DATE: 20050620

DOCKET: C41638

COURT OF APPEAL FOR ONTARIO

MCMURTRY C.J.O., DOHERTY and LAFORME JJ.A.

B E T W E E N :

407 ETR CONCESSION COMPANY LIMITED

Walter Myrka

for the respondents/appellants

Applicant (Respondent on Appeal)

J. Thomas Curry and

Nina Bombier

• and -

for the applicant/respondent

HER MAJESTY THE QUEEN IN RIGHT OF THE PROVINCE OF ONTARIO AS REPRESENTED BY THE MINISTER OF TRANSPORTATION and THE MINISTER OF TRANSPORTATION FOR ONTARIO

Respondents (Appellants)

Heard: May 12, 2005

On appeal from the judgment of Nordheimer J. of the Superior Court of Justice dated February 9, 2004.

DOHERTY J.A.:

I

[1] This appeal is concerned primarily with the application judge’s jurisdiction to grant final declaratory relief interpreting a provision in an agreement between the parties. In my view, the application judge did not have the jurisdiction to grant a final declaration interpreting the contract. He did, however, have jurisdiction under the agreement to make an interim order preserving the position of the parties until the matter could be brought before an arbitrator under the dispute resolution provision in the agreement. The arbitrator could then provide both an interpretation of the relevant parts of the agreement and a determination of the merits of the underlying dispute.

II

[2] The respondent, 407 ETR Concession Company Limited (“407 ETR”), operates the 407 highway pursuant to the terms of a ninety-nine year lease and various concession agreements (“the agreements”) entered into with the appellant, Her Majesty the Queen in Right of the Province of Ontario. The appellant, the Minister of Transportation for Ontario represents the Crown’s interests and carries out the Crown’s obligations under the lease and agreements. I will refer to the appellants collectively as the “MTO” .

[3] The 407 highway is a toll highway. In December 2003, 407 ETR notified the MTO of its intention to increase the tolls. The MTO contended that 407 ETR required the approval of the MTO before it could raise the tolls.

[4] The ninety-nine year lease, referred to as the Highway 407 Concession and Ground Lease Agreement (“CGLA”) and the agreements controlling the relationship of the MTO and 407 ETR fill hundreds of pages. Two articles of the CGLA are relevant to this appeal.

[5] Article 20 of the CGLA addresses defaults under that agreement. Pursuant to Article 20.1(iii), 407 ETR defaults if it fails to observe a material obligation imposed by the CGLA and that failure continues for sixty days after the MTO has given 407 ETR notice of the failure. This provision is referred to by the parties as the sixty day cure period provision. Obviously, if 407 ETR could not unilaterally increase the tolls and it proceeded to do so, it was in default under the CGLA if it continued to charge the increased tolls for sixty days after receiving notice of objection from the MTO.

[6] Pursuant to Article 20.2(i)(A), the MTO may terminate the CGLA if 407 ETR is in default as defined in Article 20.1(iii), by giving 407 ETR sixty days prior notice of its intention to terminate. This sixty day period is not an additional cure period. 407 ETR would have no right to remedy any default during this sixty day period.

[7] 407 ETR paid over $3 billion to acquire the right to operate Highway 407. Termination of the agreement by the MTO would bring the CGLA and agreements to an end and 407 ETR would not be entitled to any compensation.

[8] The MTO’s right to terminate described under Article 20.2(i)(A) is subject to Article 25 of the CGLA. That Article provides for a comprehensive dispute resolution mechanism to resolve all disputes arising out of the agreement. Since the MTO’s right to terminate is subject to Article 25, the MTO could not terminate the CGLA while the alleged default said to give rise to the right to termination was the subject of dispute resolution proceedings under Article 25. Similarly, Article 25.14 gives 407 ETR the right to dispute any notice of termination served by the MTO and submit that dispute to the procedures described in Article 25. Consequently, the MTO could not terminate the CGLA unless and until it had been determined through the dispute resolution provision in Article 25 that 407 ETR was not entitled to increase the tolls unilaterally. If an arbitrator made that finding, the MTO could then serve its sixty day notice of termination under Article 20.2(i)(A).

[9] While the MTO acknowledged that it could not terminate the CGLA until it had been determined that 407 ETR was in default by unilaterally increasing the tolls, the MTO asserted that the sixty day cure period provision was unaffected by Article 25 and ran from the date that the MTO served notice on 407 ETR of an alleged default in the agreement. Significantly for 407 ETR, if this interpretation of the sixty day cure period was correct, the cure period could expire before the dispute resolution process in Article 25 had concluded, and possibly, even before an arbitrator had been appointed under that process. 407 ETR could lose on arbitration and have no cure period within which to cure its default.

