Court File and Parties

COURT FILE NO.: CV-16-555857 DATE: 2018-09-21 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: Crescent Hotels and Resorts Canada Company, Plaintiff – and – 2465855 Ontario Inc., Defendant

COUNSEL: Timothy Pinos and Carly Cohen, for the Plaintiff Shawn Tock, for the Defendant

HEARD: May 17 and 24, 2018

Reasons for Decision

CAROLE J. BROWN, J.

[1] The plaintiff, Crescent Hotels and Resorts Canada Company (“Crescent”), brings this motion for summary judgment against the defendant, 2465855 Ontario Inc. (“the owner”). The defendant commenced this action by statement of claim issued June 30, 2016 involving the owner’s early termination of the Hotel Management Agreement dated July 22, 2015 (“HMA”).

[2] While the owner states that no affidavits of documents have been exchanged and no examinations for discovery have yet occurred, making this motion premature, voluminous materials were provided to the Court, such that this matter is well documented.

[3] In this summary judgment motion, Crescent seeks summary judgment and:

1. $763,150.20 for the early termination fee payable under the HMA;
2. $263,502.24 for re-bills, management fees and other out-of-pocket expenses incurred by Crescent and payable by the owner pursuant to the HMA;
3. Pre-judgment interest; and
4. Costs.

[4] The parties have agreed that, if no cause is found and it is determined that the HMA was terminated for convenience, Crescent is owed $763,150.20 for an early termination fee. As regards the alleged outstanding re-bills, management fees and other out-of-pocket expenses, the owner accepts the amount of $146,853.09 as outstanding and owing to Crescent, but disputes the balance of $121,233.18.

The Parties

[5] Crescent is an established Hotel and Hospitality Management company with over 90,000 hotels, 19,000 guestrooms and 9000 associates across 6 provinces in Canada and 28 states in the United States. Crescent is approved to manage world-class branded select service hotels and is recognized as an elite operator by both Starwood and Marriott. Crescent managed and operated the Westin Prince Hotel in Toronto pursuant to the HMA from July 2015 until the HMA was terminated by the owner in May 2016.

[6] 2465855 Ontario Inc. is the owner of the Westin Prince Hotel located at 900 York Mills Rd., Toronto. Ms. Zhuozun Zhang and her family incorporated 2465855 Ontario Inc. and, through it, purchased the Westin Prince Hotel in approximately July 2015. The hotel contains a total of approximately 390 guest rooms, restaurants and bars, ancillary facilities and amenities. Ms. Zhang is the principal of 2465855. She had minimal hotel operation experience and had limited, short term employment in China at a hotel owned by her family. Accordingly, Starwood required that the Westin Prince Hotel be managed by a third-party management company.

[7] Crescent entered into the HMA with the owner, with an effective date of July 22, 2015, and commenced management of the Hotel on August 26, 2015. Crescent continued in that role until the owner terminated the HMA on May 11, 2016, some nine months later. The HMA had a term of 10 years, subject to an automatic renewal for two five-year terms, unless terminated by either party on notice.

[8] The HMA permits termination by the owner in two circumstances: (1) for convenience; or (2) for cause.

[9] Pursuant to section 4.2(b) of the HMA, the owner may terminate for convenience at any time on 30 days written notice. However, if the owner terminates the HMA within the first two years of the term, the owner is obliged to pay Crescent an early termination fee representing the management fee that would have been payable for the period remaining in the first two years of the term, as follows:

4.2(b) At Owner’s election, at any time, upon thirty (30) days’ prior written notice to Manager, for any reason or no reason, provided that during the first two years of the term of this Agreement, the Owner shall not be permitted to exercise this right unless the Owner pays to the Manager an amount equal to the product of the number of months remaining in the first two years of the term of this Agreement multiplied by the average monthly Base Management Fee paid to the date of such termination (“Early Termination Fee”). Provided, however, the Early Termination Fee shall not be due and payable if Owner terminates this Agreement for Cause-Manager during the first two years of the term of this Agreement.

