Court File and Parties

COURT FILE NO.: CV-14-503411 DATE: 20161012 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Nikolai Chilikoff, Rarco Inc., Harold Lusthouse and Landon Lusthouse, Plaintiffs AND: West Capital Placer Inc., Roman Bittman and Alexander Logie, Defendants

AND BETWEEN: West Capital Placer Inc., Roman Bittman and Alexander Logie, Plaintiffs by Counterclaim AND: Nikolai Chilikoff, Defendant by Counterclaim

BEFORE: Madam Justice Kristjanson

COUNSEL: Bruce Baron for the Plaintiff, Defendant by Counterclaim Pavel Zharnitsky, for the Defendants, Plaintiffs by Counterclaim

HEARD: September 19, 2016

Endorsement

[1] This is a motion for judgment in favour of the plaintiffs in the amount of $150,000, pursuant to Minutes of Settlement (“Minutes”). I find that the plaintiffs are entitled to judgment.

Factual Background

[2] An action was commenced in May, 2014 by the plaintiffs in relation to alleged misrepresentations made by the defendants to the plaintiffs to induce them to invest in West Capital Placer Inc. The plaintiffs alleged that defendants’ breach of contract, misrepresentation and negligence caused the plaintiffs to incur damages of no less than $325,000.

[3] Pursuant to a mediation held on December 17, 2015, at which all parties were represented by counsel, the parties negotiated and reached a settlement. The parties executed the Minutes. Article 1 of the Minutes contained an obligation on the defendants to pay the all-inclusive sum of $75,000 to the plaintiffs, payable in four installments as follows: (i) $5000 by January 31, 2016, (ii) $10,000 by March 31, 2016, (iii) $30,000 by June 30, 2016 and (iv) $30,000 by December 31, 2016.

[4] The Minutes provided that the defendants execute consent to judgment requiring them to jointly and severally pay to the plaintiffs the sum of $150,000, plus post-judgment interest at a rate of 2% per annum. The defendants each signed the Minutes. The Minutes provided that in the event of default the defendants had 10 calendar days to cure the default following receipt of written notice, and that upon any uncured defaults of payment, the plaintiffs “shall be entitled to exercise the consent to judgment, on written notice to the defendants.” On this basis, the parties consented to a dismissal of the claim and counterclaim on a without costs basis.

[5] The defendants paid the first two installments, for a total of $15,000. However, the June 30, 2016 payment of $30,000 has not been paid, nor has the December 31 payment in the amount of $30,000.00.

[6] After the first event of default in June, 2016 the plaintiffs notified the defendants of the default, and that they would exercise the consent to judgment if the default was not cured on or before July 21, 2016. On July 20, 2016, the defendants requested an extension of time until August 1, 2016. The plaintiffs gave the defendants until August 9, 2016 to cure the default. The plaintiffs then moved for judgment.

[7] In an affidavit filed on this motion by defendant Roman Bittman, he states that in June 2016 he did not have the funds to pay his share of the payment, and the respondent Corporation, WCP Inc. had no liquid assets. He gave evidence of intention to pay money when he was in a position to do so, and on information and belief stated that his fellow defendant Alexander Logie was in the same position. He further gave evidence that efforts were made to liquidate the assets of WCP Inc., and in the event that a potential purchaser did not enter into an agreement to buy those assets, they were trying to sell equipment in order to satisfy the terms of the Minutes.

Issues

[8] This matter was originally returnable before me in August, 2016. No one appeared for the defendants. At that time I raised a concern with respect to a potential penalty clause or relief from forfeiture, and requested submissions on that issue given section 98 of the Courts of Justice Act. The plaintiffs were also seeking a sealing order based on the provisions of the Minutes. I requested submissions on the Sierra Club factors, referring to [2002] 2 S.C.R. 322 and sections 135(1) and 137(2) of the Courts of Justice Act. In oral argument, the plaintiffs abandoned the request for a sealing order.

[9] The plaintiffs are clearly entitled to enforce the settlement agreement, subject to section 98 of the Courts of Justice Act, which provides:

The court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.

[10] The plaintiffs have proved on a balance of probabilities that a valid settlement was reached, in that the parties mutually intended to create a legally binding contract and agreed on all of the essential terms of the settlement: Olivieri v. Sherman (2007), 2007 ONCA 491, 86 O.R. (3d) 778 (C.A.).

[11] The only issues on this motion are:

(1) Does the Consent to Judgment constitute a penalty clause, and would it be unconscionable to enforce it? and, (2) Should the defendants be granted relief from forfeiture with respect to the $15,000 installments paid?

