Court of Appeal for Ontario
Date: 2018-04-16
Docket: C62197
Judges: Watt, Pepall and Miller JJ.A.
Parties
Between
2249659 Ontario Ltd. and Rohwedder Canada Inc.
Plaintiffs (Appellants)
and
Sparkasse Siegen and Thomas Magnete GmbH
Defendants (Respondents)
Counsel
Jonathan Lisus and James Renihan, for the appellants
Evan Tingley, for the respondent Sparkasse Siegen
P.A. Neena Gupta, for the respondent Thomas Magnete GmbH
Hearing and Appeal
Heard: October 25, 2017
On appeal from: The judgment of Justice S.F. Dunphy of the Superior Court of Justice, dated April 29, 2016, with reasons reported at 2016 ONSC 2066.
Decision
Pepall J.A.:
Introduction
[1] This appeal arises from the ruins of the turbulent economic times that gripped the automotive industry in 2008. The appellant, Rohwedder Canada Inc. ("RCI"), was a casualty of those times. Relying on a claim of negligent misrepresentation, it looked to blame the respondents for losses suffered. The trial judge dismissed the action. For the reasons that follow, I would dismiss the appeal.
Background Facts
[2] Chrysler awarded Getrag Transmission Manufacturing LLC ("Getrag"), a subsidiary of Getrag A.G., a German manufacturer and, at the time, the world's largest transmission company, a major contract for more than $500 million to design and manufacture automobile transmissions. Getrag subcontracted with the respondent, Thomas Magnete GmbH ("TM Germany"), to manufacture certain valves. In turn, TM Germany issued a purchase order, dated September 7, 2007, to purchase three automated custom-designed assembly lines from the appellant, RCI, a subsidiary of a German public company, for CAD $6.75 million. RCI accepted the order on September 12, 2007. Payment was to be based on a series of milestones, two of which were subject to RCI providing a bank guarantee to secure RCI's obligation to refund the payment if it failed to deliver as promised. The first guarantee was provided to TM Germany on October 8, 2007, and TM Germany paid RCI the first installment of $715,500 on November 8, 2007.
[3] Due to NAFTA regulations, the valves had to be manufactured in North America. TM Germany established a wholly-owned subsidiary, Thomas Magnete Canada Inc. ("TM Canada"), to operate the manufacturing facility in Cambridge, Ontario. TM Germany's bank, Sparkasse Siegen ("Sparkasse"), lent funds and administered a financing facility of EUR $10 million, subject to various conditions, to TM Canada to set up the plant. The loan was guaranteed by TM Germany and other related companies. Sparkasse was granted a lien on the full balance in TM Canada's account at Sparkasse and a lien on the three assembly lines. Sparkasse reserved the right to terminate part of the loan facility on the basis of, among other things, "a significant deterioration in the asset situation of the end borrower [TM Canada]".
[4] RCI did not demand any guarantees from TM Germany. The greater credit risk was being assumed by the purchaser, who would potentially be paying up to 80% of the total price before anything at all was delivered by RCI.
[5] TM Germany sought to transfer its purchase order with RCI to TM Canada. This issue was not viewed as controversial by either TM Germany or RCI. TM Germany sent an email dated December 17, 2007, addressed to Silvio Osim, RCI's sales manager:
Please find attached our PO 18658 TM Canada, dated from [2]007-12-15. This order will replace PO 18658 from 2007-09-07. The original we will send by Fedex tomorrow. Please send me a copy back, confirmed and original signed by Fedex too. [Emphasis added.]
[6] Osim relayed the request to Andries Mellema, RCI's president, stating that TM Germany had moved the purchase order to TM Canada. Mellema responded by email to Osim saying: "We need a guarantee from thomas [ sic ] Germany".
[7] Osim replied to TM Germany on December 19, 2007, stating:
Following our conversation today, I would just like [to] summarize the discussion:
Since we are transferring the PO from [TM Germany] to [TM Canada,] we would need a letter from [TM Germany] that, in case of illiquidity of [TM Canada], [TM Germany] would assume the project completion and any outstanding payments to [RCI]. This request came to me from our Controller who was informed about this requirement from our Bank.
[8] At trial, Osim conceded that the last sentence of this email was untrue. RCI's bank had not made such a request.
