CITATION: Newport v. 2033862, 2016 ONSC 6703
COURT FILE NO.: CV-16-551261
DATE: 20161115
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
NEWPORT INVESTMENT COUNSEL INC.
Applicant
– and –
2033862 ONTARIO INC.
Respondent
Alistair Crawley and Kate McGrann, for the Applicant
Margaret Waddell and Emily C. Lawrence, for the Respondent
HEARD: August 10, 2016
Stewart J.
[1] Newport Investment Counsel Inc. (“Newport”) seeks leave to appeal from the decision of the Arbitrator, the Honourable Colin Campbell, which found Newport to have breached contractual and fiduciary duties owed to 2033862 Ontario Inc. (“2033862”) by failing to provide notice of suspension of redemptions from the Newport Diversified Hedge Fund and failing to redeem 2033862’s Hedge Fund investment.
[2] Newport argues that the Arbitrator made findings determinative of the outcome and which significantly affected the rights of the parties that were wrong in law.
[3] 2033862 agrees that the Arbitrator’s findings were determinative of the outcome and significantly affected the rights of the parties. However, it takes the position that the findings of the Arbitrator were well-grounded in the evidence which was largely uncontested, and no genuine issue of law has been raised. Thus, the test for leave to appeal has not been met and the motion should be dismissed.
Test for Leave to Appeal
[4] Section 45(1) of the Arbitration Act, 1991 provides:
- (1) If the arbitration agreement does not deal with appeals on questions of law, a party may appeal an award to the court on a question of law with leave, which the court shall grant only if it is satisfied that,
(a) the importance to the parties of the matters at stake in the arbitration justifies an appeal; and
(b) determination of the question of law at issue will significantly affect the rights of the parties. 1991, c. 17, s. 45 (1).
[5] It was pointed out by 2033862 that the central liability findings made by the Arbitrator are not disputed by Newport. Rather, Newport’s principal argument takes issue with the method of assessment of the losses sustained by 2033862.
[6] As noted above, 2033862 concedes that the matters at stake in the arbitration were important to the parties and the result significantly affects their rights. However, 2033862 argues that the Applicant has failed to meet the threshold requirement of demonstrating that the Arbitrator has made any error of law.
[7] The only question to be determined is whether any error of law in the reasons for decision of the Arbitrator has been identified that would materially affect the outcome of this proceeding.
Background
[8] Evidence presented at the hearing established that 2033862’s investment objective was one of long term security of capital, together with a target return of 10-12% annually, preferably in the form of investments that made regular cash distributions. Accumulated returns were paid out to meet the living expenses of the individual principal of 2033862. 2033862 monitored the investments, and moved them if the holdings were not achieving investment objectives.
[9] One of the investments that 2033862 continued to hold at Newport in January 2009 was the Newport Diversified Hedge Fund, a fund that invested in other hedge funds.
[10] The Hedge Fund is one of the investment products created by Newport. It is governed by two interrelated trust documents: a Master Declaration of Trust and the Diversified Hedge Fund Regulation. Newport is both the Manager and the Trustee of this Hedge Fund.
[11] The Master Declaration of Trust defines the scope of Newport’s authority to create, manage and operate each of its mutual funds. It sets out Newport’s rights, duties and obligations as Trustee and Manager of these funds and also sets out the rights, duties and obligations of each fund’s unit holders.
[12] Each of the Newport funds was established by a regulation under the Master Declaration of Trust. The Regulation sets out specific terms governing investments in the Hedge Fund supplementing the terms of the Master Declaration of Trust, including terms relating to the redemption of units.
[13] The Master Declaration of Trust provides that a unit holder’s order requiring redemption of units is irrevocable unless there has been a suspension of redemptions. It is mandatory that the Trustee complete the redemption and pay the redemption proceeds within three business days of the established Valuation Date, unless prior to that Valuation Date Newport had suspended redemptions.
[14] If Newport suspends redemptions, the Master Declaration of Trust compels it to give notice of the suspension to any unit holder who has delivered a redemption order and inform the unit holder of the consequences flowing from the suspension and the options then open to the investor.
[15] The Regulation provides that redemptions in this fund can be made on 30 days written notice, and establishes a mandatory redemption date that is seven business days prior to the end of each month.
[16] The Master Declaration of Trust sets out how the proceeds payable on the redemption of units are to be calculated. It imposes on the Trustee the duty to fix the current net asset value of the redeeming units as of the Valuation/redemption date. That value is the amount to be paid to the redeeming investor.
[17] The terms of the Master Declaration of Trust are unambiguous. In the event that Newport receives a redemption order, it is contractually bound to that individual redeeming unit holder to complete the redemption on the Valuation Date, and pay the proceeds within three business days thereafter. The redemption order is irrevocable. Newport’s duty to redeem is mandatory.
[18] On January 22, 2009, 2033862 instructed Newport to liquidate all its remaining investments at Newport, including its Hedge Fund units. Newport acknowledged the instructions, but did not do anything. It did not complete the redemption in the Hedge Fund by March 23, 2009, the redemption date established by the terms of the Regulation.
