Court File and Parties

COURT FILE NO.: CV-18-606032 DATE: 202002 24 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

OMJ Mortgage Capital Inc. Plaintiff – and – King Square Limited Defendant

Counsel: Melvyn Solomon and Rajiv Joshi, for the Plaintiff Maurice Neirinck and Hedy Epstein, for the Defendant

HEARD: October 3, 4, 7 & 8, 2019

Reasons for Decision

NISHIKAWA j.

Overview

[1] The issue in this case is whether the plaintiff mortgage broker, OMJ Mortgage Capital Inc. (“OMJ”), is entitled to commissions on certain loans extended by the lender, Firm Capital Corporation (“FCC”) to the Defendant, King Square Limited (“KSL”), and a non-party to this proceeding, King Square Hotel Corporation (“KSHC”). [1]

[2] OMJ claims that under the terms of its agreement with KSL, it is entitled to commissions on two loans advanced by FCC to KSL and one loan advanced by FCC to KSHC. KSL’s position is that OMJ is not entitled to any commissions on the loans because, in the case of the loans to KSL, both were made after the expiry of the applicable holdover period. In the case of the loan to KSHC, KSL argues that it is not liable for a commission on a loan made to KSHC.

[3] The trial of this action proceeded over four days. [2] Evidence in chief was submitted by affidavit and limited examination, with cross-examinations at trial.

Factual Background

[4] The following is a brief chronology of the agreements and transactions and is largely undisputed. The relevant terms of the agreements and further facts will be examined in greater detail in the Analysis section.

The Parties

[5] The plaintiff, OMJ, is a mortgage broker that has been operating for approximately 15 years. The President and principal of OMJ is Omid Jalili. Mr. Jalili was OMJ’s main witness. The other witness for OMJ was Frank Margani, formerly an Executive Vice-President of Development and Strategy at Fortress Real Developments Inc., a company that was also involved in financing KSL’s project.

[6] The defendant, KSL, is a corporation incorporated pursuant to the laws of Ontario and carries on business as an owner and developer of real estate. KSHC is also a corporation incorporated in Ontario, carrying on business as an owner and developer of real estate. The Chair of both KSL and KSHC’s Boards is Wenyi (Alvin) Wang. The only witness for KSL was Oswin Tong, who holds the position of Planning Manager at KSL.

The Project

[7] KSL is the owner and developer of land at a property municipally known as 9390 Woodbine Avenue, Markham, Ontario (the “Property”). The Property consists of Parts 1, 2, 3, 4, 5 and 8 (PIN 03047-1644 (LT) and PIN 03047-1658 (LT)) and Parts 6 and 7 (PIN 03047-1659 (LT)). Parts 6 and 7 of the Property were transferred from KSL to KSHC on May 13, 2014.

[8] KSL planned to build a large commercial, retail and residential complex on the Property (the “Project”). Phase One of the Project is on Parts 1, 2, 3, 4, 5 and 8 of the Property. Phase One of the Project consists of commercial retail and office condominiums and is largely completed. The remaining phases are to be built on Parts 6 and 7. The plan for Phase Two and Phase Three of the Property changed over time. Phase Two was originally intended to be commercial space but is now going to consist of low-rise, residential condominiums. Phase Three will consist of high-rise, residential condominiums and a hotel. Phase Four will also consist of high-rise, residential condominiums.

Background to the Parties’ Relationship

[9] The parties’ relationship dates back to the fall of 2010 when KSL initially approached OMJ to assist in securing financing for the Project. In 2011, KSL and OMJ entered into an agreement pursuant to which OMJ would obtain financing for the Project. OMJ obtained a commitment from First Source Mortgage Corporation for $7 million. KSL paid OMJ a broker fee of two percent of the amount of the commitment. In the summer of 2012, KSL paid and discharged the mortgage.

[10] KSL retained OMJ again in 2012 and 2013 to arrange for first mortgage financing, but no financing was obtained at that time.

[11] In the summer of 2013, construction on Phase One of the Project ceased. This was due in part to a lack of construction financing and also because of a dispute between KSL and its general contractor that resulted in significant liens being placed on the Project.

[12] On August 16, 2013, OMJ and KSL entered into a broker agreement pursuant to which KSL engaged OMJ to arrange and facilitate financing for the Project from Fortress Real Developments Inc. and Centro Mortgage Inc. (collectively, “Fortress”). Fortress advanced $7,462,687 in equity financing in March 2014 and construction on the Project resumed.

