COURT OF APPEAL FOR ONTARIO
CITATION: PDM Entertainment Inc. v. Three Pines Creations Inc., 2015 ONCA 488
DATE: 20150629
DOCKET: C60024
MacPherson, Epstein and Roberts JJ.A.
BETWEEN
PDM Entertainment Inc.
Applicant (Respondent)
and
Three Pines Creations Inc. and Louise Penny
Respondents (Appellants)
Kenneth Prehogan and Hilary Book for the appellants
M. Scott Martin, for the respondent
Heard: June 12, 2015
On appeal from the judgment of Justice Kevin W. Whitaker of the Superior Court of Justice, dated January 23, 2015.
MacPherson J.A.:
A. Overview
[1] The appellant, Louise Penny, is an award-winning Canadian mystery writer. In 2011, she optioned certain rights to her books to a television production company, the respondent PDM Entertainment Inc. (“PDM”). Through her company, the appellant Three Pines Creations Inc. (“Three Pines”), Ms. Penny granted PDM the option to purchase the rights to her works for the purpose of producing made-for-television movies.
[2] The option agreement had an initial two-year term. It also provided for extensions. When PDM gave notice that it was invoking the extension clause, Ms. Penny and Three Pines asserted that PDM’s rights under the agreement had ended.
[3] The parties brought duelling applications, which the application judge heard together on January 22, 2015. He found for PDM the next day.
[4] Ms. Penny and Three Pines appeal.
B. Facts
(1) The parties and events
[5] Louise Penny is a wonderful writer. She is the author of a series of ten novels featuring Chief Inspector Armand Gamache of the Sûreté de Québec and the imaginary, bucolic Quebec village of Three Pines. These books are, in a word, delightful. (I have read them all, usually by a fireplace on Boxing Day.)
[6] The first novel in the series, Still Life, was published in 2005. The second, Dead Cold, followed in 2007 and the tenth, The Long Way Home, in 2014. The novels have been a huge success; more than three million copies have been sold in 30 countries and 23 languages. They have appeared on the bestseller lists of the Globe and Mail, the London Times and the New York Times.
[7] The novels have also achieved significant critical acclaim. Ms. Penny has won awards for her books, including the Arthur Ellis Award (Canada), the Dagger Award (United Kingdom) and the Agatha Award (United States). She is the only writer ever to have won the Agatha Award five times.
[8] Three Pines is a Canadian company and the assignee of Ms. Penny’s rights in the Gamache novels. Ms. Penny is its sole officer, director and shareholder.
[9] PDM is an Ontario company that produces television programs. It was formed in 2011 by Phyllis Platt, Brian Dennis and Peter Moss, all of whom have substantial experience in the production of television movies.
[10] In September 2011, PDM as “Producer” and Three Pines as “Owner” entered into an Option/Purchase Agreement (“Option Agreement”). It gave PDM an exclusive option to acquire certain rights in the Gamache novels, including the exclusive right to make made-for-television movies based on the novels.
[11] Section 2.1 of the Option Agreement required PDM to pay Three Pines $16,000 for an option on an initial set of two books (the “First Set Option Fee”). PDM paid this fee.
[12] The Option Agreement provides that the option for the initial two books terminates after two years unless extended:
2.2 Unless extended as provided for in Section 2.3 or Section 2.3B, the Option for the initial two Books (the “First Set Option”) will terminate on the day that is 24 months from the date of execution of this Agreement (the “Initial First Set Option Period”).
[13] Sections 2.3 and 2.3B, which are at the heart of this litigation, enable PDM to extend the initial two-year term:
2.3 Provided that Producer remains in active development with respect to one or both Productions based on the initial two Books, Producer will be entitled to extend the Initial First Set Option Period for a further 12-month period (the “Extended First Set Option Period”) upon payment to Owner of the sum of C$8,000 (the “First Set Option Extension Fee”) on or before the last day of the Initial First Set Option Period. The First Set Option Extension Fee will not be applicable against the purchase price payable for any set of Books.
B. Notwithstanding the foregoing, if the initial production order received by Producer is for one Production and not two, then, upon payment of the purchase price for the initial Book, Producer shall have the right to further extend the First Set Option Period with respect to the other Book that is the subject of the First Set Option upon payment of the sum of C$4,000 (the “First Set Additional Option Extension Fee”) on or before the last day of the Extended First Set Option Period. The First Set Additional Option Extension Fee will not be applicable against the purchase price payable for that remaining Book.