[19] Newport never suspended redemptions in the Hedge Fund. As a result, there were consequences that flowed under the plain terms of the trust documents. The primary consequence was that Newport had no option but to pay to 2033862 the proceeds of redemption of its Hedge Fund units within three business days of the March 23, 2009 redemption date.
[20] 2033862 repeatedly demanded payment of the redemption proceeds. Newport did not pay, and failed to provide 2033862 with its reasons for such delay in paying the redemption proceeds.
[21] Ultimately, 2033862 was compelled to commence litigation by way of an action in the Superior Court of Justice. On consent, the action was stayed and the matter was traversed to be determined by a single arbitrator under the Arbitration Act, 1991.
[22] The parties agreed upon a process for the arbitration which involved written submissions based upon a joint book of documents, oral testimony with cross-examinations, filing additional documentary evidence and read-ins from discovery, and oral submissions. The arbitration proceeded over the course of two days in January 2016.
Decision of the Arbitrator
[23] The Arbitrator found that Newport had breached its contract with 2033862 when it failed to pay to it the proceeds of redemption in its units on the redemption date prescribed for in the governing trust documents.
[24] The Arbitrator rejected Newport’s argument that 2033862 had suffered no loss.
[25] The Arbitrator held that damages for Newport’s breach of contract flowed directly from its failure to redeem the Hedge Fund units as instructed. As such, 2033862’s damages were found to include both the balance of the unpaid net asset value of the units on the designated Valuation Date and its losses arising from the lost opportunity to reinvest that capital in other investment funds that were generating returns consistent with 2033862’s investment objectives which were known to Newport.
[26] The Arbitrator found that 2033862 was entitled to rely on the formula set out Master Declaration of Trust for calculating the proceeds of redemption payable for its Hedge Fund units, and which set the date upon which the redemption was to be completed. The Arbitrator concluded that 2033862 was entitled to be put in the position it would have been in if Newport had not breached the contract.
[27] Newport relied on case law that provides that, where a defendant wrongfully repudiates a contract which includes alternative methods of performance, damages are to be assessed based upon the assumption that the defendant would have elected to perform the contract in accordance with the method most favourable to it (see: Hamilton v. Open Window Bakery, 2004 SCC 9).
[28] The Arbitrator rejected Newport’s argument that 2033862’s damages should be measured with reference to any less onerous means of performance of the contract. The Arbitrator found that Newport was contractually obliged to comply with 2033862’s instructions and complete the redemption order on the redemption date. In his determination, there was no alternative method of performing the contract at the time of the breach and therefore the principle in Hamilton v. Open Window Bakery had no application. In coming to this conclusion, the Arbitrator found that the case before him was analogous to that in Wesbell Networks Inc. v. Bell Canada, 2015 ONCA 33.
[29] Since there was never any suspension of redemptions, Newport became immediately liable to 2033862 for the full value of the Hedge Fund units on the redemption date. Further, the Arbitrator accepted that 2033862 would have re-invested those proceeds in accordance with its stated and historical investment strategy.
[30] The Arbitrator also found that 2033862’s financial expert had correctly quantified its capital losses. He found that 2033862 would have reinvested the proceeds into other funds with a target return of 10% to 12 % with the return being withdrawn annually as income. This factual finding was consistent with the uncontroverted evidence before him. Applying the expert evidence to the evidence, the Arbitrator concluded that 2033862’s damages, inclusive of capital loss and lost opportunity, totalled $1.3 million.
Discussion
[31] The policy objective of section 45 of the Arbitration Act, 1991 is to encourage finality in the dispute resolution process. It is meant to prevent parties from pursuing unnecessary litigation through re-litigation of their private disputes in a different forum. Setting the high threshold of a requirement to demonstrate an error of law promotes the goals of limiting the number, length, and cost of appeals and promotes the autonomy and integrity of the arbitral proceedings.
[32] The Arbitrator correctly found that the contract between the parties mandated only one method of performance. This conclusion drove his assessment of damages.
[33] In my opinion, the Arbitrator did not misapply any legal standard, fail to consider any part of a legal test, or fail to consider any relevant factor. The issues raised by Newport all relate essentially to how the Arbitrator assessed the damages payable by Newport for its manifest breach of contract. All of these determinations are either of fact, or of mixed fact and law. There is no discrete question of law to be determined on appeal.
Conclusion
[34] For these reasons, leave to appeal is denied.
Costs
[35] If the parties cannot agree on the subject of costs, written submissions may be delivered by 2033862 within 20 days of the date of release of this decision, and by Newport within 15 days thereafter.
Stewart J.
Released: November 15, 2016
CITATION: Newport v. 2033862, 2016 ONSC 6703
COURT FILE NO.: CV-16-551261
DATE: 20161115
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
NEWPORT INVESTMENT COUNSEL INC.
Applicant
– and –
2033862 ONTARIO INC.
Respondent
REASONS FOR DECISION
Stewart J.
Released: November 15, 2016