[10] Pursuant to section 4.2(a) of the HMA, the owner may terminate the HMA for “Cause-Manager” in limited circumstances, including fraud, misappropriation of funds, wilful misconduct and gross negligence, or failure to cure a default under the HMA after receiving formal written notice of the default and lapse of the applicable cure period. The provision reads as follows:

1.1(m) “Cause-Manager” shall mean the occurrence of (A) any act of fraud, misappropriation of funds, wilful misconduct, or gross negligence by Manager in the management, operation or maintenance of the hotel, including, but not limited to, the fraudulent failure of Manager to disburse any amount to Owner as provided for in this Agreement… or (F) the occurrence of a default under this Agreement of which [Crescent] receives written notice (as provided in section 12.5), that is not cured prior to the lapse of any applicable notice and grace periods set forth in section 12.11.

Positions of the Parties

[11] In this case, Crescent takes the position that the owner terminated it for convenience nine months after it commenced its management of the Hotel. Crescent takes the position that it operated the Hotel in compliance with the HMA, in good faith, and did not commit any defaults that would warrant termination for cause under the HMA.

[12] The owner takes the position that Crescent was terminated for cause. It is the position of the owner that Crescent mismanaged the Hotel. It alleges that Crescent did not have the necessary experience in managing a hotel of comparable size and pedigree; that the General Manager did not have experience operating a hotel of comparable size in Toronto; that the General Manager, Linda Westgate, was not legally permitted to work in Canada; that Olivier Rochefort did not meet the test the owner required for a General Manager; that Crescent refused to terminate Mr. Rochefort until after the expiry of the probationary period, such that the owner was required to pay Mr. Rochefort severance and incur financial consequences; and that the Guest Satisfaction Index for the Hotel fell below the minimum standard benchmark; that Mr. Rochefort postponed external inspection because Crescent was not prepared; that Mr. Rochefort was incapable of handling personnel matters and insisted on paying Sathi Sathiamoorthy severance of nine months upon termination; that Crescent failed to take the necessary steps to transfer the liquor license and failed to secure the proper licensing in a timely fashion; that Crescent failed to remit the Hotel’s HST to the Canada Revenue Agency in accordance with section 5.15 of the HMA, resulting in a 10% penalty to the owner.

[13] It is the position of Crescent that the majority of these allegations are not only unfounded, but are refuted by the evidence adduced on this summary judgment motion. Further, Crescent submits that none of these allegations amounts to fraud, gross negligence, wilful misconduct, misappropriation of funds or failure to perform the covenants of the HMA in any material respect, and therefore do not meet the test for termination of the HMA for cause. Crescent further maintains that the owner failed to provide notice in accordance with the HMA.

[14] The owner maintains that the evidence of each party is diametrically opposed. Further, there are significant issues of fact which cannot be determined on a summary judgment motion. It is the position of the owner that its evidence, adduced on this motion, establishes that Crescent did not fulfil its obligations under the HMA. The owner states that the totality of the failures and omissions of Crescent amounted to cause. Further, it states that Crescent’s witnesses lack credibility. It is the position of the owner that this action must go to trial as there are genuine issues for trial that cannot be determined on this motion.

The Issues Alleged by the Owner as Justifying Termination of the HMA

[15] The owner alleges that the following issues and allegations, separately or together, justified termination of the HMA pursuant to its terms. Crescent takes the position that none of these issues and allegations has been established pursuant to the evidence, and none of them constitute cause for termination of the HMA.

1. Owner alleges that Crescent mismanaged the Hotel. Based on all the evidence adduced, the allegations made are not supported by any or sufficient evidence and are inaccurate. This allegation does not rise to the requirements of wilful misconduct, gross negligence, failure to perform a covenant in any material respect or any other cause justifying termination pursuant to the HMA as seen further below.

