ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 12-54869
DATE: 2012/02/15
BETWEEN:
Millerson Group Inc. and The Sinha Family Trust
Plaintiffs/Moving Party
– and –
Huntington Properties Ottawa Inc. and Orville Station Ltd.
Defendants/Responding Party
D. Lynne Watt, for the Plaintiffs/Moving Party
Paul A. Webber, Q.C., for the Defendants/Responding Party
HEARD: January 24, 2013
REASONS FOR decision
ANNIS J.
[1] The parties were involved in a joint venture development project in Stittsville, Ontario. The plaintiffs bought out the defendants and took over the role of managing the project in May 2012 in accordance with a Settlement Agreement (the “Agreement”) negotiated by the parties.
[2] Payment obligations of the plaintiffs under the Agreement were secured by a Promissory Note (the “Note”) payable in instalments to the defendants, two of which were honoured. The plaintiffs seek an order for partial summary judgment enforcing the outstanding overdue payment obligations on the Note and those pending in the future.
[3] The defendants plead that the Note stood as security to the Agreement. Further they claim that there were misrepresentations of the plaintiffs that “underlie” the Agreement justifying non‑payment of advances secured by the Note.
[4] The defendants advanced no claim that the misrepresentations were fraudulent, or even that they relied upon them to their detriment. The scope of their pleading was limited to establishing that “the promissory note cannot be considered in isolation”.
[5] In their reply, the plaintiffs pled that the Note was not conditional upon any other obligation or occurrence other than default in payment, which had occurred. They also denied the allegations of misrepresentations underlying the Agreement; that the defendants relied upon the alleged misrepresentations; or that any misrepresentation is a valid defence to the defendants’ obligations under the Note.
[6] On December 10, 2012, the plaintiffs filed their motion for summary judgment. On January 18, 2013, the defendants advised the plaintiffs of their intention to commence an action for damages for deceit with respect to the misrepresentations underlying the Agreement. They indicated that they would be seeking an adjournment or a stay of the summary judgment motion.
[7] The defendant provided an affidavit of Mr. Alan Whitten in which he averred that the budgets of the project were wrong and known to be wrong by the plaintiffs, i.e. the defendants claimed that they were victims of a fraudulent misrepresentation committed by the plaintiffs’ omission to provide updated information upon which the Agreement was based.
[8] After being advised that the plaintiffs were proceeding with their motion and would oppose any request for an adjournment, the defendants filed a factum requesting that the motion for summary judgment be stayed to allow them to claim damages with respect to the alleged deceit “pending the full opportunity to examine all the issues and supporting evidence” with respect to their claim.
Issues:
(1) Is the Note an independent obligation to pay, such that it is enforceable upon default without regard to the Agreement resulting in there being no genuine issue for trial?
(2) If not, should a stay of the summary judgment motion be granted to allow the defendants to commence an action in deceit regarding the negotiation of the Agreement and to explore the issues relating thereto?
(3) If not, should the motion for summary judgment be allowed on the basis that there is no genuine issue for trial regarding any misrepresentation in negotiating the Agreement?
Is the Note an Independent Obligation to Pay?
[9] The plaintiffs deny that the Note is part of a larger transaction and therefore is not conditional upon any other obligation or occurrence, other than default in payment for the makers of the Note.
[10] I agree with the defendants that the correct statement of the law on this issue is found in the Canadian Encyclopedic Digest, Bills of Exchange II.2(b) at para. 21, citing Allen v. Succession Capital Corp., 2011 ONSC 3300 (Ont. Sup.Ct.):
In assessing whether an agreement is a promissory note, the courts must consider the language of the agreement, the evidence surrounding the making of the agreement and the subsequent conduct of the parties. In other words the court cannot consider the agreement in isolation.
[11] The plaintiffs rely upon the cases of Sniderman (Trust) v. Gibbs, 2004 34233 (ON SC) and Brennan v. Andrews, 2012 ONSC 2958. I conclude that neither case is determinative of the issue of the Note being independent of the Agreement.
[12] In Sniderman, supra, Low J. concluded that the existence of a mortgage given collaterally to a promissory note would not derogate from the independence of an action to collect on the note, both being forms of security and neither being secondary to each other.