[14] Section 5.1B was added to the Option Agreement pursuant to an Amending/Confirmation Agreement executed in 2012. It provides, in part:
5.1B … if despite the best efforts of Producer the initial production order received by Producer for the initial set of two Books is for only one Production and not two as contemplated in Section 5.1, Producer shall have the right to exercise the Option for the initial Book ….
Provided that Producer has paid Owner the sum of C$16,000 representing the First Set Option Fee as contemplated in Section 2.1 above, Producer shall be entitled to extend the First Set Option Period for the other Book that is the subject of the First Set Option as contemplated in Section 2.3B above.
[15] The Option Agreement also gives PDM ‘rolling rights’ to cover additional sets of Gamache novels. (When the Option Agreement was signed, there were six novels in the series. There are now ten.)
[16] In October 2012, PDM purchased the television movie rights to Still Life, the first book in the Gamache series, and paid Three Pines $104,625 in accordance with s. 5.1(i) of the Option Agreement. The movie aired on CBC on September 15, 2013. It was the highest rated television movie for the year on CBC and was nominated for several Directors Guild of Canada Awards including best television movie and best director (Peter Moss). CBC funded the preparation of a script for a movie based on the second Gamache novel, Dead Cold, but ultimately did not order the production of the movie.
[17] Thus, in September 2013, as the second anniversary of the Option Agreement neared, PDM had exercised its option to purchase the rights to the first two books in the Gamache series – namely, Still Life and Dead Cold. It had purchased the television movie rights to Still Life and produced the movie. It had not taken these additional steps with respect to Dead Cold.
[18] On September 4, 2013, Brian Dennis of PDM sent an email to Ms. Penny’s agent giving notice that PDM was extending the Option Agreement pursuant to s. 2.3B:
I am writing to notify you that, in accordance with Clause 2.3B … we are extending the First Set Option Period for one more year.
Pursuant to Clause 9.1 of the Agreement, we made payment today by electronic transfer of $4,000 Cdn to the Knight Hall Agency.
[19] A year later, in September 2014, PDM still had not finalized a production order for Dead Cold. On September 18, Mr. Dennis sent an email purporting to extend the Option Agreement for a fourth year:
I am writing to notify you that, in accordance with Clause 2.3B … we are extending the Extended First Set Option Period with respect to Dead Cold for one more year.
Pursuant to Clause 9.1 of the Agreement, we made payment today via electronic transfer of $4,000 Cdn to the Knight Hall Agency.
[20] On October 8, 2014, Ms. Penny’s agent, Knight Hall Agency, sent an email to Mr. Dennis informing PDM that the agency was not accepting PDM’s proposed extension of the Option Agreement:
Upon legal advice, we have determined that PDM holds no such right to any extension of the Extended First Set Option Period.
More specifically, when PDM gave notice on September 5, 2013, that it was extending the First Set Option Period it did not pay C$8,000 for that extension as required by clause 2.3. PDM’s notice at that time specifically invoked clause 2.3B to permit PDM to extend the First Set Option Period by payment of only C$4,000. In doing so, PDM interpreted clause 2.3B in the same manner in which we too had understood it: as permitting the reduction by half of the First Set Option Extension Fee since PDM had then produced one of the two titles in the first set.
Clause 2.3B was only intended for the purpose to which it has already been invoked. It was never intended to accord, and is not drafted in such a way as to accord, any option term additional to the Extended First Option Period.
[21] In the same email, Ms. Penny’s agent also declared that PDM had no further right to purchase Dead Cold or any other books in the Gamache series. The agency returned PDM’s payment.
(2) The application judge’s decision
[22] On November 10, 2014, PDM brought an application seeking a declaration that the Option Agreement remained in effect and, if necessary, granting relief from forfeiture due to its payment of $4,000, rather than the $8,000 required by s. 2.3 of the Option Agreement.
[23] On December 22, 2014, Three Pines commenced its own application seeking a declaration that any option rights PDM may have had pursuant to the Option Agreement, save for the option with respect to Still Life that had already been exercised, had ended.