Issue #1: Penalty Clause and Unconscionability

[12] The issue arises because the Minutes provide for payment by the defendants to the plaintiffs of the sum of $75,000.00 in four instalments, but a failure to pay the instalments on time allows the plaintiffs to enforce a consent to judgment in the amount of $150,000, without allowance for set-off of the instalments. The analysis which a court should take in considering whether a particular clause in a contract is a penalty clause or a forfeiture clause is discussed in Peachtree II Associates – Dallas L.P. v. 857486 Ontario Ltd.. Sharpe, J.A. provided a very helpful analysis as follows:

(1) A penalty is the payment of a sum as a consequence of breach (para. 31); (2) A forfeiture is the loss, by reason of some specified conduct, of a right, property or money, often held as security or part payment of the obligation being enforced under the threat of forfeiture (para. 24) (3) A stipulated remedy clause is evaluated at the time of contract formation; if it represents a genuine attempt to estimate the damages at breach, if will be enforced. It will be a penalty if the stipulated sum “is extravagant and unconscionable in amount in comparison with the greatest loss that could be conceivably be proved to have followed from the breach” (para. 24); (4) Equity considers enforceability at the time of breach, and considers whether it is unconscionable for the innocent party to retain the right, property or money forfeited (para. 24); (5) The equitable doctrine of relief from forfeiture enforces penalty clauses, when they are in the form of a forfeiture, when it is not unconscionable to do so (para. 26); and (6) The courts should, if at all possible, avoid classifying contractual clauses as penalties and, when faced with a choice between considering stipulated remedies as penalties or forfeitures, favour the latter.

[13] As importantly, Sharpe, J.A. also considered the following factors:

(1) Assimilating the analysis under the rubric of unconscionability would provide a more rational framework for analyzing these issues (para. 32); (2) 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 oppression for the party having to pay the stipulated sum” (citing Dickson J. in Elsley v. J.G. Collins Insurance Agencies Ltd., [1977] 2 S.C.R. 916 at p. 937) (para. 32); (3) Courts should favour analysis on the basis of equitable principles and unconscionability over strict common law rules relating to penalty clauses (para. 32); and (4) There is a “rising recognition of the advantages of allowing parties to define for themselves the consequences of breach”, and “enabling parties to set their own value on performance.” (para. 34).

[14] I add to the list of relevant factors the general organizing principle of good faith in contract law, and the duty of honest performance as set out by the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494 at para. 93.

[15] This was a specifically negotiated contract, the purpose of which was to secure payment to the plaintiffs and an end to civil litigation. The fact that it was a specifically negotiated settlement is critical to my analysis. I undertake a case specific inquiry taking into account the circumstances and type of contract, the duty of honest performance, the value of enabling parties to define for themselves the consequence of breach and set their own value on performance, and whether enforcing the contract would be unconscionable.

[16] In the context of a civil litigation claim for $325,000 and a counterclaim, the parties negotiated a settlement agreement December 17, 2015. Both parties were represented by counsel. There was no inequality of bargaining power. The settlement agreement called for the payment of the sum of $75,000 in four installments. If the installments were not made the settlement agreement called for consent to judgment in the amount of $150,000, with no provision for set-off of installments already paid. Just over six months after signing the Minutes, the defendants reneged on their obligations under the settlement agreement. The defendants have led some evidence about a lack of available funds, and attempts to raise funds for the June, 2016 installment. There was no evidence led by the defendants as to what had changed, if anything, in the prior six-month period that had led them to sign Minutes in December promising to pay, yet in June failing to pay and claiming an inability to do so in a timely manner.

[17] The type of contract – minutes of settlement – is important to the analysis. The parties represented by counsel signed a settlement agreement where the parties compromised claims they could otherwise pursue in civil litigation, for the certainty of payment without requirement for prosecuting a claim with the attendant risk and cost. This was obviously a process which the parties valued. Both parties recognized the compromise of claims, and while represented by counsel, entered a contract which required the defendants to pay $150,000 on breach. As a general rule, courts hold parties to their bargain. As stated by Gloria Epstein J.A. for the Court in Remedy Drug Store Co. v. Farnham, 2015 ONCA 576 at para. 54:

Courts are motivated to enforce settlements for good reason. …"There are strong policy reasons for the court's attitude to settlements: it is in everyone's interest that litigation be concluded by the parties' agreement".

[18] Where parties enter into minutes of settlement, they are generally required to honour that settlement, and are not permitted to resile from the terms of their settlement absent demonstration of vitiating factors such as duress or unconscionability.

[19] The timing of the breach – six months after signing the Minutes – is also important to the analysis. The contract was for the payment of $75,000 over the course of one year. This is not a long-term relational contract, with many possible incidents of breach. Rather, it was a specific purpose contract, which was to be fulfilled in its entirety in a very short period of time. Given the affidavit evidence filed by Mr. Bittman on the lack of financial means by any of the defendants in June 2016, and the failure to explain why they signed a contract they could not honour a mere six months earlier, I am concerned about the duty of honest performance.