The Authority and the Commission Agreement

[13] KSL continued to engage OMJ in its efforts to obtain financing for the Project, ultimately leading to the agreements at issue in this proceeding.

[14] On January 24, 2014, OMJ and KSL entered into an agreement referred to as an “authority to seeking financing” (the “Authority”) that would expire on January 31, 2014. During that period Mr. Jalili was working with Mr. Margani of Fortress to secure financing for KSL. On February 3, 2014, OMJ obtained an oral commitment for financing from FCC.

[15] Based on this commitment, on February 4, 2014, OMJ and KSL entered into a “Renewal of Original Agreement” which renewed the Authority and authorized OMJ to obtain financing for the Project from FCC (the “Commission Agreement”). The Commission Agreement provided OMJ with a commission of three percent of the amount borrowed. The Commission Agreement was dated January 24, 2014 and provided for a one-year term, commencing January 25, 2014 and ending on January 25, 2015. The Commission Agreement provided for a holdover period of 365 days, which would expire on January 25, 2016 (the “Holdover Period”). The Commission Agreement stated that unless amended by its terms, all other terms and conditions of the Authority remained the same and in effect.

The FCC Loans to KSL and KSHC

[16] On February 26, 2014, FCC and KSL entered into a letter of intent for $52 million in construction financing for Phase One. A revised letter of intent was entered into on March 5, 2014. The amount of the loan was reduced to $50 million.

[17] The letter of intent resulted in FCC extending to KSL a mortgage loan commitment on April 23, 2014, for a construction loan in the amount of $50 million for Phase One of the Project (the “Loan Commitment”). KSL signed the Loan Commitment on May 5, 2014. The loan closed on November 25, 2014. At the same time, KSL obtained a $6 million loan from OYSX Inc. and a $12.5 million loan from Vector Financial Services Limited (“Vector”). The Vector loan was secured over Parts 6 and 7 of the Property.

[18] On January 9, 2017, KSL and FCC entered into a Mortgage Loan Amendment and Renewal Agreement with respect to the $50 million loan (the “Renewal Agreement”). The Renewal Agreement provided for a loan increase of $12.9 million (the “Second Loan”). This loan closed on February 3, 2017.

[19] On September 14, 2017, KLS and FCC entered into a second Mortgage Loan Amendment Agreement (“Amendment #2”) which provided for a loan increase of $11.8 million (the “Third Loan”) to the earlier $12.9 million. The Third Loan closed on October 20, 2017.

[20] In addition to the Second and Third Loans, on November 16, 2015, KSHC and FCC entered into a mortgage loan commitment for $15.25 million to KSHC (the “KSHC Loan”). The KSHC Loan closed on December 18, 2015.

Commissions Paid to OMJ

[21] On the date the Loan Commitment closed, November 25, 2014, OMJ was paid a commission of $1.5 million from the funds advanced by FCC to KSL. Pursuant to a verbal agreement with Fortress, OMJ paid Fortress one-half of the commission.

[22] As the Project continued, OMJ made periodic inquiries about KSL’s need for further financing. KSL did not advise OMJ about the Second or Third Loans.

[23] In July 2018, OMJ conducted a title search on the Property and discovered that FCC had made two further loan advances to KSL. OMJ then demanded commissions on the Second and Third Loans, which KSL refused to pay.

[24] OMJ then commenced this proceeding by Notice of Application issued on September 28, 2018. As a result of documents produced during the course of the litigation, OMJ discovered the KSHC Loan. OMJ seeks commissions on all three loans.

[25] KSL’s position is that both the Second and Third Loans were new loans that were not extended to KSL during the currency of the Commission Agreement or during the Holdover Period. KSL submits that because those loans were made after the Holdover Period had expired, there was no “triggering event” that would entitle OMJ to any commissions. In respect of the KSHC Loan, KSL’s position is that it is not responsible under the Commission Agreement to pay commission on a loan made to KSHC, a separate entity that is not a party to this proceeding.

Issues

[26] The issues to be determined in this proceeding are as follows:

(a) Is OMJ entitled to commissions on the Second and Third Loans?

(b) Is OMJ entitled to a commission on the KSHC Loan?

Analysis

IS OMJ Entitled to Commissions on the Second and Third Loans?

The Terms of the Commission Agreement

[27] The parties’ dispute centers around the interpretation of the provisions of the Commission Agreement. As noted above, the Commission Agreement extended the Authority previously entered into by KSL and FCC on January 24, 2014. Pursuant to Clause 3 of the Commission Agreement, other than the terms that were specifically amended, “[a]ll other terms and conditions from the original agreement dated January 24, 2014 [remained] the same and in effect.”

