Supreme Court of Canada

Wotherspoon v. Canadian Pacific Ltd., 1987 CanLII 2807 (SCC), [1987] 1 SCR 952

Date: 1987-06–25

Gordon Dorward de Salaberry Wotherspoon, Allan Leslie Beattie, Clarke McLean Beattie, Robert John Butler, Robert Alfred Dunford, Geoffrey Arthur Nelson Hitchlock, Earl Herbert Orser, Morgan Cecil Payne, Paul Charles Statler and Allan Purchase Upshall, as trustees of the Eaton Retirement Annuity Plan, suing on behalf of themselves and all other shareholders of Ontario and Quebec Railway Company except the individual Defendants and the Defendant, Canadian Pacific Limited Appellants

v.

Canadian Pacific Limited, Marathon Realty Company Limited and Ontario and Quebec Railway Company Respondents

and

John Turner, on behalf of himself and all holders of 5 % permanent debenture stock in the Ontario and Quebec Railway Company Intervener

and between

Joseph Pope, suing on behalf of himself and all other shareholders of Ontario and Quebec Railway Company except the individual Defendants and the Defendant, Canadian Pacific Limited Appellant

v.

Canadian Pacific Limited, Marathon Realty Company Limited and Ontario and Quebec Railway Company Respondents

and

John Turner, on behalf of himself and all holders of 5 % permanent debenture stock in the Ontario and Quebec Railway Company Intervener

INDEXED AS: WOTHERSPOON V. CANADIAN PACIFIC LTD.

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File Nos.: 16957, 16958.

1985: April 1, 2, 3, 4; 1987: June 25.

Present: Beetz, Estey, McIntyre, Chouinard , Lamer, Le Dain and La Forest JJ.

Chouinard J. took no part in the judgment.

ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO

Leases — Perpetual leases — Lessee of railway selling lessor's surplus lands — Whether lessee authorized by the lease or statutes to sell these lands without the lessor's approval — Whether the sale of these lands constitutes a breach of the leases — Whether proceeds from sales should go to the lessor — Whether lessor entitled to recover its reversionary interest in the surplus lands sold by lessee — Act respecting the Canadian Pacific Railway Company, S.C. 1891, c. 70, s. 2.

Creditor and debtor — Lease of railway — Lessee authorized by statute to sell lessor's surplus lands free of incumbrance — Lands subject to lessor's debenture stock — Debenture stock constituting first lien and charge on lands — Whether debenture stock an incumbrance within the meaning of the statute — Whether debenture stock a specific or a floating charge — Whether lessor's debenture stockholders have a claim against the lessee or the lessor for the sale of these lands under the lease or statute — Act respecting the Ontario and Quebec Railway Company, S.C. 1884, c. 61, s. 8 — Act respecting the Canadian Pacific Railway Company, S.C. 1891, c. 70, s. 2.

Corporations — Meetings — Notice — Sufficiency of notice — Meeting to approve sale of surplus lands to majority shareholder's subsidiary — Whether shareholders should have received the actual appraisal reports of these properties — Whether shareholders meeting validly held.

Corporations — Oppression or fraud on the minority — Board of Directors and majority shareholder of railway company voting in favour of the sale of surplus lands to majority shareholder's subsidiary — Whether such action constitutes oppression or fraud on the minority.

The Canadian Pacific Railway Co. ("CP") was incorporated in 1881 by Act of Parliament. The plan

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envisaged by the 1881 CP Act and the company charter was the establishment of a railroad, both by construction or acquisition, from the Atlantic to the Pacific. The Ontario and Quebec Railway Co. ("O & Q"), reincorporated in 1881 was empowered to construct and operate railroads from Toronto through south central Ontario to Ottawa and thence into the Province of Quebec to join up with railroads in that province. Between 1883 and 1887, by amalgamations, purchases and leasings, O & Q assembled a railway from Montréal to St. Thomas, Ontario, via Ottawa and Toronto. In particular, O & Q leased for a term of 999 years the rail lines of the Toronto, Grey & Bruce Railway Co. ("TG & B") and leased in perpetuity the rail lines of the West Ontario Pacific Railway Co. ("WOP"). These transactions were authorized by Parliament.

In 1884, 1887 and 1888, through a series of three perpetual leases also approved by Parliament, O & Q leased its entire consolidated railway to CP. There are no significant differences in the leases. The 1884 lease, which deals with the bulk of the assets of the O & Q system, is the principal lease in this appeal. With this lease, CP took over the assets and undertaking of O & Q, all in exchange to pay, pursuant to clause 9 of the lease, the interest and dividends directly to the holders of the perpetual debenture stock and common stock of O & Q, and to the holders of the remaining outstanding bonds of some of the other railway companies. The debentures issued by O & Q under s. 8 of the Act respecting the Ontario and Quebec Railway Company, S.C. 1884, c. 61, constitute "a first lien and charge" upon O & Q property. Under clause 15, CP is required to provide, at its expense, an officer to O & Q who was to be its secretary and transfer clerk. In clause 12, CP is also required to keep the railway and the rolling stock in good order and repair and, at the end of the lease, to "yield up the same or other rolling stock and equipments of equal value, to [O & Q], in like good order and condition". Under clause 11, CP enjoys "all the franchises and powers" of the lessor to run the railway and is authorized by clause 14 to take legal proceedings in O & Q's name and to "do all acts … necessary, for the convenient, efficient and effectual working of the railway … ." Finally, under clause 18, in the event of non-payment of the rental for a period of ninety days, after any installment falls due, or in the event of substantial failure to maintain, work, repair or operate the railway for a period of ninety days, the lease becomes, at the option of the O & Q, void; CP must yield possession of the railway, and the other premises

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leased, in good order and condition. In short, CP took over all the operations of O & Q and the burden of operating its railway system, and undertook to pay all the debt and equity interest or dividend obligation of O & Q. O & Q was left with no expenses and no revenue; no assets except a reversionary right to the demised railway lines in the event of the expiry or the termination of the lease; and no staff, except one officer supplied by CP. O & Q became a dormant company.

Between 1884 and 1963, CP sold a number of lands not required for railway purposes, the major part of which came from O & Q lands themselves, and the rest from lands of TG & B or WOP leased to CP through O & Q. In 1932 and 1971, CP also abandoned parts of the railway system that were uneconomical to operate. From 1963 to 1973, CP sold, at their book value, a considerable number of surplus lands to a development company, Marathon Realty Co. Ltd. ("Marathon"), a wholly-owned subsidiary of Canadian Pacific Investments Ltd., which prior to 1967, was a wholly-owned subsidiary of CP. In 1967, CP sub-leased to Marathon for 99 years certain designated surplus lands. This procedure, however, caused difficulties for Marathon in obtaining financing. In 1973, to remedy the situation, CP installed in O & Q a Board of Directors constituted of persons completely independent of CP and, then, O & Q and CP agreed to sell and convey to Marathon all the surplus lands free from incumbrance for a certain price. This agreement was authorized by the shareholders of O & Q at a meeting purportedly called in accordance with the by-laws of that company. At the meeting, CP, which held almost 80 per cent of O & Q shares, voted all its share-holdings in O & Q and thus overrode the objections of the minority stockholders of O & Q to the Marathon transaction.

In the Ontario High Court, O & Q minority shareholders and debenture stockholders claimed generally that the proceeds from the sale of O & Q surplus lands should go directly to O & Q to replace the sold assets which had been leased by O & Q to CP in 1884, and that all unsold surplus lands should no longer be include-

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ed in the lease. They also challenged the validity of the CP and O & Q agreement with Marathon on the grounds that (1) any approval by the Board of Directors of O & Q for the sale of O & Q lands prior to 1973 had no legal effect because, contrary to s. 53(2) of the Railway Act, R.S.C. 1970, c. R-2, their directors had an interest in the lease between CP and O & Q; (2) CP had no right to acquire shares in O & Q because s. 87 of the Railway Act prohibits railway companies from investing their assets in the shares of other railway companies; and (3) the notice of the O & Q shareholder meeting called to confirm the Marathon agreement was inadequate.

The Ontario High Court directed CP to pay O & Q the proceeds of all sales of lands leased to CP under the three leases determined according to the fair market value. The Court found that CP had no right under the leases or statutes to sell the surplus lands. On appeal, the Court of Appeal held that CP had the power of sale under the leases, but that O & Q was entitled only to recover the value of its reversionary interest in its lands and not the entire fair market value of the lands sold. The main issue in this appeal is whether the sale by CP of some parts of the lands demised constitutes a breach of the 1884 lease entitling O & Q to terminate this lease with attendant remedies for the appellants or whether alternatively O & Q is entitled to receive the proceeds from the sale of any lands demised under the lease, which have been determined by CP and O & Q to be no longer required for the operation of the O & Q Railway.

Held: The appeals should be dismissed and respondent CP's cross-appeals should be allowed in part.

(1) The perpetual leases

A perpetual lease is unknown to the common law. But there is no need in this case to consider the position of the leases under the common law because all the parties agreed that the various statutes of Canada authorizing these transactions at the same time also approved the perpetual leases, whatever their status might otherwise have been at common law.

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(2) Whether O & Q surplus lands remained subject to the 1884 lease

Appellants' argument that the O & Q surplus lands should no longer be included in the 1884 lease is unacceptable. CP, in leasing the consolidated railway of O & Q, was leasing the entire operation of O & Q which included both the lands that might thereafter be acquired for railway purposes as well as any lands that might thereafter become surplus to the needs of the railway. There is nothing in the circumstances or in the language of the 1884 lease to indicate that the surplus lands were no longer subject to it.

(3) Power of sale of surplus lands by lease

CP acquired the right to sell O & Q surplus lands under the 1884 lease. Clause 11 of the 1884 lease provided that CP had "all the franchises and powers" of O & Q to run the railway and that included O & Q's power to sell surplus lands, a power which O & Q enjoyed pursuant to s. 7.2 of The Consolidated Railway Act, 1879, S.C. 1879, c. 9, and later s. 90(c.) of The Railway Act, S.C. 1888, c. 29. The object of the 1884 lease and the balance of the lease support that interpretation. The perpetual arrangement between CP and O & Q, whereby CP takes over the entire undertaking of O & Q and thereafter in perpetuity runs the railway with CP's own staff, capital and other resources and for CP's own profit, providing that CP continues to honour its obligations under the lease, could not be undertaken by thinking people without contemplating a flexibility of operations as infinite as the term of the arrangement itself. The 1884 lease itself does not contemplate the original property being returned. Over the years, the content will change. Under clauses 12 and 18, it is not the nature and identity of the property which will be measured on return but rather its good order and working condition.

CP did not require the approval of the O & Q Board of Directors for any of these sales. The O & Q's by-law, enacted after the execution of the 1884 lease, which provides that "no deed of sale or conveyance of any real property of the company shall be made until it has been expressly authorized by vote of the Board of Directors" cannot affect the legal rights acquired by CP under the 1884 lease.

The holders of debentures issued by O & Q have no claim against CP and O & Q for the diminution of their properties because of the sales of surplus lands made

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under the 1884 lease. There are several indications in the lease, the 1884 Act respecting the Ontario and Quebec Railway Company and the indenture between O & Q and CP with reference to the issuance of the debenture stock that the "first lien and charge" upon O & Q's property is a floating charge securing the debenture stock and operative only upon crystallization of that charge by default. Since disposal of surplus lands is not a breach of the conditions surrounding the issuance of the debenture and since the interest has been paid as accrued, nothing has occurred in law to crystallize the floating charge and cause it to descend upon the lands of O & Q. There was thus clearly no cause of action against CP or O & Q by reason of these sales. CP acquired the power of sale under the 1884 lease and a floating charge could not operate so as to restrict this power of sale or affect the condition of the title of the land sold.

Finally, although it seems that CP also had under the perpetual leases the power to sell the surplus lands of WOP and TG & B, there is no need to determine the issue since there is no claim by WOP or TG & B in these proceedings with respect to their respective lands sold by CP.

(4) Power of sale by statute

CP may sell and cause O & Q to join in the sale of the surplus lands pursuant to the Act respecting the Canadian Pacific Railway Company, S.C. 1891, c. 70 (the "1891 CP Act"). Section 2 of this Act authorized CP to sell and convey free from incumbrance any of its surplus lands providing the proceeds of sale are reinvested in rolling stock or equipment or in "such permanent improvements" as CP may deem expedient. CP may also join any other company "whose railway forms part of the [CP] system" for the sale of the surplus lands of that other company "in like manner". The advantage accorded to CP over and above its general power of sale of surplus lands under s. 7.2 of The Consolidated Railway Act, 1879 and thereafter s. 90(c.) of The Railway Act of 1888 is that this provision permits the delivery of a clear title to the purchaser. The O & Q debenture stock constitutes a "first lien and charge" over O & Q's property and is an "incumbrance" within the meaning of the 1891 CP Act, and CP fulfilled all the requirements of s. 2 of the Act because the proceeds from the sales of surplus lands were all reinvested in the O & Q Railway. Section 2 of the 1891 CP Act does not impose any requirement of board approval of any sales under the statute and given the general control which CP exercised

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over O & Q under the 1884 lease it was not necessary for CP to secure the approval of the O & Q Board of Directors for any of these sales. Therefore, with respect to sales made pursuant to s. 2 of the 1891 CP Act, the O & Q debenture holders have no claim against CP or O & Q.

(5) Abandonment

The abandonment of two rail lines by CP in the course of operating the O & Q railway system, approved by the proper authorities, did not amount to a breach of the 1884 lease. CP continued to operate the O & Q railway system "efficiently" after these lines were abandoned as required by clause 12 of the lease. Given a reasonable and practical interpretation, clause 12 burdens the lessee with the efficient conduct of the operation of this railway in a manner consistent with the changing commercial and technological conditions and with the interest of the community being served.

(6) The Marathon Sale

CP clearly enjoys the power of sale over the O & Q surplus lands and there is no legal impediment that would prevent CP from selling them according to the procedure employed in the Marathon transaction. The condition of the title to the lands in Marathon will be the same if the sale is completed in accordance with the 1884 lease provisions, given that the claim of the debenture stockholders is in law a floating charge which has not, at the time of the completion of the sale, become crystallized into a specific charge on these lands, or in compliance with s. 2 of the 1891 CP Act.

Appellants' contentions challenging the validity of the Marathon agreement, namely, the lack of an independent board, CP's acquisition of O & Q shares, and the alleged inadequacy of the notice of the O & Q shareholders meeting, must be dismissed. Given that CP is entitled to sell O & Q's surplus lands even without the approval of the O & Q Board, it cannot be argued that the Marathon transaction involves any oppressive conduct or discrimination on the part of CP which might constitute a fraud upon the minority shareholders of O & Q. The Marathon agreement, which was duly executed and confirmed by the appropriate corporate authorities, is therefore binding upon all the parties and must be carried out according to its terms.

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(7) Reversionary interest of O & Q

O & Q is not entitled to recover its reversionary interest in the lands sold by CP either under the 1884 lease or the 1891CP Act. There is no basis in law or equity for diverting funds from a commercial transaction consciously and validly undertaken by the lessee into the corporate shell of O & Q. Under the lease, CP was clearly entitled to all the funds arising from the operation of the O & Q Railway—including the proceeds from the sale of surplus lands—providing, of course, that CP continues to honour its obligations under the lease. The intention of the parties was clearly to grant to CP the entire operation of O & Q and the efficacity of the lease does not require that additional terms be implied with respect to the reversionary interest of O & Q.

Where the sale proceeds are realized under s. 2 of the 1891 CP Act, reinvestment of the sale proceeds must take place, and the reversionary interest is by statute considered to be restored and no further entitlement is provided for the holders of securities or other interests in the railway. As the statute gives no further recourse or relief to the holder of an incumbrance, it is difficult to see how equity can in principle provide a remedy for O & Q as the lessor and the holder of the reversionary interest or for its common shareholders.

Cases Cited

Referred to: Doe d. Robertson v. Gardiner (1852), 12 C.B. 319; Sevenoaks, Maidstone & Tunbridge Railway Co. v. London, Chatham & Dover Railway Co. (1879), 11 Ch. D. 625; Town of Lunenburg v. Municipality of Lunenburg, 1931 CanLII 391 (NS CA), [1932] 1 D.L.R. 386; Manchester Ship Canal Co. v. Manchester Racecourse Co., [1900] 2 Ch. 352; Phoenix Ins. Co. of Hartford v. New York & Harlem R. Co., 59 F.(2d) 962 (2d Cir. 1932); In re Penn Central Transportation Co., 354 F. Supp. 717 (E.D. Pa. 1972), rev'd on other grounds 484 F.2d 323 (3d Cir. 1973); Beardman v. Wilson (1868), L.R. 4 C.P. 57; Hicks v. Downing (1696), 1 Ld. Raym. 99, 91 E.R. 962; Wollaston v. Hakewill (1841), 3 Man. & G. 297, 133 E.R. 1157; Milmo v. Carreras, [1946] K.B. 306; Clark v. Raynor (1922), 1922 CanLII 505 (NS CA), 65 D.L.R. 425; Evans v. Evans (1853), 22 L.J. Ch. 785; Salomon v. Salomon & Co., [1897] A.C. 22; The Moorcock (1889), 14 P.D. 64.

Statutes and Regulations Cited

Act further to amend the Act respecting the Canadian Pacific Railway Company, S.C. 1887, c. 56.

Act respecting the Canadian Pacific Railway, S.C. 1881, c. 1,ss. 17, 25.

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Act respecting the Canadian Pacific Railway Company, S.C. 1883, c. 55.

Act respecting the Canadian Pacific Railway Company, S.C. 1891, c. 70, s. 2.

Act respecting the Credit Valley Railway Company, S.O. 1882-83, c. 50, s. 1.

Act respecting the Ontario and Quebec Railway Company,S.C 1884, c. 61,ss. 1,4,8.

Act respecting the Ontario and Quebec Railway Company, S.C 1887, c. 62, s. 1.

Act respecting the Ontario and Quebec Railway Company, S.C. 1888, c. 53, s. 2, schedule.

Act to amend an Act to incorporate the Ontario and Quebec Railway Company, S.C. 1883, c. 58.

Act to amend the Canadian Pacific Railway Act, 1889, and for other purposes, S.C. 1890, c. 47, s. 6.

Act to confirm the lease of the Ontario and Quebec Railway to the Canadian Pacific Railway Company, and for other purposes, S.C. 1884, c. 54, s. 2.

Act to incorporate the Atlantic North-West Railway Company, S.C.1879, c. 65.