[24] The application judge heard the duelling applications together on January 22, 2014. He released brief reasons (11 paragraphs) the next day. He accepted PDM’s interpretation of the Option Agreement and concluded that “the option agreement allows for an extension of a fourth year by the clearest language and which makes the most commercial sense.”
[25] The application judge also granted PDM relief from forfeiture. He noted that, if PDM’s interpretation of ss. 2.3 and 2.3B of the Option Agreement was correct, then PDM had underpaid Three Pines by $4,000 on the first extension. The question thus became: should relief from forfeiture be granted and PDM permitted to pay an additional $4,000 to comply with s. 2.3 of the Option Agreement? The application judge answered this question in the affirmative. He reasoned:
I accept the suggestion that there is no restriction on the use of the equitable relief. I would suggest that the gross disproportionate outcome, if no relief is granted, is a significant part of the context to be considered. It is a comparison of the two values: a payment of $4,000 and the loss of opportunity to create and produce a very valuable and successful film property.
I agree that the relief should be used sparingly however, this is … a case where it should appropriately be used.
I agree with the factors set out in the applicant’s factum – good faith on the part of PDM, the breach of the options was trivial and based on a common mistake, there will be significant consequences for PDM.
[26] Three Pines and Ms. Penny appeal.
C. Issues
[27] The appellants raise three issues on appeal and frame them as follows:
(1) Did the application judge provide adequate reasons for judgment?
(2) Did the application judge err in finding that the Option Agreement provides for two one-year extensions of the Initial First Set Option Period?
(3) Did the application judge exceed his jurisdiction or otherwise err in granting the respondent relief from forfeiture?
D. Analysis
(1) Sufficiency of reasons
[28] The appellants contend that the application judge’s reasons are “wholly inadequate”. They attach this description to the application judge’s reasons on both the contract and relief from forfeiture issues.
[29] On the contract issue, the appellants submit that, although the application judge held that the Option Agreement in the “clearest language” permitted an extension for a fourth year, he did not say anything about the actual wording of the two key provisions, ss. 2.3 and 2.3B. Nor did he even mention a third relevant provision, s. 5.1B.
[30] On the relief from forfeiture issue, the appellants assert that, in weighing the competing interests relating to this discretionary equitable remedy, the application judge disregarded or minimized the creative and reputational importance of the Option Agreement to Ms. Penny and Three Pines.
[31] I do not accept this submission. I acknowledge that the application judge’s reasons on the contract issue are conclusory and that his reasons on the relief from the forfeiture issue are terse. They do not, however, cross the line and fall into the category of ‘insufficient’ as described in the leading cases: see R. v. Sheppard, 2002 SCC 26, [2002] 1 S.C.R. 869; Hill v. Hamilton-Wentworth Regional Police Services Board, 2007 SCC 41, [2007] 3 S.C.R. 129; R. v. R.E.M., 2008 SCC 51, [2008] 3 S.C.R. 3; F.H. v. McDougall, 2008 SCC 53, [2008] 3 S.C.R. 41.
[32] I begin with an important contextual point. After the two applications were filed, they were scheduled for hearing on an urgent basis on the first available date that permitted time for responding materials, examinations and facta. In its Notice of Application, PDM said, under a separate heading titled “Urgency”:
(eee) [I]t is imperative that the Application be heard on an urgent basis. PDM has funding applications that are presently being considered and, if there is uncertainty as to the ownership of the rights, the funding applications may have to be withdrawn[.]
[33] Moreover, at the conclusion of argument on January 22, 2015, PDM’s counsel advised the application judge of the urgency of the matter and requested that, if possible, a decision be issued quickly. There is no indication that the appellants took issue with that request or with PDM’s justification therefor. The application judge released his decision the next morning, on January 23, 2015. He gave the parties what he had been asked for: an early hearing and an immediate decision.
[34] In F.H. v. McDougall, at para. 98, Rothstein J. summarized the rationales underlying the duty to give adequate reasons:
(1) to justify and explain the result;
(2) to tell the losing party why he or she lost;
(3) to provide for informed consideration of the grounds of appeal; and
(4) to satisfy the public that justice has been done.
[35] In my view, the application judge’s reasons in this case meet this standard.