[13] Apart from being distinguishable on the facts as referring to a situation involving two forms of security, there is also some issue whether this reasoning contradicts the rule that an instrument which recites that it is to stand as a security only, or as collateral to another instrument, is not a note. See Canadian Encyclopedic Digest, Bills of Exchange II.2(b) para. 21, citing Halsted v. Herschmann (1908), 1908 269 (MB KB), 8 W.L.R. 641 (Man. K. B.).
[14] In Brennan, supra, the other case relied upon by the defendants, Healey J. granted partial summary judgment on a promissory note where the defendants had no chance of success on the issue. The defendants attempted to claim duress in signing the note, which was rejected as baseless by the motion judge. The facts bear no similarity to those in this matter.
[15] Accordingly, I conclude that the Note is not independent of the Agreement. If the motion proceeds, the court would be required to consider whether there was a genuine issue for trial concerning allegations of misrepresentations during the negotiations of the Agreement, without which it would not be in a position to conclude that there is no genuine issue for trial in respect of non-payment of the Note.
Should the Motion for Summary Judgment be Stayed to Allow the Defendants to Commence an Action in Deceit?
The Necessity to Plead Deceit
[16] The defendants are in the unusual position of seeking a stay of the motion for summary judgment in order to launch a new action in deceit, presumably with the intention of convincing the court that the Agreement and Note should be set aside because of the alleged fraudulent misrepresentations of the plaintiffs.
[17] I am not sure that the defendants could not achieve the same results by moving to amend their defence to characterize the misstatement as deceitful (and relied upon to their detriment), in addition to pleading equitable set off and adding a counterclaim for the resulting damages.
[18] Rule 26.01 of the Rules of Civil Procedure obliges the court to permit an amendment at any stage of an action, unless prejudice would result that could not be compensated by costs or an adjournment. Neither exception would apply to the suggested amendment.
[19] If the defence is not amended, I conclude that the defendants would have little chance of resisting the motion for summary judgment, apart from the alternative of bringing a separate action in deceit.
[20] The Agreement includes a full and final release of all claims against the plaintiffs, whether known or unknown. This would appear to bar a cause of action in innocent representation, but not necessarily one in fraudulent misrepresentation. See 561895 Ontario Inc. v. Metropolitan Trust Co. of Canada (2004), 2004 46650 (ON CA), 193 O.A.C. 71, para. 18:
In Van Patter v. Tillsonburg District Memorial Hospital (1999), 1999 3754 (ON CA), 45 O.R. (3d) 223, at 230 (C.A.), this court referred to the “well-established policy in favour of upholding and enforcing settlements agreed upon by litigants, or potential litigants, absent evidence of fraud, mistake of fact or unconscionability”.
Staying the Summary Judgment Motion
[21] The defendants rely upon the case of Genivar Inc. v. Taylor, 2012 ONSC 6285 (Ont. Sup.Ct.) where McKinnon J. stayed a motion for summary judgment pending production of documents and completion of examinations for discovery which had been requested by the responding party. At para. 28 of his decision, McKinnon J. explained his reasons for doing so as follows:
The motion brought by the defendants is clearly premature and cannot be disposed of in the absence of the information properly being sought by the plaintiff. Even then, given the credibility issues which have already surfaced in the affidavit evidence produced before me, it is unlikely that the issues between the parties can be determined without a trial. Having stated that, I am not prepared to foreclose a further motion for summary judgment following full discovery and the exchange of affidavits for documents. The motion is stayed pending these steps being completed.
[22] This procedure was sanctioned in the recent Court of Appeal decision in Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764, 108 O.R. (3d) in reliance upon the general interpretive provisions in Rule 1 as described at para. 58 of the court’s decision:
A party faced with a premature or inappropriate summary judgment motion should have the option of moving to stay or dismiss the motion where the most efficient means of developing a record capable of satisfying the full appreciation test is to proceed through the normal route of discovery. This option is available by way of a motion for directions pursuant to rules 1.04(1), (1.1), (2) and 1.05. [emphasis added]
[23] No motion for directions or cross-motion seeking a stay of the plaintiffs’ action has been presented. The only indication that an order seeking to stay the summary judgment motion is to be found in the “Order Sought” section of the defendants’ factum.
[24] In the Genivar, supra, it was clear that the defendants were bringing a premature and inappropriate summary judgment motion. Indeed, the judge concluded that it was unlikely that the issues between the parties could be determined without a trial.
[25] There is no issue of the plaintiffs acting prematurely when the defendants only moved six days before the hearing to advise of their intention to bring an action in deceit. The only basis for a stay is that ordering a summary judgment would be inappropriate without consideration of whether a fraudulent misrepresentation underlies the Agreement, and thereby the Note.