[28] The Commission Agreement specifically referred to construction financing arranged with FCC, stating that as of February 3, 2014, OMJ had negotiated and arranged for financing for the Project from FCC. Clause 1 of the Commission Agreement further states:

This Agreement is to confirm that, King Square Limited understand[s] and agrees that during the period of this agreement, they will act in good faith and work exclusively with OMJ Mortgage Capital in order to complete the Construction Financing of this project with Firm Capital Corporation (the lender). This would apply to any type or amount of financing for 9390 Woodbine Avenue, Markham, Ontario.

[29] The provision of the Commission Agreement dealing with commissions, Clause 2, states as follows (emphasis added):

2. COMMISSION: In consideration of OMJ Mortgage Capital Inc., hereinafter referred to as the Mortgage Broker, undertaking to assist the Borrower, the Borrower agrees to pay commission to the Mortgage Broker as follows:

If during the currency of this agreement the Borrower enters into an agreement to borrow of the general description indicated above, or if the Mortgage Broker provides a letter of intent or mortgage commitment of the general description indicated above, then the Borrower agrees the Mortgage Broker is entitled to receive and retain any commission offered by the borrower and / or the lender. The Borrower understands that the amount of commission offered in that case may be greater or less than the commission stated below. The Borrower understands that the Mortgage Broker will inform the Borrower the amount of Commission to be paid at the earliest practical opportunity. The Borrower acknowledges that the payment of any commission in this manner will not make the Mortgage Broker either the agent or sub-agent of the Lender.

The Borrower states that it has not entered into any agreement, obtained any letter of intent or obtained any mortgage commitment of the general description indicated above. On this basis the Mortgage Broker has agreed to enter into this agreement . Accordingly, if during the currency of the agreement, the Borrower enters into an agreement to borrow of the general description indicated above, closes any mortgage transaction in the general description indicated above, is provided a letter of intent or mortgage commitment of the general description indicated above then the Borrower agrees that the Mortgage Broker is entitled to be paid a commission of 3% of the amount borrowed or [blank] as well as any finder’s fee as hereinafter described. The Borrower agrees to pay directly to the Mortgage Broker any deficiency between this amount and the amount, if any, to be paid to the Mortgage Broker by the lender. The Borrower understands that if the lender does not pay commission to the Mortgage Broker then the Borrower will pay the Mortgage Broker the full amount of commission indicated above.

The Borrower agrees to pay directly to the Mortgage Broker such commission if the Borrower enters into an agreement within 365 days after the expiration of the agreement (Holdover Period) to borrow any money from any Lender introduced to the Borrower from any source whatsoever during the currency of this agreement.

The Borrower agrees to pay all commissions listed in this agreement even if a transaction contemplated by an agreement to borrow agreed to or accepted by the Borrower or anyone on the Borrower[’]s behalf is not completed, if such non-completion is owing or attributable to the Borrower’s default [or] neglect. Said commission, plus any applicable taxes, shall be payable on the date set for completion of the financing. All amounts set out as commission are to be paid plus any applicable federal Harmonized Sales Tax (HST) on such commission.

[30] This provision is identical to Clause 2 of the Authority, except that the Holdover Period in the Authority was 13 days and the Holdover Period in the Commission Agreement is 365 days.

The Principles of Contract Interpretation

[31] In interpreting the Commission Agreement, I am mindful that the primary object of contract interpretation is to give effect to the intention of the parties at the time of contract formation: Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, at para. 45. The “intent of the parties and the scope of their understanding,” is determined by reading a contract “as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract:” Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 47 [Sattva Capital].

[32] The Supreme Court of Canada has observed that the courts’ approach to contract interpretation “has evolved towards a practical, common-sense approach not dominated by technical rules of construction:” Sattva Capital, at para. 47.

[33] In Plan Group v. Bell Canada, 2009 ONCA 548, 96 O.R. (3d) 81, at para. 37, the Court of Appeal for Ontario held that a commercial contract should be interpreted: (i) as a whole, by giving meaning to all the terms of a contract to avoid an interpretation that would render any term ineffective; (ii) by determining the intention of the parties with reference to the words used in the contract; (iii) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to subjective intention; and (iv) to the extent that there is any ambiguity in the contract, in a fashion that accords with sound commercial principles and good business sense and that avoids a commercial absurdity. See also Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, 85 O.R. (3d) 254, at para. 24.

