NEWMARKET COURT FILE NO.: CV-12-464-00
DATE: 20131218
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
743513 ONTARIO LIMITED c.o.b. as MCI MEYER CONSTRUCTION
Respondent/Plaintiff
– and –
JIANING HUANG
Appellant/Defendant
W. Doodnauth, for the Respondent/Plaintiff
S. Turk, for the Appellant/Defendant
HEARD: December 10, 2013
On Appeal of the Judgment of Deputy Judge Gollom dated August 15, 2012
HOWDEN J.
[1] This is an appeal by the defendant Jianing Huang from the judgment of Deputy Judge Gollom dated August 15, 2012. The plaintiff’s action claimed $25,000 arising from an alleged breach of contract. The respondent/plaintiff MCI Meyer Construction (“MCI”) is a general building contractor. In this case, the contract entered by the parties was in writing, requiring MCI to supervise a construction project to renovate a residential property of approximately 10,000 square feet, known municipally as 62 Cachet Parkway, Markham, Ontario.
[2] The contract management fee to MCI on completion was to be $100,000. On early termination or abandonment during the pre-construction phase, the contract called for payment of ten percent of the management fee, or $10,000. Of the $25,000 claimed, this part of the claim was the only part in which the plaintiff/responding party MCI was successful at trial. The operative clause regarding the amount payable on termination was GC 7.1 (a) (Suspension Abandonment or Termination by the Owner without Cause). The claims for loss of profits and inconvenience ($7,500) and contract fee of $7,500 were not allowed. There is no cross-appeal from those decisions.
[3] The contract was a standard form agreement. There is no issue that the appellant terminated the agreement in the pre-construction phase.
[4] The appellant Huang raises two issues on which it is alleged the trial judge erred:
In finding that the appellant Jianing Huang was personally liable on the contract; and
In finding that GC 7.1(a) is not an unenforceable penalty clause.
Standard of Review
[5] The standard of review on a question of law is correctness. On a question of fact, it is palpable or overriding error. On a question of mixed fact and law, the standard of review
lies along a continuum… (W)here the legal principle is not readily extricable, then the matter is one of mixed law and fact… (W)here the issue on appeal involves a trial judge’s interpretation of the evidence as a whole, it should not be overturned absent palpable and overriding error.[^1]
The Personal Liability Issue
[6] The trial judge held that Mr. Huang was personally liable for damages for breach of contract. The appellant’s counsel submits that the trial judge erred in law and fact in finding that the appellant Mr. Huang was liable on the contract. It is submitted on the appellant’s behalf that Mr. Huang was at all material times acting as an agent for his mother-in-law who actually owned the Cachet Parkway property.
[7] The appellant submits the following:
• The contract defines “owner” as “the owner or his authorized agent or representative as designated to the Construction Manager in writing”. Therefore the definition of owner contemplates an agency relationship as being within it.
• The evidence of Karl Meyer, principal of MCI, was that Mr. Huang told him that the owner was his mother-in-law and that he was acting as her agent.
• Once MCI received notice that Huang was an agent, it was incumbent on Meyer to protect its interest by ensuring that it obtained written authorization from Mr. Huang’s mother-in-law to proceed with the contract.
• An agent will not be liable as a matter of law on a contract where he acts as agent for a principal.
[8] The trial judge found that the contract was signed by the appellant as owner without any restriction or limitations. He also found that the appellant interviewed and hired Mr. Meyer and MCI and made changes to the contract himself prior to executing it. She presented no notice or authorization in writing from his mother-in-law as owner; and the contract never identified her as owner; nor did Mr. Huang show any evidence of her being the registered owner of the Cachet Parkway property. The onus was on the appellant to show by admissible evidence that he was contracting as an agent without personal liability. Mr. Huang performed all the duties of an owner to MCI. The trial judge held therefore that the Appellant failed to meet the civil onus that he acted only as an agent with no personal liability.
[9] In my view, the terms of the contract and the evidence of the conduct of Mr. Huang bear out the findings of the trial judge. In the contract, page 1, Mr. Huang is identified as the “Owner” at the head of the first page where the parties are named. On the page where the parties signed, above Mr. Huang’s signature is the word “Owner”. It is true that “owner” is defined as “the owner or his authorized agent or representative as designated to the Construction Manager in writing”; in other words, “owner” as defined can include an agent acting as authorized representative designated to the Construction Manager. No such designation was provided to the plaintiff as Construction Manager by the owner, apparently Mr. Huang’s mother-in-law, although that was never proven at trial. Mr. Turk, on behalf of the appellant, submitted that once Mr. Huang told Meyer that he was not the owner of subject property, it was for MCI to seek and obtain the written authorization called for by the contract. However, not only the definition of owner but also the clause “GC 4 Owner’s Responsibility” becomes important to this point. Para. 4.2 places the responsibility on the owner or agent to designate a representative or agent with authority to act on the owner’s behalf on all matters under the contract. The definition of owner refers to “his authorized agent as designated to the Construction Manager”. This, together with the clauses identifying the owner as Mr. Huang in the party identification in the preamble and over the execution by Mr. Huang indicates an intention that Mr. Huang is the owner and it was for him to provide to MCI his written designation as agent by the owner.