Act to incorporate the Canada Central Railway Company, and to amend the Act, intituled: An Act to provide for and encourage the construction of a Railway from Lake Huron to Quebec (1861), 24 Vict., c. 80 (Prov. Can.)

Act to Incorporate the Credit Valley Railway Company, S.O. 1870-71,c.38.

Act to incorporate the Ontario and Quebec Railway Company, S.C. 1871, c. 48.

Act to incorporate the Ontario and Quebec Railway Company, S.C. 1881, c. 44, ss. 2, 3, 14, 15, 19, 30.

Act to Incorporate the Toronto, Grey and Bruce Railway Company, S.O. 1868, c. 40, ss. 2, 3, 29.

Act to incorporate the West Ontario Pacific Railway Company, S.C. 1885, c. 87, s. 2.

Civil Code, art. 1593.

Consolidated Railway Act, 1879, S.C. 1879, c. 9, ss. 7.2, 21.3.

Landlord and Tenant Act, R.S.O. 1980, c. 232, s. 3.

Limitations Act, R.S.O. 1970, c. 246, s. 46.

Railway Act, R.S.C. 1970, c. R-2, ss. 53(2), 87.

Railway Act, S.C. 1888, c. 29, s. 90(c.), (p.)

Railway Act, 1868, S.C. 1868, c. 68.

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Authors Cited

Anger and Honsberger Law of Real Property, vol. 1.,

2nd ed. By A. H. Oosterhoff and W. B. Rayner.

Aurora, Ont.: Canada Law Book, 1985.

Halsbury's Laws of England, vol. 27, 4th ed. London:

Butterworths, 1981.

Williams and Rhodes Canadian Law of Landlord and Tenant,

vol. 1, 5th ed. By F. W. Rhodes and Marc Casavan. Toronto: Carswells, 1983.

APPEAL from a judgment of the Ontario Court of Appeal (1982), 1982 CanLII 1927 (ON CA), 35 O.R. (2d) 449, 129 D.L.R. (3d) 1, allowing respondents' appeals and dismissing appellants' cross-appeals from a decision of the Ontario High Court (1979), 1979 CanLII 2049 (ON SC), 22 O.R. (2d) 385, 92 D.L.R. (3d) 545. Appeals dismissed and cross-appeals of the respondent CP allowed in part.

J. Edgar Sexton, Q.C., and Brian Morgan, for the appellants Wotherspoon et al.

John Sopinka, Q.C., and Kathryn Chalmers, for the appellant Pope.

Pierre Genest, Q.C., D. S. Maxwell, Q.C., F. J. C. Newbould, Q.C., and J. D. Marshall, for the respondent Canadian Pacific Ltd.

Pierre Genest, Q.C., for the respondent Marathon Realty Co.

John J. Robinette, Q.C., for the respondent Ontario and Quebec Railway Co.

L. Yves Fortier, Q.C., C. W. Lewis, Q.C., and Christine A. Carron, for the intervener.

The judgment of the Court was delivered by

ESTEY J.—

1. General Issues

1. General Issues

This appeal takes the Court back into an important chapter in Canadian history, the railway building era of the nineteenth century. Specifically, it calls for an understanding of the legal history of the formation of a large segment of the Canadian Pacific Railway Company (hereinafter "CP") railway system in central Canada. The issue arises out of a complex relationship between CP and the Ontario and Quebec Railway Com-

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pany (hereinafter "O & Q") and a number of affiliated corporations all engaged in pioneering the construction of what became the network of railways operated by CP in parts of Ontario and Quebec. The issues herein are brought to the courts by minority stockholders of O & Q and by the holders of "debenture stock" issued by O & Q in the course of the establishment of the part of the CP railway system mentioned above. The debenture holders, John Turner et al., come to court not as plaintiffs in their own right but as interveners in the minority stockholder actions brought by Joseph Pope and the trustees of the Eaton Retirement Annuity Plan who are suing on behalf of themselves and all other shareholders of O & Q. Turner intervenes in these proceedings on behalf of himself and all holders of the 5 per cent permanent debenture stock issued by O & Q.

The claims advanced by the minority stockholders against CP and O & Q as a nominal defendant, may be generally described as follows:

(a) an accounting of all the lands and premises leased by O & Q to CP in three leases in 1884, 1887 and 1888 or the proceeds from the allegedly improper disposal of such properties by CP;

(b) a declaration or an appropriate order with reference to certain of the premises so demised to CP and thereafter conveyed to Marathon Realty Co. Ltd. (hereinafter "Marathon"), a subsidiary of CP, or made subject to an agreement between the CP and Marathon;

(c) damages against CP and Marathon arising out of the dealings by those corporations in the demised premises;

(d) an order requiring CP to assign and convey to O & Q such of the demised premises as have

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become surplus to the railway requirements of CP;

(e) an order requiring Marathon to convey to O & Q any of the demised lands remaining in the name of Marathon;

(f) an order cancelling the three leases or alternatively a declaration that these leases may, at the option of O & Q, be cancelled;

and generally, remedies in support of the relief claimed as above.

These claims are primarily derivative in form and are advanced by the plaintiffs on behalf of O & Q. The balance of the claims are personal to the plaintiffs and nothing in these proceedings turns upon this distinction.

The intervener, Turner, on behalf of the debenture stockholders, was permitted to intervene and advance arguments in respect of the following assertions:

(a) the debenture stockholders hold a fixed charge on all the property and undertakings of O & Q;

(b) CP has no right in law to sell any of the demised property under the 1884 lease;

(c) the dealings between CP and its subsidiary, Marathon, with reference to part of the demised premises are ultra vires both CP and O & Q;

(d) the leases and the rights of the lessor there under remain in full force and effect;

(e) CP was not entitled to acquire shares in O & Q, its lessor, or to take over or acquire the undertaking of O & Q.

In this Court we have the very considerable advantage of having had the facts and the law so thoroughly assembled, organized and discussed by Hughes J. at trial in the High Court of Ontario and by Arnup, Zuber and Goodman JJ.A. in the Court of Appeal of Ontario. Their judgments are reported at (1979), 1979 CanLII 2049 (ON SC), 22 O.R. (2d) 385 (H.C.); and

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(1982), 1982 CanLII 1927 (ON CA), 35 O.R. (2d) 449 (C.A.) It is therefore unnecessary to burden the record here with a recitation of the very elaborate and detailed factual history from which the issues herein have arisen. It will be convenient however to refer from time to time to various findings reached and inferences drawn in the courts below and to set forth the salient facts by references to the several judgments below. It is with the greatest respect, not to say reluctance as well, that some conclusions hereinafter reached differ from those reached in the courts below.

Before dealing with the findings and conclusions at trial and the judgments in the Court of Appeal, it will be helpful to outline briefly the significant facts in the legal history of the relationships here to be examined.

2. History

(a) Incorporation of the Principal Railway Companies

2. History

In February 1881, the Parliament of Canada incorporated the Canadian Pacific Railway Company as its first step in reviving the actions theretofore instituted by Canada in fulfilment of its confederating undertaking with the new province of British Columbia which joined the union in 1870, to build a trans-continental railway. Prior to that time efforts made to construct a coast-to-coast railroad had failed and with a view to reviving and completing this project the Government of Canada entered into a contract with certain individuals resident inside and outside Canada for the establishment of a new company and for the financing of that company so as to permit it to resume and complete the construction of a trans-continental railroad. The Act respecting the Canadian Pacific Railway, S.C. 1881, c. 1 (hereinafter the "1881 CP Act"), confirmed the agreement between the federal government and George Stephen, Duncan McIntyre et al., as well as the schedule appended to that contract which provided for the constitution of a company which the statute authorized to be incorporated in the name of the Canadian Pacific Railway Company by Order in Council. All this in due course transpired. The contract

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concerns itself principally with the construction of the main line from Lake Nipissing in Northern Ontario to Port Moody in British Columbia, parts of which were at the time of the agreement in 1881 completed or in the course of construction. The plan was to complete all such construction by May 1891. It is of more than passing significance that the standard to which the railway was to be built was that of the Union Pacific Railroad of the United States when first constructed. While the contract is exclusively devoted to the construction of the line from Lake Nipissing to British Columbia, the charter of the company provided for the acquisition and the construction of the other main and branch lines which would constitute the entire railway to be known as "The Canadian Pacific Railway". The general provisions of The Consolidated Railway Act, 1879, S.C. 1879, c. 9, that were not inconsistent with the terms of the CP charter were incorporated by reference into the 1881 CP Act (s. 17). The charter goes on to provide that CP may purchase or acquire by lease or otherwise any line of railway from the city of Ottawa to navigable water on the Atlantic seaboard or that CP may acquire running powers over any such railways. These provisions plus a general provision providing for reasonable facilities for linking up with other railroads constitute the plan envisaged by the 1881 CP Act and the appended proposed charter for the company for the establishment of a railroad, both by construction and by acquisition, from the Atlantic to the Pacific.

One month later the Ontario and Quebec Railway Company was reincorporated (Act to incorporate the Ontario and Quebec Railway Company, S.C. 1881, c. 44 (hereinafter the "1881 O & Q Act")), the original having been established by an earlier Act in 1871 (S.C. 1871, c. 48). The company was, by its 1881 incorporating statute, authorized to construct and operate railroads from the city of Toronto through south central Ontario to the city of Ottawa and thence into the Province of Quebec to join up with railroads in that prov-

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ince. More specifically, the statute empowered O & Q to enter into agreements with enumerated railroads for the purpose of amalgamation with or acquisition of those railways or for the leasing of their lines, all for the purpose of establishing a through railway from Toronto to Ottawa (1881 O & Q Act, s.19).

Sometime earlier, in 1868, the Province of Ontario incorporated by statute (S.O. 1868, c. 40) the Toronto, Grey & Bruce Railway Company (hereinafter "TG & B") which figures prominently in the unfolding story of the establishment of the CP system. Generally that company was empowered to construct a railroad from the city of Toronto north-westward to Southampton on Lake Huron and Owen Sound on Georgian Bay (s. 3). In section 2, the company was given certain powers by incorporating the provisions of The Railway Act, 1868, S.C. 1868, c. 68, and was specifically given the power to acquire such lands as may be necessary for the building and operation of the railway together with the power to sell any such lands from time to time "as they may deem expedient" (s. 29).

In the year 1885 the Parliament of Canada established by special Act (S.C. 1885, c. 87) the West Ontario Pacific Railway Company (hereinafter "WOP"). This company was authorized to construct railways between Sarnia and a point on Lake Erie, with a branch line to Ingersoll or Woodstock, Ontario (s. 2). Other companies who participated in the formation of a rail network in central Canada included the Atlantic & Northwest Railway Company (hereinafter "A & NW") incorporated in 1879 by Parliament (S.C. 1879, c. 65); the Credit Valley Railway Company incorporated by the Province of Ontario in 1870 (S.O. 1870-71, c. 38); and the Canada Central Railway Company incorporated by Act of Parliament in 1861 (24 Vict., c. 80 (Prov. Can.)). The latter company established a railroad from eastern Lake Ontario at Brockville through Ottawa and up the Ottawa Valley. In June 1881 this company was

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amalgamated with CP (pursuant to s. 25 of the 1881 CP Act) and its line was immediately completed to Callander, Ontario its western terminus. This was the point of commencement of the CP western main line to British Columbia.

These are the principal corporate players in the opening of the 1880s and the modern version of the Canadian Pacific Railway was pulled together from these and other segments of railways to form a trans-continental railway system. It is interesting to note that in the various statutes of incorporation other companies in the group are mentioned as ones with whom arrangements through ownership, lease, running rights, etc. were in contemplation. On the revival of the O & Q, one of the incorporators, Duncan McIntyre, was a Director of CP and was an original incorporator of both CP and O & Q. Much more significantly, as is pointed out by Hughes J. at p. 406, only 500 of the 10 000 shares issued by O & Q were held by persons not representing other railroads "in or about to be brought into the orbit of the Canadian Pacific Railway". From the outset the majority of the O & Q shares were held by McIntyre, George Stephen and others associated with them. They were amongst the leading movers in CP from its incorporation onwards. The first Board of Directors of the reincorporated O & Q included these gentlemen. Mr. Stephen and Mr. McIntyre nominated Sir Edmund Osler as the first President of the O & Q in 1881. He became a director of CP in 1885 and served as President until 1912. A similar linkage can be traced to the personnel on the boards of or holding senior offices in A & NW and Credit Valley. The O & Q Board in turn had one director in common with TG & B.

[Page 969]

The legal procedures and instruments adopted in the building of local and regional railways in the 1800s were quite different than those in vogue in Canada today for the organization of similar commercial ventures. The leasing of railways for example was the most common procedure in those times, perhaps because of practices of that day in the United States. The main purpose of these activities was to provide, for the first time, transportation between principal settled areas. Existing pieces of rail lines were linked together where possible. Gaps between local lines were filled by new construction. There seemed to be no emphasis on direct routes or speedy connections. The arrangements for completion of the necessary construction were most informal. As shall be seen, the actual work entailed was left to CP and its engineering staff without regard to the railway company in whose name the work was in law undertaken. Financial arrangements likewise devolved upon CP and in the end, those who provided the money for all these undertakings held securities issued or effectively granted by CP.

Immediately upon the incorporation of CP and the incorporation of O & Q one month later, a series of steps was taken to establish a railway network in Ontario, filling the gap between the main line of CP to be constructed under its Act of incorporation from Callander, Ontario west to British Columbia and the lines running from Ottawa eastward into Quebec and beyond.

In 1881 the amalgamation of CP and Canada Central Railway was completed. In 1883 the following steps were taken:

1. O & Q amalgamated with Credit Valley (pursuant to s. 19, 1881 O & Q Act, an Act of Parliament, and s. 1, S.O 1882-83, c. 50, an Act of the Province of Ontario) which in the mean-

[Page 970]

time had acquired a 999-year lease to a railway line from London Junction Railway;

2. CP sold to O & Q its line from Perth to Smiths Falls;

3. O & Q leased from TG & B for a term of 999 years the rail line of the latter company running from Toronto northwest to Owen Sound and other points;

4. O & Q purchased from A & NW a part of the latter's railway system in the Province of Quebec thereby connecting the O & Q system to Montréal and the railways in Quebec;

5. O & Q obtained authorization from the Parliament of Canada to amalgamate with Credit Valley, Canada Southern, TG & B and A & NW or any of them, or to contract with any of them for the acquisition or the leasing of some or all of their lines (S.C. 1883, c. 58); and similarly to acquire or lease from CP such lines as may be necessary to form a through connection between Toronto, Ottawa and Montréal. By the same authorization O & Q was given the right to construct a line connecting its system from Smiths Falls to any point on CP or the A & NW Railway which would give a connection to Montréal on the St. Lawrence River and beyond;

6. Parliament approved a preliminary agreement between CP and Credit Valley, O & Q and A & NW wherein provision was made for the leasing by CP from these railways of so much of their lines as necessary to establish a through route from the city of Montréal to the western terminus of Credit Valley Railway at St. Thomas (S.C. 1883, c. 55). The agreement contemplated the possible amalgamation of some or all of the these railways before granting the lease to CP.

On January 4, 1884, following a somewhat different plan than that projected in the agreement described in para. 6 above, O & Q granted a perpetual lease to CP of O & Q's railway from Windsor Station, Montréal to St. Thomas, Ontario (the entire "consolidated railway" of O & Q). The lease was confirmed by s. 2 of An Act to confirm the lease of the Ontario and Quebec Railway to

[Page 971]

the Canadian Pacific Railway Company, and for other purposes, S.C. 1884, c. 54, and by s. 1 of An Act respecting the Ontario and Quebec Railway Company, S.C. 1884, c. 61 (hereinafter the "1884 O & Q Act").

On August 12, 1887, O & Q leased to CP in perpetuity, the railway of WOP which O & Q had acquired by lease in perpetuity on July 21, 1887. The lease between O & Q and WOP was approved by s. 1 of An Act respecting the Ontario and Quebec Railway Company, S.C. 1887, c. 62. The lease between CP and O & Q of the WOP lands was approved by An Act further to amend the Act respecting the Canadian Pacific Railway Company,S.C.1887, c. 56.

On November 24, 1888, O & Q leased to CP in perpetuity an extension of O & Q's railway to be constructed by O & Q from London, Ontario to a point on the Detroit River (known as the "Detroit Extension"). This lease was authorized by Parliament: S.C. 1887, c. 56. The Detroit Extension was initially authorized by s. 4 of the 1884 O & Q Act.

The final remaining portion of the O & Q line was the "Don Branch", from Leaside on the main line, to the Toronto water-front. At the request of CP, O & Q was authorized by an Order in Council of Canada dated January 25, 1887, to construct this extension of the O & Q system. The power to construct this extension was granted to O & Q by An Act respecting the Ontario and Quebec Railway Company, S.C. 1888, c. 53, s. 2 and schedule. It is not clear from the record how this extension was leased to CP and no issue of this was made by the parties.

The railway consisting of the "consolidated railway" of O & Q leased to CP by the 1884 O & Q lease, the extensions of the said railway leased to CP by the 1887 and 1888 O & Q leases, as well as the final Don Branch extension, will be referred to collectively as the "O & Q Railway".

[Page 972]

The minutes for the meetings of the Board of Directors and the shareholders of O & Q which were held after the execution of the above leases disclose the extent to which, in a relatively short space of time, CP had taken over virtually all the essential functions of O & Q. For example, the minutes for the meeting of the shareholders on February 2, 1886, reveal that those present at the meeting, the President, Sir Edmund Osler, Messrs. Van Horne, R. B. Angus, Sir George Stephen, the Honourable Donald A. Smith and Mr. J. J. C. Abbott, were all members of the CP Board or staff or were involved in the guidance of the affairs of CP. The minutes discuss the completion of the A & NW Railway to Montréal, an obligation undertaken by O & Q. Mr. Van Horne was appointed manager of construction. The plans for this construction were said to have been prepared by CP. The completion of this part of the line, including the bridge over the St. Lawrence River, was financed by a further issue of debenture stock of O & Q "… to the extent necessary to secure construction of the bridge …."

The meeting of the shareholders of O & Q on February 3, 1885, further illustrates the extent to which O & Q was operated as a part of the CP family from the outset of the 1884 lease. The President is recorded in the minutes as having advised the meeting that the whole of the capital stock and debenture stock of the Company had been issued and "… all matters connected with the Debenture Stock and Common Stock of the Company are now carried out by the Canadian Pacific Railway Company at Montreal… ." The rapidity of the absorption of O & Q by CP should not be surprising. We have already seen that by 1883 CP had entered into a preliminary agreement with a number of railways, including O & Q, which provided for a series of amalgamations, leases and acquisitions all to the end of establishing a through line from Montréal to Toronto and extending westward to St. Thomas. The officers of most of the railway companies involved in the agreement were somehow connected to CP. These agreements were approved by Parliament both with respect to CP and to O & Q. Thus by the

[Page 973]

time the 1884 lease was executed, CP had effectively taken over the operations of O & Q.