[26] As the stay remedy described by the Court of Appeal in Combined Air, supra, arises out of the general interpretation rules with reference to decisions reached by analogy to other rules and the general principle provision set out in r. 1.04 (1), the court must adopt a flexible approach that best responds to the particular circumstances before it in deciding whether to grant a stay.
[27] I would think that the court should examine the conduct of the parties, particularly with regard to delay; prejudice; proportionality; and particularly whether the defendants have presented any probative evidence to sustain its claim of fraudulent misrepresentation, i.e. a triable issue.
[28] With respect to what constitutes a triable issue, it is important to bear in mind that the threshold required to order a stay of the summary judgment motion is only for the purpose of the development of a record capable of satisfying the full appreciation test enunciated in Combined Air, not the threshold for actually deciding the motion itself.
Delay
[29] The delay of the defendants in bringing forward the request for the stay to initiate proceedings in deceit against the plaintiffs is not fully explained, although there are some factors that bear consideration.
[30] The parties apparently engaged in a mediation process in the fall of 2012 which was unsuccessful. The motion for summary judgment was filed December 10, 2012, which taking into consideration the holiday season at year-end, means that the delay until January 18, 2013 to seek the stay is significant, but not untoward. The interval between these dates would not leave much time for cross‑examinations, which neither party appeared interested in undertaking in any event.
[31] However, the additional delay caused by the commencement of a new separate action, when the defendants have not even taken steps to file a draft statement of claim to assist expedite the process, is a factor for consideration. A stringent timetable can somewhat attenuate further delay. Nevertheless, the defendants’ position is not helped by the delay occasioned in moving earlier to raise the issue of deceit.
[32] Conversely, there is an argument that the delay is partly attributed to the central focus of the parties on the issue of whether the Note was independent of the Agreement. This can be seen from the progression that took place in the pleading of issues.
[33] For example, the concluding paragraph of the defence, after setting out particulars of the misrepresentations focused on the context of the Note:
The Defendant therefore claims that the provisions of the “promissory note” must be construed considering its language, the language of the Settlement Agreement, the evidence surrounding the making of both, and the subsequent conduct of the parties. The “promissory note” cannot be considered in isolation.
[34] This was in response to a statement of claim that made no mention of the Agreement whatsoever. Thus, as originally pleaded, the defendants emphasized the relationship between the misrepresentations and the Note, not whether the misrepresentations were deceitful.
[35] In their reply, the defendants reiterated their position that the Note was independent of the Agreement, even though executed “as part of a larger transaction”. Additionally, the reply denied the misrepresentations or that the defendants relied upon them, which claims in any event were barred by the defendants’ full and final release.
[36] Obviously, the next step in the pleadings process was to allege fraudulent misrepresentation to overcome the new “defences” raised in the reply. This does not excuse the delay, but it does demonstrate that in responding to the statement of claim, the characterization of the misrepresentations as deceitful was not originally as important in the defendants’ mind as the relevance of the misstatements to the interpretation of the Note. It would appear that they only woke up to the need to characterize the misrepresentations as fraudulent when facing the approaching deadline of the motion for summary judgment.
Prejudice and Proportionality
[37] There would be no prejudice to the plaintiffs that cannot be compensated for by an appropriate cost order, provided that strict timelines are imposed to ensure that the hearing of the motion is not unduly delayed.
[38] On the other hand, the amounts in question are significant. Mr. Whitten deposed that hard costs alone are 25 per cent over project budgets representing $325,000 or an increase of 25 per cent. His lawyer claims that total projected losses could reach $1 million, but it is not clear how these claims are substantiated on the evidence before the court.
Triable Issue
[39] The affidavit of Mr. Whitten contains extensive particulars of inaccuracies in the projected budgets and related documents which beg some explanation on the part of the plaintiffs as to how they could have occurred.
[40] For example, references are made to budget changes disclosed shortly after execution of the Agreement of what are described as “glaring omissions”. These include averments about the lack of a budget for design elements such as in-floor radiant heating, concrete material, high-end kitchen countertops, railings and roofing elements for decks and the budget for an acoustics consultant to perform sound cheques for certification purposes.