[34] In this case, while both OMJ and KSL agree that Clause 2 is unambiguous, they disagree as to whether it applies in the circumstances. The parties’ dispute thus turns on the proper characterization of the Second and Third Loans.

Were the Second and Third Loans New Loans or Further Advances?

[35] OMJ argues that the Second of Third Loans were further advances under the original Loan Commitment, and that therefore, commissions are owing.

[36] By contrast, KSL argues that the Second and Third Loans were new loans entered into after the expiry of the Commission Agreement and Holdover Period. KSL’s position is that the Loan Commitment did not specifically contemplate further advances, and that the Second and Third Loans were not made until over one year after the Holdover Period under the Commission Agreement had passed. KSL maintains that it would be an absurdity to interpret the Commission Agreement in a manner that would entitle OMJ to a commission on a loans extended three years after the Commission Agreement.

The Loan Commitment

[37] As noted above, pursuant to the Loan Commitment between FCC and KSL, FCC agreed to advance KSL a $50 million construction loan. The borrowers are identified as KSL and KSHC, jointly and severally. The $50 million “construction cost facility” was to be advanced in as many draws as required on a cost to complete basis for the construction of Phase One. At the time, the project cost of Phase One was estimated at $131,500,000.

[38] The security for the loan was, among other things, a first mortgage on Parts 1 to 5 and Part 8 of the Property (Phase One) and a second mortgage on Parts 6 and 7 of the Property (Phase Two). The interest rate was the greater of eight percent per annum of the “TD Canada Trust Posted Bank Prime Rate” from time to time plus five percent per annum.

[39] The term of the loan was 24 months from the interest adjustment date. The Loan Commitment provided an option to renew for a further term of six months, provided the loan had not been in default throughout the term of the loan. Under the Loan Commitment, KSL was required to pay a commitment fee of $775,000 and an origination fee of $225,000.

[40] In the Loan Commitment, the borrower and guarantors acknowledged and agreed that a broker fee of $1.5 million was payable to OMJ.

[41] On May 5, 2014, the same date that KSL signed the Loan Commitment, KSL executed a direction directing FCC and its lawyers to pay the commission of $1.5 million to OMJ from the advance of the $50 million loan (the “Direction”). The Direction further stated that “in the event that additional commissions become due as outlined above, then the Borrower hereby directs the Lender and its lawyer or lawyers, to deduct from any advance from any one or all of them to or on behalf of the Borrower to pay an amount equal to three percent (3%) of the gross loan amount advanced less any amount previously paid for by the Borrower.” OMJ submits that the Direction amended the Commission Agreement or, in the alternative, is evidence that the Loan Commitment contemplated further advances.

[42] The Loan Commitment was amended both prior to and after closing, on May 20, 2014, September 25, 2014, October 22, 2014, and April 11, 2016. None of the amendments are relevant to the parties’ dispute. The loan took over six months to close because of the time it took for KSL to fulfil the various conditions set out by FCC. The evidence is that all parties, including Mr. Jalili, Mr. Margani, and Mr. Tong worked to ensure that KSL would fulfill the conditions.

The Renewal Agreement and Second Loan

[43] Under the Renewal Agreement, FCC advanced an additional loan facility, the Second Loan, of $12.9 million to KSL. The Renewal Agreement was executed by Mr. Wang on behalf of both KSL and KSHC.

[44] In the Renewal Agreement, the existing facility of $50 million under the Loan Commitment was identified as “Facility A.” The Second Loan was referred to as “Facility B.” The interest rate for Facility B, at 12.5 percent per annum, was higher than the interest rate for Facility A. In addition, even though $27.6 million remained on Facility A, no further advances would be made under Facility A until Facility B was fully advanced. A notice was registered on title to the Property on February 3, 2017 amending the charge to $62.9 million.

[45] The Renewal Agreement reflected a revised project cost of $168.75 million. The “buyer’s equity” portion of the project cost and capitalization increased from $47.3 million under the Loan Commitment to $71.5 million.

[46] Under the Renewal Agreement, KSL was required to pay a “renewal commitment fee” and a “renewal origination fee” on Facility A totaling $1 million. KSL was also required to pay a commitment fee for Facility B of $387,000.

[47] The Renewal Agreement specifically states that the amendments and additions contained therein are “in addition and/or substitution to the original terms of the [Loan Commitment]”, as amended. It further specified that all other terms of the Loan Commitment remain in effect.

