannot be correct because the Limitations Act, 2002, speaks of actions to remedy losses that have “occurred”, whereas the approach I describe enables claims for future losses that have not yet occurred to be statute barred. I reject this argument. A limitation period will begin to run when a cause of action arises, even if all of the damages arising from that cause of action have yet to materialize: Hamilton (City) v. Metcalfe & Mansfield Capital Corporation, 2012 ONCA 156, 347 D.L.R. (4th) 657, at paras. 64-65. Accordingly, in Bonilla v. Preszler, 2016 ONCA 759, 134 O.R. (3d) 478, a case involving a claim relating to damages for a denial of income replacement insurance benefits, this court rejected the submission that limitation periods cannot apply to future benefits: at paras. 8-12. Indeed, the appellants’ position is undermined by their own attempt to recover in this action the assessed value of Equestrian’s interest in CCL IP based on the future quarterly payments the appellants claim that it should yield. Essentially, their position is that although they can sue now for future loss, that aspect of their action is not yet subject to a limitation period.

[34] In my view, the motion judge made no error in finding that rolling limitation periods do not apply in this case. He properly approached the issue as a question of substance. He found, as he was entitled to and with good reason, that at its core, the claim that was being made was that the respondents breached the Partnership Agreement by failing to recognize Equestrian’s entitlement to a permanent 3% interest in the CCL IP, a single decision that would cause ongoing loss to the appellants. He likened the case not to the circumstances of Pickering Square, where a new breach arose with each day that the occupancy covenant was dishonoured, but to Marvelous Mario’s, where the ongoing damage arose from the denial of business loss coverage, and to Beccarea v. Canadian National Railway Company, 2018 ONSC 630, 140 O.R. (3d) 389, where ongoing damage relating to the claimed right to periodic payments arose from the defendant’s denial of the plaintiff’s entitlement to survivor’s benefits. Put in the terms expressed in Richards, the issue arising from the alleged breach in this case was whether Equestrian was entitled to a permanent 3% interest in the CCL IP, making this a category 1 case under the Pickering Square rubric. Moreover, by March 27, 2017, the appellants had all of the material facts required to initiate an action relating to the ongoing damage that would arise from the respondents’ denial that they owed Equestrian the obligation that the appellants were claiming. As I say, I can find no basis for interfering.

[35] I would reject this ground of appeal.

B. Did the motion judge err by finding that the request for declaratory relief was statute barred, contrary to s. 16(1)(a) of the Limitations Act, 2002?

[36] I am not persuaded that the motion judge erred in finding that the appellants’ request for a declaration is statute barred. In arguing that the motion judge did err, the appellants rely on s. 16(1) (a) of the Limitations Act, 2002, reproduced above in paragraph 16. They argue that in applying s. 16(1) (a), the motion judge mistakenly followed the concurring decision instead of the majority decision in Kyle v. Atwill, 2020 ONCA 476, 152 O.R. (3d) 59, which they interpret as holding unequivocally that no limitation periods apply to declarations, such that where a party seeks both consequential and declaratory relief, the consequential relief is subject to the Limitations Act, 2002 but the declaratory relief is not.

[37] With respect, the appellants overread the majority decision in Kyle. Both the majority and concurring decisions in that case agree that if a pleaded claim for a declaration is, in substance, a request for a remedy against the other party and not really a request for declaratory relief, s. 16(1) (a) will not operate and a limitation period will apply. It is therefore necessary to look at the substance rather than the form of the claim so that plaintiffs cannot circumvent a limitation period by joining a statute-barred remedial claim with a declaration claim that has no legitimate declaratory purpose beyond attempting to circumvent the expiry of a limitation period. In Kyle, the majority and concurring judgments simply disagreed on whether the declaratory relief requested in that case was, in substance, a compensatory claim or not. The motion judge therefore correctly stated the principles that he was to apply.

[38] Nor can I find any error in their application. The motion judge correctly noted that declaratory relief should be narrowly construed to ensure that s. 16(1) (a) is not used as a means to circumvent limitation periods, a proposition that finds support in Alguire v. The Manufacturers Life Insurance Company (Manulife Financial), 2018 ONCA 202, 140 O.R. (3d) 1, at para 28. By parallel thinking, courts should be vigilant when examining the substance of a declaratory request where an associated compensatory claim may be statute barred, to ensure that the declaration is not being requested to subvert a limitation period. Having found that the compensatory claim the appellants were advancing was statute barred, the motion judge was correct in closely examining whether the related request for declaratory relief was added in an attempt to avoid that limitation period.

[39] In this regard, the motion judge considered the nature and apparent purpose of the declaratory relief that was requested. This is an important inquiry in considering the substance of the claim. This is because “[a] declaratory judgment is a ‘formal statement by a court pronouncing upon the existence or non-existence of a legal state of affairs – it is restricted to a declaration of the parties’ rights and does not order any party to do anything’”: Kyle, at para. 48. If securing a declaration about a legal state of affairs has no apparent purpose in the circumstances of the case other than to be used to ground a statute-barred attempt to secure compensation, the declaration is, in substance, a request for compensatory relief.

[40] In Kyle, the majority found that the husband’s request for a declaration that the prenuptial agreement was invalid served a legitimate function in the litigation. It was being sought not to establish a right upon which the compensatory claim would be based, but rather to resolve whether the prenuptial agreement that the wife was relying upon as an obstacle to the husband’s equalization and spousal support claims was valid. In contrast, the motion judge could see no legitimate utility in the request for a declaration in this case, other than to secure a declaration of right upon which future compensation claims could be launched.

[41] I see no error in the motion judge’s conclusion. The suggestion made before us that a declaration could inspire the respondents to make a voluntary payment lacks an air of reality, particularly in the context of this hard-fought litigation. Indeed, I agree with the respondents that a hypothetical relied on by the appellants in their factum reveals that they do in fact believe that the declaration they are seeking can be used as a vehicle for a future action to continue their claim for compensation. Since it is not appropriate to use a declaration as a mechanism for obtaining compensatory relief, the declaration sought does not benefit from s. 16(1) (a) of the Limitations Act, 2002.

[42] In my view, there is no basis to interfere with the motion judge’s finding that s. 16(1) (a) does not apply and that the request for a declaration is statute barred.

Conclusion

[43] I would therefore dismiss the appeal.

[44] I would order costs to the respondent on the appeal in the amount of $20,000 inclusive of HST and disbursements.

Released: July 7, 2022 “D.B.” “David M. Paciocco J.A.” “I agree. David Brown J.A.” “I agree. L.B. Roberts J.A.”