Court of Appeal for Ontario
Citation: Way v. Schembri, 2020 ONCA 691
Date: 2020-11-02
Docket: C68037
Before: Huscroft, Nordheimer and Harvison Young JJ.A.
Between
Al Way, Kingsley Financial Inc. and Triumph Financial Holdings Inc.
Plaintiffs (Appellants)
and
Gordon Schembri, Schembri Financial Limited, 1765998 Ontario Inc., 41 Columbia Inc., King & Columbia Inc., 69 Columbia Inc., 5 Rittenhouse Inc., The Block Inc., The Block 1 Inc. and The Block II Inc.
Defendants (Respondents)
Counsel:
Jonathan C. Lisus, Andrew J. Winton and Niklas Holmberg, for the appellants
James M. Wortzman and Spencer Malthouse, for the respondents
Heard: October 21, 2020 by video conference
On appeal from the judgment of Justice James W. Sloan of the Superior Court of Justice dated February 1, 2019, with reasons reported at 2019 ONSC 819 and the costs award dated March 14, 2019, with reasons reported at 2019 ONSC 1668.
Nordheimer J.A.:
[1] The plaintiffs appeal from the summary judgment granted by the motion judge that dismissed their action.[^1] They also seek leave to appeal the motion judge’s award of costs. For the following reasons, I would allow the appeal, set aside the judgment below, and reinstate the appellants’ action. Given my conclusion that the matter should proceed to trial, I will limit any observations I may have on the enforceability of the clause in question.
Background
[2] Al Way and Gordon Schembri are real estate developers. In 2007, the two men entered into a joint venture agreement (through their respective numbered companies) to develop a project in Waterloo, Ontario. Shortly after entering into the joint venture agreement, Way and Schembri formed a corporation, Triumph Financial Holdings Inc. ("Triumph"), to pursue other development opportunities in Waterloo, London and Oshawa (the "Triumph Lands").
[3] Under a shareholders' agreement dated April 2, 2008 (the "Shareholders’ Agreement"), Way and Schembri are shareholders of Triumph through their respective corporations, Kingsley Financial Inc. (55% of common shares) ("KFI") and Schembri Financial Limited (45% of common shares) ("Schembri Financial"). Way and Schembri are Triumph's only directors.
[4] Clause 13 of the Shareholders’ Agreement reads:
- NON-COMPETITION
During the period which SCHEMBRI FINANCIAL is a shareholder of the Corporation, it shall have the ongoing obligation to present KINGSLEY FINANCIAL and the Corporation all real estate development opportunities (the "Project") which it may have acquired within the Regional Municipality of Waterloo. This obligation to KINGSLEY FINANCIAL and the Corporation shall also extend to GORDON SCHEMBRI personally, and any other legal entity in which he has an interest, either directly or indirectly, financially or otherwise. KINGSLEY FINANCIAL and the Corporation shall have FIFTEEN (15) days following the presentation of the Project to them to determine if it is economically feasible using the typical budget model consistently utilized by them in such circumstances and, if at the expiry of the FIFTEEN (15) day period neither of them have indicated to SCHEMBRI FINANCIAL in writing that it is taking on the Project, then SCHEMBRI FINANCIAL (or its designate) shall be free to pursue the Project without the involvement of KINGSLEY FINANCIAL or the Corporation.
[5] Shortly after the Shareholders’ Agreement was executed and development on the Triumph Lands commenced, Way and Schembri's business relationship deteriorated. The men have been engaged in sustained and hard-fought litigation since 2010.
[6] The appellants’ action was commenced on May 25, 2012. It is based on a claim for damages arising out of an alleged breach of clause 13. The appellants’ action is a companion action to a broader action commenced by Schembri in 2010. In that action, Schembri claims over $30 million in connection with the joint venture project and the Triumph Lands.
[7] In 2014, the parties consented to an order that the two actions be tried together. In 2018, the parties consented to an order that the two actions share common discoveries, which the respondents say are not yet complete.
[8] It is unnecessary for the purposes of this appeal to recite all of the machinations that have taken place between the parties to these two actions. It is sufficient to say that each side makes a wide variety of allegations against the other side, all alleging improper conduct of one type or another.