[10] When 407 ETR was served with the MTO notice of default in early February 2004, it had two choices. It could have delayed implementing its increase in the tolls until the dispute had proceeded through the dispute resolution process in Article 25. If 407 ETR had chosen that option, and it was ultimately determined that it was entitled to increase the tolls, 407 ETR would have had no means of recovering the amount that it had lost by not increasing the tolls when it planned to do so. 407 ETR’s second option was to unilaterally increase the tolls and proceed with the dispute resolution process. On that approach, 407 ETR ran the risk of being found in default for having unilaterally increased the tolls. Had this occurred, and if the MTO’s interpretation of the cure period provision was correct, 407 ETR would have been unable to cure that default, thereby entitling the MTO to terminate the agreement. 407 ETR decided to proceed with the toll increase and bring an application seeking to preserve its rights under the cure period provision pending a determination through the dispute resolution process of its entitlement to unilaterally increase the tolls.[^1]

[11] 407 ETR brought an application seeking primarily an order staying the operation of the sixty day cure period until the dispute over its right to raise the tolls unilaterally could be resolved through the process established under Article 25 of the CGLA. Alternatively, 407 ETR requested a declaration that under the terms of the CGLA the sixty day cure period did not begin to run until it had been determined through the dispute resolution process that 407 ETR was in default under the agreement by unilaterally increasing the tolls.

[12] The application judge accepted the submission of the MTO that he could not grant interim relief in the form of an injunction or a declaration. He held, however, that he could make a final declaration. After reviewing the relevant provisions of the agreements, he granted judgment declaring that the sixty day cure period described in Article 20.1(iii) of the CGLA did not commence until it had been determined under the dispute resolution process in Article 25 that 407 ETR was in default by unilaterally increasing the tolls.

III

[13] On appeal, counsel for the MTO advances three arguments:

• the MTO was not accorded procedural fairness on the hearing of the application;

• the application judge had no jurisdiction to grant a final declaratory judgment interpreting the provisions in the agreement; and

• the application judge incorrectly interpreted the sixty day cure period provision in the CGLA.

(a) The Mootness Argument

[14] Before addressing the merits of the submissions advanced on behalf of the MTO, I will dispose of a mootness argument advanced by counsel for 407 ETR.

[15] Counsel for 407 ETR argued that as an arbitrator had determined that 407 ETR did have a right to increase the tolls, the interpretation of the sixty day cure period provision had become moot. When counsel made this submission, the arbitrator’s decision had been affirmed on appeal to the Superior Court of Justice and an application for leave to appeal was pending in this Court. This Court has now granted leave to appeal. It is possible that the arbitrator’s decision may be set aside and the dispute remitted back to an arbitrator. Should that happen, the proper interpretation of the sixty day cure period provision could well arise. Whatever merit there may have been to the mootness argument when this appeal was heard, disappeared when this Court granted leave to appeal from the decision dismissing the appeal from the arbitrator’s decision.

[16] The application judge has interpreted the sixty day cure period provision in the CGLA. That provision applies to any allegation that 407 ETR has failed to comply with material obligations under the agreement. Given the length of the relationship established by the CGLA (ninety-nine years) and the complexity of the CGLA and agreements, subsequent disputes involving alleged failures by 407 ETR to perform its obligations seem inevitable. The interpretation of the sixty day cure period provision may well arise in those subsequent disputes. 407 ETR will no doubt rely on the interpretation placed on the provision by the application judge. The MTO contends that under the terms of the agreements, it is an arbitrator’s job to interpret the agreement and that he or she should not be bound by the interpretation of the application judge. The MTO argues that unless this appeal proceeds and the judgment of the application judge is set aside, his interpretation of the sixty day cure period provision will prevail in subsequent disputes between the parties, thereby preventing an arbitrator from deciding how the provision should be interpreted.

[17] I agree with the submissions of counsel for the MTO. The issue raised on the appeal has significance in the ongoing relationship between the parties. The appeal is not moot.

(b) The Procedural Unfairness Argument

[18] 407 ETR brought its application on short notice. The MTO requested an adjournment. 407 ETR did not oppose the adjournment, but sought an interim order staying the running of the sixty day cure period until the merits of the application could be addressed. The MTO opposed an adjournment on that term, arguing that the application judge had no jurisdiction to make such an order. The application judge, after referring to s. 14(1) of the Proceedings Against the Crown Act, R.S.O. 1990, c. P.27, indicated that he doubted his power to make an order that would have the effect of an interim injunction or interlocutory declaration against the MTO, preventing it from exercising its rights under the default provisions in the agreement. The application judge went on, however, to find that there was no jurisdictional impediment to the making of a final declaratory order interpreting the contract. He proceeded to interpret the sixty day cure period provision in favour of 407 ETR, holding that it did not run until it had been determined that 407 ETR was in fact in default under the agreements by unilaterally increasing the tolls.