At the conclusion of this series of transactions, CP had established by perpetual lease and by an amalgamation and exchanges of rail lines, a system of railway lines radiating east and south from Callander, Ontario, the eastern construction terminal of the railway line constructed by CP (and by the Government of Canada) to British Columbia. All this is described in detail by the trial judge at pp. 395-402 and by the Court of Appeal at pp. 459-62, and is schematically portrayed for easy reference, below. Thus began the national dream of constructing a railway from coast to coast amidst much criticism that this railway, "two streaks of rust across the wilderness", would "… never pay for its axle-grease" (remarks attributed to Edward Blake).

[Page 974]

[Page 975]

(b) Leases

(b) Leases

The core of the issues raised in this appeal are the three perpetual leases of 1884, 1887 and 1888 granted by O & Q in favour of CP. All parties agreed before this Court that there are no significant differences in the wording adopted by the parties in the three leases and that any differences which did exist had no bearing on the issues calling for determination here (with one possible exception to be discussed later). The 1884 lease deals with the bulk of the assets of the O & Q system and is therefore the principal lease in this appeal. It is hereinafter referred to as the "Lease". Before examining the legislative action with respect to this Lease, it is worthwhile to examine the terms of the leases themselves. The heart of the issue in this appeal is found in the Lease entered into by O & Q and CP and which was executed by the former on January 4, 1884, and by the latter, the lessee CP, on January 23, 1884. The importance of the matter and the pace of railway building in those years can be seen from the speedy confirmation by Parliament of this Lease in two statutes, each enacted and assented to on April 19, 1884.

In recitals to the Lease, parties recounted the various steps taken by amalgamation, purchase and leasing whereby O & Q assembled a "through line of railway" from Montréal and the south shore of the St. Lawrence River on the east, to St. Thomas, Ontario on the west. The recitals go on to lay out the financing and operation of this leased railway system. The rental payable by CP to O & Q under the Lease was so calculated as to equal all payments which O & Q was required to make in the future for interest and dividends on its debenture stock and common stock; all rental O & Q was obligated to pay under the railway leases it had entered into with respect to the railway lines of TG & B and London Junction Railway (through predecessors in title in the latter case); and any interest O & Q was required to pay on any of its outstanding bonds or outstanding bonds of the associated railways which had not been replaced by O & Q debenture stock. By a complex series of purchase contracts, agreements of amalgamation, and leases and assignments of leases,

[Page 976]

the debts and shares to be serviced by the rent under the Lease were consolidated into "debenture stock" and common stock of O & Q. These many transactions were authorized prospectively or approved retrospectively by Parliament. All this prelude of corporate activity is described thoroughly and accurately in the judgment of Hughes J. at trial at p. 403 and by the Court of Appeal at p. 460.

The term of the Lease, as has been said already, was "in perpetuity". This is surprising since the lessor O & Q had only a leasehold interest for a term of 999 years in two of the rail lines leased to CP under the Lease. These were the leases granted by TG & B and London Junction Railway, the latter falling into O & Q possession by an amalgamation with Credit Valley Railway. The 999-year term of these leases is specifically described in the 1884 Lease itself (s. (2.)(a) and (b)). It should be noted, however, that according to the record there is no evidence of the London Junction Railway, which was authorized to run from Port Burwell on Lake Erie to London, having ever been constructed and no issue with respect to this railway arises in this appeal. On the other hand, as will be seen, the position of TG & B as lessor under this 999-year lease is closely related to the issues before the Court in this appeal.

In the result, CP (a) took over all the assets and undertaking of O & Q and the burden of operating its railway system, and (b) undertook to pay all the debt and equity interest or dividend obligation of O & Q. On the other hand, O & Q was left with no expenses and no revenue; no assets except a reversionary right to the demised railway lines in the event of the expiry or the termination of the Lease; and no liabilities except those fully covered by the CP covenants to pay the rental under the Lease; and no staff. In all this, CP also acquired the right to use the name and to act in the name of

[Page 977]

O & Q. CP, in short, took over the entire undertaking of O & Q.

O & Q's obligations consisted almost entirely of its obligation to pay 5 per cent interest on perpetual debenture stock issued or to be issued for railway construction and acquisition; and "six per cent" interest on "two million dollars, being the amount of the common stock" issued at the time of the Lease. This is an oversimplification (but suitable for the purpose of disposing of the issues raised in this appeal) of a complex series of intercompany arrangements for the issuance of O & Q securities for the retirement of the bonds of those other railways in the group and for the payment by O & Q of the railway construction costs incurred by it and some of these other companies in completing railway lines in accordance with their obligations to O & Q under the Lease and under the preceding indentures mentioned above.

The extent of the financial interlocking between CP and O & Q, even before the main Lease of January 1884 was executed, can be seen in the terms of the agreement where CP sold and O & Q purchased a short line of railway between Smiths Falls and Perth in Ontario. This agreement was executed by the parties on December 3, 1883, and was approved and confirmed by Parliament in the 1884 O & Q Act, s. 1, which also confirmed the Lease. In this purchase agreement, attached as a schedule to the above-cited Act, O & Q agreed with CP to call in all mortgage bonds issued by O & Q and to replace them with the perpetual debenture stock of O & Q; and to pay the cost of acquisition or construction of "the entire consolidated railway of [O & Q] extending from Montreal to St. Thomas …" and the railway of A & NW to Montréal including the bridge over the St. Lawrence River.

The mechanics for the servicing by CP of the capital and debt raised by O & Q and the other

[Page 978]

companies mentioned required CP, in order "To avoid expense and circuity" in the words of clause 9 of the Lease, to pay interest and dividends as the case may be directly to the holders of the perpetual debenture stock and common stock of O & Q, and to the holders of the remaining outstanding bonds of some of the other railway companies. The Lease also provided for CP to deliver undertakings and covenants to such security holders to pay all such interest, thereby acknowledging a direct liability in CP therefor.

Clause 15 of the Lease required CP at its expense to provide an officer for O & Q "who shall be the Secretary and Transfer Clerk … at the City of Montreal" to which city O & Q agreed to move its chief place of business and which O & Q covenanted and agreed would be "the office for the transfer and registration of the stocks and bonds of [O & Q] and of the said leased lines". The Lease of 1884 does not make any express provision for the transfer of the employees and work force of O & Q to CP but that apparently occurred as a necessary result of the covenant by CP to work and maintain the railway and all the facilities of O & Q including new railway construction then in progress. It is clear that O & Q was left without any employees. Similarly, no express provision is made for the election of members of the board of O & Q during the life of the Lease. Since O & Q after the Lease had no physical assets, no employees, no revenue, no expenses and only one officer provided and paid for by CP, and inasmuch as the Lease required O & Q to pass such by-laws and regulations and execute such documents as CP may from time to time require, it is not surprising that the members of the board (except for Sir Edmund Osler) came to be CP employees. Furthermore no provision was made in the arrangement between the companies for the payment of any members of the Board of Directors of O & Q, nor were there any funds or revenue in O & Q for this or any other purpose.

[Page 979]

The end result of this elaborate plan was that CP became the sole operator of all railway lines and properties owned by five railway companies with whom it had direct and indirect leasehold and contractual links, under a perpetual lease, all in exchange for its undertaking to pay in perpetuity the interest on debenture stock and common stock of O & Q issued to raise the money employed directly and indirectly in the construction of its rail network in central Canada. This plan was formed and executed between 1883 and 1888. The railway system it produced formed most of the central Canada link in the CP trans-continental railway system which was substantially completed to British Columbia in 1885 and to the Atlantic Ocean in 1887.

These are the financial arrangements established under the Lease. There are other provisions of the Lease which must be considered. Clause 11 provides that CP shall have:

… the right to enjoy all the franchises and powers of the lessors, in respect of the running of the said railway, and of each and every part thereof, and shall also be entitled to exercise and enjoy the franchises and powers of the lessors, in respect of the acquisition of increased areas of land for station grounds, right of way, protection against snow, sidings and other purposes; and they are hereby authorized by the lessors to take all legal proceedings that may be necessary in the exercise of the said franchises and powers, and for that purpose to use the name of the lessors and of the officers thereof,—which officers are hereby authorized and required, upon the demand of the lessees, to append their signatures, and to affix the seal of the said lessors, to any document or instrument that may be necessary or useful, in the exercise or use of the said franchises.

The extent to which O & Q as lessor turned over its undertaking to CP is further illustrated by clause 14 which provides:

… they [O & Q] further agree that the lessees shall have the right to make and enforce such lawful rules, regulations and by-laws touching or concerning the running and operation of the said railway, as shall be required for the efficient and advantageous administra-

[Page 980]

tion, management and operation thereof, and for the preservation of order thereon, and as the lessors are authorized to make, under and by virtue of their charter, and of the "Consolidated Railway Act of 1879," and the amendments thereof… [Emphasis added.]

Clause 14 also provides that all tariffs of rates and tolls shall be established by CP. CP is entitled to call upon O & Q to make and pass all these regulations, by-laws and tariffs if CP deems it expedient to do so. CP is also authorized by clause 14 to take legal proceedings in O & Q's name, all at the expense of CP. The parties to the Lease clearly intended by the Lease to reduce O & Q to a shell and to turn over in perpetuity its entire undertaking to CP.

The general demise of the lands under the Lease is found in clause 1 which provides that "[t]he lessors hereby demise and lease to the lessees, the consolidated railway of the lessors…." The operations of the O & Q lines leased to CP are assigned by the Lease to CP in these words:

12. The lessees covenant to and with the lessors, that they, the lessees, will efficiently work, maintain and keep in good order and repair, the said railway and the rolling stock and appurtenances thereof, and all the property hereby demised ….

Clause 14 added these words:

… and do all acts, matters, and things, as and when necessary, for the convenient, efficient and effectual working of the railway, and for carrying out and giving effect to the lease hereby made ….

Two provisions make reference to the termination of the Lease:

12. The lessees … will, at the expiry of the present lease, yield up the same or other rolling stock and equipments of equal value, to the lessors, in like good order and condition.

No express reference is made to the return to possession of O & Q of the railway lines and lands demised nor is any explanation offered as to the meaning of the word "expiry" in a perpetual lease. Clause 18 is more explicit:

18. In the event of non-payment of the rental hereby reserved, for the space of ninety days, after any install-

[Page 981]

ment thereof shall fall due according to the terms hereof; or in the event of substantial failure to maintain, work, repair or operate the said railway for the space of ninety days continuously after written demand, the present lease shall, at the option of the lessors, become void; and the lessees shall, in that event, yield up possession of the said railway, and other the [sic] premises hereby leased, in good order and condition as the same shall be delivered to them under the present lease.

There are other clauses of no determinative value in these proceedings.

It is agreed that CP has made all rental payments required by the terms of the Lease. The issue is whether the sale by CP of some parts of the lands demised constitutes a breach of the Lease entitling O & Q to terminate this Lease with attendant remedies for the appellants or whether alternatively O & Q is entitled to receive the proceeds from the sale of any lands demised under the Lease, which have been determined by CP and O & Q to be no longer required for the operation of the O & Q Railway.

(c) Issue of Debenture Stock

(c) Issue of Debenture Stock

The various steps taken by both O & Q and CP during the course of the assembly of the O & Q Consolidated Railway System and the authorizations or approvals by Parliament of these steps, entailed the establishment and adjustment of a variety of financing arrangements some of which have already been described. In O & Q this meant a succession of issuances of "debenture stock" from its treasury. In the 1884 O & Q Act, S.C. 1884, c. 61, which was examined above in connection with the approval of the Lease of 1884, several references are made to the use of debenture stock of O & Q in such acquisitions. Section 8 of this statute deals specifically with O & Q debenture stock and provides that O & Q may issue such stock:

… in sterling money of Great Britain … and [it] shall constitute a first lien and charge upon the entire railway of [O & Q] as hereby established, and upon any extension thereof, and upon the property, franchises, plant and rolling stock thereof acquired or to be hereafter acquired by [O & Q], and upon the tolls and revenues thereof, after deduction of the working

[Page 982]

expenses thereof,—in which working expenses shall be included the rental of all railway lines now under lease to [O & Q], either directly or by virtue of any of the above-mentioned indentures….

The section then provides the process whereby O & Q may define and declare the rights of the holders of the debenture stock which O & Q may "… determine to issue … instead of bonds …." The section continues:

… [O & Q] may execute a deed or instrument securing such debenture stock, and declaring and defining the rights, privileges, ranking and remedies of the holders of such debenture stock, and may thereby change the plan of payment of the interest on such debenture stock, and among other things shall incorporate therein all by-laws which they shall have made and passed, as provided by the said Act and amendments, declaring and regulating the rights and privileges which shall be enjoyed by the holders of such debenture stock; … and any by-laws so made and passed, whether incorporated in any such deed or not, which are in force and applicable to such debenture stock at the time of the issue thereof, or of any part thereof, shall remain in force, and shall not be altered or amended, so long as any of such debenture stock remains unredeemed, and shall be binding on [O & Q] ….

By a resolution passed on April 22, 1884, by its shareholders, shortly after the execution of the 1884 Lease, O & Q authorized the issuance from treasury of debenture stock previously authorized by Parliament in the 1884 O & Q Act. This was done on the eve of the extension of O & Q eastward from Smiths Falls to Montréal and westward from St. Thomas to the Detroit River. By this stage of its history O & Q had issued mortgage bonds which the Company was desirous of redeeming. The resolution further recites that under the 1884 Lease CP undertook to pay rental which, amongst other things, was calculated to pay the 5 per cent per annum interest on debenture stock issued and to be issued in payment for the acquisition or construction of parts of the O & Q railway system already in being or then under construction by or on behalf of O & Q. The authorizing statute had placed a limit on the amount of debenture stock which could be issued by the Company, namely $25 000 per mile of the O & Q Consolidated Railway, together with some

[Page 983]

specified additional amounts for specific projects such as bridge building.

This resolution was moved and seconded by CP employees who had been elected to the Board of Directors of O & Q. Debenture stock so authorized was to form "a first lien and charge upon the entire consolidated Railway of this Company and upon the extensions thereof, and upon the property, franchises, plant and rolling stock thereof, acquired or to be hereafter acquired by this Company, and upon the tolls and revenues thereof …." Once again it was clearly part of the general plan of building the O & Q system and the leasing of that system to CP, that O & Q would become a shell whose only asset would be the lessor's leasehold interest in the Lease of 1884, the revenue from which would exactly balance the only outstanding obligations of O & Q, that is the rentals payable under railway leases executed by it as lessee, interest at the rate of 5 per cent per annum payable on the perpetual debentures, and interest at the rate of 6 per cent per annum on the outstanding common shares of the Company. O & Q was left without employees except one officer that CP was required to supply at its own expense by the terms of the 1884 Lease. No provision was made for a continuing Board of Directors and in practice the Board simply carried on without remuneration from O & Q sources and with replacements being supplied as required by CP. The record does not disclose what remuneration was paid to Sir Edmund Osler as President of O & Q or the source of any such remuneration as may have been paid.

In the by-laws passed in implementation of the resolution of the Company described above, it was stipulated that the debenture stock would be issued "in sterling money of Great Britain" in denominations of one pound and multiples thereof, with debenture stock registers to be kept in London, England and Montréal. The only provision for the rights of the holders of the debenture stock on the default of payment of interest was that the holders

[Page 984]

thereof should thereafter during such default have a right to vote at meetings of the Company and "thereafter the holders of the said debenture stock shall have all the rights and privileges of ordinary shareholders in respect of voting and of the management of the Company". No provision was made for the seizure of O & Q property upon any such default nor do the terms and conditions attaching to the debenture stock contain any prohibition against registering mortgages against Company property except as may be inferred from the resolution of the Company authorizing the issuance of such stock, where it is stated that the stock shall form a first lien and charge upon the railway. The implementing by-laws further approved a deed or instrument securing the payment of interest on the debenture stock (and the rent payable under leases undertaken by O & Q in the establishment of its railway) and for its execution by both O & Q and CP. This indenture describes the securities so issued as "five per cent permanent debenture stock" and recites the parliamentary authority of O & Q and CP for the execution of an instrument securing the payment of interest on such stock. All this emphasizes the role of the two companies in the large and burgeoning scheme for the acquisition, construction and financing of the CP transcontinental system under a complex stacking of arrangements between the two companies, for their management and for the financing of the undertaking principally in the United Kingdom by the sale of debenture stock.

The indenture sets out verbatim the terms of the 1884 Lease pertaining to the issuance of debenture stock and to the calculation and payment of the rentals thereunder by CP to O & Q. The retirement of O & Q mortgage bonds and the payment of obligations arising out of the construction of the railway line was thus secured by the issuance of perpetual debenture stock whose interest accruals were effectively guaranteed by CP. This was apparently done to assure their marketability particularly in the United Kingdom. This was the last stage of the embalming of O & Q. Thereafter it ceased to be an operational entity. Under the

[Page 985]

perpetual lease, debt and stock servicing by O & Q is performed on its behalf by CP who by the terms of the deed securing the debenture stock was required to countersign the debenture stock certificates and to therein guarantee payment of interest. All these leasing and financing arrangements are wrapped up in this deed of guarantee by an interesting and revealing clause:

8. The terms and conditions of the said indenture of lease, from the Ontario Company to the Pacific Company, shall remain and be in full form [sic] and effect except in so far as they are altered or modified by these presents.

So it was that all the assets, real and personal, corporeal and incorporeal, of O & Q were turned over to CP in perpetuity in return for a guarantee by CP of the payment of all interest accruals on O & Q perpetual debentures and common shares, and all rentals payable under perpetual or long term railway leases undertaken by O & Q; and for the provision by CP of the bare minimum of one officer to perform the formalities of corporate housekeeping by O & Q for the rest of its corporate existence.