[36] First, they justify and explain the result. Although the application judge’s reasons on the contract issue are conclusory, the two main provisions in issue are quite short. Moreover, the record before the court was comprehensive, the parties having advanced clear – and opposing – positions: see Hill, at para. 101. On the relief from forfeiture issue, the application judge stated explicitly that he agreed with the arguments in PDM’s factum, including PDM’s good faith, the minor nature of PDM’s breach of the Option Agreement – that is, paying $4,000 instead of the required $8,000 – and PDM’s great loss if it were not granted any relief, namely, “the loss of opportunity to create and produce a very valuable and successful film property.”
[37] Second, from reading the application judge’s reasons, Three Pines and Ms. Penny would know why they lost. The application judge did not agree with their interpretation of the contract and thought that PDM deserved equitable relief so that the contract could continue to operate.
[38] Third, the application judge’s reasons, coupled with the record (especially the terms of the Option Agreement) and the parties’ excellent facta and oral submissions provide for this court’s “informed consideration of the grounds of appeal”.
[39] Fourth, there is nothing to suggest that a reasonable member of the public would doubt that justice has been done. The Superior Court arranged an expedited hearing, the application judge heard submissions for several hours and he rendered a decision the next day. The public could be satisfied that justice was done.
(2) The contract issue
[40] The appellants contend that the application judge erred in interpreting ss. 2.3 and 2.3B of the Option Agreement which, for ease of reference, I set out again:
2.3 Provided that Producer remains in active development with respect to one or both Productions based on the initial two Books, Producer will be entitled to extend the Initial First Set Option Period for a further 12-month period (the “Extended First Set Option Period”) upon payment to Owner of the sum of C$8,000 (the “First Set Option Extension Fee”) on or before the last day of the Initial First Set Option Period. The First Set Option Extension Fee will not be applicable against the purchase price payable for any set of Books.
B. Notwithstanding the foregoing, if the initial production order received by Producer is for one Production and not two, then, upon payment of the purchase price for the initial Book, Producer shall have the right to further extend the First Set Option Period with respect to the other Book that is the subject of the First Set Option upon payment of the sum of C$4,000 (the “First Set Additional Option Extension Fee”) on or before the last day of the Extended First Set Option Period. The First Set Additional Option Extension Fee will not be applicable against the purchase price payable for that remaining Book.
[41] In my view, the appellants accurately and succinctly state the crucial issue in their factum, at para. 52:
The difference of interpretation between the parties may be simply stated: Was PDM permitted to extend the Option Agreement (a) pursuant to s. 2.3 and s. 2.3B, or (b) pursuant to ss. 2.3 or 2.3B? [Emphasis in original.]
[42] The Option Agreement is a contract. The respondent asserts that its interpretation presents a question of mixed fact and law because, as Rothstein J. stated in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (“Sattva”), at para. 55, “the goal of contractual interpretation, to ascertain the objective intentions of the parties, is inherently fact specific.” Accordingly, the general rule “in favour of deference to first instance decision-makers on points of contractual interpretation” (Sattva, at para. 52) applies on this appeal.
[43] I do not accept this submission. In his reasons, the application judge did not provide any analysis of ss. 2.3 and 2.3B of the Option Agreement; rather, all he said was, “I am of the view that the option agreement allows for an extension of a fourth year by the clearest language”. He said nothing about s. 5.1 of the Option Agreement, on which the appellants heavily relied. I also observe that the decision in this case was made in relation to two applications, not a trial; that there are no credibility issues; and that there are only two or perhaps three contractual provisions that need to be considered. Taking these circumstances together, I think it is appropriate to review the decision under appeal on a standard of correctness.
[44] The appellants advance four arguments in support of their position that ss. 2.3 and 2.3B of the Option Agreement are alternative, not cumulative, sources of an extension right.
[45] First, the appellants rely on s. 2.2 of the Option Agreement:
Unless extended as provided for in Section 2.3 or Section 2.3B, the Option for the initial two Books (the “First Set Option”) will terminate on the first day that is 24 months from the date of execution of this Agreement (the Initial First Set Option Period”). [Emphasis added.]
The appellants contend that the word “or” is disjunctive in this provision; PDM can extend its option, but only once.