2. Owner alleges that Olivier Rochefort did not meet the owner’s requirements for a General Manager. The evidence adduced indicates that it was the owner’s final decision to hire Olivier Rochefort after considering and rejecting other candidates presented by Crescent. Ms. Zhang, on cross-examination on her affidavit, testified that Management selected the candidates to put forth to the owner and it was up to the owner to make the final decision as to who would be selected as General Manager. In this case, Crescent presented to the owner various candidates it had selected for the position of General Manager for the owner’s final decision. The evidence indicates that the owner interviewed and rejected three candidates for General Manager from October 2, 2015 to October 24, 2015. Thereafter, the owner interviewed and hired Olivier Rochefort. There is nothing to suggest that Mr. Rochefort did not meet the owner’s requirements for a General Manager and, in any event, the owner was the one who interviewed and hired him after rejecting three other candidates. In the interim, Crescent assigned on an interim basis, Linda Westgate as Task Force General Manager pursuant to section 1.1(III) of the HMA. Ms. Westgate was a member of Crescent’s corporate staff who was assigned to the Hotel on an interim basis to fill the budgeted position of General Manager until a permanent General Manager was hired. She served from September 6, 2015 to November 26, 2015, when Mr. Rochefort was hired. Ms. Westgate was a US citizen but was not working in Canada illegally, as alleged by the owner. The general practice in such circumstances is for Crescent to write a Business Visitation letter to Canadian Immigration, in this case regarding Ms. Westgate’s temporary work in Canada.

3. Owner alleges that Olivier Rochefort’s performance as General Manager was consistently poor and gives, as an example, the termination of Sathi Sathiamoorthy. As regards the employee, Sathi Sathiamoorthy, whose contract was being terminated, the owner maintains that Olivier Rochefort, as General Manager, advocated offering severance of nine months, which the owner found to be “outrageously excessive” and ultimately settled for two months. The affidavit of Mr. Cohen indicates that the owner wanted to avoid legal fees and litigation. The evidence adduced includes a memo from Mr. Rochefort to the owner with several severance scenarios from minimum ESA (four weeks) to a starting offer (three months), to incrementally increased severance amounts (6 months, 9 months, 12 months) and vacation on term and already accrued. Based on the owner’s desires to seek a peaceful separation without litigation, he recommended “that in order to reach mutual agreement of separation reducing the risk of legal proceedings, we believe that in this case the cost of a peaceful separation might be perhaps nine months compensation”. Owner did not agree and offered two months. I am not satisfied that this establishes or demonstrates poor performance on the part of the General Manager.

4. Owner alleges that Olivier Rochefort was terminated outside his probationary period and, as a result, owner suffered financial consequences. Based on all of the evidence, the owner has failed to produce any supporting documentation as regards this allegation and has not particularized or set forth its financial consequences. It has failed to produce any supporting documentation by which to establish the allegation. In fact, Olivier Rochefort was not paid a severance fee, but was transferred to another corporate role within Crescent.

5. Owner alleges that the Hotel’s gross operating profit (GOP) fell behind comparable hotel properties while under Crescent’s management. Based on the evidence adduced on this summary judgment motion, owner failed to produce data on comparable properties or to particularize its allegation. There is no evidence adduced on behalf of the owner regarding the Hotel’s GOP. The uncontradicted evidence of the CFO of Crescent, Rob Smith, is that the GOP of the hotel increased by 5.7% compared to the same period the previous year. The CFO produced detailed accounting records in support of this.

6. Owner alleges that Crescent failed to take the necessary steps to transfer liquor license in a timely manner. The evidence adduced indicates that while it was the responsibility of the owner to complete the transfer, Crescent assisted the owner throughout the process. When the owner requested assistance, Crescent immediately responded with assistance. The evidence establishes that, during the material time, the owner/Hotel never operated without a valid liquor license.

7. Owner alleges that it never approved the 2016 Budget or Annual Plan. The evidence indicates that the owner approved the 2016 budget. Based on the evidence adduced, Crescent provided its 2016 Budget or Annual Plan on December 1, 2015. The owner approved the Budget on March 15, 2016. Pursuant to the HMA, section 7.2, when presented with the Budget or Annual Plan, the owner is to notify Crescent of its approval or indicate items it approves or disapproves within 30 business days, or owner shall be deemed to accept the Budget and Crescent shall be entitled to operate the Hotel pursuant to the 2016 Budget or Annual Plan, which Crescent did.

