COURT OF APPEAL FOR ONTARIO
DATE: 20010620 DOCKET: C33838 and C34950
OSBORNE A.C.J.O., AUSTIN, AND MACPHERSON JJ.A.
B E T W E E N:
ROYAL BANK OF CANADA
John L. Finnigan and Anne C. Sonnen for the appellant Royal Bank of Canada
Plaintiff(Appellant)
- and -
GENTRA CANADA INVESTMENTS INC.
Ronald B. Moldaver, Q.C. for the respondent Gentra Canada Investments Inc.
Defendant(Respondent)
- and -
OSLER, HOSKIN & HARCOURT
Eva E. Frank for the respondent Osler, Hoskin & Harcourt
Third Party(Respondent)
BETWEEN:
ROYAL BANK OF CANADA
John L. Finnigan and Anne C. Sonnen for the respondent Royal Bank of Canada
Respondent (Plaintiff/Appellant)
and -
and -
OSLER, HOSKIN & HARCOURT
Eva E. Frank for the respondent Osler, Hoskin & Harcourt
Third Party(Respondent)
HEARD: June 12, 2001
On appeal from the judgment of Justice Sidney N. Lederman dated August 15, 2000.
BY THE COURT:
INTRODUCTION
[1] The appellant, Royal Bank of Canada (“RBC”), appeals from the judgment of Lederman J. dated August 15, 2000 dismissing RBC’s claim against the respondent Gentra Canada Investments Inc. (“Gentra”) for recovery of the sum of $2,160,907 plus interest and costs. RBC’s claim related to a call made by Gentra on a letter of credit issued by RBC.
[2] Gentra also appeals certain aspects of Lederman J.’s judgment. Part of its appeal is firm; another part is contingent. Both parts relate to Lederman J.’s disposition of costs at trial. Lederman J. awarded Gentra its costs of the main action on a party-and-party scale to be assessed. Gentra had made a third party claim against Osler, Hoskin and Harcourt (“Osler”) which had provided it with legal advice and services relating to the letter of credit. Lederman J. awarded Osler its costs against Gentra on a party-and-party scale. On appeal, Gentra contends that, if RBC’s appeal is dismissed, the appropriate costs award in the main action should have been in its favour and against RBC on a solicitor-and-client basis and, additionally, that RBC should pay Osler’s costs or, alternatively, indemnify Gentra fully for the costs it was ordered to pay Osler. In its contingent appeal, Gentra claims that, if RBC’s appeal is allowed in whole or in part, then Gentra’s third party claim against Osler should be upheld by this court or, alternatively, remitted to the trial judge for further consideration and disposition.
A. RBC’S APPEAL
[3] RBC advances three grounds in its appeal:
(1) The trial judge erred in failing to find that Gentra’s call was fraudulent;
(2) The trial judge erred in concluding that RBC could not recover on the doctrine of mistake of fact; and
(3) The trial judge erred in rejecting RBC’s claim for recovery based on unjust enrichment.
[4] We do not agree with RBC’s submissions. RBC’s main ground of appeal is the first one which relates to fraud. On that issue, we agree with the trial judge’s careful analysis and with his conclusions. He was aware of and applied the leading authorities, especially Bank of Nova Scotia v. Angelica-Whitewear (1997), 36 D.L.R. (4th) 161 (S.C.C.). He carefully considered the precise terms of the letter of credit which RBC had agreed to and which were drafted in the form of a ‘clean’ letter of credit:
[RBC] . . . hereby establish and given you [Gentra] this unconditional irrevocable Letter of Credit . . . which may be drawn on by you at any time . . . and from time to time upon written demand for payment . . . which demand we shall honour without enquiring whether you have a right as between yourself and our said customer [Landawn] to make such demand and without recognizing any claim of our said customer. [Emphasis added.]
[5] RBC’s complaint was, and is, that Gentra did not call on the letter of credit in respect of the specific purposes relating to an Oakville shopping mall project set out in the original commitment letter. Rather, Gentra made the call for the sole purpose of applying the proceeds to a different project, the Queen’s Plate project, where the developer, Landawn, had run into difficulties. It is common ground that, as between Gentra and Landawn, there was nothing wrong with Gentra’s use of the letter of credit in this fashion because they had entered into a Cross-Collateralization Agreement whereby the letter of credit was to stand as security for both the Oakville and Queen’s Plate projects. RBC’s complaint is that it was not informed about, and did not consent to, this side agreement between Gentra and Landawn and that Gentra’s call on the letter of credit as security for the Queen’s Plate project was fraudulent.
[6] There are at least three problems with RBC’s submission on this issue. One relates to the concept of fraud, a second relates to the specific wording of the letter of credit, and the third relates to the circumstances existing at the time Gentra made the call on the letter of credit.