(d) Sales of Surplus Lands

(d) Sales of Surplus Lands

Central to the problems which gave rise to this litigation were the sales by CP as the operator of the O & Q Railway of some of the lands leased by CP from and through O & Q. Under the three leases in question, O & Q leased in perpetuity to CP 10 375.17 acres of land. CP has over the years sold 2 060.82 acres of this land in 956 parcels, 741 of which came from O & Q lands themselves, 179 from lands of TG & B leased to CP through O & Q, and 36 from lands which came into the system from WOP. It would appear that CP, immediately after the execution of the 1884 Lease, established a separate "property section" for the lands of each of the component railways in the O & Q system. For reasons unexplained in the record some of these lands, despite their origination in one of the component companies, were registered from the outset in the name of CP. Perhaps for this reason, conveyances from CP were carried out in the name of the registered owner (which some-

[Page 986]

times was CP itself) without any formal corporate authority for the conveyance in question from the beneficial owner by reversionary interest or otherwise of the lands in question. It appears from the record that the grantees may even have accepted conveyances from CP when it was not the registered owner. This might have been because the prices were minimal, the parcels small and the buyers were the contiguous farm owners who may not have thought the expense of engaging legal assistance was warranted. The average price per parcel sold in the period from January 1884 to March 1974 was approximately $5 300, there having been 578 transactions for a total consideration of $3 067 305.43.

It would appear that O & Q, so far as it was left with a corporate existence after the 1884 Lease, took the same view of the 1884 Lease transaction as did CP. For example, the first sale of surplus lands by O & Q occurred on January 4, 1884, the very day that O & Q executed the Lease and three weeks before CP had done so. Nothing in the record shows that the sale proceeds were paid over to O & Q. The land in question was registered in the name of O & Q and no corporate formalities such as a board resolution of O & Q were observed. The conveyance was executed by the then officers of O & Q. Only 55 conveyances of O & Q property were approved by the Board of Directors of O & Q and most of these appear to have been related to lands in the Province of Quebec where such formal corporate approval was a prerequisite to registration of the conveyance. Between 1884 and 1967 the conveyances by O & Q were usually executed by the officers of O & Q supplied by and at the expense of CP pursuant to the terms of the Leas.

TG & B property was handled in much the same way although the first sale took place on

[Page 987]

February 1, 1893. The first sale from WOP property occurred one month later.

In addition to the sales discussed above, CP also entered into a considerable number of sales of surplus lands with Marathon, a wholly-owned subsidiary of Canadian Pacific Investments Ltd. (hereinafter "CPI"). Marathon was incorporated in 1963 to acquire and develop CP's real estate interests not required for railway purposes and having development potential. Lands sold to Marathon between 1963 and 1967 were sold at their book value rather than at their market value because Marathon is a wholly-owned subsidiary of CPI which prior to September 1967, was a whollyowned subsidiary of CP. The aggregate consideration received by CP for the sales of surplus lands to Marathon is $8 904 928.07. The estimated aggregate market value of these sales to Marathon is somewhere between $11 818 513.83 and $12 730 503.83.

It is also important to note that many of the above sales to Marathon were sales of surplus lands that CP had acquired after the Lease for each of the three property sections that made up the O & Q total lands. CP had, however, taken title to this after acquiring property in CP's own name.

The total proceeds, therefore, from the above sales of all lands in the O & Q, TG & B and WOP property sections during the period from 1884 to February 1974, after adjusting the sales to reflect their market value, was $15 797 809.26. This figure includes the sales of lands to Marathon as well as the sales of lands acquired after the Lease by CP (and registered in CP's own name) for one of the three property sections comprising O & Q total lands.

(e) Marathon

(e) Marathon

By 1967, by reason of the importance of some lands then considered to be surplus to the railway requirements or by reason of the value of those lands or perhaps by reason of the awareness in CP

[Page 988]

of the viewpoint of the minority shareholders of O & Q and/or the debenture stockholders, CP undertook a basic reorganization of its surplus disposal processes. At that time CP entered into a sub-lease to Marathon for a 99-year term of certain designated surplus lands together with an option in Marathon to lease lands becoming surplus in the future. Rental for these lands was based upon book value together with the original cost of improvements on those lands. All the parties agreed that this rental was substantially below market rental at the time. This procedure proved to be unsatisfactory to Marathon whose role in the CP group was to develop and market these surplus lands according to their inherent values. To do so, external financing was essential but this became difficult if not impossible to arrange because Marathon could not grant, as an owner in fee simple, mortgages on these lands. Furthermore, land exchanges, dedications for streets, and exchanges for street closing were impossible. In short, the intricacies of modern real estate development demanded a better root of title in Marathon than that of a sub-lessee, however long the term of the sub-lease. Accordingly, CP installed in O & Q a Board of Directors which did not include any CP employees and which came to be regarded apparently by all parties as an independent board. This was a sharp change from the past where, since the Lease, all directors and officers of O & Q were employees of CP with the exception of Sir Edmund Osler, the President at the time of the Lease and until 1912.

In order to clothe Marathon with merchantable title to lands theretofore leased by CP and/or O & Q to Marathon, an agreement was entered into in 1973 whereby O & Q and CP agreed to sell and convey to Marathon all the lands in question free from incumbrance for a price of $8.8 million

[Page 989]

"being the amount determined by O & Q and Canadian Pacific as the value of the Scheduled Lands free from incumbrance". In fact this consideration approximated an independent appraisal obtained by O & Q but was about a million dollars less than an independent appraisal procured at the same time by CP but unknown to the directors of O & Q. The agreement also recognized that CP was conveying to Marathon CP's reversionary interest in the 99-year lease theretofore granted by CP to Marathon and for which CP under the agreement was to receive $255 000 from Marathon. This amount was included in the $8.8 million total appraised value for the surplus lands.

The agreement between CP, Marathon and O & Q recited s. 2 of the Act respecting the Canadian Pacific Railway Company, S.C. 1891, c. 70, referred to in these proceedings as the "1891 CP Act". Section 2 requires that the proceeds of sale received by CP of lands surplus to its railway requirements shall be invested in the rolling stock or other permanent improvements to CP's railway line. The section provides further that any company whose railway forms a part of CP (here the O & Q) may likewise dispose of surplus lands but with the consent of CP. The Marathon agreement called for a joint conveyance by CP and O & Q so that the question as to whether the grantor should be one or the other does not arise. This agreement was authorized by the shareholders of O & Q at a meeting purportedly called in accordance with the by-laws of that company. At the meeting CP voted all its share-holdings in O & Q and thus overrode the objections of the minority stockholders of the Company to the Marathon transaction. The issue as to whether the meeting of O & Q was duly held in accordance with applicable statutes and the by-laws of the Company will be discussed later. The Marathon agreement, though approved by

[Page 990]

O & Q, CP and Marathon, was not completed pending the outcome of these court proceedings.

(f) Abandonments

(f) Abandonments

Allied to the problem of sale of surplus lands was CP's practice of abandoning some parts of the O & Q railway system when they became, in the opinion of CP, uneconomic to operate and where the requisite regulatory authority to abandon these lines was obtained. In 1932 CP, with the appropriate public authority approval, ceased to operate 19.1 miles of a line leased by TG & B to O & Q for 999 years and thereafter included in the 1884 Lease to CP. In a series of transactions in the years following, CP sold 17.35 miles of this discontinued rail section. In none of these transactions was there any reference in the conveyancing mechanics to board authority by TG & B for the sales. Some of the lands sold had been registered in the name of CP and others were registered in the sole name of TG & B. There is no explanation in the record as to how some of these grantees were persuaded to take title from a grantor who was not the registered owner on title. The Board of Railway Commissioners approved this line closure but the record does not reveal how this was brought about without any participation by TG & B and O & Q.

The gross proceeds from the sale of this 17.35 miles of right-of-way amounted to a consideration which averaged $26.75 per transaction, or $1 444.50 in all. These moneys did not find their way into the financial statements of O & Q. The effect of these sales was the discontinuance of part of the main TG & B line from Toronto to Owen Sound. Expenditures by CP on those parts of the O & Q railway line for its maintenance in accordance with the 1884 Lease far exceeded the proceeds of these sales. If the 1891 CP Act applies to these sales, this fact may be relevant.

[Page 991]

The second significant abandonment took place in 1971 when CP and O & Q as joint applicants obtained the approval of the Canadian Transport Commission to abandon 60.9 miles of the O & Q railway line between Tweed (north of Belleville, Ontario) and Glen Tay (south of Smiths Falls, Ontario). In the CTC application, the abandoned line was referred to as a branch line but was in fact the former main line of O & Q between Toronto and Montréal. Upon the abandonment of the line the rails were removed but title to the line remains in either O & Q or CP, there having been no sales of this land (although an easement has been granted to Bell Canada to permit it to install a buried cable). The evidence is that restoration of this line to operating condition would cost about $12 million. Upon this abandonment, rail traffic in the CP system between Toronto and Montréal was carried on another line which had subsequently been acquired by CP from another railway company. This line was apparently acquired by CP because of the unsatisfactory condition and route of the O & Q line and because the later acquired rail line serviced three or four principal urban areas along the north shore of Lake Ontario whereas the O & Q line passed through largely uninhabited rock and lake country with much smaller centers of population.

(g) Purchase of Shares

(g) Purchase of Shares

When the 1884 Lease was signed by CP and O & Q there was no direct ownership of O & Q shares by CP or vice versa. The only shares of O & Q held by CP prior to 1919 were eight qualifying shares for board members. Sir Edmund Osler held 250 shares in his own right at 1884 and presumably held at least one share throughout his tenure as President. For some unexplained reason CP slowly and spasmodically began to accumulate O & Q shares from 1919 onward, and by 1964 CP held almost 2 300 out of a total issued and outstanding of 20 000. By 1974 CP holdings had increased to 15 824 shares or 79.14 per cent of all

[Page 992]

outstanding shares. The share-holdings of CP and the other parties herein, at dates of significance in these proceedings, are as follows:

(a) At the commencement of the Eaton action on October 5, 1973, and at the date of the special general meeting of O & Q shareholders to confirm the Marathon agreement (September 11, 1973), CP held 15 828 shares and the parties to these actions other than CP held approximately 2 777 shares. The balance of share-holdings is not herein represented;

(b) By December 15, 1969, CP had acquired slightly more than 50 per cent of the stock of O & Q;

(c) In 1949 the appellant Eaton bought 698 shares and the balance of its holdings of 777 shares in 1960;

(d) The plaintiff Pope became a shareholder of O & Q some time prior to December 1967 and at the time of the commencement of his action, he owned or held proxies for shares in excess of 2 000;

(e) At the election of the members of the "independent" board of O & Q in 1973 CP sold to each new member of the board 50 shares in O & Q at $72 per share being the value calculated by CP of a perpetual security bearing interest at the rate of 6 per cent per annum.

The record also reveals that by the time these actions were commenced CP owned 68 per cent of the outstanding shares of TG & B. The minority shareholders of TG & B have not appeared in these proceedings nor does the record reveal any actions brought or participated in by any of them. The record also reveals that CP owns 100 per cent of the capital stock of WOP.

(h) Financial Statements

(h) Financial Statements

The financial statements of O & Q throw very little light on the operations of the Company to the extent any such operations were carried on. The

[Page 993]

first financial statements in the record are for the fiscal year ending December 31, 1948. The liabilities of the Company were $2 000 000 in capital stock and $19 502 591 in 5 per cent debenture stock for a total of $21 502 591. The assets recorded consist entirely of "Property Investment—Cost of Road" in like amount so that the balance sheet is in balance without any reference to the surplus or deficit and without reference to any details of how and when the cost of the O & Q railway was incurred. Post-1884 construction of railway lines in the O & Q system was undertaken entirely by CP and financed by issuing O & Q debenture stock guaranteed, as earlier described, by CP. The income account is even simpler. Interest on the debenture stock and on the capital stock at 5 and 6 per cent respectively exactly balances the "Income from Lease of Road" so that the income statement is flat. Statements for the years ending December 31, 1973, are identical with respect to the assets and liabilities and vary only with respect to the income statement and then apparently only according to the actual rent received in each year. All rent so received was distributed in the same year so that there was no deficit and no surplus in any of the 25 years covered by these statements. Until the statements for the year 1952, the statements bore only a statement "certified correct" signed by an unidentified person. From 1953 onwards the certification continues but the statements bear an endorsement approved on behalf of the board executed by two directors. Commencing in the year 1955 the certification is countersigned over the word "Auditor" and the financial statements include the statement "The Company had no income for 1955 nor had it the right to any income". Reference is then made to the 1884 Lease. For the fiscal year 1972 an auditor's report appears at the foot of the statement signed by someone identified below the signature by the word "Auditor". The certificate states: "In my opinion the said balance sheet presents fairly the financial position of the Company at December 31, 1972, as lessor under the said leases, and is in accordance with generally accepted accounting

[Page 994]

principles applied on a basis consistent with that of the preceding year".

None of these statements record any income or any receipts from the sale of O & Q land by CP. Whether the proceeds of sale should be classified as capital or income receipts of O & Q or might be properly taken directly into the accounts of CP in either category remains to be answered in accordance with the determination of the principal issues herein arising. The financial statements in the exhibits in the record are themselves of little probative value inasmuch as they clearly assert the view of the 1884 Lease held by CP throughout the years covered by these statements.

3. Lower Court Decisions

3. Lower Court Decisions

Hughes J. sitting at trial disposed of these many issues as follows:

(a) The perpetual lease at common law represents a contradiction of terms but the Court need not consider the position of the lease under the common law because Parliament has the authority to create such an estate and did so in a series of enactments dealing with the railway undertakings of these companies.

(b) The three perpetual leases must be treated and regarded as leases under the general law despite their perpetual terms.

(c) None of the leases can be construed as granting to CP the power to sell surplus lands.

(d) Section 2 of the 1891 CP Act does not apply to permit CP to sell these surplus lands because the O & Q lands were not subject to any incumbrance which is a pre-

[Page 995]

requisite to the exercise of the power of sale under that provision. The debenture stock was a floating charge and did not qualify under that Act as an incumbrance.

(e) CP is a constructive trustee on behalf of O & Q of the proceeds received by CP on the sale of lands under the 1884 Lease.

(f) CP employees sitting on the O & Q Board did not in law have an interest in the 1884 Lease and therefore were not disqualified by s. 53(2) of the Railway Act, R.S.C. 1970, c. R-2.

(g) By s. 6 of the Act to amend the Canadian Pacific Railway Act, 1889, and for other purposes, S.C. 1890, c. 47, CP was empowered to purchase shares in O & Q and was free in law to exercise voting rights attached to any such shares in the meeting of the O & Q shareholders confirming the Marathon agreement. Such action taken by CP did not constitute oppression or fraud on the minority.

(h) A meeting of shareholders of O & Q held September 11, 1973, was not validly held by reason of defective notice calling the meeting.

(i) The abandonments by CP of part of the TG & B railway line and part of the O & Q line constituted a breach of the Lease of 1884 thereby entitling O & Q to treat the Lease as void.

(j) Section 46 of The Limitations Act, R.S.O. 1970, c. 246, was not pleaded and cannot be relied upon by CP but in any event the breaches of the Lease by CP are continuing and the limitation periods would not have run.

In the result, a reference was made to the Master to determine the many details in connection with the sales of surplus lands and CP was directed to pay to O & Q the proceeds of all sales of lands leased to CP under the three leases deter-

[Page 996]

mined according to the fair market value at the date of the conveyance in question with interest at the rate of 5 per cent per annum.

The Court of Appeal reduced the recovery by O & Q after making several determinations:

1.Power of Sale under the Leases

The majority (Goodman and Arnup J.A.) of the Court found that O & Q had the power to sell its own lands and that this power was granted to CP under the leases.

Zuber J.A., in dissent, would have found no such power in CP to sell O & Q lands under the leases.

2.Power of Sale under the 1891 CP Act

The majority of the Court concluded that CP had no power of sale with respect to O & Q lands by virtue of this statute because the lands were not incumbered within the meaning of that term in the statute. Zuber J.A. in dissent concluded that the lands of O & Q were incumbered within the meaning of the section by the debenture stock which in his view was a specific charge, but he nonetheless concluded as noted above that CP had no power to sell O & Q lands.

3.Limit on Recovery by O & Q

All members of the Court agreed that O & Q was entitled only to recover the value of its reversionary interest in its land and not the entire fair market value of the lands sold.

4.All members of the Court also agreed on the following:

(a) The abandonments by CP of the two segments of the O & Q railway were not a breach of the leases.

(b) The notice calling the shareholders meeting for the approval of the Marathon agreement was not in law invalid and the meeting was regularly held.

[Page 997]

(c) The surplus lands remained subject to the leases and there was therefore no adverse possession under The Limitations Act.

(d) The reduced monetary judgment carried simple interest as prescribed by the trial judge.

In the realities of commerce in southern Ontario at the time of trial it was apparent to all that the lands initially encompassed in the leases to CP by O & Q were not all required for the present-day operation of the consolidated railway system of O & Q as taken over by CP under these leases. There is no dispute as to these lands being surplus to the operating requirements of CP and O & Q in the maintenance and operation of the undertaking of O & Q. What is in dispute is the right of CP through any procedure to dispose of these lands to third parties, at arm's length or otherwise. In the event that a right to do so exists, is O & Q entitled to either the proceeds of sale or the fair market value in the case of non-arm's length sales? The major abandonment of the Tweed-Glen Tay line raises other issues of fundamental importance. There are as well many subsidiary issues bearing on the determination of these principal issues to which reference will later be made.

As noted, in 1973 CP determined to address the whole issue of the sale of surplus lands under lease. CP's plan (discussed in greater detail later) was to establish a board of directors of O & Q who were wholly independent from CP and then to cause such board to negotiate with CP for the sale of these surplus lands to Marathon, a wholly-owned subsidiary of CPI, which in turn was 80 per cent owned by CP. It was not unanticipated that litigation would follow upon the adoption of any such procedure. Because CP was already obligated by the Lease to make such expenditures as from time to time necessary to ensure the efficient operation of the O & Q system, the minority shareholders and the debenture stockholders took the view that the investment of the proceeds from the sale of surplus lands in the O & Q railway system simply reduced the expenditures by CP which would otherwise have been required under the Lease.

[Page 998]

Hence, in the view of the minority shareholders of O & Q, the sale of surplus lands of O & Q represented a loss of reversionary interest to O & Q and a gain to CP because of its reduced burden of maintenance of the system under the Lease; and accordingly these shareholders and debenture holders took the view that the proceeds from sale of surplus lands should go directly to O & Q in replacement of the departed assets which had been leased by O & Q to CP in 1884.

4. The Perpetual Lease

4. The Perpetual Lease

The perpetual lease is unknown to the common law: Doe d. Robertson v. Gardiner (1852), 12 C.B. 319, at p. 333; Sevenoaks, Maidstone & Tunbridge Railway Co. v. London, Chatham & Dover Railway Co. (1879), 11 Ch. D. 625, at p. 635. Under the common law such a lease is interpreted either as being a lease from year to year or as being in law a conveyance subject to a rent-charge interest (Doe d. Robertson v. Gardiner, supra). The result under art. 1593 of the Quebec Civil Code is similar:

1593. The alienation in perpetuity of immoveable property for an annual rent, is equivalent to a sale. It is subject to the same rules as the contract of sale in so far as they can be made to apply.