[9] TM Germany forwarded Osim's email to its bank, Sparkasse. Ms. Mueller, the manager at Sparkasse responsible for the TM Canada file, explained at trial that she was familiar with the type of comfort letter requested by RCI. She crafted a response based in part on an earlier letter confirming project financing that was sent to an unrelated general contractor. She did not testify that she drafted the letter on the basis that it was intended for RCI's bank. She understood RCI would rely on the letter but could not know whether it was the only thing it relied on. TM Germany then forwarded her letter by email to RCI on December 24, 2007. TM Germany's email enclosing Sparkasse's letter, stated:
[E]nclosed you'll find a confirmation of our bank. I hope, it will help you and your Controller, to have a better feeling.
[10] The enclosed letter from Sparkasse stated:
[T]he project of setting up a new production site by our client Thomas Magnete Group in Cambridge / Ontario is financially supported by [Sparkasse].
We hereby confirm, that – in line with the project plan – the necessary funds including expenses for the purchase of production lines and machinery are in place.
[TM Germany] provided a guarantee in our favour regarding the project's financing scheme, thus accepting financial liability for the project.
[11] Osim responded immediately, thanked TM Germany very much, and offered to send the signed purchase order immediately. He did not consult with Mellema beforehand.
[12] On January 10, 2008, RCI signed a new purchase order with TM Canada. Mellema testified that he understood that the required monies to pay RCI for the lines were irrevocably in place and that there was no concern that Sparkasse would pay the funds as they were guaranteed by TM Germany. Mellema testified that if TM Canada had asked them to do the job in the first place, RCI would never have done it without a guarantee. The trial judge did not find Osim and Mellema's testimony on their impressions regarding the December 24, 2007 email to be reliable or useful.
[13] Thereafter, RCI rendered its invoices to TM Canada and received payment from that company.
[14] Getrag's relationship with Chrysler fell apart, and on October 18, 2008, Getrag announced that the deal with Chrysler was dead. On November 17, 2008, Getrag filed for bankruptcy protection. Sparkasse allowed one further payment of just under CAD $2 million to be released to RCI, but ultimately, the bank withdrew its financing to TM Canada on February 19, 2009. TM Canada closed, and its assets were subsequently sold at auction. In total, RCI received approximately 80% of the total contract price from TM Canada.
[15] The appellant, 2249659 Ontario Ltd., an inactive company controlled by Mellema, purchased RCI including the cause of action against Sparkasse and TM Germany for one Euro on the insolvency of RCI's parent company. RCI is also now an inactive company.
[16] In October 2010, the appellants sued Sparkasse and TM Germany for negligent misrepresentation. They alleged that the Sparkasse letter had been, among other things, untrue, inaccurate, and misleading and had failed to disclose that Sparkasse's financing was contingent on the financial health of TM Canada. It claimed the respondents owed RCI the outstanding amount of $1,489,617.
Trial Judge's Decision
[17] The trial judge analysed five issues that were raised in the action, but for the purposes of this appeal, I need only address the first issue: RCI's claim of negligent misrepresentation.
[18] The trial judge commenced his analysis with his credibility findings. He found that, by and large, the respondents' witnesses were credible. He did not find the evidence of the appellants' three witnesses to be reliable. He attached very little weight to most of their testimony.
[19] He then outlined the test for the tort of negligent misrepresentation, described in Queen v. Cognos Inc., [1993] 1 S.C.R. 87, as follows:
a. there must be a duty of care based on a "special relationship" between the representor and the representee;
b. the representation in question must be untrue, inaccurate, or misleading;
c. the representor must have acted negligently in making said misrepresentation;
d. the representee must have relied, in a reasonable manner, on said negligent misrepresentation; and
e. the reliance must have been detrimental to the representee in the sense that damages resulted.
He then applied the elements of the test to the facts of the case.
[20] First, he concluded that the appellant had established the first element of the test. The respondents owed RCI a duty of care based on a "special relationship".
[21] Second, he found that the appellant had failed to prove the second element of the test, namely, that the representation was untrue, inaccurate, or misleading.
[22] The appellant did not seriously dispute that the response it received from the respondents was true and it was. The project financing was in place and TM Germany had provided a guarantee to Sparkasse. The question was whether the response was misleading because of what it did not say.