[19] Counsel for the MTO submits that the application judge should not have made a final order interpreting the sixty day cure period provision after the parties had agreed that the application should be adjourned to allow the MTO to prepare and present material. Counsel submits that the application judge effectively denied the MTO the opportunity to adequately respond to the application. Specifically, counsel contends that the manner in which the application judge proceeded prevented the MTO from adducing evidence to demonstrate the commercial reasonableness of its interpretation of the sixty day cure period provision.

[20] A final declaratory judgment is certainly an unusual outcome of a proceeding where the argument is over the terms of an adjournment. In all of the circumstances, however, I cannot accept the argument that the MTO was treated unfairly on the application.

[21] The application judge took the unusual course that he did for three reasons. First, the MTO convinced him that it was doubtful that he had any jurisdiction to make an interim order affecting the sixty day cure period provision. Second, the application judge was satisfied that there was urgency in the sense that 407 ETR could lose the benefit of the cure provision and effectively face automatic termination of a very valuable commercial arrangement upon a finding of default, unless the court intervened to interpret the sixty day cure period provision prior to the dispute reaching the arbitration stage. Third, and I think most importantly, the trial judge relied on the concession of counsel for the MTO. The application judge described the concession in these words:

[A] judge would be in no better position to determine the interpretation issue after the respondents [the MTO] file their material than I am currently in on the material that is before me.

[22] In his factum, counsel for the MTO (who was not counsel on the application) denied that any concession had been made on the application. In oral argument, he took the position that while a concession may have been made, it should not have been made. Neither argument has any merit. Nothing in the appeal record casts any doubt on the accuracy of the application judge’s description of the position taken by counsel before him. Nor has counsel on the appeal provided any basis upon which to question the wisdom of the concession made before the application judge. In any event, as the issue was one of procedural fairness, it is irrelevant whether the concession should, as a tactical matter, have been made by counsel. The application judge was entitled to rely on the concession and cannot be criticized for doing so.

(c) The Jurisdiction of the Application Judge to Grant a Final Declaratory Judgment Interpreting the Contract

[23] Under the terms of the CGLA, it is beyond doubt that the parties intended that all disputes relating to that agreement should be resolved through the comprehensive resolution dispute mechanism established in Article 25. That process provides for negotiation followed by mediation if necessary, and then by arbitration, if necessary, (Articles 25.2, 25.3, 25.4). Under the timelines established by Article 25, an arbitrator could not be appointed within sixty days of the notice of default unless the parties agreed to shorten the time periods set out for advancing through the negotiation and mediation phases of the process.

[24] If a dispute goes to arbitration, the arbitrator is given broad powers to ensure the just, expeditious, economic and final determination of all disputes (Article 25.9). Those powers extend to the making of interim orders. The arbitrator’s decision is final subject to a right of appeal to the Superior Court limited to questions of law (Article 25.8).

[25] It follows inextricably from the broad powers bestowed on the arbitrator by Article 25, particularly as augmented by the incorporation of the Arbitration Act, 1991, S.O. 1991, c. 17 (except as modified by the agreement), that the interpretation of the provisions of the CGLA, including the sixty day cure period provision, is part of the arbitrator’s responsibility.

[26] Article 25.11, however, does recognize a role for the courts in the dispute resolution process agreed upon by the parties. It reads:

No party shall be precluded from initiating a proceeding in a court of competent jurisdiction for the purpose of obtaining an emergency or provisional remedy to protect its rights that may be necessary and that is not otherwise available under this agreement, including temporary and preliminary injunctive relief …

[27] Article 25.11 allows the court to provide “emergency or provisional” remedies to protect the rights of either the MTO or 407 ETR where that relief is not available under the dispute resolution process established in Article 25. Article 25.11 anticipates gaps in the dispute resolution process during which either party might lose rights under the agreement for want of an available forum in which to have some aspect of a dispute resolved in a timely fashion. Article 25.11 serves as a fail safe provision allowing the courts to step into those gaps and make orders preserving rights pending a determination of the merits of the dispute through the process described in Article 25.

[28] The facts placed before the application judge revealed one such gap in the dispute resolution process. The parties disagreed over the interpretation of the sixty day cure period provision in the CGLA. Under the terms of Article 25, this disagreement had to be resolved by an arbitrator appointed under that Article. However, under the timelines set out in Article 25, and depending on the ultimate interpretation of the cure period provision, the sixty days referred to in that provision could expire before an arbitrator was appointed. In other words, before an arbitrator could decide the proper interpretation of the cure period provision, 407 ETR may have lost its rights under that provision.

[29] I think the pre-conditions to the making of an order under Article 25.11 existed on the facts placed before the application judge. There was a real danger, depending ultimately on the interpretation of the cure period provision, that 407 ETR could lose its rights under that provision unless some provisional or temporary order was made staying the running of the sixty day cure period. In addition, 407 ETR did not have any other remedy available to it under the agreement that could preserve its rights under the sixty day cure period provision until an arbitrator could be appointed under the CGLA.

