Charter Building Company, a Division of Ladson Properties Limited v. 1540957 Ontario Inc., c.o.b. as Mademoiselle Women's Fitness & Day Spa, et al.

[Indexed as: Charter Building Co. v. 1540957 Ontario Inc.]

107 O.R. (3d) 133

2011 ONCA 487

Court of Appeal for Ontario,

R.P. Armstrong, Epstein and Karakatsanis JJ.A.

July 4, 2011

Contracts -- Enforcement -- Election -- Plaintiff granting waiver of defence to permit parties to negotiate settlement -- Settlement reached but defendants failing to comply with terms -- Plaintiff obtaining default judgment -- Default judgment set aside as waiver of defence was still in place when judgment was obtained -- Common law doctrine of election applying -- Plaintiff barred from seeking enforcement of settlement agreement as it had pursued its rights under action through obtaining default judgment -- Fact that default judgment was technically unavailable not altering fact that plaintiff chose to pursue its rights under action rather than seeking to enforce settlement -- Election binding.

The plaintiff granted a waiver of defence to allow the parties to engage in settlement discussions. As a result, no statement of defence was served. A negotiated settlement was reached, but the defendants failed to comply with the terms of the agreement. The plaintiff applied successfully for default judgment. Because the waiver of defence was still in place at the time of the default judgment, the judgment was irregularly obtained. It was set aside on consent. The plaintiff then sought an order enforcing the settlement agreement. The order was granted. The defendants appealed.

Held, the appeal should be allowed. [page134]

The common law doctrine of election applied. In choosing to proceed with the action through obtaining default judgment, the plaintiff unequivocally treated the settlement agreement as at an end. The fact that default judgment was technically unavailable did not alter the fact that the plaintiff chose to pursue its rights under the action rather than seeking to enforce the settlement. Once made, the election was binding.

APPEAL from the order of Milanetti J. of the Superior Court of Justice dated June 17, 2010 enforcing a settlement agreement.

Cases referred to

James v. Klaus, 1987 2657 (BC CA), [1987] B.C.J. No. 1271, 40 D.L.R. (4th) 763, [1987] 5 W.W.R. 226, 14 B.C.L.R. (2d) 124, 5 A.C.W.S. (3d) 47 (C.A.); Johnson v. Agnew, [1980] A.C. 367, [1979] 1 All E.R. 883, [1979] 2 W.L.R. 487, 251 E.G. 1167, [1979] E.G.D. 969 (H.L.); Oliver Ashworth (Holdings) Ltd. v. Ballard (Kent) Ltd., [2000] Ch. 12, [1999] 2 All E.R. 791, [1999] 19 E.G. 161, [1999] 2 E.G.L.R. 23 (C.A.); Tang Man Sit v. Capacious Investments Ltd., [1996] 1 A.C. 514, [1996] 1 All E.R. 193, [1996] 2 W.L.R. 192 (P.C.), consd Other cases referred to Banner Industrial and Commercial Properties Ltd. v. Clark Paterson Ltd., [1990] 2 E.G.L.R. 139, [1990] 47 E.G. 64 (Ch. Div.); Commonwealth of Australia v. Verwayen (1990), 170 C.L.R. 394, 95 A.L.R. 321 (H.C.A.); Findlay v. Findlay, 1951 10 (SCC), [1952] 1 S.C.R. 96, [1951] S.C.J. No. 34, [1951] 4 D.L.R. 769; Granot v. Hersen (1999), 1999 1689 (ON CA), 43 O.R. (3d) 421, [1999] O.J. No. 1302, 173 D.L.R. (4th) 227, 120 O.A.C. 320, 26 E.T.R. (2d) 221, 87 A.C.W.S. (3d) 854 (C.A.); Morrison-Knudson Co., Inc. v. British Columbia Hydro and Power Authority, 1978 1977 (BC CA), [1978] B.C.J. No. 1218, 85 D.L.R. (3d) 186, [1978] 4 W.W.R. 193, [1978] 2 A.C.W.S. 55 (C.A.); Motor Oil Hellas (Corinth) Refineries S.A. v. Shipping Corporation of India (The Kanchenjunga), [1990] 1 Lloyd's Rep. 391 (H.L.); United Australia Ltd. v. Barclays Bank Ltd., [1941] A.C. 1, [1940] 4 All E.R. 20 (H.L.) Authorities referred to Bower, George Spencer, Alexander Turner, Piers Feltham, Daniel Hochberg and Tom Leech, eds., The Law Relating to Estoppel by Representation, 4th ed. (London: LexisNexis Butterworths, 2004)