[23] The trial judge proceeded to interpret the request and the response. Dealing with the former, he noted that the clear implication was that RCI had already agreed to the transfer of the purchase order. No request for a guarantee from TM Germany was in fact made. Indeed, the word "guarantee" was not even used; the reference to illiquidity did not necessarily refer to solvency concerns; a response addressing the existence and adequacy of project financing appeared objectively quite reasonable and responsive; and lastly, the reference to RCI's bank implied to an objective reader that, while RCI had no qualms about transferring the purchase order, it needed a letter for its banker.
[24] The trial judge then turned to the enclosed Sparkasse letter. While he accepted that a misrepresentation may arise if there is a failure to disclose information that, in context, rendered the statements, though literally true, misleading, he rejected the appellant's characterization of the evidence as such. He observed that Mellema had admitted on discovery that banks impose terms and conditions on their financing and may have the right to terminate financing arrangements if certain events occur. In addition, Mellema summarized his understanding of the Sparkasse letter as follows: the bank confirmed that financing was in place; the bank was for the project; and TM Germany had provided a guarantee for the financing of that project to the bank. None of this was untrue, inaccurate, or misleading in context. Moreover, these were sophisticated parties. He wrote:
I find that RCI knew and expected that TM Germany's financing had "normal" commercial conditions attached to it and could not reasonably have assumed that such conditions would have required Sparkasse to continue advancing even in the face of the complete cancellation of the underlying project by Getrag or the bankruptcy of Getrag.
[25] He stated that his conclusion was all the more evident if one considered the "guileful and misleading" nature of Osim's original request attributing the requirement for a letter to RCI's bank. Furthermore, discovery admissions confirmed that RCI understood that TM Germany's guarantee was to Sparkasse alone. The guarantee underscored TM Germany's commitment to the project.
[26] The trial judge then turned to the third element of negligent misrepresentation and concluded that the letter and email could not be considered to have been negligently made. It was not unreasonable to respond to RCI's correspondence by providing an assurance of full project financing at the level of TM Canada. The respondents had accepted Osim's false assertion that he was trying to satisfy RCI's bank and provided a responsive reply. Adequate project financing would be needed. Moreover, RCI had immediately accepted Sparkasse's letter and did not treat it as unresponsive. In addition, RCI understood it had received a letter from Sparkasse and not from TM Germany.
[27] The trial judge reasoned that RCI could not satisfy the fourth element of reasonable reliance either. In reaching this conclusion, he relied on four factors. First, the only reasonable reliance would have been in the context of satisfying the non-existent requirement of RCI's bankers. He was unaware of any case where actionable negligent misrepresentation had been found in the face of a deliberately misleading request. Second, he rejected RCI's evidence that it would never have agreed to a transfer of the purchase order had it known the full details of TM Canada's loan conditions or TM Germany's guarantee. Third, there was no disparity of bargaining power, and fourth, it could not be reasonable to have relied on alleged omissions when those omissions were known to RCI. It made no inquiries to confirm the conditions of Sparkasse's financing.
[28] The trial judge assessed RCI's damages in the event he had erred in his analysis of negligent misrepresentation. As I have concluded that the appeal cannot succeed, there is no need to address the damages analysis.
Grounds of Appeal
[29] The appellants' appeal has two overlapping prongs: the first is based on alleged factual errors and the second on a denial of procedural fairness. For the following reasons, I would dismiss the appeal.
(1) No Palpable and Overriding Errors
[30] The appellants submit that the trial judge drew three core inferences that were unavailable on the record and therefore fell into reversible and palpable and overriding error.
[31] Appellate intervention is warranted where an inference of fact is not supported by any evidence and where an improper inference has a material effect on the outcome: 1250264 Ontario Inc. v. Pet Valu Canada Inc., 2013 ONCA 279, 115 O.R. (3d) 653, at para. 69 citing Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paras. 22-23.
[32] The trial judge's reasons were admittedly long and occasionally strayed into areas that were not demanding of any commentary. That said, the trial judge had a firm grasp of the facts and applied the correct law in analysing the negligent misrepresentation claim.
