Jordan v. CIBC Mortgages Inc., 2019 ONSC 1178

COURT FILE NO.: 5303/11CP

DATE: 20190221

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Robert Jordan and Paulina Danao

Plaintiffs

– and –

CIBC Mortgages Inc.

Defendant

Alex Dimson and Tyler Planeta, for the Plaintiffs

Paul Steep, Caroline Zayid and H. Michael Rosenberg, for the Defendant

HEARD: August 15 and 16, 2018

Raikes J.

[1] The plaintiffs seek to certify this action as a class proceeding pursuant to s. 5(1) of the Class Proceedings Act, 1992, S.O. 1992, c. 6 (“CPA”). Although two persons are named as plaintiffs, only Mr. Jordan is put forward as a proposed representative plaintiff.

[2] The plaintiffs’ claim arises from prepayment penalties charged by the defendant since 2005 pursuant to terms contained in standard charge terms used by the defendant and its related entities on residential mortgages across Canada. The proposed class definition is:

Persons in Canada, except persons in the provinces of British Columbia and Quebec, who were or are mortgagors under mortgages issued by the Defendant as mortgagee, who prepaid part or all of the principal amounts secured by those mortgages from 2005 onward, and who:

(1) had a mortgage containing either a Discretion as to Calculation Clause or a Discretion as to Comparison rate Clause or both, and paid any prepayment penalty; or

(2) had any mortgage issued by the Defendant and paid a Prepayment Penalty based on an interest differential.

[3] The plaintiffs propose to certify the following common issues:

a. Are the provisions of the Defendant’s Mortgage Contracts (as defined in the Amended Statement of Claim) that purport to allow the Defendant to charge penalties upon the prepayment of part or all of the principal debt enforceable?

b. If the answer to common issue (1) is “yes”, is the maximum penalty that may be charged under the Defendant’s Mortgage Contracts limited to three months’ interest on the principal amount that is prepaid?

c. If the answer to common issue (1) is “yes” and the answer to common issue (2) is “no”, when the Defendant calculated and charged prepayment penalties based on interest rate differentials did the Defendant miscalculate and overcharge those prepayment penalties?

d. If the answer to common issue (3) is “no”, are the provisions of the Defendant’s Mortgage Contracts that purport to permit such calculation and charging of prepayment penalties unconscionable, void or voidable, and/or illegal, unenforceable and/or contrary to public policy at common law or in equity?

e. Do the following alleged acts and omissions of the Defendant warrant an award of punitive damages?

a) A breach of the Plain Language Promise as defined in the Amended Statement of Claim;

b) A breach of the Trust and Loan Companies Act, S.C. 1991, c. 45 and the Cost of Borrowing (Trust and Loan Companies) Regulations, SOR/2001-104, as alleged in the Amended Statement of Claim;

c) A breach of fiduciary duties as alleged in the Amended Statement of Claim; and

d) The commission of Overcharges as alleged in the Amended Statement of Claim.

f. If the answer to issue (5) is “yes”, should an award of punitive damages be made against the Defendant and, if so, in what amount?

[4] Because so much of the argument of the motion focused on whether the Amended Statement of Claim discloses a cause of action, I attach a copy of that pleading as Schedule “A” for ease of reference.

[5] The impugned clauses (see below) are found in standard charge terms used in both variable and fixed rate residential mortgages. However, plaintiffs’ counsel advised during oral argument that this claim is restricted to fixed rate mortgages on which all or part of the principal amount was repaid early and a prepayment penalty was charged.

Facts

a. CIBC

[6] The defendant, CIBC Mortgages Inc. (hereafter “CMI”), is a wholly owned subsidiary of the Canadian Imperial Bank of Commerce (“the Bank”).

[7] Until December 2013, CMI was in the business of lending money to homeowners and other property owners. Those loans were secured by mortgages/charges registered against affected titles. CMI serviced and administered those residential mortgage loans including prepayment penalties charged.

[8] FirstLine Mortgages (“FirstLine”) was a division of CMI until December 22, 2013, at which time it became a division of the Bank pursuant to an internal reorganization. Until then, FirstLine serviced and administered FirstLine branded residential mortgages.

[9] Presidents Choice Financial (“PCF”) is a trademark owned by Loblaws Inc.. Residential mortgage loans were given by PCF through an arrangement with the Bank. CMI acted as nominee for the Bank by holding charges on properties under FirstLine and PCF branded mortgages, but only on mortgage loans made before early 2014.

[10] 3877337 Canada Inc. (“3877337”) is a wholly owned subsidiary of CMI. 3877337 is registered as a mortgage broker in all provinces and territories in Canada. It carries on business under the name HLC Home Loans Canada (“HLC”) and acts as a broker of residential mortgages. HLC brokers mortgages on behalf of related entities including FirstLine. HLC is not itself a mortgage lender.

[11] This action deals with mortgages held by CMI as mortgagee regardless whether the mortgage originated through the Bank, FirstLine, HLC or PCF.

Loan Process

[12] Typically, borrowers applied for a loan either directly or through a mortgage broker. The borrower had a number of options available at the outset including whether to have a fixed or variable interest rate, the amortization period, the term of the loan, and whether to have an open or closed mortgage.

[13] An open mortgage is one that permits a borrower to pay down all or part of the principal amount of the mortgage loan at any time without penalty. A closed mortgage is one that limits the amount that can be paid over and above the monthly payment due; for example, no more than 10% in each year. In the case of a closed mortgage, the borrower may have to pay a penalty for early payment above that permitted by the contract. This case deals only with what I have described as closed mortgages.

[14] CMI usually issued a commitment letter setting out the basis on which it was prepared to lend. Once CMI’s commitment letter was accepted, CMI prepared and delivered to the borrower a disclosure statement as required. That statement is supposed to lay out in plain and understandable language how the loan will work including how payment amounts will be calculated. This includes how the prepayment penalty calculation is done although the exact algorithm is not necessary.

[15] After the disclosure statement, the mortgage documents are prepared, signed and registered. Because most of Ontario is now under the Land Titles system, mortgages are more properly referred to as charges. For purposes of this motion, the terms “charge” and “mortgage” are interchangeable.

[16] Most, if not all, lenders have a standard set of charge terms which they use for their residential loan transactions. CMI and its related entities had their own standard charge terms from 2005 onward. Those terms included prepayment penalty clauses.

b. The Plaintiffs

[17] The plaintiffs, Robert Jordan and Paulina Danao, were common law spouses. On May 8, 2007, they entered into a variable rate mortgage with CMI in the amount of $300,030 to purchase a residence on Warden Avenue in Toronto. They were represented on that transaction by a lawyer who was acting under a joint retainer with CMI.

[18] CMI registered a charge against the Warden Avenue property to secure its loan. The charge specified that Standard Charge Terms 200543 applied to the charge; viz. the terms set out in the Standard Charge Terms are incorporated into and form part of the charge.

[19] In March 2008, the plaintiffs renewed their mortgage and converted the loan to a five-year fixed rate mortgage with CMI. They dealt directly with CMI and did not use a lawyer for that transaction.

[20] In the summer of 2011, the plaintiffs sold their house on Warden Avenue and moved in order to start up a retirement community business elsewhere. They sold and repaid CMI the full balance owing on the mortgage loan before the term of the mortgage renewal had expired. As a result, CMI charged them a prepayment penalty of $12,856.97 which they unhappily paid.

c. Prepayment Penalty Clauses

[21] Exhibit “C” to Mr. Jordan’s affidavit is the standard charge terms for his Warden Avenue loan and renewal. Section 4.12 is entitled, “Prepaying your mortgage with prepayment charges” [original in bold]. There are various sub-headings that address ordering a mortgage payout statement, prepaying after the fifth year of a mortgage, and preconditions to payment before the end of the fifth year of the mortgage. For the purposes of this action, the key provisions in issue are found under the sub-heading, “Prepaying a fixed rate closed mortgage or a 6-month convertible closed mortgage” [again original in bold].

[22] Attached as Schedule “B” is section 4.12 in its entirety.

[23] Whether paying off the entire principal amount owing or a lesser amount that exceeds that permitted, a prepayment penalty is payable. Section 4.12 states:

…Also, in both cases, the prepayment charge will be the higher amount of the following two amounts, each of which will be calculated by us using a method determined by us from time to time at our discretion:

• three months’ interest costs on the amount you are prepaying that is subject to a prepayment charge, calculated at your existing annual interest rate, plus any discount you received on your existing annual interest rate; or

• the interest rate differential amount, which is explained below. [Italics added]

[24] Thus, the CMI standard charge terms expressly gives to CMI a discretion to calculate the two amounts to be calculated “using a method determined by us”. In these reasons, I will refer to same as the “methodology discretion”.

[25] The interest rate differential (“IRD”) is one of two calculations necessary for comparison to determine the amount payable by the mortgagor. For a partial prepayment situation, IRD is defined as follows:

If you are making a partial prepayment that is more than that allowed in section 4.11, the interest rate differential amount is the difference between the following two amounts:

1. The interest costs on the amount you are prepaying that is subject to a prepayment charge, calculated from the prepayment date to the maturity date of your mortgage. The interest costs are calculated at your existing annual interest rate, plus any discount you received on your existing annual interest rate.

2. The interest costs on the amount you are prepaying that is subjected to a prepayment charge, calculated from the prepayment date to the maturity date of your mortgage at the interest rate posted by us on the date of prepayment for the type of mortgage described in the chart below. Use the chart below to find out what interest rate would apply in your case. [Bolded in original]

[26] The IRD for a payment of the entire outstanding principal amount is defined as follows:

If you are prepaying the entire outstanding principal amount, the interest rate differential amount is the difference between the following two amounts:

1. The interest costs on the amount you are prepaying, calculated from your last scheduled regular payment date that is on or before the date of prepayment, whether or not it was actually paid, to the maturity date of your mortgage. The interest costs are calculated at your existing annual interest rate, plus any discount you received on your existing annual interest rate.

2. The interest costs on the amount you are prepaying, calculated from your last scheduled regular payment date that is on or before the date of prepayment, whether or not it was actually paid, to the maturity date of your mortgage at the interest rate posted by us on the date we prepare the payout statement for the type of mortgage described in the chart below. Use the chart below to find out what interest rate would apply in your case. [Again, bolded in original]

[27] As is evident, two separate components must be calculated in order to do the IRD calculation. The first uses the “contract rate”. The second uses a “comparator rate” from a comparable mortgage selected by CIBC.