[10] The appellant submits that Mr. Meyer was told by Mr. Huang that the subject property was owned his mother-in-law and that he was only her agent. He stated that Mr. Meyer admitted he was told this and that he knew the property was owned by someone else. The evidence on this point is not as cut and dried as Mr. Turk would have it. At page 15 of the transcript:
(Mr. Turk)
Q. You mentioned sir, the out – first of all, who is the owner of the property?
A. I don’t know.
Q. Were you not told that my client’s mother-in-law was the owner of the property?
A. Yes. But I don’t know that for sure.
Q. And do you understand under the terms of the contract you were required to get something in writing from the owner of the property?
A. Where is that in my contract?
At page 17 of the transcript:
(Mr. Turk)
Q. It says the term owner which is defined as my client…
A. Correct.
Q. …means the owner or his authorized agent.
A. Mm-hmm.
Q. Okay, or representative as designated to the construction manager in writing. You knew that the owner of this property was someone other than…
A. No, I did not know that.
Q. You were told that. You just told us that a few moments ago.
A. Okay, well I was also told other things. I didn’t know that. I didn’t have that in writing either. So, I didn’t know that, so you’re - you’re making an assumption.
Then at page 21 of the transcript:
Q. This contract, who drew it up?
A. Who drew it up? It’s a – it’s a…
Q. Who presented it to whom?
A. …it’s a standard construction contract.
Q. And you presented it to the defendant, did you not?
A. Yes, in advance.
[11] The evidence also is that it was Mr. Huang who asked Meyer if he was interested in the project. It was Mr. Huang who dealt with the architect who drew the design. Mr. Huang made changes to the contract before it was signed, and it was Mr. Huang who terminated the contract at the meeting with Mr. Meyer at Tim Hortons. (Transcript, pages 8 to 11). Nothing in the contract indicates that a third party, unnamed, was the owner, only Jianing Huang was named as owner. In fact, the defendant never established who in fact the owner of the property was, if it was not him. In the face of these facts and the words in the contract, it was incumbent on Mr. Huang to obtain his mother-in-law’s written designation if indeed she was the owner and a statement to Mr. Meyer without any proof is hardly sufficient to displace what he had led Mr. Meyer to believe by his actions. It is as likely that Mr. Huang is a part owner and acting as agent for the other owner as that he is an agent for the sole owner. But it is clear that he signed the contract holding himself out to be the owner as described in the identification of the parties and over his signature. He cannot in fairness sign the contract as owner, whatever he may have told Mr. Meyer orally, and later escape his responsibility by claiming to be an agent only, without personal liability.
[12] There is ample evidence to support the finding of the trial judge that the Appellant Jianing Huang failed to rebut the evidential onus that he was the owner and he is therefore bound by the contract in his personal capacity. It was open to him on the evidence to make the finding that he did.
Enforceability of GC 7.1(a)
[13] The trial judge correctly stated that the onus of establishing that GC 7.1(a) is an unenforceable penalty clause is on the party seeking to set it aside. The law on enforceability of so called penalty clauses over the past 30 years has moved in the direction of upholding freedom of contract rather than setting aside too readily clauses negotiated by the parties having penal consequences as unenforceable, absent unconscionability. As Sharpe J.A. concluded in Peachtree II Associates – Dallas, L.P. v. 857486 Ontario Limited (2005), 2005 23216 (ON CA), 76 O.R. (3d) 362 at para. 32:
Second, I agree with Professor Waddams’ observation in The Law of Damages, loose leaf (Aurora: Canada Law Book Inc., 1991) at para. 8.310 that as there is often little to distinguish between the two types of clauses and that there is much to be said for assimilating both under unconscionablity. The effect of assimilation would be to provide a more rational framework for the decisions of both forfeitures and penalties. Unconscionability is also the direction suggested by the dictum of Dickson J. in Elsley et al v. J.G. Collins Insurance Agencies Limited, 1978 7 (SCC), [1978] 2 S.C.R. 916 at 937:
It is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against the oppression for the party having to pay the stipulated sum.