[33] First, the appellant asserts that the trial judge made a palpable and overriding error in finding that Sparkasse and TM Germany sent the December correspondence understanding that it would be relied upon by RCI's bank rather than RCI. The appellants submit that this was not an available inference. They emphasize that Mueller, Sparkasse's representative who had drafted the bank's letter, did not testify that she thought she was writing for the benefit of RCI's bank.
[34] This is an overstatement of the trial judge's finding. He described the wording of RCI's email request as odd and then proceeded to describe some of its features. He did so from an objective perspective, stating that, when referring to RCI's bank's "requirement", the clear implication "to an objective reader" was that RCI needed something to show its banker. This was a reasonable conclusion.
[35] Furthermore, Mueller's testimony was not determinative. The test for whether the representation in question is untrue, inaccurate, or misleading is "an objective one of the effect that the statement would have had on a reasonable person in the circumstances of the representee". Toronto Dominion Bank v. Leigh Instruments Ltd. (Trustee of), 40 B.L.R. (2d) 1 (Ont. C.J.), at para. 471. Also, in determining whether the representor acted negligently in making the alleged misrepresentation:
The standard of care to be exercised by the representor is the same standard as is applied in other negligence cases, that of the reasonable person. This standard of care is an objective one, namely, what a reasonable person would do in the circumstances. The duty requires not only that the representor be honest and truthful, but that the representor exercise such reasonable care as the circumstances of the case dictate, to ensure that representations made are accurate and not misleading.
Leigh Instruments Ltd., at para. 472. See also Cognos Inc., at pp. 121-122, 125.
[36] Read objectively, the trial judge did not misconstrue the RCI letter or the response received. Importantly, Osim advised TM Germany that the requirement for a guarantee came from RCI's bank, and in TM Germany's email to Osim enclosing Sparkasse's letter, it is clear that TM Germany was responding to the request chain that allegedly proceeded from RCI's bank to RCI's Controller to Osim.
[37] Secondly, the appellants contend that the trial judge erred in finding that RCI deliberately omitted the word "guarantee" in its request. It was open to the trial judge to infer that the omission was deliberate. Osim had been instructed to obtain a guarantee but the letter requested did not refer to a guarantee. There was no suggestion of any inadvertence or oversight in this regard. In the circumstances, it was fair for the judge to infer that the omission was deliberate.
[38] Thirdly, the appellants submit that the trial judge erred in finding that RCI was not concerned about transferring the purchase order to TM Canada because it knew that Getrag was contractually obliged to indemnify TM Canada for its payment obligations. Although the trial judge's reference to an indemnity was not grounded in the evidence, the contract between TM Canada and RCI was in the context of a mega-project for Chrysler and Getrag. The commercial reality was that there was a food chain of contracts of which RCI would be one participant. Moreover, TM Canada's 2008 correspondence to Getrag and internal Sparkasse correspondence would suggest that some reimbursement arrangement for upfront costs was in place with Getrag. In any event, although the trial judge's reference to an indemnity appears to be in error, it was not palpable and overriding. At most, it would relate to only one of the elements necessary to prove a claim in negligent misrepresentation.
[39] In their factum, the appellants raised numerous other errors that were not pressed in oral submissions. In particular, they allege that the trial judge erred in finding RCI knew that Sparkasse had imposed conditions on its financing and that RCI had agreed to move the purchase order to TM Canada before accepting the letter from Sparkasse.
[40] I would not give effect to these submissions. Mellema admitted on discovery that he knew that banks "impose terms and conditions on their financing" and that a bank "may have the right to terminate its financing arrangements if certain events occur". He also admitted that he understood the Sparkasse letter to mean "first of all, that the bank confirms that the financing is in place and secondly, that they're for the project and … that [TM Germany] has provided a guarantee for the financing of that project to the bank".
[41] The trial judge went on to find that RCI knew or ought to have known that TM Canada's financing was subject to conditions and made no inquiries about them. It was not reasonable to assume that there were no conditions simply because none were specifically identified. These were sophisticated parties. They knew or ought to have known that commercial project financing was subject to commercial lending conditions just as they knew that RCI's own financing was subject to conditions. The trial judge's findings on this point were reasonable and available to him on the record.