[9] The respondents say that they have completed their examinations for discovery. They also say that the Schembri action has been set down for trial, although there is apparently no trial date set. The appellants have not completed their examinations for discovery.
[10] In May 2017, the respondents brought a motion for summary judgment to dismiss the appellants’ action on the ground that clause 13 is an unenforceable restrictive covenant. The motion was heard over two days in October 2018 and another two days in January 2019. The motion judge agreed with this submission, held that clause 13 was unenforceable, and granted judgment dismissing the action.
Analysis
[11] There is no analysis undertaken by the motion judge as to whether this was a proper situation in which to consider summary judgment, although that preliminary question was argued before him. Indeed, the motion judge alludes to the issue at para. 138 of his reasons. I would note on this point that the litigation between the parties has been going on for more than 10 years. The motion judge also happens to be the judge who is case managing these actions. The summary judgment motion itself was launched more than three years ago.
[12] It would seem, at first blush, to be unusual to consider summary judgment in one action that has already been ordered to be tried together with another action, along with an order for common examinations for discovery. Indeed, the order directing that the actions be tried together refers to the fact that the actions are “related”. It is even more unusual given that it appears that the facts underlying the two actions are inextricably intertwined.
[13] The respondents contend that summary judgment is appropriate because the only issue before motion judge was the enforceability of clause 13. That argument might have gained some traction if there had been agreement that the only issue to be decided was the meaning of clause 13 based on its wording alone, without the need for any factual context. That was not the case, however. The factual matrix was a necessary consideration of any decision regarding the application and enforceability of clause 13 because “[c]onsideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning”: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para.47.
[14] In any event, it is difficult to see what saving of time and expense was accomplished by dealing with this issue separately, when the main parties are locked in other litigation that is still ongoing and has been for some time. The issue of the enforceability of clause 13, by itself, could have been easily dealt with at the trial, if the issue was as narrow as the respondents contend. Purporting to deal with it through a summary judgment motion has only caused further delay, distraction, and expense, all in the context of litigation that has been going on for far too long as it is.
[15] On this point, the appellants say that the motion judge effectively granted partial summary judgment because of the existence of the other action and the factual linkage between the two. The respondents reply that the motion judge granted full summary judgment because it disposed of the appellants’ action.
[16] The respondents are correct, but only in the most technical sense. More importantly, the principles surrounding partial summary judgment are not to be so narrowly construed nor applied. Partial summary judgment is a rare procedure that should be sparingly invoked: Butera v. Chown, Cairns LLP, 2017 ONCA 783, 137 O.R. (3d) 561, at para. 34. The reasons for that approach are enunciated by Paciocco J.A. in Service Mold + Aerospace Inc. v. Khalaf, 2019 ONCA 369, 146 O.R. (3d) 135, at para. 14:
There is also the risk that partial summary judgment can frustrate the Hryniak objective of using summary judgment to achieve proportionate, timely and affordable justice. If used imprudently, partial summary judgment can cause delay, increase expense, and increase the danger of inconsistent findings at trial made on a more complete record. [Citation omitted.]
[17] Those concerns regarding partial summary judgment are fully engaged in this case because, as the appellants correctly point out, the two actions are factually intertwined. Indeed, the motion judge acknowledged the overlap in the facts of the two cases numerous times in the course of his reasons. He also relied on that overlap in reaching the costs decision that he did.
[18] As a result, there is the very real possibility that conclusions reached by the trial judge could conflict with the result reached by the motion judge. There is also the possibility that the trial judge will reach a better understanding of the relationships between the parties that would give a more informed view of the meaning and purpose behind clause 13. This was the very concern that Lauwers J.A. expressed in Baywood Homes Partnership v. Haditaghi, 2014 ONCA 450, 120 O.R. (3d) 438, when he said, at para. 37:
In the complex situation in this case, it is therefore entirely possible that the trial judge who hears the trial of the issue on the validity of the promissory notes will develop a fuller appreciation of the relationships and the transactional context than the motion judge. That could force a trial decision on the promissory notes that would be implicitly inconsistent with the motion judge's finding that the third release is fully valid and effective, even though the parties would be bound by that finding. The process, in this context, risks inconsistent findings and substantive injustice.