[46] I am not persuaded by this submission. In my view, the word “or” in s. 2.2 cannot be interpreted in isolation from ss. 2.3 and 2.3B. “Or” signals only that there are, depending on the facts on the ground with respect to development, two possible routes to an extension. PDM could initially choose the s. 2.3 route near the end of the original contract period; the s. 2.3B route allows for a potential second extension a year later.
[47] Second, the appellants rely on the phrase “[n]otwithstanding the foregoing” in s. 2.3B of the Option Agreement. They say that this phrase indicates that s. 2.3B is an alternative, not an addition, to the extension route set out in s. 2.3.
[48] Again, I disagree. When the words of s. 2.3B are considered as a whole, it becomes clear that all the “notwithstanding” phrase does is provide a transition from the extension route in s. 2.3 to the extension route in s. 2.3B in circumstances where PDM has moved from no production order to an initial production order.
[49] Third, the appellants submit that s. 5.1B, which was added to the Option Agreement in 2012, supports its position. For ease of reference, I set out the relevant part of s. 5.1B again:
… Provided that Producer has paid Owner the sum of C$16,000 representing the First Set Option Fee as contemplated in Section 2.1 above, Producer shall be entitled to extend the First Set Option Period for the other Book that is the subject of the First Set Option as contemplated in Section 2.3B above.
According to the appellants, this provision makes it clear that where PDM has obtained the rights to produce a movie relating to one book, but not the second, s. 2.3B (and not s. 2.3) is to be used to extend the Initial First Set Option Period.
[50] I do not accept this submission. In my view, s. 5.1B speaks to the timing and circumstances (one movie moving forward) relating to the exercise of the extension right in s. 2.3B. Section 5.1B says nothing about whether that right is alternative or cumulative to the extension right in s. 2.3 of the Option Agreement. Rather, s. 5.1B expressly states that the Producer’s entitlement to extend is “as contemplated in s. 2.3B”, which provides for a further extension during the Extended First Set Option Period.
[51] Fourth, the appellants submit that, since part of the basic test for contractual interpretation is “to ascertain the objective intentions of the parties” (Sattva, at para. 55), PDM’s own actions support the appellants’ reading of the provisions at issue. The appellants note that PDM sought legal advice when it extended its option in 2013. Based on that advice, it specifically invoked s. 2.3B of the Option Agreement, not s. 2.3. It paid a fee of $4,000, not $8,000. In short, say the appellants, PDM knew that there were two potential routes for extending its option. It sought and obtained legal advice in choosing between them. It accepted and acted on that advice. PDM’s eyes were wide open throughout the extension process and it arrived, in 2013, at an interpretation of the contract opposite to the one it advanced before the application judge in January 2015.
[52] I agree with this submission. It is a strong point in the appellants’ favour.
[53] However, in the end, I think that the wording of ss. 2.3 and 2.3B, taken together, supports the respondent’s interpretation of the Option Agreement. Section 2.3 provides for an extension of the contract into a third year. Section 2.3B provides for a further extension, albeit in more limited circumstances.
[54] Section 2.3 applies when, after almost two years of effort, the Producer (PDM) is, at a minimum, “in active development” with respect to at least one of the two books in its First Set Option. In 2013, PDM was easily inside that requirement; it had developed the project to the point of purchasing the movie rights to Still Life from Three Pines for $104,625. So PDM could have invoked s. 2.3 at this juncture to obtain an extension of the Option Agreement for a third year.[^1]
[55] To obtain a further extension thereafter, under s. 2.3B, it would not have been enough for PDM merely to have been engaged in the “active development” of the project. Rather, PDM would have needed to have received an initial production order to trigger the extension. This was precisely the lay of the land in September 2014; PDM had obtained a production order from CBC. Section 2.3B had been triggered.
[56] What, then, does s. 2.3B say?
[57] In my view, the wording of s. 2.3B strongly supports an additional extension. It provides the Producer with the right to “further extend” the First Set Option Period with respect to the second book in the First Set Option. It requires payment of a fee of $4,000 and calls it the “First Set Additional Option Extension Fee”. It requires that the option be exercised “on or before the last day of the Extended First Set Option Period”. All of these words and titles – especially the words “further” and “[a]dditional” and the explicit link to the expiration of the third-year extension in s. 2.3 – support the conclusion that, against the backdrop of a major new development in year three (a production order), s. 2.3B allows an extension of the Option Agreement for a fourth year.