[28] For selection of the comparator mortgage, there are tables immediately following the descriptions of the IRD computations for each of partial or entire repayment. The left column in each table sets out various lengths of time between the prepayment date and maturity date. The right column indicates at the top: “We will use the posted interest rate charged by us on the date of prepayment for a CIBC brand closed mortgage product similar to yours with a term of:…” [Italics added]. The right column then sets out the term that will be used to correspond with the time frames listed in the left column.

[29] Plaintiffs’ counsel asserts that CMI effectively has a discretion to select the date on which it prepares the payout statement once requested and what is a comparable mortgage for the purpose of determining the comparator rate. In these reasons, I will refer to this discretion as the “comparison rate discretion”.

[30] The plaintiffs assert that the methodology and comparison rate discretions are unlawful, contrary to public policy, unconscionable and void for uncertainty. The defendant has been unjustly enriched.

[31] Further, the plaintiffs contend that the discretions held by CMI, if valid and enforceable, are subject to obligations to act in good faith, with honesty and in a commercially reasonable manner which CMI did not do. In particular, the calculations used by CMI to calculate the prepayment penalties:

1. fail to apply a present value adjustment in the IRD calculation;

2. use a shorter amortization period than that specified in the mortgage contract or applicable under the contract rate when calculating the comparison rate (the “Shortened Comparison Amortization Period” or “SCRAP”).

The failure to make a present value adjustment and/or the use of SCRAP results in higher prepayment penalties charged to customers.

Class Size

[32] It is undisputed that CMI issued many mortgages that contain the methodology discretion, and the comparison rate discretion or both in the jurisdictions covered by the proposed class definition. It is also undisputed that CMI has calculated prepayment penalties on mortgages since 2005 without use of the adjustments that the plaintiffs claim are necessary to the calculation.

[33] According to the affidavit of Mr. Gollom, CMI’s witness, the available records indicate that between January 1, 2005 through the Fall of 2016, the defendant assessed prepayment penalties on approximately 235,234 residential mortgages for residents of Canada outside of British Columbia and Quebec (“the proposed class territory”). There were approximately 389,364 borrowers resident in the proposed class territory on mortgages for which a prepayment penalty was assessed.

[34] Of the 389,364 borrowers, approximately 300,184 paid a prepayment penalty of three months’ interest. Approximately 89,180 borrowers paid a prepayment penalty based on the IRD calculation.

[35] Mr. Gollom indicates in his affidavit that some of the prepayment penalties assessed may have been reduced or, in some cases, reimbursed when the borrower acquired another property within a certain period and took out a new mortgage loan with CMI on the new property. Further, some prepayment penalties may have been paid by third parties such as an employer. In cases of default, the prepayment penalty may have been uncollectible. There is no way to know exactly the true size of the class.

Diversity of Class

[36] Mr. Gollom indicates in his affidavit opposing the certification motion that there are significant differences in the individual circumstances of each borrower at the time they entered into their mortgage; For example,

1. Members of the proposed class obtained their mortgages by different means. Some dealt directly with the Bank, while others worked through brokers or other agents. Accordingly, what advice and information was provided as to prepayment penalties will vary widely;

2. Borrowers have varying levels of sophistication and experience with mortgage contracts and prepayment penalty clauses;

3. Some borrowers obtained partial or complete relief from the prepayment penalty for hardship reasons;

4. Some borrowers received concessions or reductions because of their relationship with the Bank or their interaction with Bank staff;

5. Some borrowers received discounts because they belonged to a special group like the military.

[37] Simply put, the gist of Mr. Gollom’s evidence on this point is that not every customer was charged or charged strictly in accordance with the terms of the prepayment clause. Borrowers do not present with uniform education, sophistication or experience in mortgage transactions. Moreover, what advice they received before they entered into the mortgage contract and from whom will likewise vary.

Internal and External Complaint Mechanisms

[38] The Bank and related entities have an internal dispute resolution process for customers. Some complaints can be dealt with at the manager level. If a borrower is not satisfied, he or she can escalate the issue by contacting the applicable Client Care department. If unsatisfied with the resolution offered by that department, the borrower may ask the Bank’s Ombudsman to investigate and review.

[39] The Ombudsman’s office may investigate and will provide written reasons either accepting or rejecting the resolution proposed by the Client Care department. The Ombudsman’s office may recommend an alternative solution. From 2005 through 2015, that office handled approximately 183 complaints relating to mortgage prepayment charges. No evidence is provided as to the nature or outcome of those complaints.

[40] If the dispute cannot be resolved internally, a borrower may make a complaint to the Canadian Ombudsman for Banking Services and Investments (“OBSI”). The OBSI has authority to resolve disputes between participating institutions and their customers. CMI is a participating institution.

[41] OBSI reviews complaints by borrowers about mortgage prepayment charges. It cannot investigate matters already addressed by a court. If the borrower is unsatisfied with OBSI’s decision, he or she may choose to bring a case before the courts.

[42] OBSI investigates the complaint and gathers information. At the end of that investigation, OBSI may make a non-binding recommendation. A financial institution that refuses a recommendation risks that fact being made public.

[43] Mr. Jordan did not pursue a complaint about the prepayment penalty either internally with the Bank or through OBSI.

Regulatory Supervision of Mortgage Lending

[44] Residential mortgage lending is governed by various Acts and regulations including the Bank Act, the Trust and Loan Companies Act and the Cost of Borrowing Regulations.

[45] CMI and the Bank’s mortgage lending practices are subject to review by the Financial Consumer Agency of Canada (“FCAC”). FCAC is an independent regulatory body responsible for supervision of regulated financial institutions. Its mandate includes ensuring compliance with the consumer provisions of various federal Acts relating to financial services. The FCAC has various methods at its disposal to ensure compliance including imposition of monetary penalties, criminal sanctions and other action.

[46] The Office of the Superintendent of Financial Institutions Canada (“OSFI”) oversees mortgage lending of federally regulated entities like CMI. OSFI has authority to ensure compliance with specific lending requirements when making mortgage loans.

[47] Neither CMI nor the Bank have received a Notice of Violation from FCAC for failure to adhere to the disclosure requirements for mortgage prepayment charges under the Bank Act or the Trust and Loan Companies Act.

Sherry Litigation

[48] This action is one of three parallel proposed class proceedings commenced by a consortium of plaintiffs’ counsel of which the Siskind firm is a member. The other two actions are in British Columbia and Quebec. The proposed class definitions in those cases are confined to residents of those provinces.

[49] The British Columbia action, Sherry v. CIBC Mortgages Inc., is the most advanced of the three actions. The procedural history in Sherry is essential to understanding scope of what has been certified and when.

[50] The British Columbia Supreme Court conditionally certified the Sherry action in June 2014. Certification was conditional on the plaintiff re-crafting the proposed class definition so that it was not overly broad. In March 2015, Watchuk J. unconditionally certified the action after hearing submissions addressing the class definition and whether a common issue should be added to deal with punitive damages.

[51] The defendant appealed and the British Columbia Court of Appeal allowed the appeal in part. In June 2016, the Court of Appeal upheld certification but dismissed some of the causes of action asserted. As a result, the common issues certified were narrowed significantly.

[52] Subsequent to release of the decision of the Court of Appeal, the plaintiff amended her pleading in Sherry to assert additional causes of action. The defendant brought a motion to strike the amendments as an abuse of process, while the plaintiff sought to expand the common issues to take into account the new issues raised by the amendments. Those motions were argued in November and December 2017.

[53] On August 31, 2018, Watchuk J. released her decision. Her Reasons provide a blue-print of the common issues previously certified and rejected, the amendments subsequently made by the plaintiff and her conclusions regarding same.

[54] The plaintiff initially pleaded four causes of action in Sherry;

1. The provisions in the mortgage contracts which grant discretion to CMI in calculating prepayment charges are void for uncertainty;

2. Those provisions are unconscionable at common law, in equity and under the Business Practices and Consumer Protection Act, S.B.C. 2004, c. 2 (“BPCPA”);

3. Alternatively, CMI breached the mortgage contracts by miscalculating prepayment charges because CMI failed to use present values in the IRD calculations and used SCRAP; and

4. Also in the alternative, CMI breached a fiduciary duty owed by miscalculating prepayment charges.

[55] In 2014 and 2015, Watchuk J. certified common issues related to these causes of action. As mentioned, the British Columbia Court of Appeal pared down the causes of action and common issues. In doing so, the Court of Appeal rejected and removed the following claims:

1. The mortgage contracts are void or unenforceable;

2. CMI miscalculated prepayment charges; and

3. CMI breached their fiduciary duty.

[56] In her August 31, 2018 decision, Watchuk J. summarized the certified common issues remaining after release of the Court of Appeal decision at para. 14 as follows:

a) Are the provisions of the Defendant’s Mortgage Contracts that purport to permit such calculation and charging of prepayment penalties:

i. Unconscionable;

ii. Contrary to the Business Practices and Consumer Practices Act, S.B.C. 2004, s. 8, and if so, should those provisions be set aside pursuant to the Business Practices and Consumer Practices Act ss. 10 and 105 or otherwise?

b) Do the following alleged acts and omissions of the Defendant warrant an award of punitive damages?

i. A breach of the Plain Language Promise as defined in the Notice of Civil Claim;

ii. A breach of the Trust and Loan Companies Act, S.C. 1991, c. 45, and the Cost of Borrowing (Trust and Loan Companies) Regulations, SOR/2001-104, as alleged in the Notice of Civil Claim;

iii. A breach of the Mortgage Brokers Act, R.S.B.C. 1996, c. 313, s. 9.1 and Mortgage Brokers Act Regulations, B.C. Reg. 100/73, as amended, as alleged in the Notice of Civil Claim;

iv. A breach of the Business Practices and Consumer Practices Act, ss. 67(1) and 84(m), as alleged in the Notice of Civil Claim;

c) If the answer to issue (b) is yes, should an award of punitive damages be made against the Defendant and, if so, in what amount?