[41] Mr. Whitten also deposed that advances for work done on the project at the end of December 2011 requiring certification for the amounts of hard and soft costs set out in a report were incorrect, including non-payment of amounts certified to have been paid to the City of Ottawa, Hydro Ottawa and construction companies and material suppliers.
[42] In addition, the budget for marketing sales commissions was stated to have been exhausted with only 30 per cent of the units sold. Mr. Whitten claims that there were also no allowances to buy appliances even though sales agreements had been signed which included appliances in the sales price.
[43] The plaintiffs claim that all this information was not concealed and readily ascertainable had proper due diligence been conducted. Nevertheless, by not adjourning the motion and conducting cross‑examinations on the affidavit, the court faces contradictory claims by the parties which remain unchallenged.
[44] The court is also mindful of the warning of the Court of Appeal in Combined Air, supra at para. 57 that it is not in the interest of justice to grant summary judgment if brought too early in the litigation process:
However, we add an important caveat to the “best foot forward” principle in cases where a motion for summary judgment is brought early in the litigation process. It will not be in the interest of justice to exercise rule 20.04(2.1) powers in cases where the nature and complexity of the issues demand that the normal process of production of documents and oral discovery be completed before a party is required to respond to a summary judgment motion. In such a case, forcing a responding party to build a record through affidavits and cross-examinations will only anticipate and replicate what should happen in a more orderly and efficient way through the usual discovery process.
Analogy to a Request for an Amendment
[45] I also see the defendants’ position being somewhat analogous to the situation of requesting an amendment to pleadings. In effect, the defendants are requesting leave to introduce a new cause of action into a proceeding, which could have been pleaded in the original statement of defence.
[46] I consider this a relevant consideration because the drafters of the Rules of Civil Procedure have clearly promulgated in r. 26.01 a very generous policy permitting amendments to add causes of action, subject only to avoiding prejudice not compensable by costs or an adjournment.
[47] The policy underlying r. 26.01 reflects that the securing of a “just” result referred to in the “General Principle” r. 1.04 is achieved by the liberal introduction of new causes of action for the determination of a civil proceeding on its merits, even though obviously at odds with the opposing goals of promoting the least expensive and most expeditious procedure.
Conclusion
[48] Weighing all of the above factors leads me to conclude that the securing of a just result on the merits in this proceeding is best achieved by an order temporarily staying the motion for summary judgment to allow the defendants to initiate an action in deceit.
[49] This will provide for a record to be developed to properly assess whether there is a genuine issue for trial pertaining to the alleged deceitful misrepresentations that the defendants’ claim should vitiate the Agreement and Note.
[50] In order to limit further delay, I order that the defendants’ statement of claim be issued and served on the plaintiffs’ counsel within two weeks of the release of this decision, failing which the stay is lifted and this motion is to be brought back on forthwith.
[51] Furthermore, if the parties cannot agree within two weeks from the release of this decision on a timetable for completing procedures to allow for the motion for summary judgment to proceed on an expeditious basis in the face of the added factor of the defendants’ action in deceit, the defendants are further directed to apply forthwith by way of a motion for directions to obtain a timetable for that purpose.
[52] My order granting the stay obviously defers the final determination of the plaintiffs’ motion for partial summary judgment for payment of any outstanding amounts owing on the Note until a more fulsome record is available on the issue of the alleged fraudulent misrepresentations.
Costs
[53] Despite my order granting the stay, the plaintiffs are entitled to their costs on a partial indemnity basis up to January 18, 2013 when first advised of the defendants’ intention to seek a stay. This decision reflects the cost thrown away that I find were caused the plaintiffs by the defendants’ delay in bringing their action in deceit. No costs of this motion are otherwise ordered.
[54] Based upon the costs outlines provided by the parties in sealed envelopes at the close of the motion hearing, I award the plaintiffs the amounts claimed to January 18, 2013. I assess these costs in the amount of $3,750 in fees, with taxable disbursements of $426.63, plus HST. This award is consistent with costs described in the defendants’ costs outline and reflects the factors set out in r. 57.01 (1), as described in the plaintiffs’ submissions.
Mr. Justice Peter Annis
Released: February 15, 2013
COURT FILE NO.: 12-54869
DATE: 2012/02/15
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Millerson Group Inc. and The Sinha Family Trust
Plaintiffs/Moving Party
– and –
Huntington Properties Ottawa Inc. and Orville Station Ltd.
Defendants/Responding Party
REASONS FOR decision
Annis J.
Released: February 15, 2013