Counsel

F. Scott Turton, for appellants. Harry Korosis and Mark Labenski, for respondent.

The judgment of the court was delivered by

EPSTEIN J.A.: --

I. Overview

[1] In February 2008, the respondent started a lawsuit against the appellants. In the months that followed, a negotiated settlement was reached. When the appellants failed to comply with the terms of the settlement agreement, the respondent sought and obtained default judgment. At the time of the default judgment, a waiver of defence was in place. As a result, the judgment was irregularly obtained and, on consent, was set aside. [page135]

[2] Once the judgment was set aside, the respondent returned to the settlement agreement and sought an order for its enforcement. The motion judge agreed with the respondent's position that a settlement had been reached and granted the order.

[3] The issue on this appeal is whether, having proceeded with the action, the respondent is barred from seeking the enforcement of the settlement agreement.

[4] I would allow the appeal on the basis that the respondent, by electing to pursue its rights under the action, is precluded from pursuing its rights under the settlement agreement. In my view, the motion judge erred in concluding that the consequences of this election were "academic" and that she had the discretion to order that the settlement be enforced.

II. Factual Background

[5] In February of 2008, the respondent sued one of the corporate appellants and the appellant, Neil Proctor, on a promissory note and the other two corporate appellants for unpaid invoices. The amounts claimed totalled an amount in excess of $200,000.

[6] In March of 2008, the appellants served a notice of intent to defend and a demand for particulars.

[7] The respondent granted a waiver of defence to allow settlement discussions to take place, and as such, no statement of defence was served. At the end of August 2008, a tentative agreement was reached between the parties. The terms of this agreement, particularly in relation to a repayment schedule, were fine-tuned over the next month or so to the point where, on October 15, 2008, counsel for the respondent provided detailed minutes of settlement for signature by the appellants. Despite follow-up by counsel for the respondent, the appellants did not sign the minutes of settlement or communicate further with the respondent in any respect. Notably, they did not make any payments contemplated by the agreed-upon repayment schedule.

[8] As a result of this non-communication, in March 2009, the respondent obtained default judgment. Through inadvertence, counsel for the respondent failed to revoke the waiver of defence. Eight months later, counsel for the respondent wrote to the appellants enclosing the default judgment and informing the appellants that writs of seizure and sale had been filed with the sheriff. The appellants were advised that the sheriff was going to be directed to enforce the writs if the judgment was not paid.

[9] The appellants brought a motion to have the default judgment set aside. The respondent brought a cross-motion seeking to enforce the settlement. [page136]

III. The Motion Decision

[10] The appellants took the position that since the waiver of defence remained in force, the default judgment was irregularly obtained. As previously indicated, the respondent conceded this point and the motion judge set aside the judgment.

[11] In defence to the respondent's cross-motion for enforcement of the settlement, the appellants argued that, having elected to abandon the settlement and proceed with the action, the respondent was no longer in a position to seek to enforce its terms.

[12] The motion judge found that the parties had reached a settlement agreement in October 2008, despite the failure to sign the minutes of settlement. She went on to reject the appellants' argument that the respondent had waived its right to rely on the agreement, reasoning as follows:

Although the argument that the plaintiff elected [words missing] the settlement but proceeded with the action (as is the election under Rule 49) is interesting, it is academic given that the noting of default has been set aside on consent. In any event it is not in the interests of justice to allow the defendant to enforce its non-payment of the agreed to settlement, nor legal [illegible] to the statement of claim served on February 08/05 and now say there is a real defence to the action.

[13] The specific term of the order provides "that the settlement reached between the parties to this action shall be enforced".

IV. The Issues

[14] The only issue on this appeal is whether the respondent, by pursuing its rights under the action through erroneously obtaining default judgment, is precluded from seeking to enforce the settlement agreement. This issue invokes the doctrine of election.

V. Analysis

[15] The essence of the doctrine of election is that a person is precluded from exercising a right that is inconsistent with another right if he has consciously and unequivocally exercised the latter.