[57] As mentioned, the plaintiff amended her pleading to assert additional causes of action after the Court of Appeal released its decision. The amendments are summarized at para. 15 of Watchuk J.’s most recent decision. The amendments include, inter alia, a plea that the impugned discretionary clauses are illegal and/or contrary to public policy because they fail to comply with Federal and B.C. laws and are contrary to scheme and purpose of those laws. Because of that illegality and non-compliance, CMI has been unjustly enriched.

[58] In her decision dated August 31, 2018, Watchuk J. found that:

1. The Court of Appeal rejected the plaintiff’s claim that the discretionary clauses were void for uncertainty;

2. The Court of Appeal considered the reasonableness of those discretionary clauses in finding they were not void;

3. The Court also considered the miscalculation claims and concluded that they were bound to fail;

4. Likewise, the Court of Appeal rejected a breach of fiduciary duty claim based on the exercise of discretion and reasonableness of calculations claims asserted;

5. The amended plea of illegality and breach of the statutory scheme and public policy for failure to comply with statutory disclosure requirements is supported by the case law cited and cannot be said at this point to be bound to fail. Those allegations disclose a cause of action and the common issues arising from them will be certified; and

6. Unjust enrichment was rejected by the Court of Appeal but not in relation to the new statutory claim. The claim for unjust enrichment arising from illegality/breach of statutory scheme/breach of public policy is permitted to proceed.

[59] At this point, the certified issues in Sherry deal with the following claims:

1. Unconscionability at common law, in equity and under the provincial statute (BPCPA);

2. Illegality under Federal and B.C. legislation;

3. Unjust enrichment as a consequence of (2); and

4. Punitive damages.

[60] The submissions made by counsel before me share the following common theme: I am not bound by the decisions in British Columbia but I should find the parts helpful to each to be persuasive.

Certification

a. General Principles

[61] The test for certification is set out in s. 5 of the CPA. The burden rests on the plaintiff(s) to satisfy all of the criteria: AIC Limited v. Fischer, [2013] S.C.R. 949 at para. 48. Certification is mandatory where the requirements of s. 5(1) are satisfied: Hurst v. Berkshire Securities Inc., [2006] O.J. No. 3647 (S.C.J.) at para. 11.

[62] Section 5(1) states:

5 (1) The court shall certify a class proceeding on a motion under section 2, 3 or 4 if,

(a) the pleadings or the notice of application discloses a cause of action;

(b) there is an identifiable class of two or more persons that would be represented by the representative plaintiff or defendant;

(c) the claims or defences of the class members raise common issues;

(d) a class proceeding would be the preferable procedure for the resolution of the common issues; and

(e) there is a representative plaintiff or defendant who,

i. would fairly and adequately represent the interests of the class,

ii. has produced a plan for the proceeding that sets out a workable method of advancing the proceeding on behalf of the class and of notifying class members of the proceeding, and

iii. does not have, on the common issues for the class, an interest in conflict with the interests of other class members.

[63] The general principles applicable to a certification motion are succinctly stated by Perell J. in Bennett v. Hydro One Inc., 2017 ONSC 7065 at paras. 59-61 as follows:

[59] For an action to be certified as a class proceeding, there must be a cause of action shared by an identifiable class from which common issues arise that can be resolved in a fair, efficient, and manageable way that will advance the proceeding and achieve access to justice, judicial economy, and the modification of behaviour of wrongdoers. (Sauer v. Canada (Atty. Gen.), 2008 CanLII 43774 (ON SC), [2008] O.J. No. 3419 (S.C.J.) at para. 14, leave to appeal to Div. Ct. refused, 2009 CanLII 2924 (ON SCDC), [2009] O.J. No. 402 (Div. Ct.)). On a certification motion, the question is not whether the plaintiff’s claims are likely to succeed on the merits, but whether the claims can be appropriately prosecuted as a class proceeding. (Hollick v. Toronto (City), 2001 SCC 68 at para. 16.) The test for certification is to be applied in a purposive and generous manner, to give effect to the goals of class actions; namely: (1) providing access to justice for litigants; (2) encouraging behaviour modification; and (3) promoting the efficient use of judicial resources. (Western Canadian Shopping Centres Inc. v. Dutton, 2001 SCC 46 at paras. 26 to 29; Hollick at paras. 15 and 16.)

[60] The purpose of a certification motion is to determine how the litigation is to proceed and not to address the merits of the plaintiff’s claim; there is to be no preliminary review of the merits of the claim. (Hollick, paras. 28 and 29) however, the plaintiff must show “some basis in fact” for each of the certification criteria other than the requirement that the pleadings disclose a cause of action. (Hollick, paras. 16-26) The “some basis in fact” test sets a low evidentiary standard for the plaintiffs, and a court should not resolve conflicting facts and evidence at the certification stage or opine on the strengths of the plaintiff’s case. (Pro-Sys Consultants v. Microsoft, 2013 SCC 57; McCracken v. CNR Co., 2012 ONCA 445.) In particular, there must be a basis in the evidence to establish the existence of common issues. (Dumoulin v. Ontario, [2005] O.J. No. 3961 at para. 25 (S.C.J.); Fresco v. Canadian Imperial Bank of Commerce, 2009 CanLII 31177 (ON SC), [2009] O.J. No. 2531 at para. 21 (S.C.J.); Singer v. Schering-Plough Canada Inc., 2010 ONSC 42 at para. 140.) To establish commonality, evidence that the alleged misconduct actually occurred is not required; rather, the necessary evidence goes only to establishing whether the questions are common to all the class members. (Pro-Sys, para. 110) The representative plaintiff must come forward with sufficient evidence to support certification, and the opposing party may respond with evidence of its own to challenge certification. (Hollick, para. 22) Certification will be denied if there is an insufficient evidentiary basis for the facts on which the claims of the class members depend. [See cases at footnote 32.]

[61] On a certification motion, evidence directed at the merits may be admissible if it also bears on the requirements for certification but, in such cases, the issues are not decided on the basis of a balance of probabilities but rather on that of the much less stringent test of “some basis in fact”. (Hollick, paras. 16-26; Cloud v. Canada (2004), 2004 CanLII 45444 (ON CA), 73 O.R. (3d) 401 at para. 50 (C.A.), leave to appeal to the S.C.C. ref’d, [2005] S.C.C.A. No. 50, rev’g (2003), 2003 CanLII 72353 (ON SCDC), 65 O.R. (3d) 492 (Div. Ct.)) The evidence on a motion for certification must meet the usual standards for admissibility. [See cases at footnote 34.] While evidence on a certification motion must meet the usual standards for admissibility, the weighing and testing of the evidence is not meant to be extensive, and if the expert evidence is admissible, the scrutiny of it is modest. (Griffin v. Dell Canada Inc., 2009 CanLII 3557 (ON SC), [2009] O.J. No. 418 at para. 76 (S.C.J.) In a class proceeding, the close scrutiny of the evidence of experts should be reserved for the trial judge. (Stanway v. Wyeth, 2011 BCSC 1057, aff’d 2012 BCCA 260.)

[64] The CPA is a procedural statute. The focus at the certification stage is on the form the action will take. It is not the time or place to assess the chances of success or merits of the claim. Rather, the question at this juncture is whether this is an appropriate case to proceed as a class proceeding.

s. 5(1)(a) - Cause of Action Criterion

a. General Principles

[65] Section 5(1)(a) requires that the plaintiff’s pleading disclose a cause of action. The applicable test is the same as that on a r. 21 motion: the “plain and obvious” test.

[66] The following principles apply:

• No evidence is admissible.

• The facts pleaded are accepted as true and accurate unless they are patently ridiculous or incapable of proof.

• The pleading should be read generously with allowance for technical deficiencies.

• Matters of law that are novel or unsettled in the jurisprudence should be allowed to proceed.

• For a claim to be dismissed, it must be plain and obvious that the plaintiff has no chance of success.

[67] The plain and obvious test sets a low bar. Nevertheless, the requirement that the pleadings disclose a reasonable cause of action mandates a careful review of the pleading in issue. It is not a perfunctory exercise.

b. Analysis

[68] The plaintiffs plead that the prepayment penalty clauses are illegal, contrary to public policy, unconscionable and void for uncertainty. As a result, the defendant, CMI, has been unjustly enriched.

[69] The plaintiffs further plead that even if those clauses are not illegal or void, CMI nevertheless miscalculated prepayment penalties because it failed to give a discount or credit for present value of the amount payable and/or used SCRAP to calculate the amount due. This miscalculation resulted in overcharges which breached the defendant’s obligation to act honestly, fairly and in a commercially reasonable manner. Again, CMI has been unjustly enriched as a result.

[70] Further, the plaintiffs plead that the defendants’ conduct constitutes a breach of fiduciary duty owed to its customers.

[71] I will deal first with the allegations of illegality and contrary to public policy. I will next address the issue of unconscionability before considering whether the prepayment penalty clauses are void for uncertainty. Finally, I will consider the allegations that CMI was obliged to apply a present value discount, and was not entitled to use SCRAP in its calculations. I will consider the claims for unjust enrichment and breach of fiduciary duty in the course of that analysis.

c. Illegal and Contrary to Public Policy

[72] I have described above and quoted from the standard charge terms relevant to prepayment penalties charged by CMI. Those terms are expressly referred to in the Amended Statement of Claim and are thereby incorporated by reference into the pleading. It is unnecessary to repeat same here.

