DATE: 20060126

DOCKET: C43914

COURT OF APPEAL FOR ONTARIO

RE:

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c.C-36, AS AMENDED

IN THE MATTER OF A PROPOSED PLAN OF COMPROMISE OR ARRANGEMENT OF STELCO INCORPORATED, CHT STEEL COMPANY INCORPORATED, STELPIPE LIMITED, STELWIRE LIMITED AND WELLAND PIPE LIMITED

APPLICATION UNDER THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c.C-36, AS AMENDED

BEFORE:

GILLESE, BLAIR and JURIANSZ JJ.A.

COUNSEL:

William V. Sasso

for the appellants, Georgian Windpower Corporation and Nanticoke 80WP Inc.

Michael E. Barrack and Geoff R. Hall

for the respondent, Stelco Inc.

HEARD:

January 23, 2006

On appeal from the Order of Mr. Justice James Farley of the Superior Court of Justice, dated June 28, 2005.

E N D O R S E M E N T

Background

[1] Georgian Windpower Corporation and Nanticoke 80WP Inc. (collectively “GWC”) appeal from the Order of Farley J. dated June 28, 2005, directing that any reference to a Memorandum of Understanding (“MOU”) entered into between GWC and Stelco Inc. be excised from the GWC statement of claim in this action.

[2] The parties entered into the MOU on June 25, 2004 “to confirm the general principles pertaining to the ongoing discussions between GWC and Stelco with respect to the development of a multi-part wind energy project” on Stelco’s lands along the shores of Lake Erie in Haldimand County. The project contemplated an 80 megawatt land based wind turbine facility, and encompassed five distinct aspects known collectively as the “Industrial Biotricity Project”.

[3] As part of the MOU, the parties agreed “to negotiate in good faith, terms and conditions necessary to conclude an agreement to be a participant in the Industrial Biotricity Strategy together with other consortium members to be determined”, and in Section 4.3, entitled “Exclusivity”, stipulated that:

In consideration of the cost and effort associated with this endeavor by both parties, Stelco and GWC will pursue the opportunities of Industrial Biotricity Strategy [as described within this document] in good faith. Neither party will pursue other interests related to this endeavor without written permission of the other party [GWC or Stelco] or termination of this agreement as stipulated in section 7.0.

[4] Section 7.0 is a termination clause. It provides that:

Specifics of the terms and conditions around termination would form part of the negotiations on any formal agreement entered into as part of Industrial Biotricity Strategy. This document is assumed to remain in force until (i) either party provides notice of their intention to terminate the agreement or (ii) an agreement between Stelco and GWC is signed covering Stelco and GWC’s relationship in respect of the Industrial Biotricity Strategy. To terminate the agreement, either party will be required to provide a notice period of at least sixty (60) days. In the event of termination, each party will be responsible for all costs incurred by them with respect to the development of this Industrial Biotricity Strategy, up to and including the date of termination.

[5] On October 20, 2004, the parties entered into an Easement Agreement that gave GWC rights over certain Stelco lands on which the wind turbines and related facilities were to be constructed. This Agreement is said to encompass one of the five parts of the Industrial Biotricity Strategy. There was part performance under the Easement Agreement, which did not contain any termination clause.

[6] On April 15, 2005, Stelco terminated the MOU, the Easement Agreement and all other contracts, agreements or arrangements with GWC arising in connection with the wind energy project. It purported to do so under Article 7 of the MOU, set out above. GWC disputes Stelco’s right to do so and has commenced this action claiming damages and other related relief. As Stelco is under Court protection pursuant to the Companies’ Creditors Arrangement Act R.S.C., c. C-35, as amended (the “CCAA”), GWC applied for an order lifting the CCAA stay to permit it to issue its statement of claim. At the same time, Stelco brought a cross-motion seeking to have the statement of claim struck under Rule 21 on the basis that it “fails to disclose any basis upon which Stelco could be held liable to GWC” and in the alternative on the basis that the statement of claim failed to disclose a reasonable cause of action.

[7] The Motion Judge dismissed the Rule 21 cross-motion for the most part, but ordered that any reference to the MOU be excised from the statement of claim. In a separate order he granted GWC’s motion to lift the stay so that the statement of claim could be issued but provided that no further steps were to be taken in the action, if the cross-motion were unsuccessful, until Stelco emerged from CCAA protection.

[8] GWC appeals the order excising the references to the MOU in the statement of claim. In our view, the appeal must be allowed.

Analysis

[9] The Motion Judge’s decision was founded on two principal conclusions. First, he held that although there were several provisions in it that had “enforceability qualities” (e.g., the termination clause), the MOU was “for the most part” simply an unenforceable agreement to agree and therefore could not be relied upon by GWC to establish any contractual obligations. Secondly, he found that since Stelco had sent a notice of termination on April 14, 2005, all agreements and arrangements were thereby terminated and “the MOU relationship between Stelco and GWC came to an end 60 days after the notice was sent, namely June 13, 2005.” “In the end result”, he therefore concluded, “GWC is not able to rely upon the terms of the MOU as founding any ongoing contractual right against Stelco upon which to form a cause of action” (Reasons, para. 6).

[10] Respectfully, the Motion Judge erred.

[11] First, Mr. Barrack concedes that the Order as drafted may go beyond what the Motion Judge ordered in the sense that all references to the MOU should not be excised from the pleading but that the Order should be confined to the Motion Judge’s conclusions as stated in para. 6 of his Reasons, cited above. He acknowledges that the MOU is a material fact and, indeed, that neither the statement of claim nor Stelco’s proposed statement of defence can be drafted without references to the MOU, at the very least as part of the contextual framework in which the relationship between the parties must be considered. Mr. Barrack did not identify any portion of the statement of claim that had to be excised, on this view.

[12] Secondly, to the extent that the Motion Judge may have found that GWC was, as a matter of law, precluded from pleading a good faith obligation arising expressly or impliedly from the MOU and the relationship between the parties, he erred in doing so at this stage of the proceedings. In Transamerica Life Inc. v. ING Canada Inc. (2003), 68 O.R. (3d) 457 (C.A.) this Court held that the jurisprudence as to whether Canadian courts recognize a stand-alone duty of good faith that is independent from the terms expressed in a contract is not settled. Rule 21 motions should not be allowed on points of law where the jurisprudence in question is not well settled. Furthermore, the MOU itself contains specific wording calling on the parties to negotiate in good faith and to pursue the opportunities of the Industrial Biotricity Strategy in good faith. Given these factors, it cannot be said at this stage, in our opinion, that it is “plain and obvious” the plaintiffs cannot succeed in arguing that Stelco’s termination may be subject to such an obligation.

[13] Finally, the Motion Judge erred in deciding that Stelco’s notice of termination was valid and dispositive at this stage. Whether Stelco had a legitimate argument based upon the notice provisions of the MOU is a matter of defence. At best, it is a matter of mixed fact and law, and not something to be determined on a Rule 21 motion, which is available only for the determination of a question of law or the determination of whether a pleading discloses a reasonable cause of action. That Stelco may have a defence on the merits does not fall within either category.

Disposition

[14] Accordingly, the appeal is allowed, the Order of the Motion Judge set aside and in its place an Order is granted dismissing Stelco’s cross-motion in its entirety.

[15] GWC is entitled to its costs both here and below (since success is no longer divided). We fix the costs of the motion below at $7500 all inclusive, and of the appeal at $7500 all inclusive.

Released: “E.E.G.” January 26, 2006

“E.E. Gillese J.A.”

“R. A. Blair J.A.”

“R. Jurinsz J.A.”