[16] The doctrine is set out in the oft-quoted decision of Lord Atkin, in United Australia Ltd. v Barclays Bank Ltd., [1941] A.C. 1, [1940] 4 All E.R. 20 (H.L.), in which the appellant had started an action against a company on a cheque, framing the action as money had and received to the use of the appellant. The cheque had been unlawfully issued. The action was discontinued and no judgment obtained. The appellants then brought [page137] an action against the bank for conversion of the cheque. It was held that the commencement of the first action did not amount to an election to waive the tort so as to preclude the bringing of the second action. In the course of his decision, Lord Atkin said, at pp. 29-30 A.C.:

It seems to me that in this respect it is essential to bear in mind the distinction between choosing one of two alternative remedies, and choosing one of two inconsistent rights. As far as remedies were concerned, from the oldest time the only restriction was on the choice between real and personal actions. If you chose the one you could not claim on the other @7 . . . . .

On the other hand, if a man is entitled to one of two inconsistent rights it is fitting that when, with full knowledge, he has done an unequivocal act showing that he has chosen the one he cannot afterwards pursue the other, which after the first choice, is by reason of the inconsistency no longer his to choose. Instances are the right of a principal dealing with an agent for an undisclosed principal to choose the liability of the agent or the principal: the right of a landlord where forfeiture of a lease has been committed to exact the forfeiture or to treat the former tenant as still tenant, and the like. To those cases the statement of Lord Blackburn in Scarf v. Jardine [(1882) 7 App. Cas. 345, 360] applies "where a man has an option to choose one or other of two inconsistent things when once he has made his election it cannot be retracted." In a later passage [(1882) 7 App. Cas. 345, 361] Lord Blackburn speaks of a man choosing between two remedies: but it is plain that he is speaking of remedies in respect of the inconsistent things as stated above. The case was one where the plaintiff had a right of recourse against two former partners, or against two new partners: but obviously not against both. Lord Blackburn quotes Dumpor's case [(1601) 4 Co. Rep. 119(b)] which was a plain case of inconsistent rights, the question of waiver of a forfeiture. I therefore think that on a question of alternative remedies no question of election arises until one or other claim has been brought to judgment.

[17] The doctrine has been endorsed by Canadian courts. See, for example, Findlay v. Findlay, 1951 10 (SCC), [1952] 1 S.C.R. 96, [1951] S.C.J. No. 34, at pp. 103-104 and 110 S.C.R.

[18] The doctrine of election has been broken down into two categories -- the common law doctrine of election and the equitable doctrine of election.

[19] Election at common law takes place where a party is faced with a choice between two inconsistent courses of action that affect another party's rights or obligations, and knowing that the two courses of action are inconsistent and that he or she has the right to choose between them, makes an unequivocal choice and communicates that choice to the other party. The doctrine provides that the party making the election is afterwards precluded from resorting to the course of action that he has rejected. The election is effective at the point of communication on the basis that the parties to an ongoing relationship are [page138] entitled to know where they stand: Commonwealth of Australia v. Verwayen (1990), 170 C.L.R. 394, 95 A.L.R. 321 (H.C.A.), at pp. 421-22 C.L.R.

[20] Subsequent to the development of the common law doctrine, the courts of equity developed a separate principle -- the equitable doctrine of election -- in the context of wills and trusts. The doctrine is based on the fact that the electing party, having obtained a particular benefit from a transaction, must accept all of the consequences that flow from that transaction, including those to his detriment: Granot v. Hersen (1999), 1999 1689 (ON CA), 43 O.R. (3d) 421, [1999] O.J. No. 1302 (C.A.), at p. 424 O.R.; George Spencer Bower, Alexander Turner, Piers Feltham, Daniel Hochberg and Tom Leech, The Law Relating to Estoppel by Representation, 4th ed. (London: LexisNexis Butterworths, 2004), at pp. 361-62.