…all of this suggest to me that courts should, whenever possible, favour analysis on the basis of equitable principles and unconscionability over the strict common law rule pertaining to penalty clauses.
[14] This trend in the law is clear from the following line of cases. Elsley, supra; Infinite Maintenance Systems Limited v. ORC Management Limited, [2005] O.J. No. 77 (Ont. C.A.); Peachtree II Associates – Dallas, L.P., supra; Birch v. Union of Taxation Employees Local 70030, (2008) 2008 ONCA 809, 93 O.R. 3d 1 (Ont. C.A.); Calloway Reit (Westgate) Inc. v. Michaels of Canada, ULC, [2009] 7760 (S.C.J.); Nguyen v. Tran, [2012] O.J. No. 1762 (S.C.J.).
[15] The appellant submits that the figure resulting from ten percent of the fee of $100,000 or $10,000, in the event of termination was a randomly chosen figure. There was no actual pre-estimate of expenses that could occur. The test urged by the appellant is: “was the $10,000 payable under GC 7.1(a) on termination a pre-estimate of damages?” The appellant suggests that according to the evidence it was not.
[16] The trial judge referred to a broader test – the summary of factors set out in Nguyen, supra, at para. 60. Those factors are: the terms of the contract, its inherent circumstances; to be judged at the time of making of the contract; whether it is extravagant, unconscionable or unreasonable in comparison with the greatest loss that could conceivably be proved to have followed from the breach of contract; whether it is oppressive as opposed to a genuine advance estimate of damage; all of which factors to be considered in light of the jurisdiction to strike down penalty clauses as an exception to the general principle that parties have the freedom to contract as they wish.
[17] The trial judge concluded that the plaintiff would have earned income if no termination had occurred; the defendant entered the contract with full knowledge of GC 7.1(a); and there has been no demonstration that $10,000 does not represent a rough estimate of loss of income during the pre-construction phase, absent termination. He found that having considered these factors as well as the contract and the evidence, the appellant had failed to meet the onus of proving GC 7.1(a) was an unenforceable penalty clause.
[18] It seems to me that the trial judge’s decision is cast too narrowly but when looked at in the context of the recent case law, and in light of the evidence, it is a reasonable conclusion open to him on the evidence before him. In view of the trend of the case law represented by the several appellate and trial cases referred to earlier, I would suggest that factors such as whether there actually was a pre-estimate of damages are now less important than what is now regarded as the central issue in such cases: unconscionability. In Birch, supra, the Ontario Court of Appeal held that the test for unconscionability involves a two-part analysis – a finding of inequality of bargaining power and a finding that the terms of the agreement have a high degree of unfairness or were an abuse of bargaining power.
[19] There is nothing in this record cited to me to indicate any inequality of bargaining power. There is nothing to indicate other than each was a knowledgeable business person. Each of these parties dealt with each other in regard to a renovation project for a house owned by the defendant on Normandale Avenue. It appears that all had gone well on that project and it was “near completion” at the time Mr. Huang told Mr. Meyer that he should stop work on the Cachet Parkway contract (transcript, page 40). The time to judge the clause in question is at the time the contract was made. The pre-construction phase of the $100,000 contract includes many things which take time and potential financial outlay on the part of the construction manager: meetings during the preliminary design and preparation of working drawings, recommendations on construction feasibility and on availability of materials and labour, preliminary budgets, preparation of preliminary master time schedule, breakdown of the schedule into individual phases showing sequence and timing, recommending equipment or materials for pre-order, full range of construction planning and recommending bonding of trades, assembling bid documents for competitive bidding, analysis of bids and assisting with obtaining building permit and legal survey. These are some of the responsibilities of the construction manager under the contract with Mr. Huang during the pre-construction phase. There is nothing cited to me from this record to indicate that $10,000 is in any way extravagant or unconscionable in comparison with the greatest loss that could conceivably occur following termination during that phase of the contract (Infinite Maintenance, supra, at para. 14). The parties were both aware of what was in the contract, or reasonably should have been. There is no evidence to indicate a high degree of unfairness or that there was an abuse of bargaining power.
[20] I see no error in the trial judge’s finding. On the evidence before him, it was a determination that was open to him on the evidence before him.
[21] In the result, the appeal is dismissed. If costs are not agreed, counsel may make written submissions addressed to me at the Barrie Court House within 30 days. The respondent (plaintiff) MCI shall have 15 days from the date of release to file its submissions.
HOWDEN J.
Released: December 18, 2013
[^1]: Newbingging v. M. Butler Insurance Brokers Limited et al. (released September 13, 2012, Welland, Ont.); Citing Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235.