[73] In their pleading, the plaintiffs also allege that:

1. CMI and the Bank have advertised and promoted their commitment and promise to use “plain language mortgage documents”, specifically including plain language regarding the cost of prepayments (para. 18);

2. CMI’s use of mortgage contracts containing the methodology discretion and comparison rate discretion are contrary to and in breach of its plain language promise (para. 23);

3. CMI’s use of such mortgage contracts is contrary to and in breach of its statutory obligation to disclose the particulars of the terms and conditions relating to prepayment penalties and the manner in which prepayment penalties are to be calculated. Specifically, CMI is in breach of ss. 436(1) at 438(1)(a) of the Trust and Loan Companies Act, S.C. 1991, c. 45, and the Cost of Borrowing (Trust and Loan Companies) Regulations, SOR/2001 – 104, as amended (“Federal Laws”) (para. 26);

4. CMI is vicariously liable as principal for HLC’s failure to comply with its statutory obligation to disclose in a clear and comprehensible manner a statement of any charge for prepayments pursuant to the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29 and the Cost of Borrowing and Disclosure to Borrowers Regulation, O. Reg. 191/08 (“Ontario Laws”) (para. 27);

5. The Federal and Ontario Laws are consumer protection laws enacted to protect persons such as the plaintiffs and class members in their dealings with financial institutions like CMI (para. 33);

6. The underlying purposes of the Federal and Ontario Laws are protection for consumers, enhanced cost of credit disclosure, uniform disclosure practices, and ensuring consumers receive fair, accurate, timely and comparable information about the cost of borrowing (para. 31);

7. As a matter of law and/or public policy, it is not possible or permissible for a contract to negate the application or effect of the Federal Laws or the Ontario Laws or to otherwise contract out of those laws (para. 34);

8. The discretion clauses in the prepayment penalty provisions of the CMI mortgage contracts are contrary to and in breach of Federal Laws and contrary to the statutory scheme and purpose of those laws (para. 35);

9. It would be contrary to public policy to give any effect to the penalty provisions that purport to make the methodology discretion applicable to quantification of prepayment penalties (para. 36);

10. The comparable rate discretion is similarly illegal and contrary to public policy (paras. 40 and 41);

11. The penalty provisions are severable from the other provisions of the mortgage contracts (paras. 37and 42); and

12. CMI has been unjustly enriched from the quantification, charging and collection of prepayment penalties under these mortgage contracts (paras. 39 and 44).

[74] It is undisputed that CMI is a mortgage lender that is subject to the Trust and Loan Companies Act. This is a federal statute in place throughout the claim period. The plaintiffs plead and rely on ss. 436 and 438(1) of that Act.

[75] Section 436(1) prohibits a company from lending to individuals unless the “cost of borrowing” and other prescribed information has been disclosed to the borrower in the prescribed form and manner. Section 438(1) prescribes additional disclosure required of a lender. It states:

438(1) Where a company makes a loan in respect of which the disclosure requirements of section 436 are applicable and the loan is required to be repaid either on a fixed future date or by instalments, the Company shall disclose to the borrower, in accordance with the regulations,

(a) whether the borrower has the right to repay the amount borrowed before the maturity of the loan and, if applicable,

(i) any terms and conditions relating to that right, including the particulars of the circumstances in which the borrower may exercise that right, and

(ii) whether, in the event the borrower exercises the right, any portion of the cost of borrowing is to be rebated, the manner in which such rebate is to be calculated or, if a charge or penalty will be imposed on the borrower, the manner in which the charge or penalty is to be calculated; [Italics added] …

[76] The Cost of Borrowing (Trust and Loan Companies) Regulations, SOR/2001 – 104, sections 6 – 8 deal with the manner, timing and content of disclosure required. The relevant portions are:

6(1) For the purpose of subsection 436(1) of the Act, a company that grants credit must, in writing, provide the borrower with a disclosure statement that provides the information required by these Regulations to be disclosed.

(2) A disclosure statement may be a separate document or may be part of a credit agreement or an application for a credit agreement.

(2.2) For a disclosure statement that is separate from the credit agreement or the application,

(a) the disclosure statement must be provided before entering into the agreement or together with the agreement or the application; …

(3) Information disclosed in a disclosure statement may be based on an assumption or estimate if the assumption or estimate is reasonable and the information disclosed by it

(a) cannot be known by the company when it makes the statement; and

(b) is identified to the borrower as an assumption or estimate.

(4) Any disclosure that is required to be made by a company under these Regulations must be made in language, and presented in a manner, that is clear, simple and not misleading.

8(1) A company that enters into a credit agreement for a loan for a fixed interest rate for a fixed amount, to be repaid on a fixed future date or by instalment payments, must provide the borrower with an initial disclosure statement that includes the following information:

(l) the disclosure required by paragraph 438(1)(a) of the Act, including a description of any components that comprise a formula to calculate a rebate, charge or penalty in the event that the borrower exercises the right to repay the amount borrowed before the maturity of the loan and, if section 17 applies, the formula set out in subsection 17(4).

[77] At para. 55 of the plaintiffs’ factum, the plaintiffs argue that they have pleaded that CMI’s “mortgage contracts” are in breach of CMI’s statutory obligations under Federal Laws as they did not disclose the particulars of the terms and conditions of the prepayment penalties and the manner in which they are calculated. It was conceded by plaintiffs’ counsel in oral argument that the above provisions in the Trust and Loan Companies Act and Regulations apply to disclosure statements.

[78] Plaintiffs’ counsel argued that the pleading should be read expansively; viz. the mortgage contract includes the standard charge terms and disclosure statement. There is no doubt that the standard charge terms form part of the mortgage contract and the pleading reflects that fact. It is, to say the least, a significant stretch to read the pleading as including the disclosure statement as part of the mortgage contract.

[79] For example, at para. 14, under the heading “The Mortgage Contracts”, the plaintiffs plead:

“14. In the course of conducting Mortgage Business, CIBC [CMI] entered into mortgage contracts. Each of the mortgage contracts that are the subject of this proceeding (the “Mortgage Contracts”) names CIBC [CMI] as the lender and/or mortgagee and the Plaintiffs or Class Members as the borrowers and/or mortgagors.” [Italics added]

[80] It strikes me that lenders do not “enter into” disclosure statements; rather, they provide them as required by law. The position advanced by counsel in oral argument is at odds with the pleading and their written submissions. The focus of the pleading and written argument is on the pre-payment penalty provisions found in the standard charge terms.

[81] Counsel offered no case authority for the proposition that the disclosure statement is part of the mortgage contract. I note that the plaintiffs’ witness, Mr. MacDonell, provides evidence on this point, but evidence is not admissible for the s. 5(1)(a) analysis.

[82] I am mindful of the obligation to read the pleading generously with allowance for drafting deficiencies. At the same time, I am to undertake the “plain and obvious” analysis on the pleading before me.

[83] I find that on the whole, the pleading exhibits an intention to place in issue compliance with statutory disclosure requirements and the adequacy of the defendants’ disclosure of the cost of prepayment penalties and the manner of their calculation. The pleading specifically asserts non-compliance with the above provisions. It alleges a breach of the statutory obligation to disclose the terms and conditions relating to prepayment penalties and the manner of their calculation, albeit without direct reference to disclosure statements and without pleading that the disclosure statement forms part of the mortgage contract. In these circumstances, it is appropriate to read the pleading generously with leave given to amend to clarify and remedy these deficiencies.

[84] I turn next to the Ontario Laws referred to in the pleading. The plaintiffs allege vicarious liability on the part of CMI as principal for non-compliance by its agent, HLC, a mortgage broker. Section 24 of the Mortgage Brokerages, Lenders and Administrators Act, 2006 requires mortgage brokers to disclose the terms that apply if a borrower is entitled to repay the mortgage early and, if a penalty is to be imposed, the manner of calculation of same. Although the Regulations are referred to in the pleading, the plaintiffs do not specify what section has been breached, and did not provide same as part of the written or oral submissions on this motion.

[85] In any event, the allegation is that HLC breached its statutory obligation as it failed to provide adequate disclosure of the terms of the prepayment penalty and the manner of calculation.

[86] The plaintiffs submit that:

1. CMI did not disclose the particulars of the terms and conditions of the prepayment penalties and the manner in which they are calculated;

2. Accordingly, CMI breached the provisions of the legislation (Federal Laws and Ontario Laws);

3. That legislation and those provisions are aimed a consumer protection;

4. A court may refuse to enforce a term in a contract found to be illegal;

5. In addition, a legislative scheme may be breached even where the contract in question does not violate and is not contrary to a specific provision in a statute. A contractual provision that is inconsistent with the legislative purpose of a statutory scheme may for that reason be contrary to public policy;

6. This is an evolving area of the law; and

7. It cannot be said at this stage that the plaintiffs’ claim is bound to fail.

[87] The defendant submits that it is plain and obvious that the claim of illegality or contravention of public policy does not give rise to a reasonable cause of action as:

1. The federal statute relied upon by the plaintiffs expressly provides in s. 536 that a failure of compliance will not invalidate the contract, and the plaintiff has not pleaded that the failure of disclosure resulted in an unjust enrichment;

2. The disclosure requirements relied upon by the plaintiffs apply only to disclosure statements and do not apply to the mortgage agreement the plaintiffs seek to invalidate; and

3. In any event, there is no illegality or contravention of public policy.

I will address the defendants’ arguments in the same order set out above.

(i) Section 536

[88] CMI relies upon s. 536 of the Trust and Loan Companies Act. That section expressly provides that a contravention of any provision of the Act or regulations “does not invalidate any contract entered into in contravention of the provision.” [Bold print added.]

[89] The defendant relies on the decision of the Supreme Court of Canada in Continental Bank Leasing v. Canada, 1998 CanLII 794 (SCC), [1998] 2 S.C.R. 298 which dealt with a similar saving provision found in s. 20(1) of the Bank Act. In Continental Bank Leasing, the bank owned a leasing company that entered into a partnership. Banks were prohibited from entering into partnerships by s. 174(2)(i) of the Bank Act. The issues before the court were whether the transaction was ultra vires and whether, therefore, the transaction was void as a result. Central to that issue was the effect of s. 20(1) which provided that no act of a bank, including a transfer of property was invalid by reason only that it was contrary to a provision of the Bank Act.

[90] The majority decision was written by McLachlin J. (as she then was). The majority concluded at paras. 109-110 that the bank was not, in fact, a partner. Rather, the leasing company was a separate corporation with its own identity and it was not a bank. There was nothing in s. 174 of the Bank Act that made it unlawful for the leasing company to be a member of the partnership; the prohibition in the Bank Act was not engaged.

[91] The majority then addressed the argument that despite the fact that the leasing company’s participation in the partnership did not contravene the provisions of the Bank Act, it should be considered unlawful for public policy reasons. McLachlin J. summarized the dissenting view of Bastarache J. that sanctioning the leasing company’s participation in the partnership equated to sanctioning an agreement to circumvent the provisions and penalties of the Bank Act and Partnerships Act.