[21] The two doctrines are distinct. This point is clearly stated in the following passage in Banner Industrial and Commercial Properties Ltd. v. Clark Paterson Ltd., [1990] 2 E.G.L.R. 139, [1990] 47 E.G. 64 (Ch. Div.):

There is, however, another principle upon which a party may be held to his choice and that is the doctrine of election. "Election", as Viscount Maugham pointed out in Lissenden v CAV Bosch Ltd [1940] AC 412 at pp 417-418, is a term used in different senses. There is an equitable doctrine of election (known in Scotland as the doctrine of "approbate and reprobate") encapsulated in Lord Eldon's dictum that "no person can accept and reject the same instrument": Ker v Wauchope (1819) 1 Blight 1 at p 21. Its main application has been to a will, deed or other instrument which confers a benefit upon a party and at the same time purports to dispose of his property to someone else. The principle requires that if he accepts the benefit, he must also accept the burden of giving effect to the purported disposition of his own property or compensating the person intended to benefit thereby. There is also the common law principle of election, under which in certain circumstances a party faced with a choice of remedies (such as whether to affirm or repudiate a contract induced by misrepresentation) may be held to the choice he has made. The circumstances in which the two doctrines will apply are quite distinct. (Emphasis added)

[22] As can be seen, there is a fundamental difference between the two doctrines. The equitable doctrine of election does not involve choice between alternatives. To establish an election in equity, it is unnecessary to show that the electing party made a conscious choice between inconsistent rights at the time when the original decision was made. In fact, an equitable election does not involve making a choice at all -- it involves accepting the consequences of a decision already made. On the other hand, the common law doctrine is all about choice. It applies to prevent [page139] a person who has made a decision from resorting to an inconsistent course of action that he has specifically rejected.

[23] Here, the common law doctrine clearly applies.

[24] The respondent sued the appellants and agreed to hold the action in abeyance while settlement discussions proceeded. A settlement was reached but the appellants did not honour their obligations under the agreement. At that point, the respondent, faced with a fundamental breach of the settlement agreement by the appellants, had a choice between two inconsistent courses of action. It could have elected to affirm the settlement and hold the appellants to the performance of their contractual obligations. Or, it could have elected to accept the breach as a repudiation of the contract and proceed with the action.

[25] The decision of what to do in the face of a repudiatory breach or renunciation of a contract by the other party is one of the situations most often cited as a typical example of a common law election. Lord Goff, in his description of the principles of election in the Motor Oil Hellas (Corinth) Refineries S.A. v. Shipping Corporation of India (The Kanchenjunga), [1990] 1 Lloyd's Rep. 391 (H.L.), at p. 398 Lloyd's Rep., makes this observation:

Election itself is a concept which may be relevant in more than one context. In the present case, we are concerned with an election which may arise in the context of a binding contract, when a state of affairs comes into existence in which one party becomes entitled, either under the terms of the contract or by the general law, to exercise a right, and he has to decide whether or not to do so. His decision, being a matter of choice for him, is called in law an election. Characteristically, this state of affairs arises where the other party has repudiated the contract or has otherwise committed a breach of the contract which entitles the innocent party to bring it to an end, or has made a tender of performance which does not conform to the terms of the contract. But this is not necessarily so. An analogous situation arises where the innocent party becomes entitled to rescind the contract, i.e. to wipe it out altogether, for example because the contract has been induced by a misrepresentation; and one or both parties may become entitled to determine a contract in the event of a wholly extraneous event occurring, as under a war clause in a charter-party. Characteristically, the effect of the new situation is that a party becomes entitled to determine or to rescind the contract, or to reject an uncontractual tender of performance; but, in theory at least, a less drastic course of action might become available to him under the terms of the contract. In all cases, he has in the end to make his election, not as a matter of obligation, but in the sense that, if he does not do so, the time may come when the law takes the decision out of his hands, either by holding him to have elected not to exercise the right which has become available to him, or sometimes by holding him to have elected to exercise it. . . . Once an election is made, however, it is final and binding (see Scarf v. Jardine, per Lord Blackburn, at p. 360). @7 . . . . . [page140]

There are numerous examples of the application of this principle of election in English law. Perhaps the most familiar situation is that which arises when one contracting party repudiates the contract. The effect is that the other contracting party then has a choice whether to accept the repudiation (as it is called) and bring the contract to an end; or to affirm the contract, thereby waiving or abandoning his right to terminate it. If, with knowledge of the facts giving rise to the repudiation, the other party to the contract acts (for example) in a manner consistent only with treating that contract as still alive, he is taken in law to have exercised his election to affirm the contract.

[26] Here, in choosing to proceed with the action through obtaining default judgment, the respondent unequivocally treated the settlement agreement as at an end. The fact that the initial step the respondent took was irregular -- the default judgment was technically unavailable -- does not, in my view, in any way alter the fact that the respondent chose to pursue its rights under the action rather than seeking to enforce the settlement.