Amendment #2 and the Third Loan

[48] On September 14, 2017, pursuant to Amendment #2, Facility B was increased by $11.8 million to a total of $24.7 million. The charge on the property was amended to a total of $76.3 million. The revised project cost for Phase One was $185.2 million. The buyer’s equity portion of the project cost and capitalization increased to $76.3 million. Amendment #2 was executed by Mr. Wang on behalf of both KSL and KSHC.

[49] Under Amendment #2, KSL was required to pay commitment and origination fees totaling $544,500 on Facility B, which would be paid from the proceeds of the loan advance. KSL relies upon the additional commitment and origination fees to support its argument that that the Second and Third Loans were new loans.

[50] Like the Renewal Agreement, Amendment #2 also stated that the terms were “in addition and/or substitution to the original terms of the [Loan Commitment] dated April 23, 2014,” as amended and the Renewal Agreement dated January 9, 2017. All other terms of the Loan Commitment remained in effect.

Findings

[51] In my view, the above review of the loan documents demonstrates that the Second and Third Loans were not new loans but were further advances made by FCC pursuant to the original Loan Commitment.

[52] First, both the Renewal Agreement and Amendment #2 refer to the Loan Commitment and incorporate its terms. They are not stand-alone loan agreements but are based on and connected to the original Loan Commitment.

[53] Second, when the Second and Third Loans were made, the original mortgage was not discharged, nor were new mortgages registered. Rather, the amount of the charge increased by the additional amounts advanced. The notices in the land registry identify the charges as amended, not new, charges.

[54] Third, both KSL and FCC consistently treated the further advances as having been made pursuant to the original Loan Commitment. Under the heading “Loan Amount” Amendment #2 stated that the amount was amended and restructured and referred to “Existing Facility A” of $50 million, “Existing Facility B” of $12.9 million and “Increase to Facility B” of $11.8 million. It stated that the “Total Revised Loan Facility” was $74 million, thus demonstrating that the loan was viewed as a whole, rather than as three separate loans. Of that amount a total of $50,678,388.97 had been advanced to date. The subsequent advances under Facility B flowed from the Loan Commitment and were never treated by FCC or KSL as new loans.

[55] KSL’s attempt to portray the Second and Third Loans as new loans bears no support in the loan documents. The fact that the Renewal Agreement and Amendment #2 required further origination and commitment fees does not make them new loans.

[56] Clause 2 of the Commission Agreement states “if during the currency of the agreement, the Borrower enters into an agreement to borrow of the general description indicated above, closes any mortgage transaction in the general description indicated above, is provided a letter of intent or mortgage commitment of the general description indicated above then the Borrower agrees that the Mortgage Broker is entitled to be paid a commission of 3% of the amount borrowed…” The language of Clause 2 is broad and included an agreement, mortgage transaction, letter of intent or mortgage commitment. In this case, FCC provided a Loan Commitment during the currency of the agreement.

[57] The Loan Commitment from FCC resulted from OMJ’s introduction and work. KSL then received two additional advances from FCC based on the original Loan Commitment which were both done as amendments to the Loan Commitment and on the same security. Having benefitted from OMJ’s work in securing the Loan Commitment, KSL cannot exclude OMJ’s entitlement to a commission for amounts advanced pursuant to the same arrangement, even if they were made a year after the Holdover Period expired. The basis for the further advances was the original Loan Commitment, which was entered into during the currency of the Commission Agreement.

[58] While the Second and Third Loans were not made until over a year after the Holdover Period, interpreting the Commission Agreement to apply to those advances does not lead to an absurdity. The Commission Agreement applies to those advances because they were made pursuant to the Loan Commitment, which KSL and FCC continued to apply. Contrary to KSL’s submission, this does not result in OMJ being entitled to commissions indefinitely or for an unreasonable period of time. Construction on the Project, and KSL’s need for financing, would not have continued indefinitely. At some point, if the terms of the Loan Commitment were no longer suitable, KSL and FCC could have entered into a new loan agreement. In the circumstances, they did not opt to enter into a new loan agreement. As long as the Loan Commitment was the basis for the advancement of further funds by FCC to KSL, OMJ was entitled to a commission.

[59] Similar circumstances arose in Warburg-Stuart Management Corp. v. DBG Holdings Inc., 2015 ONSC 1594, [2015] O.J. No. 1173, rev’d in part, 2016 ONCA 157, 263 A.C.W.S. (3d) 921, where the plaintiff was entitled to a commission if the defendant entered into a commitment with a lender who was “disclosed” by the plaintiff. In that case, Myers J. found that the plaintiff was entitled to a commission because it had disclosed a lender, RBC, to the defendant despite a pre-existing relationship between the defendant and RBC.