It might therefore be arguable on the basis of common law that in the circumstances of these leases the perpetual leasehold element never arose in law and thus the parties to the purported lease are reduced in law to the status of parties to an ordinary contract without any accompanying estate interest; or alternatively that the lease operated as a simple conveyance of the demised premises with or without a rent-charge. Such a result would be a deprivation of O & Q and its debenture stockholders of the security represented by the leasehold interest. We are however saved in these proceedings from the exploration of these complex and ancient concepts of property law by reason of the agreement of all parties to this appeal in the courts below and in this Court that the various statutes of Canada authorizing these transactions at the same time also approved the perpetual leases, whatever their status might otherwise have

[Page 999]

been at common law (see p. 460, Court of Appeal decision). With respect to the interpretation of this parliamentary approval, which gives effect to an interest in property which otherwise would not be recognized by the common law, the following comments of Ross J. in Town of Lunenburg v. Municipality of Lunenburg, 1931 CanLII 391 (NS CA), [1932] 1 D.L.R. 386 (N.S.S.C.), at p. 390, are useful:

In this case we are primarily called on to construe an Act of the Legislature and not to discuss abstruse questions of real property law. I think it is safe to say, that the Legislature never intended to inflict on the parties the Chinese puzzle that would result from a declaration such as the plaintiff seeks in this action. The Legislature enacted that on the payment of a certain amount of money the defendant should have "the use forever" of certain portions of the building for court room, Judges' room, etc. I am not concerned about giving the defendant's interest any special technical name; all I am concerned with is that the right was created by the statute and I adopt the opinion of Jessel, M.R., in the case of Sevenoaks Maidstone & Turnbridge [sic] R. Co. v. London Chatham & Dover R. Co. (1879), 11 Ch. D. 625, that interests unknown to the common law may be created by statute. Even if there is no such thing at common law as a lease in perpetuity I do not see why Parliament cannot create an estate equivalent to such lease. I think this reasoning finds support in the case of Manchester Ship Canal Co.v. Manchester Racecourse Co., [1900] 2 Ch. 352, at p. 360.

If the Legislature has declared that the defendant is to get the "use forever" of the premises I do not see how the Court can say that it got something else. It might be different if it could be successfully urged that the Legislature obviously intended to confer a fee simple, but that is exactly what in my judgment the Legislature never intended to do. The plaintiff was and still is the owner in fee simple of the property in question, subject to the statutory rights of the defendant.

I think the words of Farwell J. in Manchester Ship Canal Co. v. Manchester Racecourse Co., [1900] 2 Ch. 352, at pp. 360-61, also provide a helpful introduction to this case:

What Jessel M.R. meant [in Sevenoaks, supra] was that if the Legislature adopts and gives validity to a contract,

[Page 1000]

it does in fact make it valid, although if it were not for that confirmation and validation it would as a contract between the parties be absolutely void.

Unless the words were so absolutely senseless that I could do nothing at all with them, I should be bound to find some meaning, and not to declare them void for uncertainty. The ground on which the Courts have declared a testator's will void for uncertainty really is that the testator was inops consilii, and it would be impossible for me to apply such a consideration as that to the Legislature of this country.

I, therefore, feel bound to give some effect to this agreement, although it may to some extent require a certain expansion of the language used.

5. Power of Sale of Surplus Lands by Lease or by Statute

5. Power of Sale of Surplus Lands by Lease or by Statute

This brings us to an examination of the three leases and the applicable statutes to determine whether or not a power of sale arises in CP acting either alone or in concert with O & Q, with reference to these surplus lands. The first issue that must be addressed when considering these lease arrangements is the contention by the appellants that the lands no longer required for railway purposes are no longer subject to the O & Q leases. This argument is central to the appellants' case; they claim that all of the proceeds of the sale of surplus lands ought to be paid to O & Q and all unsold surplus lands of O & Q should no longer be included in the leases.

Both the trial judge (at p. 575) and the entire Court of Appeal (at p. 477) held that the surplus lands remained subject to the O & Q Lease. I agree with their conclusions and would dismiss the appellants' argument as being without merit. The Lease clearly includes all of the lands of the consolidated railway of O & Q and there is nothing in the circumstances or in the language of the Lease to indicate otherwise. No provision can be found in the Lease that requires that lands surplus to railway requirements shall cease to be subject to the Lease. Although this is a Lease of "the consolidated railway of the lessors" (clause 1(1)), the meaning given to this phrase must accord with the

[Page 1001]

economic reality of the period. As the Court of Appeal noted at pp. 477-78 in its reasons, unanimous on this issue:

It is clear that the trial judge did not accept the submissions of the plaintiffs that surplus lands were no longer subject to the lease: see p. 575 O.R. We do not accept them either. In our view the lease included all of the lands of the consolidated railway of O. & Q. If that very new railway already had surplus lands by January 1884, the lease covered those lands. If lands not surplus in 1884 became surplus later, under C.P.'s operation, those lands did not "fall out of the lease". The rental C.P. was paying (including payments direct to ordinary stockholders and debentures stockholders of O. & Q.) was paid in respect of surplus lands as well as the main line and all its tracks and accessory facilities.

An operating railway is not static. As economic and demographic conditions change, the railway must change to meet the new conditions. What was needed in 1884 (or 1984) may become redundant, obsolete, inefficient or worthless. Similarly the existing railway may become inadequate or inefficient for lack of additional or different land. When C.P. decided, as the operator of every aspect of O. & Q.'s railway, that additional land was required for the purposes of the O. & Q. railway, that land when purchased became subject to the lease, and the reversion in it became the property of O. & Q. (or, if the land purchased was a necessary addition to the portion of O. & Q.'s consolidated railway that had once been T.G. & B.'s or W.O.P.'s, the property of the appropriate company).

CP, in leasing the consolidated railway of O & Q, was thereby leasing the entire operation of O & Q which included both the lands that might thereafter be acquired for railway purposes as well as any lands that might thereafter become surplus to the needs of the railway. On this issue I am in complete agreement with both courts below.

[Page 1002]

(a) Power of Sale in the Lease

(a) Power of Sale in the Lease

This is the principal issue in this appeal and should be met at once. The concept of a lease in property law is in basic conflict with any concept which recognizes a right in the lessee to dispose of the lessor's interest in the land under lease. The lessee might encumber or assign (subject to the terms of the lease) the leasehold interest created by the lease, or the lessee may enter a sub-lease. Landlord and tenant law recognizes no right in conventional leasing whereby a lessee in his own right may grant a title in fee simple to a third party. While the lease may in part find its existence in the law of contract, it also takes its character from property law and creates an estate in the land in the lessee, albeit a limited interest.

Although a conventional lease does not ordinarily grant a power of sale to the lessee, it should be noted that this grant of a power of sale is not necessarily inconsistent with the landlord-tenant relationship. In several long-term leases of railways in the United States a power of sale in respect of lands demised was expressly granted in the lease and enforced by the courts (Phoenix Ins. Co. of Hartford v. New York & Harlem R. Co., 59 F.(2d) 962 (2d Cir. 1932); In re Penn Central Transportation Co., 354 F. Supp. 717 (E.D. Pa. 1972), rev'd on other grounds 484 F.2d 323 (3d Cir. 1973)). Such a power of sale is within the contractual capacity of the parties to create.

If there is a power of sale under the Lease to CP it must be found in clause 11 of the 1884 Lease when read in conjunction with the balance of the Lease. For convenience it is repeated here:

11. During the continuance of the present lease, the lessees shall have the right to enjoy all the franchises and powers of the lessors, in respect of the running of the said railway, and of each and every part thereof, and shall also be entitled to exercise and enjoy the franchises and powers of the lessors, in respect of the acquisition of increased areas of land for station-grounds, right of way, protection against snow, sidings and other purposes; and they are hereby authorized by the lessors to take all legal proceedings that may be necessary in the exercise of the said franchises and powers, and for that purpose

[Page 1003]

to use the name of the lessors and of the officers thereof,—which officers are hereby authorized and required, upon the demand of the lessees, to append their signatures, and to affix the seal of the said lessors, to any document or instrument that may be necessary or useful, in the exercise or use of the said franchises.

The learned trial judge construed the section as follows (at pp. 521-22):

… I cannot justify holding that the power to dispose of surplus lands was one of those contemplated by the words beginning "in respect of the running of the said railway", and in the teeth of the grant of the power to acquire land for specific railway purposes: inclusio unius est exclusio alterius.

Zuber J.A. dissenting in the Court of Appeal came to the same conclusion (at p. 520):

I find it strange (to say the least) that if a lessor were to convey to a lessee the extraordinary power to sell parts of the leased property such a power would be buried in the obscurity of the phrase "all the franchises and powers of the lessors in respect of the running of the said railway". This term suggests to me simply the power to operate a railway between given points, the power to expropriate land, build bridges, operate ferries, build stations and other like functions.

The majority of the Court of Appeal (Goodman J.A. in whose judgment Arnup J.A. concurred) reached a contrary conclusion with reference to clause 11 of the Lease (at p. 514):

It must be emphasized that it was the intent of the parties that C.P. "run" the railroad in perpetuity. This was no short term arrangement. The clear wording of the lease indicates that O. & Q. granted to C.P. all of its powers which would include the power to sell surplus lands owned by it. It would be unreasonable to interpret the lease in a manner which would have the effect of reserving to O. & Q., out of all the powers which it had, only the power to sell such of its lands as might become surplus.

And he concluded at p. 518:

For the reasons given, I am of the opinion that C.P. received a grant of all of O. & Q.'s powers and that included the power to sell O. & Q.'s surplus lands, a

[Page 1004]

power which O. & Q. itself enjoyed by statute. That power exists not by virtue of the landlord-tenant relationship between them but rather by express agreement between the parties, duly authorized and confirmed by Acts of Parliament. I am of the opinion that the learned trial judge erred in holding that O. & Q. did not grant to C.P. the power to sell surplus O. & Q. lands by cl. 11 of the 1884 lease.

For certainty, I repeat that it was agreed by all parties in this Court that all three leases are to the same effect in law as regards powers and franchises of the lessee with one possible difference to which we shall later return when discussing the application of the doctrine inclusio unius est exclusio alterius. It is to state the obvious that the concept of a power of sale in a lease is usually hostile to the relationship of landlord and tenant at law. But this Lease is itself an anomaly in the law. The term is perpetual. The common law knows no such relationship in the law of leaseholds. The Civil Code of the Province of Quebec reaches a like result. Parliament, in a series of statutes already noted, "approves", "confirms" and once "validates" this Lease. Parliament also conferred upon the railway companies various powers, including the power to sell railway lands. There is no instance, however, where Parliament has expressly directed itself to the issue of the status in law of the parties to this Lease as regards such matters as title, rights on reversion, or the rights of third parties on receiving a transfer of these lands. Parliament, like the other parties to these transactions, was engaged primarily in railway building and secondarily if at all in revising applicable real property laws.

It is in this atmosphere of uncertainty that we come to the Lease itself in order to settle the rights of the parties to the Lease and those of third parties affected thereby in the light of all that has happened in the century which has passed since this complicated and far-reaching arrangement was established. Clause 11 falls into three parts.

[Page 1005]

First Part

"[T] he lessees shall have the right to enjoy all the franchises and powers of the lessors in respect of the running of the said railway and of each and every part thereof… ." These franchises and powers include those held by O & Q under its Act of Incorporation, the 1881 O & Q Act, S.C. 1881, c. 44, and any other statutes, including general railway legislation, which grant to O & Q, either specifically or as one of those railways within the jurisdiction of Parliament, any powers and rights with reference to the conduct of its business. It may be that some statutory rights accorded to O & Q could not be assignable by contract because of either an express or implied limitation contained in the granting of such public right. No such limitation has been drawn to the attention of the Court. Section 2 of the O & Q Act of Incorporation provides that the Company "shall have all the powers and privileges conferred on such corporations by "The Consolidated Railway Act, 1879," subject, however, to the provisions hereinafter contained". Section 3 specifically authorizes the Company to construct and operate a railway from Toronto through Ottawa to a junction point with railways in the Province of Quebec. Furthermore, ss. 14 and 15 authorize the Company to issue mortgage bonds secured by trust deed which empowered the trustees on default to possess and sell the railway and its property. A grant of such powers by the lessor O & Q to the lessee CP clearly held out the possibility of similar developments quite hostile to the conventional right of reversion in the lessor as set up in the Lease. By section 30 of its Act of Incorporation, O & Q was given a specific power to purchase land for warehouses, elevators, docks and other supporting facilities and to sell any such properties "as may be found superfluous". This power relates directly to some parts of the land leased by O & Q to CP. In respect of such lands at least there is a contradiction with conventional legal concepts of rights of reversion by the inclusion of such powers in clause 11 of the Lease. The lessor's right of reversion can at least be reduced under the 1881 O & Q

[Page 1006]

Act to the extent of lands in the category described in s. 30 of that Act.

It was argued by some counsel that this grant of specific power of sale by the legislature somehow constricted O & Q's right to sell lands, surplus or otherwise, which do not fall into the s. 30 category. This submission overlooks the broad powers granted by Parliament to railways under general railway legislation for the sale of lands and surplus lands. Parliament in 1879 had already granted important powers to railways thereafter constructed under the authority of Parliament. Section 7.2 of The Consolidated Railway Act, 1879, S.C. 1879, c. 9, expressly granted the power to sell lands.

7. The Company shall have power and authority,—

8. To purchase, hold and take of any corporation or person any land or other property necessary for the construction, maintenance, accommodation and use of the railway, and also to alienate, sell or dispose of the same:

A similar section with minor amendments has appeared in the Railway Act since 1879. Most notably, this power of sale was restricted to the sale of surplus lands only in The Railway Act, S.C. 1888, c. 29, s. 90(c.) which provides that a railway company may:

(c.) Purchase, take and hold of and from any person, any lands or other property necessary for the construction, maintenance, accommodation and use of the railway, and also alienate, sell or dispose of so much thereof as is not necessary for the purposes of the railway;

(p.) From time to time alter, repair or discontinue the before mentioned works or any of them, and substitute others in their stead;

Second Part

Clause 11 then goes on to provide that the lessee (CP) "shall also be entitled to exercise and enjoy the franchises and powers of the lessors, in respect

[Page 1007]

of the acquisition of increased areas of land for station-grounds, right of way, protection against snow, sidings and other purposes… ." This clause is of no direct help or interest as it relates to a power of acquisition of ancillary or support facilities. Its only relevance is found in an argument or viewpoint expressed by some counsel before this Court and adopted by Hughes J. at trial (at pp. 521-22) to the effect that, if it is necessary to specifically provide a power of acquisition to add a railway station to the system, it follows that failure to do likewise with respect to a power of sale of any of the lands demised under the Lease, on becoming surplus or otherwise, is a telling omission in the Lease: inclusio unius est exclusio alterius. There are many answers and variations of answers to this suggestion. The "running of the … railway" which accompanied the first grant of powers under clause 11 may have meant less to the draftsman of the Lease than to some of its readers. Out of an abundance of caution the power to add land to the leasehold land, at the sole cost of the lessee and without affecting the rent payable by the lessee, was added to the clause. Such a clause is unconventional but it is clear and express and is therefore valid and enforceable. It is an additional power to all those included in the first clause of this article. It is an ejusdem generis clause. When read in the context of the whole relationship between the parties, and the umbrella statutes hoisted over these operations by Parliament, it is neither logical nor sensible to read this added clause as somehow reducing the stature and authority of the lessee in these infinite, profound, elaborate and extensive arrangements for the assembly and operation of the O & Q railway system by CP into infinity.

Goodman J.A., for the majority of the Court of Appeal, also dismissed the inclusio unius est exclusio alterius of the trial judge (at pp. 514-15). He concluded that the power to acquire lands as found in clause 11 was clearly redundant as this

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power was already included in the general grant of power to run the railway. He noted that clause 11 is thereby similar to the provision for the power to purchase lands to erect "warehouses, elevators, docks, stations, workshops and offices" found in s. 30 of the O & Q incorporating statute. As already noted, this power found in s. 30 is again largely redundant because the broad power to purchase and sell lands had already been granted to O & Q by virtue of the incorporation of the provisions of The Consolidated Railway Act, 1879. It would appear that O & Q clearly enjoyed a power to purchase lands greater than that found in s. 30 because it specifically granted a power to purchase lands in clause 11 for purposes different from those in s. 30. The 1884 O & Q Act confirming the Lease did not purport to grant to O & Q any powers in addition to those already acquired by O & Q in its 1881 incorporating statute. The inclusion of s. 30 in the 1881 O & Q Act incorporating O & Q as well as the inclusion of the power to purchase lands found in clause 11 are, therefore, clearly redundant when viewed in the context of the general power to both acquire and sell lands found in s. 7.2 of The Consolidated Railway Act, 1879. I would therefore agree with Goodman J.A.'s conclusion, at p. 515, that "… [t]o use the inclusion of the provision with respect to the power of acquiring increased areas of lands as the basis for finding that a grant by O. & Q. to C.P. of all its powers in respect of running the railway did not include a power of sale of surplus land is not justified … ."

Third Part

Clause 11 concludes as follows:

… and they are hereby authorized by the lessors to take all legal proceedings that may be necessary in the exercise of the said franchises and powers, and for that purpose to use the name of the lessors and of the officers thereof,—which officers are hereby authorized and required, upon the demand of the lessees, to append their signatures, and to affix the seal of the said lessors,

[Page 1009]

to any document or instrument that may be necessary or useful, in the exercise or use of the said franchises.

This is a largely mechanical facility to allow the lessee to operate the undertaking of O & Q as fully and efficiently as the lessor itself could do. The lessee may do so in its own right by exercising the contractually granted powers, or it may do so as proxy for and in the name of the lessor whose existence has been continued throughout the term of the grant of these powers. The clause must be read in conjunction with clause 15 of the Lease requiring the lessee to engage and pay an officer of the lessor at the principal place of business of O & Q which by the Lease the lessee is required to move to Montréal, the head office of the lessee itself. Clause 14 also provides that the lessor is required to "do all acts, matters and things, as and when necessary, for the convenient, efficient and effectual working of the railway, and for carrying out and giving effect to the lease hereby made … ." Clause 14 continues: ". .. and … they, the lessors, hereby covenant and agree to make and pass such by-laws, rules and regulations, or tariff or both, as shall reasonably be required of them by the lessees … ." For all these purposes the "lessors will allow the lessees to use the lessors' name, in any suit or proceeding in which it may be necessary to use the same in connection with the working of the railway … . " Clause 9 of the Lease contemplates an even greater integration of O & Q and CP:

9. To avoid expense and circuity, the lessees [CP] have agreed to pay … the said rental direct to the holders of the said debenture stock, common stock and bonds … and … will make and execute an undertaking or certificate to be endorsed upon … the said debenture stock and bonds respectively, declaring the obligation of the lessees to pay the said interest… .