[92] McLachlin J. set out the following principles applicable to the doctrine of illegality at paras. 115 – 116:

• The meaning of the term “illegal” within the context of the doctrine of illegality does not always mean “unlawful” in the traditional sense of being contrary to, prohibited or unauthorized by law. Caution must be exercised in the use of the term “illegal” in this context.

• “The fact that the court determines that a contract is void or unenforceable for public policy reasons under the doctrine of illegality does not render either the contract itself or the subject of the contract unlawful.”

• A contract may be void or unenforceable for public policy reasons where no specific legal wrong is involved.

[93] The majority decision then considered the practical implications of invalidating contracts and other transactions and specifically found that doing so would introduce uncertainty into the affairs of individuals and businesses (para. 118). Thus, there was a sound public policy justification not to invalidate transactions made in these circumstances.

[94] Finally, at para. 119, McLachlin J. considered the purpose and effect of s. 20(1). She wrote:

…Section 20(1) thus supports the view that Parliament never intended breaches of the Bank Act to render bank transactions, including investments in other corporations, like Leasing, null and void. This supports the argument that Parliament intended to create an offence punishable by fines, not to invalidate otherwise lawful transactions and that the doctrine of illegality should have no application in the case at bar.

[95] In his dissenting judgment, Bastarache J. sets out a helpful analysis of the development of the doctrine of illegality. I note that the majority expressly accepted the legal principles he laid out. I will briefly summarize those principles:

• Under the doctrine of illegality, a contract prohibited by statute or for any illegal purpose will be declared void even if it conforms to all other requirements of a valid transaction (para. 64).

• The doctrine of illegality is not to be rigidly applied. The court must take into account the harmful effect on the parties for whose protection for the law making the bargain illegal exists (see para. 66 citing Sidmay Ltd. v. Wehttam Investments Ltd. (1967), 1967 CanLII 24 (ON CA), 61 D.L.R. (2d) 358 (Ont. C.A.), aff’d on other grounds, 1968 CanLII 23 (SCC), [1968] S.C.R. 828, and Royal Bank of Canada v. Grobman (1977), 1977 CanLII 1113 (ON SC), 18 O.R. (2d) 636 (H.C.)).

• The doctrine of illegality is divided into two categories: common-law illegality and statutory illegality.

• A finding of illegality depends not only on the purpose underlying the statutory provision, but also on the remedy sought and the consequences which flow from a finding that the contract is unenforceable (para. 67 citing Still v. Minister of National Revenue (1997), 1997 CanLII 6379 (FCA), 221 N.R. 127 (Fed. C.A.)).

[96] Turning then to the effect of s. 536 of the Trust and Loan Companies Act, I do not read that provision as prohibiting a finding that a particular clause in a contract is unenforceable; rather, it preserves the integrity and existence of the agreement that underlies that impugned provision. To use the vernacular, the baby is not tossed out with the bathwater.

[97] In my view, the purpose of s. 536 is to preserve the underlying agreement when there is a breach of the Act. The mortgage contract still exists. Whether the impugned clause will be enforced is a matter to be determined by the court having regard to the purpose of the statutory provision that has been violated, the remedy sought and the consequences that flow from not enforcing that provision.

[98] In short, s. 536 does not bar application of the doctrine of illegality but it does inform the application of that doctrine. If that section was intended to bar any and all common law remedies for breach of the Act, it does not say so expressly or by implication.

[99] Finally, I do not agree that Trust and Loan Companies Act provisions, including s. 536, limit or restrict the consequence for breaches of the Act to prosecution of offences under the Act. In Continental Bank Leasing, rigid application of the voiding provision would have negatively impacted third party purchasers with broad ramifications for the market. Here, the provisions in question are intended to protect consumers. Restricting or preventing access to common law remedies for breach of those provisions leaves those intended to be protected without a remedy.

(ii) Unjust Enrichment Plea Lacking

[100] CMI also argues that no claim is made in the plaintiffs’ pleading for unjust enrichment arising from the failure to disclose. The plea of unjust enrichment refers only to the “quantification, charging and collection” of the prepayment penalties.

[101] With respect, I disagree. If the prepayment penalty clause is found to be unenforceable because of statutory or common law illegality including inadequate disclosure, it follows that CMI had no right to quantify, charge and collect prepayment penalties from customers. If need be, I would give leave to amend to clarify that allegation.

(iii) Applicability of Statutory Provisions

[102] The next position advanced by CMI concerns the particular documents to which the statutory provisions relied on by the plaintiffs apply. Simply put, these provisions relate only to disclosure statements, not the mortgage contracts at issue.

[103] I have addressed this issue above at paras. 77-83. The adequacy of disclosure is in issue.

(iv) Breach of Statute or Statutory Scheme

[104] The final argument advanced by CMI on this cause of action is that there is no illegality or contravention in this case that would justify the application of this doctrine to void or make unenforceable the prepayment penalty provisions. Likewise, there is no breach of the statutory scheme.

[105] The plaintiffs’ Amended Statement of Claim asserts that the prepayment penalty clauses do not comply with the legislation and regulations and, alternatively, those clauses as drafted are inconsistent with the legislated scheme which protects borrowers through provision by the lender of sufficient information in simple and understandable form as to how a prepayment penalty will be calculated.

[106] As indicated above, there are two branches to the doctrine of illegality: statutory and common law. In The Law of Contracts (7th Ed.) (Thomson Reuters: Toronto; 2017), Professor S. M. Waddams distinguishes the doctrines of statutory and common law illegality at para. 566:

A distinction must be drawn between cases where the court interferes with an agreement as contrary to public policy - the cases of so-called common-law illegality - and cases where the court strikes down an agreement as directly contrary to statute - statutory illegality. In the former group of cases the court may of course take account of statutes, for the public policy of a society is reflected in its statutes, but the reason for striking down the agreement is the court’s apprehension of what public policy is. The court itself makes the judgment as to what is public policy and the court itself must strike the necessary balance. In the case of an agreement that is contrary to a statute, though of course public policy remains the root reason for intervention, the court does not itself make the judgment of what is public policy. If the legislature has enacted that no one shall sell ungraded apples, the court is precluded from discussing the question of whether an agreement to sell ungraded apples is or is not contrary to “public policy”.[Kingshott v. Brunskill, [1953] O.W.N. 133 (C.A.)]

[107] The claim as pleaded is one of statutory illegality.

[108] I take the analytical framework required for statutory illegality to be as follows:

1. Does the contract or the term of the contract in question breach the statute?

2. If the answer to 1 is “no”, does the contract or term of the contract violate the scheme of the legislation – is it contrary to the legislated intent of the statute?

3. Should the contract or term be held to be void or unenforceable for public policy reasons apparent from the legislation?

[109] It is at the last stage of the analysis that the court should weigh the consequences of invalidating the contract, the social utility of those consequences, the purpose of the legislation, and the class of persons intended to benefit or be protected by the legislation: Royal Bank of Canada v. Grobman, p. 432; Still v. Minister of National Revenue; Continental Bank Leasing, paras. 66 and 118. Courts should exercise extreme caution in interfering with the freedom to contract on the grounds of public policy: Fleming v. Massey, 2016 ONCA 70 at para. 34.

[110] In my view, each of these three questions is capable of determination at this stage on the facts alleged; a trial is not required. These are questions of law that do not depend on findings of fact (see Canada Trustco Mortgage Co. v. Renard, 2008 BCCA 343 at para. 6).

[111] With respect to the first two questions of the analysis, I observe that there is no suggestion in the legislation pleaded that prepayment penalties are prohibited per se; in fact, the obligation to provide borrowers with statements showing how such penalties are calculated compels the opposite conclusion.

[112] Further, the legislation and regulations pleaded do not prescribe what prepayment penalties lenders may charge or how prepayment penalties are to be calculated. The plaintiffs have not pleaded nor did they advert to specific statutory provisions applicable to the content of prepayment penalty clauses contained in mortgage contracts including standard charge terms. The provisions pleaded relate only to disclosure.

[113] There is nothing in the legislation that prohibits a lender from wording the prepayment provisions of the contract to provide the mortgagee a discretion(s) as to the manner of calculation of the prepayment penalty.

[114] The plaintiffs argue that the statutes and regulations, in particular the provisions pleaded, are consumer protection legislation. As such, they are entitled to broad and liberal interpretation consistent with that purpose. I agree.

[115] I have reviewed the disclosure statement contained in the motion record. If, as the plaintiffs contended, it is part of the “mortgage contract”, it is incorporated by reference into the pleading and may be considered by me.

[116] I find that:

1. Both the disclosure statement and prepayment penalty clause in the standard charge terms make clear to a borrower that charges are payable if the borrower pays more than he or she is entitled to prepay under the mortgage contract;

2. Both documents set out how the quantum will be determined;

3. The wording of the disclosure document and mortgage terms are consistent internally and with each other;

4. The wording of these documents is unambiguous and readily understandable;

5. The disclosure document provides examples of the manner of calculation that are easy to follow;

6. Although the exact algorithm used by the lender is not set out, that is not required by the Regulation and, in any event, seems to me more likely to inject confusion; and

7. There are variables inherent in the calculation that cannot be precisely known at the time the mortgage is entered into. The lender has no way to know exactly when in the term of the mortgage the borrower will pay above what is permitted by the contract. The lender cannot know what interest rates will be at some future date. Accordingly it is not possible to state the calculation with mathematical precision at the outset.

[117] I do not agree with the plaintiffs’ submission that the disclosure statement or prepayment penalty provisions used by CMI are at odds with or contrary to the scheme of the statutes and regulations pleaded, nor inconsistent with the purpose of that legislation because they contain the methodology and/or comparison rate discretions. The goal of these provisions is not to prohibit prepayment penalties or to limit or prescribe what amount can be charged; rather, the aim is to ensure consumers have the information needed to make an informed decision whether to enter into the contract. To do so, consumers need to know:

1. There is a penalty or charge for paying early; and

2. How that penalty or charge will be determined.

[118] The methodology or comparison rate discretions, alone or together, do not operate to frustrate or undermine the intent of the statutory disclosure provisions. This is especially so given the obligation on CMI to act honestly, in good faith and in a commercially reasonable manner in the exercise of the discretions contractually agreed to. CMI is accountable for the exercise of those discretions and may be held liable in damages if it acts unreasonably or without utmost good faith.