8. Owner alleges that Crescent failed to meet franchise standards and that Crescent’s operation resulted in consistently negative and below-average ratings and fell below the standards set by the Hotel franchisor, Westin/Starwood. Based on all of the relevant evidence adduced, I am not satisfied Crescent consistently (over the nine months it was there) fell below the standards required by the franchisor. No sufficient evidence of such failure was adduced by owner. Indeed, the evidence indicates that when Crescent assumed management of the Hotel, the score was 7.46 and within four months, by December 2015, it had increased to 8.34.

9. Owner alleges that Crescent failed to remit taxes as required, but that Crescent remitted the Hotel’s HST in the name of the previous vendor of the Hotel who then contacted the Hotel to advise of the error, resulting in a penalty to owner. No evidence was adduced on this motion to support the allegation of a penalty. While Crescent admits that it inadvertently remitted HST on behalf of a corporation affiliated with the vendor, but immediately rectified this when it was brought to Crescent’s attention, the clerical error was resolved and it maintains that the owner did not incur a penalty. As indicated above, there was no evidence adduced to support the allegation of a penalty. I do not find there to have been a material breach in this regard.

[16] Based on the foregoing, and on all of the evidence, I do not find any of the allegations made by owner to be supported by the evidence. I do not find the allegations to constitute cause.

Notice of Defaults/Cure Periods

[17] Based on the evidence before this Court, and the various emails and letters between the parties between March 23 and May 11, 2016, I am satisfied that the owner further failed to provide proper, particularized notice of any alleged defaults, nor the proper time to cure any such alleged defaults pursuant to section 12.11 of the HMA.

[18] Based on the foregoing, I am satisfied that none of the allegations, even if proven, which I not find to be the case, do not rise to the HMA requirement for cause. None can be said to constitute fraud, wilful misconduct, gross negligence, misappropriation of funds, a failure to perform the covenants of the HMA in any material respect, or a failure to cure a default, for which I have found there to have been no proper notice provided.

Credibility

[19] The owner maintains that the moving party’s witnesses lack credibility while the moving party alleges that Ms. Zhang’s affidavits are inconsistent and self-serving, and that Ms. Lam’s is not reliable or in compliance with Rule 20.01 of the Rules of Civil Procedure. Having read all of the affidavits and reviewed the exhibits, I note that all have deficiencies. However, I am not prepared to exclude them or the evidence therein entirely. I have based my decision on a totality of the evidence and have weighed the evidence contained in the affidavits accordingly.

Summary Judgment

The Law

[20] Pursuant to Rule 20 of the Rules of Civil Procedure, summary judgment shall be granted where there is no genuine issue requiring a trial.

[21] In Hyrniak v Mauldin, 2014 SCC 7, [2014] S.C.J. No. 7, the Supreme Court of Canada determined that there would be no genuine issue requiring a trial where a judge is able to reach a “fair and just determination on the merits” of the case. This will be the case where the process: (1) permits the judge to make the necessary findings of fact on the basis of the evidence adduced, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result.

[22] Pursuant to Hyrniak, the motion judge should first determine if there is a genuine issue requiring a trial based only on the evidence before the court, without using the new fact-finding powers set forth in Rule 20.04 of the Rules of Civil Procedure. There will be no genuine issue requiring a trial if the summary judgment process provides the court with the evidence required to fairly and justly adjudicate the dispute and is a timely, affordable and proportional procedure. If there appears to be a genuine issue requiring a trial, the motion judge should determine if a trial can be avoided by using the new powers under Rules 20.04(2.1) and (2.2) of the Rules of Civil Procedure. The judge may, at his or her discretion, use those powers, provided that doing so does not offend the interest of justice, i.e., that it will lead to a fair and just result and will serve the goals of timeliness, affordability and proportionality in light of the litigation as a whole.

[23] The moving party bears the onus of establishing that there is no triable issue. However, a responding party must “lead trump or risk losing”: 1061590 Ontario Limited v Ontario Jockey Club, [1995] O.J. No. 132, 21 O.R. (3d) 547 (Ont. C.A.). The responding party may not rest on the allegations or denials in the pleadings, but must present by way of affidavit or other evidence, specific facts and coherent, organized evidence demonstrating a genuine issue. The motions judge is entitled to assume that the record contains all evidence that the parties will present if there is a trial. It is not sufficient for the responding party to say that more and better evidence will be available at trial. The court must take a “hard look” at the evidence to determine whether there is a genuine issue requiring a trial.