[19] That, however, is not the only problem with employing summary judgment in this case. The motion judge made a number of findings about clause 13 that demonstrate that summary judgment was not, in fact, an appropriate route to take in this action. First, he found that clause 13 is a restrictive covenant, although it is not clear what the motion judge meant in making that finding. Clause 13 is, in fact, a right of first refusal. Second, the motion judge found that clause 13 was ambiguous in several respects. He found its spatial parameters were ambiguous; he found at least four phrases to be ambiguous; and he found the requirement for Schembri to “present all real estate development opportunities” to be ambiguous. Third, the motion judge found clause 13 to be “commercially absurd” and not necessary to “protect Triumph’s or Kingsley’s legitimate interests”. Fourth, the motion judge found that no “typical budget model” had been presented to the court and thus concluded that this phrase was also ambiguous. Fifth, the motion judge found that the arbitration provision in the Shareholders’ Agreement, by which any disputes were to be resolved by arbitration, was “commercially unreasonable and something that no businessperson would agree to”.
[20] In addition to these findings, the motion judge also found that “it is difficult to see how Way’s interests have been damaged by the breaches of Clause 13 that he alleges”. The motion judge based this finding on the fact that Way and his companies had generated millions of dollars in revenues during the same period of time.
[21] All of these findings require a factual foundation. Yet, the motion judge failed to refer to any factual foundation for any of these findings. Indeed, given that contracts are to be interpreted in a manner “consistent with the surrounding circumstances known to the parties at the time of formation of the contract” (Sattva Capital, at para. 47), evidence regarding those circumstances would appear to have been a necessary interpretive step.
[22] It is also unclear what factual foundation the motion judge relied upon for his conclusion that the arbitration provision was one that was commercially unreasonable. That finding would require consideration of the application of the clause in the particular commercial context that existed, none of which is examined by the motion judge. Given the presence of arbitration provisions in countless business agreements, it cannot be that their existence alone is commercially unreasonable. Further, the motion judge’s view that no businessperson would agree to such a clause appears to be contradicted by the very facts of this case, as both Way’s and Schembri’s companies signed the Shareholders’ Agreement as did Way and Schembri personally.
[23] The motion judge also rejected the legitimacy of clause 13 on the basis that it was a mere agreement to agree. As I have said, clause 13 is, on its face, a right of first refusal, notwithstanding the title the clause was given by the drafters of the Shareholders’ Agreement. Rights of first refusal are a common feature of many commercial arrangements: see, for example, Downtown King West Development Corp. v. Massey Ferguson Industries Ltd. (1996), 1996 CanLII 1232 (ON CA), 28 O.R. (3d) 327 (C.A.), at p. 339, leave to appeal refused, [1996] S.C.C.A. No. 258. In some instances, they contemplate that when certain opportunities are presented to one party, that party will offer the other party the right to participate. In other instances, they contemplate that, before a party enters into a sale with a third party, the party will offer the other party the first chance to buy. Rights of first refusal always contemplate that there will be the need for a further agreement between the parties. However, the need for a further agreement does not invalidate a contractual right of first refusal. This suggests that the motion judge misunderstood the proper application of the “agreement to agree” principle.
[24] Finally, there is no legal foundation for the motion judge’s conclusion that, in some fashion, the appellants are not entitled to advance a claim for damages arising from a breach of a contractual term just because they have otherwise been financially successful in their business affairs.
Conclusion
[25] This is not a matter that ought to have been dealt with by way of summary judgment. The summary judgment cannot stand. I would allow the appeal, set aside the summary judgment along with the award of costs, and reinstate the action. Accordingly, I do not reach the motion for leave to appeal the costs award.
[26] The appellants are entitled to their costs of the appeal which are fixed at the agreed upon amount of $50,000, inclusive of disbursements and HST. I leave the disposition and fixing of the costs of the original summary judgment motion to the trial judge.
Released: “GH” November 2, 2020
“I.V.B. Nordheimer J.A.”
“I agree. Grant Huscroft J.A.”
“I agree. Harvison Young J.A.”
[^1]: I note that 1765998 Ontario Inc. is not included in the title of proceeding in the formal judgment below but it is included as a party in the title of proceeding in the originating process. Thus, it is properly included in the title of proceeding here.