[119] If the defendants are entitled to use SCRAP and are not required to apply a present value discount, the plaintiffs’ disclosure statement satisfies the requirements for disclosure set out in s. 438 (1)(a) of the Trust and Loan Companies Act, ss. 6-8 of the Cost of Borrowing (Trust and Loan Companies) Regulations and s. 24 of the Mortgage Brokerages, Lenders and Administrators Act, 2006. Even if those statutory provisions are applied to the prepayment penalty terms contained in the standard charge terms (and that is questionable), the same conclusion must hold.

[120] On the other hand, if CMI is not permitted to use SCRAP or is required to apply a present value discount, the disclosure statement fails to avert to CMI’s practice to the contrary. The prepayment penalty provision is equally silent. Borrowers would be in the dark.

[121] It seems to me, however, that either CMI is required to give a present value discount or it is not. Either CMI is entitled to use a shorter amortization or it is not. If the plaintiffs are successful, the failure of the defendants to disclose to customers that they have acted wrongly – kept that information from them - adds little to the defendants’ liability except perhaps in relation to punitive damages.

[122] In my view, on the plaintiffs’ theory with respect to a present value discount and/or the inappropriate use of SCRAP, the failure to disclose does not result in the prepayment clause being void, voidable or unenforceable given the availability of a reasonable, fair alternative remedy in the form of damages. The lack of disclosure merely hides the underlying wrong – breach of the prepayment provisions or the duty to act honestly and in a commercially reasonable manner for which damages are the appropriate remedy.

[123] Hence, there is no compelling reason to find the prepayment penalty provisions in CMI’s standard charge terms unenforceable, void or voidable for public policy reasons. If Parliament and/or provincial Legislatures wish to restrict the amount of prepayment penalties or prescribe the manner of their calculation, they can do so. To date, they have not from which I infer that to the extent public policy can be discerned from legislation, the issue is one best determined by the contracting parties. Prepayment penalty clauses afford borrowers a contractual option to pay down their mortgages early, and thereby serve a valid, necessary purpose.

[124] It is open to borrowers to seek to negotiate changes to prepayment clauses including penalties. If there is enough push back by consumers, lenders will react or not to their peril. Consumers also have the right and ability to lobby for legislative change. In short, there are avenues open to borrowers individually and at a grass roots level to address prepayment penalties. Thus, from a public policy perspective, there are other means of holding lenders to account for wrongdoing without applying the doctrine of illegality to void the prepayment clause in its entirety. Voiding or holding the prepayment clause entirely unenforceable provides a windfall for consumers.

[125] Therefore, I find that on the facts alleged by the plaintiffs:

a. The use of the methodology discretion and/or comparison rate discretion do not breach the legislation pleaded, nor are they contrary to the intent or scheme of that legislation;

b. The disclosure statement provided complies with the disclosure requirements of the legislation assuming no present value discount is required and CMI is entitled to use SCRAP;

c. If CMI is required to discount for the present value of the prepayment and/or is not permitted to use SCRAP, the disclosure statement does not reveal that approach by CMI;

d. Even so, mortgagors will have recourse in damages for the underlying breach of contract and breach of the duty to act honestly, in good faith and in a commercially reasonable manner. There is a remedy in damages for that breach;

e. The failure to disclose, if present, adds little if anything to the loss sustained by mortgagors, but voiding the prepayment clause or declaring it entirely unenforceable would yield a windfall to mortgagors who expected to pay for the privilege of prepaying their mortgages;

f. The legislation pleaded does not prescribe how prepayment penalties are to be calculated, and the intent seems to be to leave that to the contracting parties;

g. The ability to prepay mortgages is a genuine benefit to mortgagors; and

h. There is no public policy reason to void or declare the prepayment penalty provision unenforceable for failure to properly disclose in these circumstances.

[126] I am mindful that Watchuk J. took a different approach and came to a different result in Sherry. She concluded that this is an evolving area of the law and the cause of action should proceed. I agree that illegality for public policy is an evolving area of law; however, I find that the issue is one capable of determination at this stage as part of the s. 5(1)(a) analysis.

[127] In summary, I find that the pleading that the prepayment penalty clauses are void, voidable or unenforceable as contrary to public policy cannot succeed and does not raise a cause of action.

d. Unconscionability

[128] The plaintiffs plead at para. 62 of the Amended Statement of Claim that the provisions of the mortgage contracts that permit quantification of prepayment penalties are unconscionable. The penalty provisions are “so harsh and inequitable” to borrowers “as to be inequitable and are void or voidable and unenforceable at common law and in equity”. (See also para. 79 of the pleading)

[129] In Titus v. William F. Cooke Enterprises Inc., 2007 ONCA 573, the Court of Appeal examined and set out the law as it relates to unconscionability in Ontario at paras. 36-38:

[36] A party relying on the doctrine of unconscionability to set aside a transaction faces a high hurdle. A transaction may, in the eyes of one party, turn out to be foolhardy, burdensome, undesirable or improvident; however, this is not enough to cast the mantle of unconscionability over the shoulders of the other party: see Fridman, The Law of Contract in Canada (Fifth Edition), p. 320.

[37] In Black v. Wilcox (1976), 1976 CanLII 555 (ON CA), 12 O.R. (2d) 759 at 762 (C.A.), Evans J.A. discussed the foundations of unconscionability in a similar fashion:

In order to set aside the transaction between the parties, the Court must find that the inadequacy of the consideration is so gross or that the relative positions of the parties are so out of balance in the sense of gross inequality of bargaining power or that the age or disability of one of the controlling party’s places him at such a decided disadvantage that equity must intervene to protect the party of whom undue advantage has been taken.

[38] In a recent case dealing with the doctrine of unconscionability in a wrongful dismissal context, Cain v. Clarica Life Insurance Co., supra, Cote J.A. reviewed the leading cases and academic commentary and concluded, at para. 32:

Those authorities discuss four elements which appear to be necessary for unconscionability…

1. a grossly unfair and improvident transaction; and

2. victim’s lack of independent legal advice or other suitable advice; and

3. overwhelming imbalance in bargaining power caused by victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and

4. other party’s knowingly taking advantage of this vulnerability.

[130] The Ontario Court of Appeal has recently re-affirmed that Titus is the leading authority in Ontario on the test for unconscionability: Phoenix Interactive Design Inc. v. Alterinvest II Fund L.P., 2018 ONCA 98 at para. 39. In Phoenix Interactive, the court specifically rejected the test in Morrison v. Coast Finance Ltd., a 1965 decision of the British Columbia Court of Appeal in which only two elements are required to be proven to establish an unconscionable transaction:

1. an inequality in the position of the parties, arising out of the ignorance, need or distress of the weaker party; and

2. the substantial unfairness of the bargain that is obtained by the stronger party.

[131] In Sherry, the certification motion judge held that the claim disclosed a cause of action in unconscionability. In the British Columbia Court of Appeal, the focus was not on whether the claim disclosed a cause of action but whether the motion judge erred in ruling that it could be determined as a common question. The defendant argued that application of the doctrine of unconscionability depended on a variety of individualized factors relevant to the analysis of the disparity in bargaining power between customers on the one hand and the Bank on the other; as such, the claim was not amenable proceeding as a class proceeding based on a common issue. The same argument is made before me on the s. 5(1)(c) criterion (see below).

[132] I note that the plaintiff in Sherry pleaded and relied upon the provisions of s. 8 of the BPCPA which provides a statutory test for unconscionability that differs from the test in Titus. The decision of the motion judge did not specifically address the doctrine of unconscionability distinct from the BPCPA. Accordingly, the decision of the courts in Sherry is of limited assistance to the analysis under s. 5(1)(a) of the CPA.

[133] A review of the pleading here reveals the following relevant allegations:

a. Mortgagors do not negotiate the terms of the mortgage contracts which are put to them as a take-it or leave-it proposition (para. 19);

b. CIBC had an obligation, either as an implied term of the mortgage contract or as a result of an applicable rule of common law and/or equity, including a duty to honestly perform its contractual obligations. The defendant breached its obligations by failing to exercise the discretions in an objectively reasonable and fair manner and in a manner that achieved a reasonable and fair balance of the financial interests of both lender and borrower (para. 46);

c. Until 2005, the defendants’ practices when calculating IRD penalties included the application of both an unchanged amortization and a present value adjustment (para. 47(c));

d. Generally recognized mathematical principles include recognition of the fact that the value or cost of a given nominal amount of money is greater today than it will be on a later date. The defendants used and applied those same principles when calculating and quantifying the values of their assets and costs of their liabilities (para. 47(d));

e. Since 2005, the defendants have failed to apply an unchanged amortization and a present value adjustment when calculating IRD’s and charging prepayment penalties (para. 49);

f. Since 2005, the defendants have been using a formula or formulae to calculate IRD’s which are not part of or incorporated by reference into the mortgage contracts (para. 52);

g. The use of SCRAP and failure to present value increase the amount payable by borrowers is unfair and contrary to the defendants’ obligations (paras. 53-55);

h. The defendant was in a position of power and dominance over the plaintiffs and class members, including regarding the creation and use of the penalty provisions and quantification of prepayment penalties (para. 61); and

i. If the provisions of the mortgage contracts permit quantification of prepayment penalties in the manner used by the defendant, such quantification was and is unconscionable (paras. 62 and 79).

[134] Having regard to the four criteria enumerated in Titus, the Amended Statement of Claim asserts:

1. A power imbalance – the defendant was in a position of power and dominance and put the mortgage contracts to borrowers as take-it or leave-it propositions that were non-negotiable;

2. The terms of the mortgage contract as they relate to prepayment penalties are unfair and improvident given what the Bank did before 2005, how it treats its own assets and liabilities, and how the formula(e) is/are applied. In essence, the defendant is reaping an undeserved and inappropriate windfall at the expense of the mortgagors.

[135] The Amended Statement of Claim does not allege that the representative plaintiffs and mortgagors who entered into fixed term mortgage contracts with CMI did not obtain ILA or other suitable advice. There is also no specific allegation that the defendants have taken advantage of the vulnerability of such mortgagors. The cause of action as drafted strikes me as aimed at satisfying the lower standard in Morrison.