Analysis

[24] The relevant provisions of the HMA have been set forth above.

[25] Material breach is one that is material, substantial and goes to the root of the contract: Guarantee Company of North America v Gordon Capital Corp., 1999 SCC 664, [1999] 3 SCR 423 para 44. Breach of the HMA will only be material if it deprives the owner of the entirety of all benefits of the contract or the very thing the parties contracted for. Here, none of the alleged breaches is “material”; none deprive the owner of the very thing bargained for, namely Crescent’s operation and management of the Hotel.

[26] In this case, the owner has failed to put its best foot forward regarding the alleged breaches, which were without any or sufficient foundational evidence. It has failed to prove any of the breaches alleged above. Further, it failed to provide proper notice of an event of default and failed to provide a cure period pursuant to the HMA: see Kingdom Construction Ltd. v Regional Municipality of Niagara, 2018 ONSC 29.

[27] Based on all of the evidence, the voluminous materials produced, the law, and the submissions of counsel, I find that there are no genuine issues requiring a trial. I am satisfied that I am able to make a fair and just determination of the issues set forth above on the merits and to make the necessary findings of fact on the basis of the record before the Court. I assume, as I am entitled to, that the record contains all evidence that the parties will present at trial. I do not find it necessary to use the new powers available to the Court pursuant to Rules 20.04 (2.1) and (2.2) of the Rules of Civil Procedure. I am of the view that, in the circumstances of this case and based on the evidence before me, a fair and just determination of the issues before the Court can be made on the evidentiary record before me. I am further satisfied that my decision as regards summary judgment takes into account the interests of justice, the principles of timeliness, affordability and proportionality.

[28] I am satisfied that the early termination fee is owed by the owner to Crescent pursuant to the HMA in the amount of $763,150.20. I am further satisfied that the amounts owing and agreed to for re-bills, management fees and other out-of-pocket expenses are due and owing in the amount of $146,853.09.

[29] As regards the amounts under dispute in the amount of $122,052.44, which also represent payments made by Crescent for re-bills, management fees and other out-of-pocket expenses, and evidenced in the documentation adduced on this motion, I am satisfied that they are covered and payable pursuant to section 5.20, 6.2 and 6.5 of the HMA. Based on the evidence, similar types of expenses had been authorized and paid by the owner in the months prior to the dispute.

[30] As regards the disputed amounts outstanding, the affidavit of Ms. Lam purports to set forth the reasons the amounts were not accepted. Said reasons were not supported by evidence. Moreover, on cross-examination, Ms. Lam indicated that she did not have direct knowledge or a basis to speak to the evidence tendered by her as first-hand knowledge. Indeed, in cross-examination, she testified that she did not have first-hand knowledge or experience regarding the invoices, but went through them with Ms. Zhang who knew the background of the invoices. She testified that she was not familiar with the HMA provisions requiring the owner to reimburse Crescent for operating expenses (sections 5.20, 6.2, 6.5). Further, she testified that she had no involvement in the accounting process regarding submission by Crescent to the owner of operating expenses for reimbursement, was not aware of the review process undertaken by Ms. Zhang as regards approval of Crescent invoices, and had no experience providing accounting services in the hotel industry prior to her employment with the owner. She did not become Comptroller of the Hotel until after the HMA was terminated and Crescent was no longer managing the hotel. As a result, I do not find her affidavit to be persuasive as regards the disputed amounts owing for the reasons set forth above. I am satisfied that the disputed amount of $122,052.44 is due and owing to Crescent and must be paid.

[31] I grant the moving party’s motion for summary judgment. The owner is to pay to Crescent the total amount of $1,026,652.44, plus pre-judgment interest and costs.

Costs

[32] I would urge the parties to agree upon costs, failing which I would invite the parties to provide any costs submissions in writing, to be limited to three pages, including the costs outline. The submissions may be forwarded to my attention, through Judges’ Administration at 361 University Avenue, within thirty days of the release of this Endorsement.

Carole J. Brown, J.

Released: September 21, 2018