[7] An allegation of fraud is a very serious matter. A party making such a serious allegation faces a high hurdle. RBC contends that the trial judge stated an incorrect legal test for fraud, namely that a claim is fraudulent only if it is “not even colourable as being valid or has absolutely no basis in fact”. RBC proposes that the definition of fraud, in the context of a representation, is that the false representation was made knowingly, without an honest belief in its truth, or recklessly or carelessly whether it be true or false: Derry v. Peek (1889) 14 App. Cas. 337 (H.L.). Accepting RBC’s definition (while not disagreeing with the trial judge’s formulation), RBC could not establish either the second or third components of the definition. On the record before the trial judge, there was nothing surreptitious or underhanded about Gentra’s call on the letter of credit. Before making the call, Gentra consulted in a formal way with two law firms, Osler and Goodman and Goodman, about the wording of the letter of credit and the relationship between it and the Cross-Collateralization Agreement between Gentra and Landawn. Both firms advised Gentra that it could call on the letter of credit in the manner it proposed. In light of Gentra’s caution in this regard, it is simply unrealistic and unfair to seriously consider that its conduct was deserving of the labels ‘dishonest’ or ‘reckless’.
[8] In Cineplex Odeon Corp. v. 100 Bloor West General Partner Inc., [1993] O.J. No. 112 (Gen. Div.), Blair J. stated, at p. 9:
While the notion of fraud may elude precise definition, it is a concept well-known to the law, and it must, in my view, import some aspect of impropriety, dishonesty or deceit.
In our view, Gentra’s conduct in this case did not exhibit these indicia of fraud.
[9] In addition, the precise wording of the letter of credit also tells against RBC’s position. We agree with the trial judge’s analysis on this point:
[T]he central complaint of RBC is that it did not consent to the cross-collateralization and that Gentra applied the monies to another project. However, whatever the intention of Gentra and Landawn may have been, the call on the Letter of Credit was proper from a documentary point of view and the application of the funds by Gentra is immaterial.
The Letter of Credit did not require the beneficiary to verify or attest to the accuracy of the call documents. It simply required Gentra to present the call documents in accord with the Letter of Credit and that was done.
[10] Finally, we agree with the trial judge that Gentra’s call on the letter of credit did not violate the formal conditions for making the call. His conclusion on this point, with which we agree, was:
Although no one appears to have been mindful of it at the time, the existence of a debt service coverage deficiency provided a basis for making the call under the Commitment. The Commitment is silent on how or for what amount it could be made. Furthermore, technical though the position is, there had in fact not been publication of the Project Architect’s Certificate of Substantial Completion. Thus, because a call could be made for these purposes, quite apart from the Cross-Collateralization Agreement, it cannot be said that there has been any fraud on the issuing bank. [Emphasis is trial judge’s.]
[11] Turning to the other two grounds of appeal, counsel for the appellant conceded in argument that they were inextricably linked to the fraud issue. He candidly and fairly conceded that if RBC’s appeal on the fraud issue was unsuccessful, the appeal on grounds of mistake of fact and unjust enrichment should also fail.
[12] For these reasons, we would dismiss RBC’s appeal.
B. GENTRA’S APPEAL
[13] In light of the disposition of RBC’s appeal, it is necessary to consider Gentra’s appeal relating to the costs disposition made by the trial judge. It is unnecessary to consider Gentra’s contingent appeal, also relating to costs.
[14] There are two aspects of Gentra’s appeal on the costs issue: (1)Gentra contends that the trial judge erred by not awarding it costs on a solicitor-and-client basis; and (2) Gentra submits that the trial judge erred by ordering it, rather than RBC, to pay Osler’s costs of the action.
[15] On the first aspect of the appeal, although an unsuccessful fraud claim often attracts the penalty of a solicitor-and-client costs award, the rule is not an absolute one. In the circumstances of this case, we are not inclined to interfere with the scale of costs ordered by the trial judge who presided over an 11 day trial involving many witnesses and a multitude of documents.
[16] On the second aspect of the appeal, we agree with the trial judge’s decision to award Osler its costs against Gentra, not RBC. We agree with the trial judge’s conclusion:
Although it had the option, it was not necessary for Gentra to have joined Osler as a third party. Gentra had a complete defence against RBC without the necessity of bringing Osler into the action.
DISPOSITION
[17] RBC’s appeal is dismissed. Gentra is granted leave to appeal the trial judge’s costs award; however, Gentra’s appeal is dismissed. Costs of both appeals to the successful parties on a party-and-party basis.
RELEASED: June 20, 2001
“C.A.A. Osborne A.C.J.O.”
“Austin J.A.”
“J.C. MacPherson J.A.”