[136] The general tenor of the Amended Statement of Claim seems to be that CMI is overcharging customers on prepayment penalties because it fails to take into account the present value of money and uses a shortened amortization period (SCRAP) to calculate the amount payable. The Bank’s conduct is unreasonable and contrary to the terms of the mortgage contract or the intent of those terms. If the mortgage terms are lawful and enforceable, and thereby ostensibly permit CMI to act in this manner, the terms are nevertheless unconscionable and should be severed from the balance of the mortgage contract.

[137] The pleading as presently constituted is inadequate. I am satisfied that the plaintiffs have attempted to plead unconscionability but fall short of the mark for technical or drafting reasons. For purposes of the s. 5(1)(a) analysis, I find that a cause of action for unconscionability is not yet disclosed. Leave to amend to plead the missing constituent elements should be given.

e. Void for Uncertainty

[138] The plaintiffs assert in their pleading that the methodology and comparison rate discretions are void for uncertainty, unenforceable and severable from the remaining terms of the mortgage contracts.

[139] In Sherry, the motion judge held that the pleading in that case disclosed a cause of action with respect to whether the discretion clauses were void for uncertainty and thereby unenforceable. The British Columbia Court of Appeal disagreed. The Court noted and examined the different approaches taken in Australia and Canada on the question of discretionary clauses. Relying on the Ontario Court of Appeal decision in Greenberg v. Mefffert (1985), 1985 CanLII 1975 (ON CA), 18 D.L.R. (4th) 548, and several Canadian cases which followed Greenberg, the Court found that the motion judge erred in finding a cause of action existed on that basis.

[140] The plaintiffs make essentially the same arguments before me as were made in Sherry. They also submit that the British Columbia Court of Appeal misinterpreted Greenberg and the scope of application of the principles set out in it. Greenberg did not address the void for uncertainty concept at all and, in any event, left the door open to the possibility that some discretionary clauses may not fit into the broad categories it referenced. Further, the Court of Appeal in Sherry failed to recognize that the law is unsettled especially given that decisions are necessarily tied to the wording of the contract in question. Accordingly, the Court of Appeal went too far on a certification motion.

[141] I agree with the analysis and conclusion reached by the British Columbia Court of Appeal in Sherry. The fact that the terms of the prepayment penalty clauses conveyed discretion(s) to the lender does not render the prepayment terms indefinite and incapable of application. The discretions granted are not open-ended and vague to the point of uncertainty. They are not unfettered in the sense that CMI could choose to charge whatever it wished. The exercise of its discretion is constrained by the terms of the agreement and the duty of honesty and good faith application: Graillen Holdings Inc. v. Orangeville (Town), 2016 ONSC 3687 at para. 74; Greenberg at para. 18.

[142] In Greenberg, Robins J.A. wrote at para. 20:

20. In any given transaction, the category into which such a provision falls will depend upon the intention of the parties as disclosed by their contract. In the absence of explicit language or a clear indication from the tenor of the contract or the nature of the subject matter, the tendency of the cases is to require the discretion or the dissatisfaction to be reasonable: Minster Trust Ltd. v. Traps Tractors Ltd., [1954] 1 W.L.R. 963, [1954] 3 All E.R. 136 at 145. This construction imposes the least hardship in that it produces a result that cannot be said to be unfair or unjust to either of the parties. Other things being equal, I think it preferable that provisions of this kind be construed as implying the less arbitrary standards of the objective test: Restatement, Contracts (2d), s. 228.

[143] Prof. S.M. Waddams writes in The Law of Contracts (Seventh Edition) at }59:

… In Canada Square Corp. v. Versafood Services Ltd. [(1981), 1981 CanLII 1893 (ON CA), 130 D.L.R. (3d) 205 (ON CA)], Morden J.A. said that “a Court should not be too astute to hold that there is not that degree of certainty in any of its essential terms which is the requirement of a binding contract”. It may be suggested, therefore, that indefiniteness standing alone will very rarely be a ground for refusing enforcement, particularly where the party seeking enforcement has relied on the promise. The reliance shows that some meaning has been ascribed to the words and unless the reliance is clearly unreasonable the court is likely to seek to protect it. Words, however explicit, always take meaning from their context and contain large elements of implication. It is an everyday task of the Courts to examine the context and to make the necessary implications. Where the disputed clause represents only one obligation among many, the courts are more ready to disregard the disputed clause, leaving the remainder of the agreement enforceable.…

[144] The wording of the methodology discretion which permits CMI to calculate the amount of the prepayment charge “using a method determined by us” should not be considered in isolation. It is clear that the prepayment charge will be the higher of two amounts which are then delineated. Likewise, the comparator discretion by which CMI selects a comparator mortgage in order to calculate the IRD is bounded by the requirement that the mortgage be similar to that of the borrower at the time. Tables are provided as exemplars to assist both parties in understanding the intent of the discretion.

[145] The intention of the parties is readily discernible from the wording of the prepayment clause. CMI does not have carte blanche to select any comparator mortgage; rather, it must use a mortgage similar to the mortgage held by the borrower. That imports an objective standard of reasonableness. It does not give rise to such uncertainty as to be incapable of application or review.

[146] Accordingly, I find that there is no cause of action that the discretions are void for uncertainty.

Application of the Prepayment Provisions

[147] The plaintiffs plead that CMI miscalculated prepayment penalties because it failed to present value the amount prepaid and used SCRAP to calculate the amount due. Not applying a present value adjustment and using the shortened amortization resulted in overcharges, and breached the defendant’s obligation to act honestly, fairly and in a commercially reasonable manner.

[148] The defendants accept that they are required to act in a commercially reasonable manner in their performance of the terms of the prepayment provisions, they have a duty of good faith performance, and they must not exercise their discretion in an arbitrary or capricious manner: see Bhasin v. Hrynew, 2014 SCC 71 at para. 89.

[149] The defendants submit, however, that the prepayment terms in the mortgage contracts are silent with respect to the both matters; the plaintiffs are essentially asking the Court to imply new and unnecessary terms into the prepayment provisions. The fundamental flaw in the plaintiffs’ claim is the notion that the prepayment penalty is simply to replace the lender’s lost income stream. The prepayment terms do not say that and cannot be construed to that conclusion. These are straightforward contractual terms which give a borrower the option to pay early but at a price agreed upon.

[150] The defendants rely on decisions of the British Columbia Court of Appeal in Sherry and Pfeiffer v. Pacific Coast Savings Credit Union, 2003 BCCA 122.

[151] The issue is addressed at paras. 67-78 in Sherry. I note that:

a. In rejecting the plaintiff’s claim based on the failure to apply a present value adjustment, the Court referred to and followed its earlier decision in Pfeiffer; and

b. The plaintiff raised another ground for miscalculation which she asserted for the first time in her factum at the appeal. The Court declined to allow that ground to be argued. The Court of Appeal did not address the use of SCRAP.

[152] The plaintiffs assert that Pfeiffer is not the law in Ontario. It has not been followed here, nor has the issue been considered. The Court of Appeal in Sherry was bound by and heavily influenced by its earlier decision in Pfeiffer. The Pfeiffer decision followed a trial and, in any event, is distinguishable from the case before me.

[153] In Pfeiffer, the borrower entered into two residential mortgages with a credit union. The mortgages were each for a five year term. The borrower repaid them in their entirety after two years. The credit union calculated the amount of the prepayment penalties and a dispute arose as the correctness of those calculations. The prepayment clause allowed the borrower to prepay all or part of the mortgage at any time so long as she paid to the credit union an amount calculated per the agreement “as compensation”.

[154] The plaintiff in Pfeiffer argued that the word “compensation” equated to indemnification for lost interest that would otherwise be paid during the balance of the term of the mortgage. She also argued that when calculating the prepayment amount, the credit union was required to discount the amount payable to account for present value. She was successful at trial.

[155] The British Columbia Court of Appeal overturned the trial decision and allowed the appeal. Levine J.A. for the court wrote at paras. 46-49:

46. A plain reading of the Prepayment Clause does not, in my view, lead to the conclusion that the credit union was to be indemnified for the interest it would have received had the mortgages not being paid out before the expiry of their terms. Paragraph (a)(i) of the Prepayment Clause clearly does not provide for indemnification, as found by the trial judge. Calculating the Prepayment Amount under paragraph (a)(ii) in the manner determined by the trial judge cannot lead to indemnification for lost interest, because no matter what rate is applied to the “amount payable”, that amount does not decline over the remaining term as it would if the mortgages were not paid out.

47. In my opinion, the clear meaning of the Prepayment Clause is that it provides for the calculation of the price to be paid for the privilege of ending the contract before its term expires. That is the proper meaning of “compensation” for the purposes of both paragraphs (a)(i) and (ii).

48. Paragraph (a)(ii) requires a calculation of the difference between two interest rates: the Mortgage rate and the Prevailing Rate. It does not require a calculation of interest payable, or that would be payable, if the mortgage was not prepaid. There is nothing in the words of paragraph (a)(ii) of the Prepayment Clause that requires the application of an “effective rate”, “equivalent rate”, or any rate other than the rate of interest set out in the mortgage and at which the credit union would lend on a similar mortgage.

49. In my view, a distinction should be made, for these purposes, between the rate of interest set out in the contract, and the other factors that determine the amount of interest payable during the life of the contract. The Prepayment Clause does not require a calculation of the amount of interest that would otherwise be payable over the remaining term of the mortgage; it requires the determination of an “amount” by which one rate of interest exceeds another rate of interest and the application of that “amount” to the “amount prepaid” for the remaining term.…

[156] Further, Levine J.A. wrote at paras. 56 and 57:

56. The Prepayment Amount is not the amount of interest that would otherwise be paid in a stream over a future period; it is a one-time payment for the privilege of ending the contract before its term. Thus, the principle that the credit union should be in the same position financially had the interest being received over the remaining term has no application.

57. The mortgages do not refer anywhere to “present value”, and the words “compensation” and “not in advance” do not imply a requirement to present value of the Prepayment Amount.

[157] In Sherry, the Court of Appeal found that similar reasoning applied to the prepayment clauses in question. None of the prepayment clauses contemplate the computation of interest that would be foregone over the term of the mortgage or the calculation of a present value of that interest (see para. 73).