[30] My finding that Article 25.11 allowed the application judge to grant a remedy as a term of the adjournment of the application is consistent with the reasoning of the application judge. He relied on Article 25.11 in granting a final declaration indicating at para. 33:

It is open to the court to decide an aspect of an application which is ready for determination while other aspects of the application proceed for a further and later hearing. The proper interpretation of the running of the cure period is such an issue. It requires nothing more than a review of the various provisions of the agreement and an interpretation as to how those provisions should operate. A declaration as to that interpretation can then issue. It is a result which, in the particular circumstances of this case, constitutes a “provisional remedy to protect [a party’s] rights that may be necessary” under the Concession and Ground Lease Agreement. Indeed it seems to me that it is precisely this type of provisional remedy which Article 25.11 was designed to allow [emphasis added].

[31] While I agree that Article 25.11 seemed designed for precisely the kind of situation faced by the application judge, I disagree with his holding that a final declaratory judgment is a “provisional remedy”. A provisional remedy is a temporary or interim remedy. It is the antithesis of a final declaratory judgment. By making a final declaratory judgment interpreting a provision of the CGLA for all time, the application judge went beyond the language of Article 25.11 and usurped the arbitrator’s authority to decide the meaning of the terms of the agreement.

[32] Once the application judge had decided both that the right of 407 ETR under the cure period provision could be lost and that there was no timely remedy available to 407 ETR under the agreement, the application judge should have fashioned a remedy that delayed the running of the cure period until the underlying dispute over the right of 407 ETR to unilaterally increase the tolls was before an arbitrator. That arbitrator would then have the power to determine the meaning of the cure period provision and provide whatever interim order he or she thought necessary pending resolution of the underlying dispute.

[33] Section 14(1) of the Proceedings Against the Crown Act is no impediment to the making of an interim order staying the running of the cure period under Article 25.11. That section precludes relief in the nature of an injunction or specific performance against the Crown. While Article 25.11 refers to interim injunctions as one possible remedy, and to that extent may conflict with s. 14, Article 25.11 is not limited to relief in the nature of an interim injunction. It provides for other remedies, including, in my view, an order that maintains the rights of the parties where the dispute resolution process agreed upon by them does not provide, in a timely way, a forum in which those rights can be resolved.

[34] An interim order staying the running of the sixty day cure period until the dispute, including the interpretation of the cure period provision, can be placed before an arbitrator, does not have the effect of requiring the MTO to do something, or the effect of enjoining it from exercising a right that it has under the agreement. The MTO can still give notice under Article 20.1(iii). An order staying the running of that sixty day period until otherwise ordered by an arbitrator simply maintains the rights of the parties until the forum which the parties have agreed should determine disputes over the terms of the agreement is available to the parties.

[35] I would add that the extent of the delay in obtaining an interpretation of the cure period provision was to some degree in the hands of the MTO. The agreement allows for the parties to agree to waive the time limits provided for the various stages of the dispute resolution process described in Article 25. As I understand it, 407 ETR was prepared to waive those time limits and proceed directly to arbitration but the MTO was not.

(d) The Proper Interpretation of the Cure Period Provision

[36] For the reasons set out above, it was not appropriate for the application judge to pronounce on the meaning of the sixty day cure period provision in the agreement. That was a matter for an arbitrator. It would be equally inappropriate for this court to opine on the proper interpretation of that provision in this appeal.

IV

[37] I would set aside the judgment of the application judge. As the matter presently stands, 407 ETR is not in default under the CGLA. I see no need for any order under Article 25.11. However, as this court has granted leave to appeal, the correctness of the arbitrator’s decision is now in issue. It may be that some form of provisional remedy under Article 25.11 may be available and appropriate to protect the rights of 407 ETR either pending appeal or should the appeal be allowed and the order of the arbitrator set aside. The availability of relief under Article 25.11 in the context of the ongoing appeal is best addressed in those proceedings, if necessary.

V

[38] As I would set aside the judgment below, the MTO as appellant would normally be entitled to its costs. However, the order that I think should have been made on the application is one of the orders requested by 407 ETR in its application. The MTO argued that the application judge had no jurisdiction to make that order. In those circumstances, it would not be appropriate to award the MTO costs of the application or the appeal. I would not interfere with the costs order made on the application. I would make no order as to costs on the appeal.

RELEASED: “R.R.M.” “JUN 20 2005”

“Doherty J.A.”

“I agree R.R. McMurtry C.J.O.”

“I agree H.S. LaForme J.A.”

[^1]: 407 ETR also undertook to reimburse those who paid the higher toll if it was ultimately determined that 407 ETR could not raise the tolls.