[42] As for the appellants' complaint that there was no basis for the trial judge to determine that RCI had agreed to move the purchase order to TM Canada before it received the Sparkasse letter, the trial judge did not make this finding. He found that both parties understood that "the transfer was something that was always intended and a matter of routine". This statement had ample evidentiary support. Osim testified that during initial discussions, he acknowledged that the transfer of the purchase order to TM Canada was acceptable in principle. He also wrote to Mellema on December 17, 2007, stating that TM Germany "has moved the PO from [TM Germany] to TM Canada Inc. Are there any clerical issues since we have invoiced them already 10 percent?" The trial judge interpreted Osim's December 19, 2007 email – that starts with the statement, "Since we are transferring the PO from [TM Germany] to [TM Canada]" – as reflecting a lack of concern with TM Canada's status. It did not reflect a temporal finding that RCI had already agreed to move the purchase order, as the appellants assert. The trial judge found that RCI "expected" that the request to transfer the purchase order to TM Canada would be made and that RCI had given TM Germany no reason to believe it would be unfavourably received. This proved to be the case.
[43] Other alleged factual errors described in the factum were not pressed in oral submissions. Suffice it to say that none rose to the level of palpable and overriding error.
(2) No Denial of Procedural Fairness
[44] The appellants complain that the trial judge made an "atmospheric error". They submit that the trial judge adopted a theory that RCI had guilefully tricked TM Germany and Sparkasse. Instead of analysing the plain language of the correspondence and the principles in Cognos Inc., the trial judge characterized Osim and his request as dishonest, guileful, and misleading – a narrative that was not advanced by the parties, was untethered from the evidence, and which improperly coloured his treatment of the correspondence and his analysis of the issues.
[45] They particularly note the trial judge's findings that: RCI deliberately omitted the word "guarantee" from the letter request; the respondents' response was written for consumption by RCI's bank; Osim guilefully referred to its bank to extract a concession from TM Germany; and did so in circumstances where the concession was unnecessary since RCI had already agreed to transfer the purchase order based on its confidence in Getrag's contractual obligation to indemnify TM Canada. They emphasize that Mueller, Sparkasse's representative who had drafted the bank's letter, did not testify that she thought she was writing for the benefit of RCI's bank.
[46] They submit that the appellants were caught by surprise by findings that reflected a theory of the case that was neither pleaded nor pursued at trial.
[47] In rejecting these arguments, I make three observations.
[48] First, the subject matter of the appellants' complaints were addressed in the pleadings of the respondents and therefore gave the appellants notice of the respondents' position in the action:
RCI and its German parent were sophisticated international business entities. Both knew at all material times that RCI had not obtained a guarantee or surety from the respondents of the debts and obligations of TM Canada.
the appellants were attempting to draw unsustainable and unreasonable inferences from the December correspondence.
no inquiry was made by the appellants for further details upon receipt by RCI of the December correspondence.
the appellants knew or ought to have known that in modern commercial transactions between a lender and a borrower, there are inevitably terms and conditions which permit the lender to: (i) cancel the financing, (ii) refuse to advance funds, (iii) take and register security, (iv) require guarantees or other forms of written assurances, and (v) require priority as to the monies lent as against other creditors, such as trade creditors.
RCI knew or ought to have known that Sparkasse's relationship with TM Germany would be governed by terms and conditions.
the December correspondence was requested by RCI simply to satisfy its bank and to the best of TM Germany's knowledge, the December correspondence did satisfy RCI's bank. No further requests for information or documentation were made by the appellants. The appellants were now seeking to construe a letter, drafted to meet the requirements of RCI's bank, in a manner in which it was never intended to be construed.
[49] It is trite to say that the pleadings define the issues in the lawsuit. Given the contents of the pleadings, there was no denial of procedural fairness. The trial judge's interpretation of the evidence was supported by the pleadings.
[50] Secondly, counsel's submissions at trial supported the theory pleaded and relied upon by the trial judge.
[51] In submissions, counsel for TM Germany argued that the test for negligent misrepresentation is not what RCI understood the representation to be but what a reasonable person in all the circumstances of RCI would have understood. Counsel for Sparkasse urged the trial judge to construe its letter in a manner responsive to Osim's statement that the requirement emanated from RCI's bank. TM Germany also advanced the argument that a sophisticated supplier in the position of the appellants would have known that there would be terms and conditions of financing or terms and conditions upon which a bank would revoke the financing.
[52] I am unable to conclude that the trial judge constructed a new, unforeseen theory of the case.