This contractual scheme is all part of a detailed arrangement between O & Q and CP whereby CP takes over the entire undertaking of O & Q and thereafter in perpetuity runs the railway with CP's own staff, capital and other resources and for CP's

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own profit. CP in return is required to pay rental calculated by the parties as sufficient to enable O & Q to service its outstanding debt and capital obligations and all railway leases to which it is a party, these being the only outlays thereafter required to be made by O & Q. The lessor O & Q was to have no other sustenance. O & Q was thereby to be kept alive entirely on blood pumped into it by CP. CP thus became the grantee of exclusive possession for a term without end of the O & Q railway and O & Q was reduced to a shell company which nominally existed only to maintain the legal existence of the debt and capital obligations of the corporation so that they could be serviced in perpetuity by CP directly to the holders of all such securities of O & Q.

Preparatory to all these arrangements O & Q replaced its bond mortgage indebtedness with debenture stock which is unsupported by any conveyance of title in the railway by way of trust deed, mortgage or otherwise. This move facilitated the freedom of action by the lessee under the Lease in the management of the properties of the railway all of which, except the title to the right-of-way itself, were subject to obsolescence over the years in the ordinary course of business.

A perpetual arrangement could not be undertaken by thinking people without contemplating a flexibility of operations as infinite as the term of the arrangement itself. The direction of the expansion of the community and of commerce in the community itself would of necessity be seen as a force for change in the future of the location and the size of the railway facilities, and of the very nature of the railway business itself. Rapidly advancing technology of railway transportation at the time of the Lease further contributed to the obvious need for flexibility in the maintenance of operations of the O & Q railway system. The original route and grade of the right-of-way, with a minimum of foresight or imagination, called for change in the foreseeable let alone infinite future as the speed and power of railroad transportation

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machinery advanced. This is manifest in the reversionary term itself where it is noted:

12. The lessees covenant to and with the lessors, that they, the lessees, will efficiently work, maintain and keep in good order and repair, the said railway and the rolling stock and appurtenances thereof, and all the property hereby demised, and will, at the expiry of the present lease, yield up the same or other rolling stock and equipments of equal value, to the lessors, in like good order and condition.

The words and the expressions used in clause 12 do not literally contemplate the original property being returned. The precise wording of the clause does not even require a return of land but simply "the same or other rolling stock … in like good order and condition". Whatever it means, this paragraph is a clear recognition that O & Q was, by the arrangement, becoming an integral part of the CP system for all time. Only clause 18 contemplated any other result:

18. In the event of non-payment of the rental hereby reserved, for the space of ninety days, after any instalment thereof shall fall due according to the terms hereof; or in the event of substantial failure to maintain, work, repair or operate the said railway for the space of ninety days continuously after written demand, the present lease shall, at the option of the lessors, become void; and the lessees shall, in that event, yield up possession of the said railway, and other the [sic] premises hereby leased, in good order and condition as the same shall be delivered to them under the present lease.

Clause 18 cannot be read literally for to do so would defy all common sense. Unlike clause 12, no mention is made of substitution of worn equipment. Rather clause 18 treats "the said railway" as a large container in which all property, real, personal and incorporeal, shall be held. What constitutes the railway depends on what circumstances over infinite time require to be in the container. The contents will change. At the end of the Lease the lessor recovers the container with whatever may be in it, and short of fraud the lessor would

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appear to have no remedy against the lessee for change of content. The concluding words, as quoted above, indicate that it is not the nature and identity of the property which will be measured on return but rather its good order and working condition. The railway must be workable on return but clause 18 does not specify that the railway must be made up of precisely the same components upon termination as existed in 1884.

The expressions "operate the said railway" in clause 18 or "efficiently work … the said railway …" in clause 12, sit at the center of the agreement between the parties. All contemporary railway building history, at least from 1881 onwards, contemplating as it did an ever-widening web of railway lines within Canada, must be taken into account in construing the meaning of the terms employed in this Lease. The small local railway lines of the 1850s gave way in the 1870s to regional lines. With one false start ending with the collapse in 1873 of the first Pacific venture, the late 1870s and 1880s saw railways move up to a trans-continental scale, and CP was the center of it all. The. patent object of the O & Q - CP scheme was to fit the O & Q consolidated railway in as an integral part of the eastern base for a national railway spanning the continent under the aegis of the CP. These clauses in the 1884 Lease must be read in this light.

The decision of the Court of Appeal, unanimous when addressing the issue of the abandonment of certain parts of the O & Q Railway by CP, refers to this larger object of the O & Q - CP scheme (at p. 481):

What is a "substantial failure to maintain, work, repair or operate" the railway is a matter of degree, depending on all the circumstances of the events alleged to be a breach, and considered in the context of the entire railway operation. We agree that the context is not the continued operation of the C.P. railway system, but rather the operation of the leased O. & Q. railway by C.P. as part of C.P.'s system. The distinction may be

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subtle, but it is both real and important. [Emphasis added.]

The conduct of the parties before and after execution of the 1884 Lease is also relevant to its interpretation and, in this record, illuminating. As we have seen, the first sale of railway land leased under the 1884 Lease took place on January 4, 1884, the date of execution by O & Q and three weeks before CP even executed the Lease. Clearly the sale was conducted at a time when the entrepreneurs who theretofore had operated O & Q were still very much in office and active in the operations between the parties. Over the next 100 years these sales occurred regularly, many during the term of office of Sir Edmund Osler, the first President of the O & Q elected at the time of incorporation. Many of these sales were completed long before the original incorporators and shareholders had left the scene. During this time when those who would have best understood the arrangement between these two railroads (and which affected several other railway companies in central Canada as well) were still alive if not still active in the railway business, there was a long program of construction in which additions and subtractions were made to the demised premises. No challenge was ever mounted in those early decades of the term of the Lease, at least so far as the record herein reveals. Parliament continued to authorize expansion of the O & Q system by additional leasing arrangements, sales were made of parcels of land from the demised lands, and debenture stock was floated and remained outstanding. All this was done on the basis of the 1884 Lease.

It must be noted however that shortly after the execution of the 1884 Lease, the shareholders of O & Q enacted by-law 13 which required that "… no deed of sale or conveyance of any real property of the company shall be made until it has

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been expressly authorized by vote of the Board of Directors". This would seem to contradict the conclusion that the parties to the 1884 Lease contemplated that CP was to have the exclusive power of sale over O & Q lands. I would, however, agree with Goodman J.A. at the Court of Appeal (at p. 517) that "…the by-laws of O. & Q. cannot affect the legal rights acquired by C.P. under the 1884 lease… ." Further, by-law 13, along with a number of other O & Q by-laws of that time, represent no more than the usual steps taken by shareholders of a company with respect to the organization of a company. Many of these by-laws obviously contradict the 1884 Lease in that they purport to grant to the Board of Directors of O & Q general control over all the affairs of O & Q; clearly the largest part, if not all, of this control over the affairs of the O & Q Railway was already transferred to CP under the 1884 Lease. For example, the Lease authorized CP to call upon the officers of O & Q to execute documents in the name of O & Q and the Board itself to adopt regulations and procedures reasonably required by CP in the operation of the O & Q Railway. Subsequent by-laws of O & Q cannot alter this agreement. I would therefore conclude that by-law 13 does not significantly contradict the conclusion that the parties to the 1884 Lease contemplated and relied upon the understanding that CP enjoyed the power of sale of O & Q land.

The language used by Parliament in the statutes noted above likewise leads to this same mode of interpretation of this Lease and its contractual provisions. The use of identical corporate procedures, financial arrangements and parliamentary authorizations in selected undertakings stamps this document as being a key part in the larger railway development scene.

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The 1884 Lease enabled CP to operate a railway business in Central Canada. CP was given a free hand to run O & Q as it saw fit. Unless CP breached the Lease by failure to pay the rent and to maintain the railway, O & Q was forever a hollow conduit between CP and the debenture stockholders and common shareholders of O & Q. CP received all the powers of O & Q which related to the performance of these obligations.

I have therefore come to the conclusion that the Lease of 1884 (and all counsel agreed that all three leases are, for the purposes of resolving the questions arising on this appeal, identical) includes a power of sale in the lessee of such of the demised lands as are not reasonably required for the efficient operation of the railway in accordance with the obligations of the lessee under the Lease.

There are, however, different classifications in law of the lands demised under the three leases. The sales of O & Q surplus lands by CP fall into three categories: sales of O & Q, TG & B and WOP lands. As found above, CP enjoys the power of sale over O & Q lands. Such is not necessarily the case with respect to WOP and TG & B lands. The WOP lease to O & Q is both in perpetuity and contains a "franchises and powers" clause similar to clause 11 in the O & Q and CP Lease. This would lead to the conclusion that O & Q enjoys the power of sale over WOP lands, and that this power of sale was conveyed to CP. This question is rendered moot by the fact that CP now owns 100 per cent of the shares of WOP and there is no claim by WOP in these proceedings with respect to the WOP lands sold by CP.

The situation with respect to the TG & B lands is somewhat more complex. CP argued that in clause 9 of the TG & B lease to O & Q for 999 years, the power of sale of TG & B lands was conveyed to O & Q. Clause 9 provides that O & Q shall "… operate and work the Railway in accord-

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ance with the terms of the charter of the Toronto [TG & B] Company". The TG & B charter includes the general power granted under The Railway Act, 1868, S.C. 1868, c. 68, to acquire and sell lands (s. 2 of TG & B Incorporating Statute, S.O. 1868, c. 40).

The Court of Appeal unanimously rejected this argument and held that CP did not acquire the power to sell TG & B surplus lands (Arnup J.A. at p. 503; Goodman J.A. at pp. 518-19; and Zuber J.A. at p. 521). In deciding this point, it can first be observed that the sale by CP of those lands coming from TG & B gives rise to no rights in O & Q as against CP or anyone claiming derivatively through O & Q. The head lessor in the TG & B lease granted to O & Q the exclusive possession of the lands in question for a term of 999 years. In the 1884 Lease, O & Q acknowledged this fact and then proceeded to grant to CP a lease of these same lands in perpetuity. In relation to these lands, the 1884 Lease amounts in law to an assignment by O & Q to CP of any rights in O & Q to the lands in question. An underlease of the whole term of a lease operates as an assignment in law: Beardman v. Wilson (1868), L.R. 4 C.P. 57. Furthermore, if a lessee for a term of years makes a lease for a term greater than his own, this second lease operates as an assignment: Hicks v. Downing (1696), 1 Ld. Raym. 99, 91 E.R. 962; Wollaston v. Hakewill (1841), 3 Man. & G. 297, 133 E.R. 1157; Milmo v. Carreras, [1946] K.B. 306. (See generally Williams and Rhodes Canadian Law of Landlord and Tenant (5th ed. 1983), vol. 1, pp. 3-62, 3-63; Halsbury's Laws of England (4th ed.), vol. 27, pp. 296-321; but see Anger and Honsberger Law of Real Property (2nd ed. 1985), vol. 1, pp. 259-64, for a comment on a possible interpretation of s. 3 of the Landlord and Tenant Act, R.S.O. 1980, c. 232 on this point.)

The difference between an assignment of a lease and a sub-lease is, of course, of fundamental importance. Upon the assignment of a lease, the original tenant (O & Q) grants his own estate to

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the assignee (CP), thus putting the assignee in his shoes as the immediate tenant of the head landlord (TG & B). On the other hand a sub-lease creates no direct relationship between the subtenant and the landlord. Because the 1884 Lease operates as an assignment of O & Q's interest in the TG & B lands to CP, O & Q has no further estate interest in this land. The sale of TG & B lands by CP does not, therefore, raise any right in O & Q as against CP. TG & B of course may still enforce its lease to O & Q if a breach is brought about either by the lessee O & Q or the assignee CP.

As a result, with respect, I disagree with the conclusion of the majority of the Ontario Court of Appeal at p. 503 (Arnup J.A.) that CP must account to O & Q for O & Q's reversionary interest in the lands owned by TG & B and sold by CP. O & Q has no reversionary interest in these lands and it is not open to O & Q to call upon the assignee, CP, for the performance of its covenants on reversion. That claim arises in the head lessors (TG & B) who are not claimants in these actions. It may be, therefore, that a derivative claim could be asserted in the name of the head lessor (TG & B) by those minority shareholders affected by the sales by O & Q and/or CP, but no such persons are to be found amongst the plaintiffs. In any case, this would concern only 32 per cent of the shareholders of TG & B (the remainder of the shares being held by CP) and the claims would relate only to some 50 parcels of land, none of which would appear to be of significant value, at least at the time the sales were made.

As already mentioned, clause 9 of the TG & B lease to O & Q, which was assigned to CP, provides that O & Q shall "operate and work the Railway in accordance with the terms of the charter of the Toronto [TG & B] Company". This charter grants to TG & B the power to acquire and sell lands. Clause 9 of the TG & B lease to O & Q is thus similar in its operation to the "franchises and powers" provision found in clause 11 of the Lease under which CP holds all the rights over

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O & Q, including the power of sale of surplus lands. It is consistent to conclude therefore that TG & B did grant this power of sale to O & Q in the TG & B lease and that this power of sale was assigned (as previously discussed) to CP in the 1884 Lease. However, because TG & B is not before the Court in this present action, it is not now necessary to make any declaration with respect to CP's power to sell TG & B surplus lands. Furthermore, this action raises no claim for anything in the nature of an in rem judgment running with all the lands herein in question. The issue of the sale of TG & B lands is thus better left to any action that may be brought by TG & B, derivatively or otherwise, should some minority shareholder of TG & B hereafter conclude that it might be in their interests to do so.

(b) 1891 CP Act

(b) 1891 CP Act

In the 1891 CP Act, S.C. 1891, c. 70, Parliament made additional provision for the sale by CP of surplus lands and lengthy argument was presented by the parties with respect to a power of sale of O & Q land that CP may have acquired by virtue of s. 2 of that Act, which provides as follows:

2. The Company may, from time to time, sell and convey free from incumbrance such of its surplus lands as it thinks fit, — the proceeds to be applied to the acquisition of rolling stock or other equipment for the Company's railway, or to such permanent improvements of its line as the Company deems expedient; and any other company whose railway forms part of the Canadian Pacific Railway Company's railway system may, with the consent of the Canadian Pacific Railway Company, sell and dispose of its surplus lands in like manner, and subject to the like condition, — surplus lands, for the purposes of this section, not to include any land which is required in connection with the company's railway business, or any land to which it is or may become entitled by way of subsidy under the terms of the Act which authorized its incorporation.

In applying this section of the 1891 CP Act it must be remembered that under s. 7.2 of The Consolidated Railway Act, 1879, all railways had

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a general power of sale and thereafter by s. 90(c.) of the Railway Act of 1888, the railways had a general power of sale to sell those lands not necessary for the purposes of the railway. By section 2 of the 1891 CP Act, CP was authorized to sell and convey free from incumbrance any of its surplus lands providing the proceeds of sale are reinvested in rolling stock or equipment or in "such permanent improvements" as CP may deem expedient. The words "its surplus lands" must be taken to refer to surplus lands of CP. The section goes on to allow CP to join with any other company "whose railway forms part of the [CP] system" for the sale of the surplus lands of that other company "in like manner". This clearly covers the case here where both CP and O & Q are concerned with the disposal of surplus lands in the CP system which comprised, along with other railways, the O & Q system. As in the case of the Marathon transaction, CP played two roles: the first as the operator of the O & Q undertaking under the terms of the Lease, and the second in its own right, in consenting under the statute to the O & Q sale of surplus lands forming part of the CP system. Thus both interests in the O & Q system participated through CP in the sale of these surplus lands under powers granted in the Lease and in the statute.

The 1891 CP Act is a clear mandate of power from Parliament to sell lands properly classified as surplus by the railway company who owns the land. The advantage accorded to the railway over and above its general power of sale of surplus lands under the 1879 Act et seq. is that this provision permits the delivery of a clear title to the purchaser without the need to obtain a waiver from incumbrance holders or without the railroad suffering a reduction in price to attract a buyer who will take the surplus land subject to outstanding debt claims. It also frees the railway company from possible future litigation with purchasers of surplus lands if an incumbrance not expressly undertaken by the purchaser were thereafter

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enforced against the lands in the hands of the purchaser. Whether or not this power of sale is available to CP and whether a purchaser would take these lands free from debenture stock indebtedness was the subject of much argument in this appeal.

The term "incumbrance" is undefined in the Act. It has been assigned many meanings by the courts according to the context in which it is employed. The Court of Appeal focussed on the meaning of the word "incumbrance" because they concluded (Arnup J.A. for the majority at p. 496) that it was an "indispensable" element of CP's claim (to enjoy a power of sale pursuant to s. 2 of the 1891 CP Act) that the lands of O & Q be subject to an incumbrance. Although the term "incumbrance" is not a particularly precise term of law, Arnup J.A. concluded that "incumbrance" as found in the 1891 CP Act referred only to specific, not floating, charges.

The debate at the Court of Appeal then turned to the nature of the various charges to which the O & Q, TG & B and WOP lands were subject. CP argued that these lands were subject to a number of specific or fixed charges, the most important of which was the debenture stock issued by O & Q. As has already been discussed, s. 8 of the 1884 O & Q Act, S.C. 1884, c. 61, empowered O & Q to issue debentures which "shall constitute a first lien and charge upon the entire railway of the Company … and upon any extension thereof, and upon the property, franchises, plant and rolling stock thereof acquired or to be hereafter acquired … and upon the tolls and revenues thereof after deduction of the working expenses thereof… ." O & Q issued perpetual debentures pursuant to the 1884 O & Q Act and the debenture indenture (in which CP joined as a party) charged the property of the railway company in the exact words authorized by this said Act. Unless this debenture holders' charge could be characterized as a specific charge, the Court of Appeal concluded that O & Q railway lands were not subject to an "incumbrance" and could not therefore be sold pursuant to the 1891 CP Act. Both Arnup J.A. for the

[Page 1021]

majority of the Court of Appeal (at pp. 496-97) and Hughes J. at trial (at pp. 525-26) held that the debenture holders' charge was in fact a floating charge, not a specific charge, and CP had therefore acquired no right to sell O & Q surplus lands pursuant to the 1891 CP Act, Zuber J.A., in dissent at pp. 522-23, disagreed with the majority of the Court of Appeal and held that the debenture holders' charge was a specific charge.