[60] The parties dispute the factual matrix as it pertains to the interpretation of the Commission Agreement. In support of its position that the Commission Agreement and loan Commitment contemplated further advances, OMJ argues that all parties knew at all times that further financing would be required. It relies upon the fact that KSL originally requested that OMJ seek $70 million in construction financing. KSL denies that this was known and states that significant cost overruns took place subsequently. It is not necessary to determine this issue conclusively because the Commission Agreement was not limited other than by virtue of its term and the Holdover Period. Clause 2 did not exclude the possibility of commissions on further advances beyond an initial commitment. Similarly, the Loan Commitment contained no limiting language, as evidenced by the fact that the Second and Third Loans were advanced pursuant to its terms. To interpret the agreements in a manner that limits the prospect of further financing from a known source, and therefore the possibility of further commissions, would be inconsistent with their terms. It would also be inconsistent with the objective evidence of the factual context, which was the financing of a large, multi-phase construction project.

[61] KSL’s main objection to OMJ’s claim for commissions on the Second and Third Loans is that OMJ performed little or no work in securing those advances. Mr. Tong also testified that it was Mr. Margani and not OMJ who was key to negotiating the Loan Commitment with FCC. Both Mr. Jalili and Mr. Margani disputed this. While it appears from the documents that OMJ’s role decreased over time, KSL’s attempt to minimize OMJ’s role in negotiating both the Loan Commitment and the subsequent advances is irrelevant because the Commission Agreement is silent as to the degree of work or involvement required on OMJ’s part. Under Clause 2, the obligation to pay commissions was triggered when the Loan Commitment was provided. On cross-examination, Mr. Tong admitted that OMJ would be entitled to a commission regardless of the hours OMJ put toward the Loan Commitment.

[62] Once it is determined that OMJ obtained the Loan Commitment from FCC as contemplated by the Commission Agreement, OMJ’s role in closing the deal or securing further advances has no bearing on OMJ’s entitlement to a commission. Had the parties intended that OMJ’s entitlement to commission be determined on factors beyond securing a commitment, they could have included this in the Commission Agreement. Both were sophisticated parties and there is no evidence to suggest that OMJ imposed the terms on KSL, who in fact negotiated at least one amendment to the Authority.

[63] Since the Second and Third Loans were further advances on the original Loan Commitment, OMJ is entitled to a commission of three percent on the Second and Third Loans in the amount of $741,000.

Breach of the duty of good faith

[64] OMJ further submits that KSL breached the implied duty of good faith and fair dealing, as well as an express contractual term requiring that KSL act in good faith.

[65] In Bhasin v. Hrynew, 2014 SCC 71, Cromwell J. stated that “parties generally must perform their contractual duties honestly and reasonably, and not capriciously or arbitrarily:” at para. 63. The duty to act honestly in contractual performance is not an implied term but a general doctrine of contract law that requires that parties not lie or otherwise knowingly mislead each other about matters directly linked to the performance of their contract: Bhasin v. Hrynew, 2014 SCC 71, at para. 73.

[66] In this case, good faith was also an express term of the parties’ contract. Clause 1 of the Commission Agreement expressly states that KSL “will act in good faith and work exclusively with [OMJ] in order to complete the Construction Financing of this project with [FCC].”

[67] Mr. Jalili testified that when he saw that the Project was taking significant time to be completed, he inquired with Mr. Tong about whether KSL needed further funds. According to Mr. Jalili, Mr. Tong advised him that Mr. Wang would be obtaining further funds “from China.” Mr. Tong testified that this was factually correct, since Mr. Wang was contributing significant amounts to the Project. Mr. Tong saw no need to disclose the Second and Third Loans from FCC because he believed that they were new loans.

[68] Given that KSL agreed to act in good faith, and based on the duty of good faith in contractual performance, at a minimum, KSL was required to respond honestly and not to mislead OMJ when specifically asked about financing. KSL’s failure to disclose that it was obtaining further funds from FCC, the source that OMJ had identified, under the very Loan Commitment that OMJ had secured, was a breach of Clause 1 of the Commission Agreement and the duty of honesty in contractual performance. Indeed, KSL’s failure to disclose the Second and Third Loans to OMJ, when specifically asked, suggests that it was aware that further commissions on those advances could be owing. If KSL believed that they were new loans, there would have been no need to conceal them from OMJ. KSL breached its obligation to act in good faith under the Commission Agreement.