[53] Thirdly, and in any event, the appellants mischaracterize the trial judge's statements. On the issue of the omission of the guarantee from the letter, the trial judge wrote at paras. 58 and 162:
There may be any number of reasons why a guarantee was not requested. Speculation can supply these and many other commercially reasonable explanations. I am not required to decide why they did what they did. I do conclude that the idea of asking for a guarantee came up internally and was not acted upon after a reflection period of two days. While Mr. Mellema may have hoped that TM Germany would "take the hint" that Mr. Osim dropped and offer a guarantee, I find that he well knew that RCI had not in fact asked for one.
Secondly, despite Mr. Mellema having raised the subject of a "guarantee" from TM Germany with Mr. Osim internally two days earlier and despite the existence of requirements for two such guarantees from RCI in favour of TM Germany in the purchase order, no request for a guarantee from TM Germany was in fact made. The parties all knew what a guarantee was – the words used were carefully chosen. They may have been designed to hint that a guarantee might be offered, but none was actually requested. The parties were discussing, however casually, the terms by which TM Germany would be released from the existing contract and TM Canada would assume it. I attach considerable weight to the deliberate omission of the word "guarantee" from the communication sent by RCI and absolutely no weight to the testimony of RCI's witnesses suggesting that the request made amounted to "the same thing". It did not.
[54] The trial judge did not find Mellema to be credible, attached little weight to his and Osim's current recollections of discussions between the two men, and preferred the contemporary written record as being much more reliable. RCI clearly did not request a guarantee. And Osim admitted that he did not use the word guarantee in the email. It was a fair inference for the trial judge to conclude that this was a deliberate decision. There was no denial of procedural fairness.
[55] As for the trial judge's statement describing the nature of Osim's original request as guileful and misleading, the trial judge had already concluded that the respondents' correspondence was not untrue, inaccurate, or misleading. Indeed, the trial judge stated: "This conclusion is all the more evident if one considers the guileful and misleading nature of Mr. Osim's original request attributing the requirement for a letter to RCI's bank" (emphasis added). This characterization did not materially impact the trial judge's conclusion. Furthermore, Osim's statement about RCI's bank was admitted to be false. The trial judge's finding, although superfluous, was nonetheless based on an inference that was available on the record.
[56] The appellants other complaint relates to the trial judge's reference to Getrag's indemnity of TM Canada.
[57] Mellema testified that Getrag was the "largest company in the world producing transmissions for the automotive industry"; and that for "Getrag itself, it would be a large project, I understand that the Getrag project itself was more than $500 million". He also testified that they had several customers that were involved with the project. Although an indemnity was not pleaded and there was no express evidence on any indemnity from Getrag in favour of TM Canada, any finding in this regard would not have effected the ultimate dismissal of the negligent misrepresentation claim.
[58] In my view, the appellant was not taken by surprise nor was there procedural unfairness that served to deny the appellants natural justice.
Conclusion
[59] The fundamental issue in this case was whether there was a negligent misrepresentation arising out of an exchange of correspondence. The trial judge concluded that the correspondence sent by the respondents was true and not misleading and he dismissed the appellants' claim for negligent misrepresentation. In my view, his analysis was properly grounded in the evidence, was responsive to the pleadings, and reflected no error in principle or any palpable and overriding error.
Disposition
[60] For these reasons, the appeal is dismissed.
[61] As agreed by the parties, the appellants shall pay TM Germany $15,000 and Sparkasse $10,000 in partial indemnity costs inclusive of disbursements and applicable taxes.
[62] The appellants paid $72,776.57 into court as security for costs of the action and the appeal to the credit of Sparkasse and $165,302.98 to the credit of TM Germany. These amounts reflect the June 20, 2016 costs award of the trial judge of $62,776.57 in favour of Sparkasse and $150,302.98 in favour of TM Germany plus the agreed upon appeal costs. In light of the result, I would grant the respondents' request that these funds be paid out of court as follows:
- $72,776.57 plus accrued interest to Sparkasse; and
- $165,302.98 plus accrued interest to TM Germany
Released: April 16, 2018
Pepall J.A. (for the Court)
"DW" "S.E. Pepall J.A."
"APR 16 2018" "I agree David Watt J.A."
"I agree B.W. Miller J.A."