[58] Finally, I think there is commercial sense in the above interpretation. Section 2.3 deals with a commercial scenario in which, after two years under the Option Agreement, the Producer has engaged in genuine active development of the project but has not obtained a production order. Section 2.3 gives the Producer a third year to try to fulfil its contractual obligations to the Owner. Section 2.3B deals with a different factual scenario – one in which, by the end of the third year, the Producer has obtained a production order for a movie relating to one of the two books. In other words, the Producer has achieved a huge success, not only for itself but also for the Owner. Section 2.3B, as interpreted above, recognizes this success and grants the Producer a second (and final) extension to try to obtain a production order for a movie relating to the second book. This strikes me as commercially reasonable and fair.
[59] For these reasons, my answer to the clear and succinct question posed by the appellants in their factum is: PDM was permitted to extend the Option Agreement pursuant to s. 2.3 and s. 2.3B, cumulatively. The application judge correctly interpreted the Option Agreement.
(3) Relief from forfeiture
[60] PDM now admits that it erred in citing s. 2.3B as the basis for the first extension of the Option Agreement. It sought relief from forfeiture to avoid the harsh consequences of this error. The application judge exercised his equitable discretion to grant that request.
[61] The appellants submit that, in doing so, he erred. They say that the application judge did not have jurisdiction to grant relief from forfeiture because this remedy can only be granted where the party seeking relief has breached a contract and the breach gives rise to a right to forfeiture essentially to secure payment of money. PDM did not breach the Option Agreement; it chose to extend the option under a contractual provision (s. 2.3B) which caused it to lose its extension right a year earlier than if it had extended the option under a different provision (s. 2.3).
[62] I do not accept this essentially technical argument. A court has a broad discretion to award relief from forfeiture under s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43:
A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.
[63] Relief from forfeiture is available in a wide range of cases, including cases involving a failure to renew a lease: see, for example, 120 Adelaide Leaseholds Inc. v. Oxford Properties Canada Ltd., [1993] O.J. 2801 (C.A.), at para. 9; 1383421 Ontario Inc. v. Ole Miss Place Inc. (2003), 2003 57436 (ON CA), 67 O.R. (3d) 161 (C.A.), at para. 80. I am not prepared to draw a bright line distinction between ‘breach’ and ‘loss’ to avoid considering the merits of granting relief from forfeiture in this case.
[64] The appellant contends that, even if the application judge had the jurisdiction to grant relief from forfeiture, he erred in doing so.
[65] The test for granting relief from forfeiture was recently restated by LaForme J.A. in Kozel v. Personal Insurance Co., 2014 ONCA 130, 119 O.R. (3d) 55, at para. 31:
In exercising its discretion to grant relief from forfeiture, a court must consider three factors: (i) the conduct of the applicant, (ii) the gravity of the breach, and (iii) the disparity between the value of the property forfeited and the damage caused by the breach.
[66] Although his reasons are brief, the application judge touched on all of these factors. He found that PDM acted in good faith in the contract extension process; that its ‘breach’ (mistake) – the payment of $4,000 instead of $8,000 – was trivial in relation to a contract on which it had already paid well over $100,000; and that forfeiture would be a grossly disproportionate outcome in light of PDM’s mistake – namely, “the loss of opportunity to create and produce a very valuable and successful film property.”
[67] Relief from forfeiture is a discretionary equitable remedy. A judge’s decision in this domain is entitled to considerable deference. I see no basis for interfering with the application judge’s exercise of discretion in this case.
E. Disposition
[68] I would dismiss the appeal. The respondent is entitled to its costs of the appeal, which I would fix at $20,000, inclusive of disbursements and HST.
Released: June 29, 2015 “JCM”
“J.C. MacPherson J.A.”
“I agree Gloria Epstein J.A.”
“I agree L. B. Roberts J.A.”
[^1]: In its September 2013 email to Ms. Penny’s agent, set out above, PDM actually stated that it was extending the Option Agreement pursuant to s. 2.3B, not s. 2.3. PDM now acknowledges that this was an error. This is the basis for PDM’s claim for relief from forfeiture.