Unlike the Court of Appeal, I have concluded that the debenture holders' charge does constitute an "incumbrance" for the purposes of the 1891 CP Act. The term "incumbrance" is a general term of law without any classical meaning. The word should be accorded its plain meaning that is consistent with the context of the statute. As is discussed by the Nova Scotia Supreme Court in Clark v. Raynor (1922), 1922 CanLII 505 (NS CA), 65 D.L.R. 425 (C.A.), at p. 439, "The word "encumbrance" has no technical meaning. It is not one of the "terms of the law" and no definition of it will be found in the older books". By generally accepted definition "it comprehends "every right to or interest in the land which may subsist in a third person to the diminution of the value of the land, but consistent with the passing of the fee by the conveyance" … It is apparent, of course, that the word is to be interpreted according to the context in which it is found" (p. 439). (See also Evans v. Evans (1853), 22 L.J. Ch. 785 (C.A.), at p. 790.)

The debenture stock holder in this case has a "first lien and charge" upon the property of O & Q and in my view this constitutes an "incumbrance" within the meaning of the 1891 CP Act. It is not necessary to determine whether this debenture stock is a specific or floating charge in order to decide whether it is an "incumbrance" for the purposes of the 1891 Act. The patent purposes of s. 2 are to protect the security holders against

[Page 1022]

diminution of the security, to ensure clear title to a purchaser, and to enable the railway to dispose of assets surplus to its needs. There is nothing in the 1891 CP Act to indicate that it is only to have a narrow or limited meaning so as to apply only to sales involving land incumbered by a specific or fixed charge. These evident purposes can be served by according to the term 'incumbrance' its ordinary and full meaning and cannot be served by reading into s. 2 an unspecified condition that the incumbrance cannot be an announced but uncrystallized 'charge or lien'. The requirement for the reinvestment of proceeds under s. 2 makes up for any diminution of the security and this protection should be available to holders of both specific or floating charges. Whether or not the value of the O & Q Railway is the same after the lands have been replaced by the investment of these proceeds will depend upon the market value of the railway and all its assets after the investment had been made. Furthermore, the testing of this condition will occur at the day of liquidation of O & Q which is the date of termination of the perpetual lease. Section 2 of the 1891 CP Act appears to assume that the equation is in balance and hence specifies that the incumbrance holder, here including the debenture stock holder, cannot follow the land so transferred in order to secure his claim in debt, even if at common law he could have done so.

The holders of the debenture stock, represented by the intervener John Turner et al., agree that their charge does constitute an "incumbrance" within the meaning of the 1891 CP Act. However, they argue that their debenture stock constitutes a specific charge on the assets of O & Q and consequently CP is only entitled to sell surplus lands pursuant to the 1891 Act. Any sales either prior to this Act or not in accordance with this Act would therefore in their view have violated the specific charge of the debenture holders. It is agreed that CP never secured any release from the debenture holders for the sale of surplus lands.

[Page 1023]

If this debenture stock does constitute a specific charge on all O & Q assets, any sales prior to the 1891 CP Act may violate the debenture stock security as prescribed in the indenture and the 1884 O & Q Act, supra, under which the debenture stock was issued. There is the related question as to whether in this event the charge follows the land into the hands of the purchaser. There is no prohibition against sale of the lands in the debenture stock indenture or the statute. There is no trust deed with foreclosure provisions. There has been no default by O & Q in payment of interest, and the sale of part of the demised lands is not made a default by the indenture. The exercise of the power of sale which has been found to arise in CP under the Lease may, however, be unaffected by the presence of the 'charge or lien' in the debenture terms because there has been no failure by O & Q to pay the interest on these debentures when due, and the sale itself is not specified to constitute a breach. The right if any in the debenture stock holder to enforce the debenture charge against the lands in the hands of the purchaser or a successor in title may well be statute barred.

With the advent of the 1891 CP Act, O & Q, with CP's consent, was empowered to sell these lands free of this charge. The debenture holders concede this point but argue with reference to post-1891 sales that CP did not comply with the terms of s. 2 of the 1891 CP Act because these sales were not authorized by the O & Q Board of Directors. The Board of Directors in fact only authorized a very small number of these sales. I am satisfied that CP did in fact meet all the requirements of s. 2 of the 1891 CP Act. The 1891 Act requires that the proceeds from the sales of surplus lands be applied either to the acquisition of rolling stock or to permanent improvement of the railway. The aggregate amount spent by CP on permanent improvements to the O & Q Railway to the end of 1973 was $141 423 948, a sum which greatly exceeds the aggregate amount of the proceeds received by CP from sales of O & Q, TG & B and WOP surplus lands, that is $15 797 809.26.

[Page 1024]

CP expenditures on permanent improvements do not even include the expenditures which CP made on rolling stock during this period. The failure to obtain the approval of these sales by the Board of Directors of O & Q has already been discussed. CP by the Lease was granted complete control over the operation of the O & Q Railway. CP could call upon O & Q to take all steps reasonably necessary for the operation of the O & Q Railway by CP. The officers of O & Q were obligated under the Lease to execute such documents as required by CP in the conduct of its operation under the Lease (see clause 11, supra). The lease terms were explicit and could not be varied or overturned by subsequent O & Q by-laws. Section 2 of the 1891 CP Act does not impose any requirement for board approval of any sales under the statute and given the general control which CP exercised over O & Q under the Lease it was not necessary for CP to secure board approval for any of these sales.

As a result, whether or not the debenture holders have a specific or floating charge, CP has statutory authority under the general and special railway statutes already mentioned to sell railway lands either subject to or free from incumbrance according to the statute applicable to the sale in question. The debenture charge and lien is an "incumbrance" within the meaning of the 1891 CP Act, and CP fulfilled all the requirements of s. 2 of the Act because the proceeds from the sales of surplus lands were all reinvested in the O & Q Railway. With respect to sales made after 1891, the debenture holders therefore have no claim against CP or O & Q.

There may however be a problem with respect to any sales of surplus lands prior to 1891. If this debenture stock does constitute a specific charge, the holders of this stock may have either some

[Page 1025]

claim against O & Q or CP for the diminution of their security, or they may have some claim against this land in the hands of the purchasers or their successors in title. On the other hand, if this debenture stock constitutes a floating charge, there is clearly no cause of action against CP or O & Q by reason of these sales. CP acquired the power of sale under the Lease and a floating charge could not operate so as to restrict this power of sale, this being the very nature of a floating charge which has not yet crystallized into a fixed or specific charge. There are present in the Lease, and more importantly in the 1884 O & Q Act and the indenture between O & Q and CP with reference to the issuance of the debenture stock, several indications that the first "charge and lien" is a floating charge securing the debenture stock and operative only upon crystallization of that charge by default. Default is not defined as including a sale of parts of the demised premises, as for example these surplus lands. The only condition expressly or inferentially defined as default is the failure of O & Q to pay the interest accruing under the perpetual debentures. Unless and until such a breach occurs, any purported exercise of the rights of enforcement which may ultimately arise is premature. The Lease contains no prohibition against the sale of surplus lands or any other lands and accordingly the power of sale is not subject to any limitation under the Lease except that which is inferred from the obligation of the lessee to carry on and operate the railway undertaking of the lessor. The indenture entered into between O & Q and CP in support of the issuance of this debenture stock likewise does not include, expressly or by inference, any limitation on the rights of the issuer or CP under the Lease. Section 8 of the 1884 O & Q Act authorizing the issuance by O & Q of the debenture stock makes no reference directly or indirectly to any restriction on the issuer of the issuer's ordinary right to dispose of lands. The debenture stock is not supported (as already mentioned) by a trust deed or any legal process amounting to a power to foreclose in the event of breach by the issuer. None of the supporting documentation makes any provision for a partial discharge or any other control by the holder of the debenture stock over the assets of the issuer or the

[Page 1026]

conduct by CP as the operator of the undertaking of the issuer. The sole right arising in the debenture holder in all this documentation surrounding the creation of the debenture debt is the right to vote in the corporate proceedings of O & Q should O & Q fail to pay interest as accrued under the perpetual debentures. None of the indicia of a fixed or specific charge is found in any of this documentation. Indeed the clearest right emerging from these unusual instruments is a charge or lien enforceable upon the termination of the issuer. On the winding-up of O & Q these debentures clearly represent a first charge and lien on its assets in the hands of the liquidator. Until that time, when the charge becomes enforceable as against the land as distinct from against the issuer, this charge falls more clearly into the category of a floating charge. Since disposal of surplus lands is not a breach of the conditions surrounding the issuance of the debenture and since the interest has been paid as accrued, nothing has occurred in law to crystallize the floating charge and cause it to descend upon the lands of O & Q. This in my view is a conclusion consistent with the overall arrangement as between the lessor and the lessee under the Lease and the debenture holders under the indenture entered into by the lessor and the lessee. The entire transaction must be taken in toto and interpreted on that basis rather than by endeavouring to determine the meaning of the various instruments on the basis of their individual or isolated dissection. On this basis, I have come to the conclusion that the debenture holders are secured only by an inchoate indebtedness which has not matured and fallen due by reason of breach.

It therefore follows, and again more particularly by reason of the absence of any prohibition, that the issuer is free to dispose of its land in the ordinary course of business as is the case here with the sale of the surplus lands. This is not a terminal disposition in the nature of a winding up but rather

[Page 1027]

a series of transactions incidental to the operation of the railway undertaking of the issuer O & Q by the lessee CP under the contractual terms of the Lease. It therefore follows, and I so conclude, that the power of sale heretofore found to have been granted to CP under the Lease can be exercised without precipitating the crystallization of the charge in the debenture. These conclusions are reached within the framework of the actions brought by the appellants and the claims made by the intervener. The Court of Appeal, in finding the existence of a power of sale in the lessee under the Lease, did not proceed to deal with the consequence of the exercise of this power of sale in relation to the rights of the debenture stockholders as the holders of a first charge and lien. It follows irresistibly from that finding however that the Court of Appeal were of the view that in the exercise of the power of sale under the Lease, the lessee was not restricted by the existence of these provisions in the debenture stock. There are no claimants before the Court seeking to enforce the debenture charge against the lands in the hands of the purchasers from O & Q and CP in the case of those sales which took place prior to 1891. In that period there were 35 sales of O & Q land none of which appear to have brought in any significant proceeds as most of them were sold for a dollar and "other valuable consideration".

6. Abandonment

6. Abandonment

Related to these sales of surplus lands are the abandonments of rail lines by CP in the course of operating the O & Q railway system. As already noted, the TG & B abandonment related to 19.1 miles of line of which 17.35 miles were sold. This occurred in 1932. The remaining two acres remain in TG & B. This line closure occurred with the approval of the Canadian railway regulatory authority. The remaining abandonment relates to the O & Q line from Tweed to Glen Tay, Ontario, 60.9 miles in all located more or less in the middle of the O & Q railway from Toronto to Ottawa. The rails have been removed but title to the right-of-way remains in O & Q. This abandonment was authorized by the Canadian Transport Commission on the application of O & Q and CP in 1971.

[Page 1028]

There is no issue as to the legality of these abandonments under the regulatory system in place at the time; the only question is whether these abandonments or either of them amount to a breach of the Lease.

In the TG & B abandonment, traffic on the line was rerouted onto another part of the O & Q system as it was more efficient to do so. In the O & Q abandonment, traffic from Tweed to Ottawa was rerouted to another railway line acquired by lease by CP from another railway company the ownership of which CP subsequently acquired. According to the evidence an expenditure of about $12 million would be required to restore the track along this portion of the right-of-way.

The decision of the Court of Appeal, unanimous on this point, found that CP continued after these abandonments to operate the O & Q railway system "efficiently" as required by clause 12 of the Lease (at pp. 481-82). The Lease cannot be reasonably interpreted to require the operator of the O & Q railway to conduct its operations efficiently and at the same time use some equipment and other properties which seriously reduce the efficiency of such operations. It is inevitable with the march of technology that equipment will change and of course will wear out and require replacement over the years. As the speed of the equipment and the power of its traction increase over the years, the layout of the right-of-way will likewise become inefficient and will impede the economic operation of the railway by the lessee. Growth of the community served by the railway will equally and inevitably force changes in routes and supporting facilities and services over the years. Given a reasonable and practical interpretation, clause 12 burdens the lessee with the efficient conduct of the operation of this railway in a manner consistent with the changing commercial and technological conditions and with the interest of the community being served. I therefore agree with the decision of the Court of Appeal that these abandonments are not in law breaches of these leases. I would also note that I completely agree with the unanimous finding of the Court of Appeal, at p. 482, that the

[Page 1029]

application by CP before the CTC does not raise any issue of fraud or illegality merely because CP applied to abandon a "branch" line of the CP system which was in fact a "main" line of the O & Q system. The facts do not disclose any fraudulent misrepresentation to the CTC. The exercise by CP of its majority voting power so as to cause O & Q to join in this application to the CTC does not of itself amount to actionable oppression. This issue is further discussed below. No fraudulent or oppressive intent on the part of CP in those proceedings before the CTC or other regulatory authority with reference to these abandonments is revealed in the extensive record before the Court.

7. The Marathon Sale

7. The Marathon Sale

The origins of the Marathon transaction have already been outlined. Difficulties were encountered by Marathon in attempting to develop the lands surplus to the O & Q Railway undertaking. Additional difficulties arose when CP issued stock to the public in its subsidiary, CPI, which held all the outstanding shares of Marathon. When Marathon thereby ceased to be a wholly-owned subsidiary of CP, taxation problems arose because it was no longer appropriate to make inter-company transfers of this real estate on the basis of historic book value or cost. Also the question of the position of the shareholders of CP vis-à-vis the shareholders of Marathon or of its parent company would be a relevant consideration in effecting any transfers of real estate between the two companies. In the course of its studies CP obtained a comprehensive report from the late Allan Findlay, Q.C., upon which subsequent strategy for the transfer of these surplus properties from CP and O & Q to Marathon was developed. The primary recommendation by Mr. Findlay was the amalgamation of O & Q and CP. This would have brought the perpetual lease to an end as the reversion and the leasehold estate would have collapsed into CP. Unhappily this course was not open to CP because of unexplained administrative problems. The second route recommended was that which was in

[Page 1030]

fact followed and has already been briefly outlined. The first step along this route was the replacement of the Board of Directors of O & Q which for many years dating back almost to the 1884 Lease was filled with employees of CP. The new Board elected in 1973 comprised five persons independent of CP who were senior members of the bar in the Province of Quebec or persons recently retired from senior executive positions in the world of finance or business generally in this country.

This Board proceeded to obtain from independent real estate appraisers an appraisal of the market value of these surplus lands. These appraisers, pursuant to instructions, valued the entire interest in these lands as though there were no incumbrance or lease, at $8 639 000. At the same time, Marathon and CP jointly retained appraisers who valued these lands on the same basis, at $9 652 000. As a subsidiary exercise the appraisers of both O & Q and Marathon valued the reversionary or remainder interest of CP upon the expiry of the 99-year lease to Marathon and the reversionary interest of O & Q upon the expiry of the perpetual lease to CP. The final agreement between the parties valued these reversionary interests at $255 000. This value was included in the appraisal of the entire market value of these lands.

It is clear that the O & Q directors were not aware that the CP appraisal of these lands was significantly higher than that of their own appraisers. In the agreement that followed for the sale of these lands, the directors of O & Q therefore agreed to sell these lands for a total consideration of $8.8 million, a price slightly above their appraisal value.

The proposed sale of these lands was then reduced to writing in a tripartite agreement executed by the parties in September 1973. This agreement recites s. 2 of the 1891 CP Act and purports to be a dual exercise of that section and the powers thereby granted to O & Q and CP. The agreement requires CP, in consideration of O & Q conveying

[Page 1031]

its rights in these lands to Marathon, to invest an amount equal to the entire value ($8.8 million) in rolling stock and permanent improvements for and in the O & Q line "in such manner and at such time or times as O & Q and [CP] shall deem expedient provided it be made within three years of the Completion Date…" and which sum O & Q specifically agrees is the value of these surplus lands free from incumbrance and leases. CP in turn agrees to sell and convey to Marathon CP's right in these lands in consideration of Marathon paying to CP $255 000 being, as discussed above, the valuation of all reversions and remainders in these lands. The agreement provides for the closing of this sale and purchase after approval of the agreement by the shareholders of O & Q at such date as may be mutually agreed upon. Shareholder approval was obtained as already mentioned and the completion date has been deferred pending the outcome of these actions. The net effect is that CP must invest in the O & Q Railway, from its own funds, a net amount of $8.8 million. In essence, therefore, the $255 000 payment is an in-house transfer of funds between CP and a subsidiary of a subsidiary with minority outside interests. With respect to the $255 000 payment, O & Q has no interest and suffers no prejudice, a like sum already having been paid to O & Q by the investment of the $8.8 million in the O & Q Railway. This process at the same time restores or maintains the interest of the debenture stockholders.

No doubt out of an abundance of caution, the grantors arranged in the agreement for the investment in the O & Q Railway of the entire valuation of all interests in these surplus lands. The expression "proceeds" of sale of surplus lands in s. 2 can by no interpretation exceed the total fair market value of all interest in the lands being transferred. Whatever the settlement may be in the corporate records of CP for the inter-corporate assignment of these lands is of no concern to O & Q so long as O & Q receives the benefit prescribed by s. 2. This benefit cannot exceed or indeed even approach the total market value of these lands since the O & Q

[Page 1032]

interest therein consists only of the reversionary rights on the termination or expiry of the Lease which, along with the CP remainder rights under the 99-year Marathon lease, were appraised at $255 000. We do not know the value placed by the appraisers on each of the component interests. The commercial issue in the Marathon matter thus resolves itself into who shall be the recipient of the $8.8 million or $9.6 million and in what form.

The appellants have raised a number of challenges to the validity of the Marathon agreement, each of which is addressed below.

(a) Independent Board

(a) Independent Board

As noted, in early 1973 CP decided that before arrangements were made for the sale to Marathon of the freehold interest in O & Q lands, the Board of Directors of O & Q should be reconstituted so that it would consist of persons completely independent of CP. This precaution taken by CP may have resulted from either an exercise of an abundance of caution or a misinterpretation of s. 53(2) of the Railway Act, R.S.C. 1970, c. R-2, which disqualifies employees of a railway company or anyone having an interest in a contract with the railway company, from serving as a member of its board of directors.