The Direction Does Not Amend the Commission Agreement

[69] Based on my findings and analysis above, I need not address OMJ’s argument that the Direction amended the Commission Agreement and provided for commissions on further advances made by FCC. I would note, however, that the Direction is a document directing KSL’s lender and its counsel to pay OMJ’s commission directly to OMJ from the loan funds and has no impact on the contractual obligations of OMJ and KSL. The Direction simply assists in carrying out the payment of the commission and did not amend the Commission Agreement.

The Fortress Loan Is Irrelevant

[70] In addition, OMJ relies upon the fact that KSL paid OMJ an additional commission of $32,157 when Fortress increased its loan to KSL by $1,071,913 to support its entitlement to further commissions on the FCC loans.

[71] The Commission Agreement is unambiguous and OMJ’s entitlement to a commission must be determined under the terms of that agreement. As a result, KSL’s course of conduct in dealing with the Fortress loan is irrelevant to the proper interpretation of the Commission Agreement and its application to the FCC loans.

Failure to Call Alvin Wang As a Witness

[72] OMJ submits that an adverse inference ought to be drawn from KSL’s failure to call its principal, Mr. Wang, as a witness. As I have found that OMJ is entitled to commissions based on the terms of the Commission Agreement and the fact that the Second and Third Loans were not new loans, I need not address this argument.

Is OMJ Entitled to a Commission on the Loan to KSHC?

The Mortgage Loan Commitment to KSHC

[73] OMJ also seeks a commission on the KSHC Loan for $15.25 million for Phase Two of the Project. The KSHC Loan was extended by FCC to KSHC on November 16, 2015 and closed on December 18, 2015, which was after the termination of the Commission Agreement but during the Holdover Period.

[74] Unlike the Second and Third Loans, the KSHC Loan is a distinct loan, separate from the Loan Commitment. The KSHC Loan makes no mention of the Loan Commitment and does not incorporate its terms. While the Second and Third Loans named both KSL and KSHC as borrowers, the KSHC Loan was to KSHC only. The KSHC Loan was, however, guaranteed by KSL. The purpose of the loan, as stated in the commitment, was to “refinance.”

[75] Under the KSHC Loan, FCC obtained a first mortgage over Phase Two, which consisted of Parts 6 and 7 of the Property. FCC already had a second mortgage over Phase Two which was part of the security under the Loan Commitment. The interest on the KSHC Loan was a floating rate of the greater of nine percent per annum or the TD Canada Trust Posted Bank Prime Rate from time to time plus 3.5 percent per annum. The term was 31 months from the interest adjustment date.

[76] OMJ relies upon the definitions provision in Clause 1 of the Authority, which was incorporated into the Commission Agreement, for its entitlement to a commission for the KSHC Loan. Clause 1 of the Authority states as follows:

1. DEFINITIONS AND INTERPRETATIONS: This agreement shall be read with all changes of gender or number required by the context. For the purposes of this agreement, Borrower, may not yet be the registered owner of the subject property or in fact it may be that the Borrower will not become the registered owner but may be applying for this loan on behalf of the registered owner pursuant to an authorization provided to the Borrower by the Registered Owner. In either event, the Borrower warrants that it has authority to make all representations and agreements herein on behalf of the owner of any of the security listed in this agreement and intends as such to bind such registered owner. Borrower therefore includes the person or company named above as well as the registered owner of any security listed above on whose behalf the Borrower named above has written authority to bind.

[77] KSL argues that it did not agree to pay commissions on any loans made to KSHC. KSL further submits that there can be no liability for a commission because KSHC was not a party to the Commission Agreement or to this proceeding.

[78] Clause 1 is convoluted and confuses rather than clarifies the definition of “Borrower.” Moreover, it is likely boilerplate language that was intended to cover a range of circumstances and was not tailored to address the factual circumstances that existed here. For example, despite the references to “security listed in this agreement” and “security listed above,” there is no security listed in the agreement. There is only the address of the property in the preamble.

[79] Giving the words used their ordinary meaning, and interpreting Clause 1 in the context of the Authority as a whole, consistent with the surrounding circumstances, I find that the above language pertaining to the “Borrower” provides for two possibilities: (i) that KSL was not yet the registered owner of the property that would be the security under an eventual loan; or (ii) that KSL would not become the registered owner of the property but was applying for the loan on the registered owner’s behalf. The interpretation of the provision as providing for two potential situations is supported by the subsequent language “[i]n either event…[.]”