[20] I find that the sum of $150,000 stipulated in the Minutes is not a penalty, since the sum stipulated for is not unconscionable given the circumstances of this case. A finding of unconscionability would require the defendants to establish both an inequality of bargaining power and a finding that the minutes of settlement are substantially unfair. (Birch v. Union of Taxation Employees, Local 70030, 2008 ONCA 809 at para. 45). They have failed to do so. Even if the clause is a penalty clause, I decline to exercise my discretion under section 98 of the Courts of Justice Act for the reasons set out herein, as the clause is not unconscionable.

Issue #2: Relief from Forfeiture

[21] The defendants now raise relief against forfeiture with respect to the $15,000 installments paid, and seek to have that amount set off against the $150,000 consent judgment. I note, however, that the court raised the issue by requesting argument to determine whether the court had jurisdiction, and the defendants did not bring a motion or application. Relief against forfeiture is also a discretionary remedy under section 98 of the Courts of Justice Act.

[22] The defendants rely on the three part test established in Sask. River Bungalows v. Maritime Life, [1994] 2 S.C.R. 490 at p. 504, as adopted by the Court of Appeal in Dube v. RBC Life Insurance Company, 2015 ONCA 641 at para. 6: the conduct of the applicant, the gravity of the breaches, and the disparity between the value of the property forfeited and the damage caused by the breach. I note, however, that Peachtree II Associates – Dallas L.P. v. 857486 Ontario Ltd. also deals with relief against forfeiture, and the principles to be applied in breach of contract cases where relief against forfeiture is sought. I prefer to apply those principles to the case here, as they are directly relevant to the issues in this motion.

[23] The question is whether the bargain is unconscionable.

[24] On December 18, 2015, the day after the Minutes were signed, counsel for the defendants wrote to counsel for the plaintiffs stating:

It was understood among our side when discussing with the mediator as to the consent to judgment, that it was obvious that the judgment would be offset by whatever payment your clients already received. To interpret that clause otherwise would mean that a default before the first payment leads to a less onerous judgment then a default at the very last payment. The fact that the default judgment is twice the payment plan is already a strong “hammer”; that it ends up being triple is an absurdity. What I suggest to you is that we agree on a common interpretation now so that there may be no conflicts in the future; if we cannot do so, then if in the future if you do enforce the consent judgment for whatever reason, I may have to bring a motion for a declaration the previous payments be imputed to that judgment as partial satisfaction… That your clients “real” claim was for $325,000 is, respectfully, irrelevant. Your clients settle for less so we can all move on to a new chapter in our lives without figuring out who is ultimately liable at law.

[25] Counsel for the plaintiffs wrote on that point as follows:

[C]onsent to judgment is for $150,000. There is no offset for settlement funds paid. Keep in mind that our “real” claim was for $325,000. We need a hammer to enforce settlement. This will all be moot provided settlement funds are paid.

[26] While the affidavit filed by the defendant Bittman attaches this e-mail correspondence, there is no affidavit evidence as to the understanding of the defendants, the effect that this had (e.g., mistake) or steps taken if the deal was not as understood (e.g., rectification).

[27] At no point did the defendants seek relief under section 98 of the Courts of Justice Act, until the court raised the issue of its own motion in the absence of the defendants. Even when faced with the motion for judgment brought by the plaintiffs, the defendants took no steps to seek relief from forfeiture, and indeed, did not attend at the original date scheduled for the motion. In this, they have been dilatory.

[28] The defendants have not explained why they signed Minutes in December committing them to concrete financial commitments on specified dates, yet by June were unable to comply with the Minutes.

[29] Most importantly, I do not find the bargain struck in the Minutes to be unconscionable, for the reasons given above, and so decline to grant relief under section 98 of the Courts of Justice Act.

[30] In the result, the plaintiffs’ motion for judgment is granted. The defendants shall pay the plaintiffs the amount of $150,000.00 plus post-judgment interest of 2% from the date of judgment, plus costs as set out below.

[31] The parties exchanged costs outlines. The plaintiffs were entirely successful and are entitled to receive their costs on a partial indemnity basis. The plaintiffs seek partial indemnity costs in the amount of $4,353.00, plus fees for preparation and attendance in the amount of $1,500, plus HST, plus disbursements in the amount of $256.10, for a total amount of $6,870.00.

[32] The fixing of costs is a discretionary decision under s.131 of the Courts of Justice Act. That discretion is generally to be exercised in accordance with the factors listed in Rule 57.01 of the Rules of Civil Procedure. Overall, the court is required to consider what is “fair and reasonable” in fixing costs with a view to balancing compensation of the successful party with the goal of fostering access to justice: Boucher v Public Accountants Council (Ontario), (2004), 71 O.R. (3d) 291 (Ont. C.A.), at paras 26, 37.

[33] The plaintiffs were successful on the motion. Having considered the relevant principles and factors outlined in Rule 57.01, I order that costs in the amount of $6,870.00 be fixed and payable by the defendants to the plaintiffs within 30 days.

Kristjanson J. Released: October 12, 2016