The appellant Wotherspoon argued that any approval by the Board of Directors of O & Q for sale of O & Q land prior to 1973 (some 55 sales of surplus lands) had no legal effect because their directors had an interest in the contract between CP and O & Q, that is, the 1884 Lease.

Because I have already determined that CP enjoys the power of sale of O & Q lands by virtue of the 1884 Lease (a lease which was authorized by the Board of Directors of O & Q), the approval of the O & Q Board of Directors for any of these sales prior to 1973 was obviously unnecessary. Further, if I had to decide the point as to whether the O & Q Board of Directors prior to 1973 had an interest in the O & Q-CP Lease which disquali-

[Page 1033]

fied them, I would conclude that neither the shareholders nor the employees of CP have in law or equity any interest in the assets of CP including CP's interest in the real estate and other assets of O & Q (see Salomon v. Salomon & Co., [1897] A.C. 22 (H.L.)). Consequently, employment by CP is not a disqualification for membership on the Board of O & Q. I would also adopt the conclusion of the trial judge, Hughes J., at p. 530:

… I find nothing in the provisions quoted above [primarily s. 53(2) of the Railway Act, supra] … to disqualify the Ontario and Quebec company's directors simply because they derived their status and sustenance from the Canadian Pacific Railway Company in the circumstances which generally prevailed between 1884 and 1973 …. The situation [with respect to the perpetual lease arrangement] was almost, if not demonstrably unique, and the type of double-dealing which is the cause of disqualification when proscribed by statute and discountenanced in the Courts was evidently absent.

In passing I would also note that the allegations of the appellant minority shareholders against the directors of O & Q who approved the 1973 Marathon agreement, that these directors were negligent in the performance of their duties, was dismissed by Hughes J. No appeal on this point was made by the appellants although they nonetheless continued to question the independence of the post-1973 Board as well as the earlier Board. I would agree with Hughes J.'s conclusion in dismissing this claim and would adopt the unanimous decision of the Court of Appeal at p. 467, that "[t]he record does not justify any aspersions upon the independence or good faith of these directors".

(b) CP Acquisition of O & Q Shares

(b) CP Acquisition of O & Q Shares

Underlying the Marathon transaction is another issue advanced to undermine its efficacy in law, namely the right of CP to acquire shares in O & Q. Section 87 of the Railway Act, R.S.C. 1970, c. R-2, prohibits railway companies from investing their assets in the shares of other railway companies:

[Page 1034]

87. Except as otherwise provided in this Act or the Special Act, no company shall, either directly or indirectly, employ any of its funds in the purchase of its own stock, or in the acquisition of any shares, bonds or other securities, issued by any other railway company, or in the purchase or acquisition of any interest in any such stock, shares, bonds or other securities.

Section 6 of the Act to amend the Canadian Pacific Railway Act, 1889, and for other purposes, S.C. 1890, c. 47, specifically empowers CP to enter into a lease for the running powers of another railway and to acquire thereafter any shares, bonds or other securities of this other railway:

6. The Company may enter into working arrangements with, or may enter into a lease of or acquire running powers over or the right to work the line of any other company in Canada which has been empowered by the Parliament of Canada to make or grant the same to or with the Canadian Pacific Railway Company, and upon such terms and conditions and for such period as are, from time to time, agreed upon by the boards of directors of the respective companies: Provided however, that every such transaction shall be subject to the approval of two-thirds of the votes of the shareholders of the Company present or represented at an annual general meeting or a special general meeting duly called for the purpose; and thereafter the Company may acquire and hold shares, bonds or other securities of such other company.

CP purchased shares in O & Q long after the 1890 Act and was therefore fully authorized by Parliament to do so. I am therefore in complete agreement with Hughes J. at trial (at p. 536) and the unanimous decision of the Court of Appeal (at p. 494) that s. 6 of the 1890 Act conferred on CP the necessary power to acquire and hold shares of O & Q.

(c) Notice of the O & Q Shareholders Meeting

(c) Notice of the O & Q Shareholders Meeting

The appellant Pope argues that the notice of the O & Q shareholders meeting called to confirm the Marathon agreement was inadequate because the notice did not contain sufficient information. Together with the notice given in time and form as

[Page 1035]

prescribed by the Company's legislation, the shareholders received a letter from the President of O & Q and a form of proxy. The letter from Mr. Lewis, the President, set out the fact of the establishment of the independent board and a general summary of its conduct of the company affairs since its appointment. In particular, the letter revealed the engagement of the services of Mr. Jean Martineau, Q.C., and the appointment of independent appraisers together with the results of their appraisal of a value of $8.8 million for all interests in the surplus lands subject to the Marathon agreement. The appellants take the position that in addition to this information, the stockholders should have received the actual appraisal reports on these properties which amounted to some 128 pages of material. The Court of Appeal dealt with this submission at p. 487:

With the greatest of respect we think it quite unreasonable to suggest that the notice of meeting was fatally defective unless accompanied by 128 pages of appraisal reports. The shareholders were told that independent appraisers had made a report, and that the purchase price subsequently agreed upon was "somewhat in excess" of the appraised values. In our opinion, a decision that the constitution of the meeting was ultra vires on the single ground stated cannot be supported on the facts of the case.

With all respect, I adopt that disposition.

The unanimous Court of Appeal (at p. 489) went on to hold that the notice of the meeting was not defective on any of the other grounds relied upon by the appellants, such as the alleged duty of CP to disclose the higher appraisal of these lands that was received by Marathon:

In these instances … we do not think that there was material non-disclosure, even assuming there was any duty of disclosure on C.P. No fraudulent omission of material facts is pleaded or argued.

With respect, I also adopt this disposition of the Court of Appeal.

(d) Validity of Marathon Sale

(d) Validity of Marathon Sale

It has already been found with reference to the Lease that: (a) CP acquired the right to sell O & Q surplus lands under the Lease, (b) CP did not

[Page 1036]

require the approval of the O & Q Board of Directors for any of these sales, and (c) the debenture holders charge is a floating charge and thus cannot operate to restrict this power of sale or affect the condition of the title of the land sold. It has also been found above, with reference to statutory authority, that: (a) CP may sell and cause O & Q to join in the sale of these surplus lands pursuant to the 1891 CP Act and that the debenture holders charge does constitute an "incumbrance" under the meaning of that Act, not so as to authorize the application of the statutory power of sale but so as to make the vendor deliver title free and clear of incumbrance, (b) the approval of the O & Q Board of Directors is not required for sales under the statute, and (c) CP is required to reinvest the proceeds from any such sale, as CP has agreed to do under the Marathon agreement.

It follows, therefore, that CP clearly enjoys the power of sale over these lands and that there is no legal impediment that would prevent CP from selling these lands according to the procedure employed in the Marathon transaction. I note, however, that as CP does not require the approval of the O & Q Board of Directors in order to sell these surplus lands, either under the Lease or the 1891 CP Act, the Marathon transaction, which had as its express purpose the securing of the approval of the O & Q Board of Directors, was not absolutely necessary in law.

In summary, the outcome of this transaction is the same whether the power to make such a sale of surplus lands arises as a matter of law in CP pursuant to the terms of the Lease, or whether that power arises in CP and O & Q acting jointly under the 1891 CP Act, or both. Furthermore the condition of the title to the lands in Marathon will be the same if the sale is completed (a) in accordance with the Lease provisions, given that the claim of the debenture stock holders is in law a floating charge which has not, at the time of the completion of the sale, become crystallized into a specific charge on these lands, or (b) if the sale is made in compliance with s. 2 of the 1891 CP Act. There is

[Page 1036]

no form of estoppel in the law which would cause the deed of conveyance to Marathon to be less effective in law only because the grantor purported to deliver title under one power of sale and without reference to another existing power of sale in the grantor. The grant will attract the appropriate power of authority from the applicable law.

The other grounds advanced by the appellants to challenge the Marathon agreement, the lack of an independent board, CP acquisition of O & Q shares, and the alleged inadequacy of the notice of the O & Q shareholders meeting, have all been dismissed. Given that CP is entitled to sell surplus lands of O & Q even without the approval of the O & Q Board (because of the arrangements embodied in the Lease, which were duly approved by the O & Q Board, whereby CP was authorized to take such action necessary to operate the O & Q undertaking in the name of O & Q), it cannot be argued that the Marathon transaction involves any oppressive conduct or discrimination on the part of CP which might constitute a fraud upon the minority shareholders of O & Q. The Marathon agreement, which was duly executed and confirmed by the appropriate corporate authorities, is therefore binding upon all the parties and must be carried out according to its terms.

These various arguments or approaches all run aground on the proposition that an improvident contract, willingly made by parties capable in law of doing so, cannot be unwound particularly after a century of acceptance and operation by the parties, simply because the balance of the interests of the parties under the contract may be seen by one party as so altered by the passage of time as should entitle such party to rescission, termination or substantial modification.

8. Reversionary Interest of O & Q

8. Reversionary Interest of O & Q

The final issue to be addressed in this appeal is whether or not O & Q is entitled to receive compensation for the loss of its reversionary interest in the surplus lands sold by CP. As already noted, Hughes J. at trial held that CP did not have any power of sale over O & Q lands, either by

[Page 1038]

virtue of the Lease or the 1891 CP Act, and he therefore held CP liable as a constructive trustee for O & Q with respect to all the proceeds of the sales of surplus lands. The majority of the Court of Appeal overturned this finding of the trial judge and held that CP did possess the power to sell O & Q surplus lands by virtue of the Lease (but not by virtue of the 1891 CP Act). The Court of Appeal went on to hold CP liable to account for and pay over to O & Q only the value of its reversionary interest in the lands sold. The judges of the Court of Appeal addressed this point very briefly. Arnup J.A., at p. 503, commented that "… in the unique circumstances of this case, equity imposed fiduciary obligations on C.P. towards O. & Q. with respect to the proceeds of O. & Q.'s interest, the application of which is not specifically provided for by contract or statute". Goodman J.A. agreed at p. 518: "In my opinion, as a matter of equity, C.P. is under an obligation to pay to O. & Q. the value of its reversionary interest in such lands …." Zuber J.A., who in dissent held that the Lease did not grant to CP any power of sale over O & Q lands, nonetheless limited the recovery of O & Q to the value of its reversionary interest only. Zuber J.A., at p. 522, simply stated that "the solution is more complex" than that perceived by the trial judge. The Court of Appeal therefore reduced the judgment of the trial judge who had awarded O & Q the entire value of the lands sold.

Unlike the Court of Appeal, I am not convinced that O & Q is entitled to recover anything for the sale of these surplus lands by CP. Once these sales have been found (as the Court of Appeal concluded) to have been validly made, I fail to see how the principles of equity can have any application to these facts. The appellants have not alleged any mistake, misrepresentation, duress, undue influence, or unconscionability, at least one of which is usually required in order to bring the principles of equity into play. Rather, it appears that the Court

[Page 1039]

of Appeal granted the appellants damages for having voluntarily entered into a Lease over 100 years ago which in the eyes of some has turned into an improvident or unfortunate transaction. That the passage of time should operate so as to make this Lease progressively less attractive to what are now the minority shareholders of O & Q is not sufficient grounds in law to provide O & Q with a remedy. As I have already concluded, the entire operation of the O & Q Railway was turned over to CP under the O & Q leases. Under these three leases CP is clearly entitled to all the funds arising from the operation of the O & Q Railway providing, of course, that CP continues to honour its obligations under the Lease to pay rent by way of dividend and interest to the holders of common and debenture stock respectively. This it has done for over a century. Part of the funds arising from the operation of the O & Q Railway includes proceeds from the sale of surplus lands. Where the sale proceeds are realized under s. 2 of the 1891 CP Act, as the parties to the Marathon sale agreed to be the case, reinvestment of the sale proceeds must take place, and the reversionary interest is by statute considered to be restored and no further entitlement is provided for the holders of securities or other interests in the railway. As the statute gives no further recourse or relief to the holder of an encumbrance, it is difficult to see how equity can in principle provide a remedy for O & Q as the lessor and the holder of the reversionary interest or for its common shareholders.

A court must also be influenced by the circumstance that there was no machinery established by the parties to the Lease to permit the handling of any payment to O & Q for its reversionary interest in the proceeds of the sales of surplus lands or any other function of corporate existence. The Lease had the effect of reducing O & Q to a shell, a dormant company, which had no means by which to accept, handle, invest or distribute any of these proceeds. Furthermore, O & Q would be prevented by s. 21.3 of The Consolidated Railway Act, 1879,

[Page 1040]

S.C. 1879, c. 9, from paying dividends to its shareholders out of the capital of O & Q:

21. At the general meetings of the shareholders of the undertaking from time to time holden, a dividend shall be made out of the clear profits of the undertaking, unless such meetings declare otherwise:

22. No dividend shall be made whereby the capital of the company is in any degree reduced or impaired, or be paid out of such capital, nor shall any dividend be paid in respect of any share, after a day appointed for payment of any call for money in respect thereof, until such call has been paid:

This would have the effect of preventing O & Q from distributing the proceeds of the sale of surplus lands to its shareholders and thereby trap the funds in this totally collapsed corporation. The Court of Appeal did not address this question and only ordered that the reversionary interest of O & Q in the lands sold be paid to O & Q. How O & Q was to accept, manage or distribute these proceeds was not discussed by the Court.

I am also not persuaded that it is necessary to imply any term or terms into the O & Q leases that would have the effect of granting O & Q the right to recover its reversionary interest as well as the means to accept and distribute these funds. Given the broader context of this lease arrangement, which has the result of granting the entire operation of O & Q to CP, I cannot conclude that it is necessary to imply any such terms in order to give efficacy to the contract. It cannot be argued that this case is one where such a term should be implied thus permitting the law to raise "… an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that at all events it should have". (The Moorcock (1889), 14 P.D. 64, at p. 68). The intention of the parties in this transaction was clearly to grant to CP the entire operation of the O & Q Railway, incidental to which was the power to dispose of surplus lands. The efficacy of this Lease does not

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require that additional terms be implied with respect to the reversionary interest of O & Q in the lands sold. As already discussed, it is the undertaking of the O & Q railway which reverts, not specific items of property from time to time existing and comprising the physical equipment of the railway.

O & Q therefore by its own hand by entering into the 1884 Lease through its appropriate and authorized governing body (which Lease was duly confirmed by Parliament) wilfully and deliberately removed all the life signs from the body corporate of O & Q. That entity lies embalmed in the Lease and cannot be revived 100 years later because by the standards of hindsight it could now be said to be an improvident bargain, either permanently or transitionally so at this stage of the history of the railway. Consequently there is no basis in law or equity for diverting funds from a commercial transaction consciously and validly undertaken by the lessee, CP, into the corporate shell of O & Q. Once it has been determined that CP enjoys a power of sale under the leases, it is entirely inconsistent with this conclusion to then impose a fiduciary duty on CP to account for O & Q's reversionary interest prematurely. The Lease is still valid and in full force and effect. This conclusion is even more strongly reinforced if the primary power of sale of CP is found in s. 2 of the 1891 CP Act. Section 2 only provides that the proceeds of sale be reinvested. There is no provision requiring CP to account for the reversionary interest of O & Q. If O & Q has received the benefit of reinvestment as required by the statute, it has received all to which it is entitled according to the statutory scheme. Although this decision rests on the conclusion that CP enjoys the power of sale under the Lease and only in the alternative that CP may also sell O & Q lands pursuant to s. 2 of the 1891 CP Act, I think the conclusion is the same under either exercise of these powers to sell. O & Q is therefore

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not entitled to recover its reversionary interest in these lands.

9. Disposition of the Appeal

9. Disposition of the Appeal

I would therefore dismiss the appeals and partially allow the cross-appeals of the respondent CP. Paragraph 3 of the two orders of the Court of Appeal is varied as follows:

(a) Paragraph 3, subparagraph 2 is varied by deleting therefrom the words "corrected as hereinafter directed".

(b) Subparagraphs 4, 5 and 6 shall be struck out.

With respect to the lands acquired for the O & Q Railway, it is consistent with my determination above, that the operations of the entire enterprise of O & Q were turned over to CP under the leases, to conclude that CP in the exercise of O & Q's franchises and powers is entitled to register these additional lands in the name of either O & Q or CP. Given that O & Q is not entitled to recover its reversionary interest in any of the lands leased by O & Q or in any of the O & Q lands acquired after the Lease on disposal as surplus lands, an order requiring CP to alter the registration of these additional lands would have little effect and no purpose. No good purpose is served in my view in putting the parties and indeed the state to the expense and difficulty of altering the registration of these additional lands. There is no practical necessity for any such relief as long as the O & Q Railway is operated by CP. The matter is at best premature. Therefore paragraph 4 of the order of the Court of Appeal requiring rectification of the internal records of CP and the registry records shall be deleted.

Because the final order of the Court of Appeal does not mention costs in that court, reference should be made to the reasons of the Court of Appeal on p. 526 where it is stated:

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It is obvious that the defendants are entitled to the costs of the appeal and cross-appeals … There will be no costs to or against the intervenant.

The plaintiffs shall pay to the personal defendants their costs of the action.

Out of the broad spectrum of claims advanced by the plaintiffs at trial, they have failed in most of them, although O. & Q. will be entitled to some amount following the reference, and we have already provided for the costs of the reference. In all the circumstances we exercise our discretion by ordering that save as already provided, there be no costs of the action.

I would not disturb the exercise of discretion of the Court of Appeal as to costs at trial or in the Court of Appeal. Costs in this Court shall be to the respondents. As in the Court of Appeal, the appellants shall be jointly and severally liable to pay these costs. Eaton trustees and Joseph Pope shall each be liable for one-half of such costs. There shall be no costs of these appeals payable to or against the intervener John Turner.

Appeals dismissed and cross-appeals of the respondent Canadian Pacific Ltd. allowed in part.

Solicitors for the appellants Wotherspoon et al.: Osler, Hoskin & Harcourt, Toronto.

Solicitors of the appellant Pope: Stikeman, Elliott, Toronto.

Solicitors for the respondent Canadian Pacific Ltd.: Tilley, Carson & Findlay, Toronto.

Solicitors for the respondent Marathon Realty Co.: Cassels, Brock & Blackwell, Toronto.

Solicitors for the respondent Ontario and Quebec Railway Co.: McCarthy & McCarthy, Toronto.

Solicitors for the intervener: Miller, Thomson, Sedgewick, Lewis & Healy, Toronto; Ogilvy, Renault, Montréal.