[80] Neither of the possibilities apply to the circumstances that existed and that were known to the parties. The first part does not apply because KSL was the registered owner of the Property when it entered into the Authority and the Commission Agreement, including Parts 6 and 7. KSL subsequently transferred Parts 6 and 7 to KSHC. The first part was intended to apply to a situation where a borrower did not own yet own property that it was in the process of obtaining and which was to be used as security for a loan. This was not KSL’s situation.

[81] Similarly, the second part, which states that “the Borrower will not become the registered owner” does not apply because KSL was the registered owner. The second part of the provision attempts to cover a situation where the party executing the Authority does not intend to become the registered owner but enters into the agreement on another party’s behalf. This interpretation is supported by the further language that the Borrower “may be applying for this loan on behalf of the registered owner pursuant to an authorization provided to the Borrower by the Registered Owner.” Since KSL was the owner of the Property at the time, the subsequent language about having authority to bind the registered owner cannot apply.

[82] Clause 1 further states that “Borrower includes the person or company named above as well as the registered owner of any security listed above on whose behalf the Borrower named above has written authority to bind.” Even if the second part of Clause 1 of the provision could potentially apply to KSL, there is no evidence of any authorization provided to KSL by KSHC. It does not appear that the reference to written authority was in relation to a particular document, since no evidence was adduced at trial to show that KSL had written authority to bind KSHC.

[83] Clause 1 of the Authority does not include the possibility that the borrower is the registered owner of the property but transfers the property to another party. Since Clause 1 states nothing about binding a subsequent owner, KSL could not have bound KSHC. Moreover, OMJ was aware that Parts 6 and 7 were transferred to KSHC in May 2014. That was during the term of the Commission Agreement and shortly after the Loan Commitment was executed by KSL and KSHC. If the parties intended that the Authority and Commission Agreement would apply to loans extended to KSHC, separate and apart from KSL, they could have amended their agreement.

[84] Clause 1 of the Authority does not apply to the circumstances of this case and cannot render KSL liable for a commission on a loan made to KSHC. Notwithstanding the overlap in principals between KSL and KSHC, KSHC is a distinct corporate entity and entered into the KSHC Loan on its own behalf. KSHC was not a party to the Authority or to the Commission Agreement and has not been named a party to this proceeding.

[85] Based on the foregoing, I need not address KSL’s argument that the KSHC Loan was not “construction financing” to which the Authority and the Commission Agreement would apply. I note, however, that the circumstances leading to the KSHC Loan were very different from those leading to the Second and Third Loans. The Commission Agreement specifically refers to the fact that OMJ had arranged for financing for the Project from FCC. This resulted in the Loan Commitment and further advances that were all within the scope and contemplation of the Commission Agreement.

[86] By contrast, the KSHC Loan was unrelated to the Loan Commitment secured by OMJ. In 2015, KSHC sought to renew its loan from Vector on Phase Two of the Property. Vector would not agree unless FCC subordinated its second mortgage on Phase Two under the Loan Commitment, which FCC refused. KSHC then had to negotiate a loan with FCC, without any involvement from OMJ. The bulk of the proceeds of the KSHC Loan were used to repay the Vector loan, leaving only approximately $1.8 million, which KSHC then loaned to KSL. The objective evidence of the surrounding circumstances supports an interpretation of the Commission Agreement as not applying the KSHC Loan, which was not contemplated when the Commission Agreement was executed. This interpretation also accords with sound commercial principles and good business sense.

[87] Accordingly, I dismiss OMJ’s claim to a commission on the KSHC Loan.

Conclusion

[88] Based on the foregoing analysis, OMJ’s claim for commissions for the Second and Third Loans is granted with costs. OMJ’s claim for a commission on the KSHC Loan is dismissed. OMJ is therefore entitled to total commissions of $741,000 plus pre- and post-judgment interest.

[89] Counsel requested an opportunity to make submissions on costs. In the event that no agreement on costs is reached, Plaintiff’s counsel shall submit their bill of costs and costs submissions within 14 days of the release of these Reasons. The Defendant’s responding costs submissions are due within 14 days of receiving the Plaintiff’s cost submissions. No costs submissions are to exceed four double-spaced pages. If no costs submissions are received within this time frame, the parties will be deemed to have resolved costs.

Nishikawa J.

Released: February 24, 2020

Footnotes

[1] KSHC changed its name to Markland Residential Corporation in January 2016 but will be referred to as KSHC throughout these reasons.

[2] The proceeding was originally commenced by Notice of Application and converted into an action on consent in January 2019.