[27] Canadian case law confirms that an election, once made, is binding. See, for example, Morrison-Knudsen Co., Inc. v. British Columbia Hydro and Power Authority, 1978 1977 (BC CA), [1978] B.C.J. No. 1218, 85 D.L.R. (3d) 186 (C.A.), at p. 224 D.L.R., which specifically addressed the concept of election when a party is faced with a repudiation of the contract [at para. 130]:

When faced with a fundamental breach the innocent party is put to an election. He may elect to affirm the contract and to hold the other party to the performance of his obligations and sue for damages as compensation for the breach. He may, on the other hand, elect to treat the breach as a fundamental breach and accept it as such. Thus he would terminate the contract and thereafter be relieved of any further duty to perform and he could sue at once for damages or quantum meruit for performance to that point. It is essential that such election, an election between inconsistent rights, be made promptly and communicated to the guilty party. Once made, the election is binding and cannot be changed. (Emphasis added)

[28] I acknowledge that decisions may be found where statements have been made suggesting that the common law election rules should not be applied too strictly. I refer to the decisions in Oliver Ashworth (Holdings) Ltd. v. Ballard (Kent) Ltd., [2000] Ch. 12, [1999] 2 All E.R. 791 (C.A.) and Tang Man Sit v. Capacious Investments Ltd., [1996] 1 A.C. 514, [1996] 1 All E.R. 193 (P.C.).

[29] However, in Canada this view has been restricted. Both of these cases cite Johnson v. Agnew, [1980] A.C. 367, [1979] 1 All E.R. 883 (H.L.). In James v. Klaus, 1987 2657 (BC CA), [1987] B.C.J. No. 1271, 40 D.L.R. (4th) 763 (C.A.), at p. 765 D.L.R., counsel for the plaintiff relied on Johnson v. Agnew for the general proposition that the [page141] court has a discretion whether to hold a party to an election. Justice Hutcheon, correctly in my view, rejected this argument, holding that Johnson v. Agnew should be confined to the situation where a party sues for specific performance and then later wants to accept repudiation and seek damages:

I agree with Mr. Cadman, counsel for the trustee, that Johnson v. Agnew must be read cautiously on the issue of election. All that was held in that case was that if the vendor has obtained a decree for specific performance that election is not irrevocable: the vendor may later accept the repudiation and ask for damages. That was based on the proposition that the contract was still in being, a proposition that emerges from this passage in the speech of Lord Wilberforce at p. 894:

In my opinion, the argument based on irrevocable election, strongly pressed by the appellant's counsel in the present appeal, is unsound. Election, though the subject of much learning and refinement, is in the end a doctrine based on simple considerations of common sense and equity. It is easy to see that a party who has chosen to put an end to a contract by accepting the other party's repudiation cannot afterwards seek specific performance. This is simply because the contract has gone, what is dead is dead. But it is no more difficult to agree that a party, who has chosen to seek specific performance, may quite well thereafter, if specific performance fails to be realised, say, "Very well, then, the contract should be regarded as terminated." It is quite consistent with a decision provisionally to keep alive, to say, "Well, this is no use -- let us now end the contract's life." A vendor who seeks (and gets) specific performance is merely electing for a course which may or may not lead to implementation of the contract; what he elects for is not eternal and unconditional affirmation, but a continuance of the contract under control of the court which control involves the power, in certain events, to terminate it. (Emphasis added)

[30] In my view, therefore, the law is clear. Once a party accepts repudiation of a contract by pursuing a course of action that is inconsistent with the existence of the contract, that party is no longer entitled to assert its rights under the contract. The court has no discretion to rule otherwise.

[31] Here, when the appellants failed to honour their obligations under the settlement agreement, the respondent could have sought to enforce the agreement. Instead, it made a binding election to treat the settlement agreement as if it had never been and to proceed with the litigation. It follows that, from the point in time that this election was communicated to the appellants, all rights and obligations of the parties to the agreement came to an end.

[32] The motion judge erred in making an order to enforce the terms of an agreement that no longer existed. The order, therefore, cannot stand. [page142]

VI. Disposition

[33] I would therefore allow the appeal and set aside the order of the motion judge. Pursuant to the agreement between counsel, I would award the appellants their costs in the amount of $6,000, inclusive of disbursements and applicable taxes.

Appeal allowed.