[158] At para. 74, Newbury J.A. for the court wrote:

74. No rule of law or equity, or even logic, was cited to us that would support the notion that he prepayment clause must in law incorporate the calculation of the present value of interest that would have been payable over the term. Pfeiffer illustrates that it need not, and the wording of the clauses in this case shows that CIBC did not do so.…

[159] The British Columbia Court of Appeal went on to find that although contractual interpretation is a matter of mixed fact and law, these were standard form contracts and, accordingly, the factual matrix was less important than the contractual terms. The court determined that the issue was one of contractual interpretation of a systemic nature. Accordingly, it could determine the issue at this early stage and found there was no requirement to present value the amount payable under the prepayment clause (see paras. 76-77).

[160] Contractual interpretation is an exercise in which principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633 at para. 50. The interpretation of contracts requires a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine the intent of the parties and the scope of their understanding: Sattva, para. 47. Where the wording in question is part of a standard form contract, the surrounding circumstances of the negotiations are less relevant to the determination of the parties’ intentions.

[161] In Sattva, Rothstein J., for the court, wrote at paras. 47 and 48:

47. …To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. …

48. The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement (see Moore Realty Inc. v. Manitoba Motor League, 2003 MBCA 71, 173 Man. R. (2d) 300, at para. 15, per Hamilton J.A.; see also Hall, at p. 22; and McCamus, at pp. 749-50). As stated by Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.):

The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words as a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.

[162] Finally, at para. 57, Rothstein J. cautioned:

57. While the surrounding circumstances will be considered in interpreting the terms of the contract, they must never be allowed to overwhelm the words of that agreement (Hayes Forest Services, at para. 14; and Hall, at para. 30). The goal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract (Hall, at pp. 15 and 30-32). While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement (Glaswegian Enterprises Inc. v. B.C. Tel Mobility Cellular Inc. (1997), 1997 CanLII 4085 (BC CA), 101 B.C.A.C. 62).

[163] With these decisions and principles in mind, I turn now to the prepayment clause and the terms of the mortgage contract as a whole. I will deal first with the alleged requirement that the prepayment amount be discounted to credit the borrower for the present value of that payment.

[164] It is plain and obvious that the prepayment provision contains no reference to present value either expressly or by implication. The terms of the prepayment provision do not specify or suggest, directly or indirectly, that the purpose of the payment is to reimburse CMI for the lost income stream caused by early repayment.

[165] On a plain and ordinary reading of the words of the prepayment provision and the mortgage contract terms, the purpose and intent of this provision is to grant to the mortgagor the right to repay the mortgage loan in part or in its entirety before the end of the term of the loan and, in return for the exercise of that privilege, the mortgagor pays CMI an amount to be determined in accordance with the formulae set out. Absent a prepayment clause, there is no right in the mortgagor to repay the amount owing other than by the terms of the mortgage contract on a monthly basis until the term expires. The mortgagor is not compelled to prepay the mortgage loan; that is an option available at a price.

[166] As in Pfeiffer, there is nothing in the wording of the mortgage contract and the prepayment clause that requires a present value credit to achieve the objective of the clause. It is not necessary to imply a present value adjustment to give effect to the reasonable expectations of the parties or to give business efficacy to the agreement: Canadian Pacific Hotels Ltd. v. Bank of Montréal, 1987 CanLII 55 (SCC), 1987 CarswellOnt 760 (S.C.C.) at paras. 54-55; Venture Capital USA Inc. v. Yorkton Securities Inc., 2005 CanLII 15708 (ON CA), [2005] O.J. No. 1885 (ON CA) at para. 31.

[167] There is no doubt that applying a present value discount would be beneficial to the mortgagor; however, in my view, there is no compelling need for same to accomplish the objectives evident in the prepayment provision. That CMI gets more money is not a sufficient basis to imply the adjustments sought. In my view, requiring CMI to give a present value adjustment would amount to rewriting the terms agreed upon.

[168] It follows that the failure to apply a present value adjustment does not constitute a breach of CMI’s obligation to act honestly, in good faith and in a commercially reasonable manner. CMI is entitled to strictly apply the terms of the prepayment penalty and cannot be faulted for adherence to the terms accepted by mortgagors.

[169] I turn next to the use of a shortened amortization or SCRAP.

[170] At para. 53(a) of the Amended Statement of Claim, the plaintiffs allege that instead of applying an unchanged amortization, the defendant applied a shortened amortization period - one that is shorter than that specified in the mortgage contract and/or applicable under the contract rate - when calculating the notional amount of interest payable under the comparison rate. The use of the shorter amortization period affects the IRD calculation and, ultimately, the amount paid by mortgagors.

[171] The wording for calculation of the IRD, whether for a partial repayment or entire repayment, indicates that CMI will use the interest rate posted by it “for the type of mortgage described in the chart below”. The charts have two headings above the two columns titled:

(a) above the left column – “if the length of time between prepayment date and the maturity date of your mortgage is:”

(b) above the right column – “we will use the posted interest rate charged by us on the date…for a CIBC brand closed mortgage product similar to yours with a term of”. [Italics added]

[172] There is a slight difference in the right column headings between a partial prepayment and complete repayment. In the former case, the date used is the date of the prepayment. In the latter, the date used is the date on which the mortgage statement is prepared. In both cases, however, the column on the right is matched up to the column on the left that corresponds.

[173] By way of example, if a mortgagor opted to pay out his or her entire mortgage when there was still 15 months before the end of the term of that mortgage, CMI would use the posted interest rate on the date the mortgage statement was prepared for a similar CIBC brand closed mortgage with a term of one year. It is clear and obvious to anyone reading the tables that differences may exist between the amount of time left before renewal (left column) and the term of the mortgage used to calculate the IRD (right column).

[174] However, there is no mention of the amortization period used for the comparator mortgage, nor is there any disclosure that a different, shorter period will be used for the “similar mortgage” selected by CMI. The amortization period affects the rate at which the principal amount is repaid. It is arguable that on the wording used in the prepayment clause, the intent is that the comparator mortgage used will be one with the same or similar amortization period when calculating the IRD. Certainly that appears to be the case on a plain reading of the text of the provision.

[175] It is also arguable that using a comparator mortgage with a shorter amortization period is not using a “similar” mortgage as contemplated by the terms of the prepayment provision.

[176] It seems to me that it is not a foregone conclusion that the plaintiffs must fail in their claim that the use of a shortened amortization constitutes a breach of the prepayment penalty provision and/or a breach of the defendant’s obligation to act in a commercially reasonable manner in the performance of the contract and in the exercise of its discretion. A court may well find at the end of the day that it is appropriate to imply a term that the “similar” mortgage use the same amortization period. It follows that to the extent the disclosure statement fails to alert mortgagors that the defendant is using a different amortization period than that in the mortgagor’s mortgage, the disclosure statement may also be misleading.

[177] I am satisfied that the plaintiffs’ claim discloses a cause of action as to whether use of a shortened amortization period is consistent with the terms of the prepayment provision, and CMI’s obligation to act in good faith and in a commercially reasonable manner in calculating the amount payable.

Unjust Enrichment/Breach of Fiduciary Duty

[178] I am satisfied that the Amended Statement of Claim discloses a cause of action for unjust enrichment insofar as it relates to the use of the shortened amortization or SCRAP. If correct, plaintiff class members may have paid CMI more than they should have and there is no juristic reason for CMI to have received those additional monies.

[179] With respect to a claim for breach of fiduciary duty, the facts pleaded in the Amended Statement of Claim do not, in my view, ground a claim for breach of fiduciary duty. The relationship is that of lender and borrower only. On these facts, that relationship is not elevated to that of a fiduciary where the defendants are obliged to look out for the best interests of mortgagors: XPG v. Royal Bank, 2017 ONSC 2598 at paras 362-365.

Summary

[180] In summary, I find that:

a. The pleading does not disclose a cause of action that the prepayment provision or the disclosure of same is illegal and thereby void, voidable or unenforceable as contrary to public policy;

b. The pleading of unconscionability is inadequate and leave to amend is granted;

c. The prepayment provision is not void for uncertainty and no cause of action for same is disclosed;

d. The pleading does not disclose a cause of action with respect to any requirement to apply a present value discount for prepayments;

e. The pleading does disclose a cause of action as to whether the defendant was entitled to use a shortened amortization period (SCRAP), and whether the use of same is a breach of the defendants’ duty to act honestly and in a commercially reasonable manner; and

f. It is plain and obvious that the claim for breach of fiduciary duty will fail.

s. 5(1)(b) – Identifiable Class

[181] The following principles apply to the identifiable class criterion:

1. The class definition should not be merits based;

2. Membership in the class should be determinable by objective criteria;

3. Not every class member need have a provable claim or recover to the same degree;

4. There must be a rational relationship between the class, the causes of action and common issues; and

5. The class definition must not be unnecessarily broad or over-inclusive.

(See Hollick v. Metroploitan Toronto (Municipality), 2001 SCC 68 at paras. 20-21; Cloud v. Canada (Attorney General) (2004), 2004 CanLII 45444 (ON CA), 73 O.R. (3d) 401 (ON CA) at paras. 45-46; Das v. George Weston Limited, 2017 ONSC 4129 at para. 610; Tiboni v. Merck Frosst Canada Ltd., 2008 CanLII 37911 (ON SC), [2008] O.J. No. 2996 (S.C.J.) at para. 78.)

[182] The threefold purpose of a class definition is to:

1. identify persons who have a potential claim for relief against the defendants;

2. define the parameters of the lawsuit so as to identify those persons bound by the result; and

3. describe who is entitled to notice: Bywater v. Toronto Transit Commission, [1998] O.J. No. 4913 (Ont. Gen. Div.).

[183] The proposed class definition is set out at para. 2 above. It is substantially the same as that approved in Sherry. The definition is set out in objective terms such that membership is readily ascertainable. Inclusion in the class is not dependent on the merits of the claim or outcome of the litigation. There is a rational connection between the class definition and the causes of action and common issues. It is not overly broad. It includes only those persons who may have an interest in the resolution of the common issues.

[184] It is undisputed that the proposed class definition satisfies the numerosity requirement in s. 5(1)(b) of the CPA.

[185] The identifiable class criterion is satisfied. It may be that some adjustment to the proposed class definition is warranted given the narrowed claim. If so, that can be addressed through a case conference or further motion.

s. 5(1)(c) – Common Issues

[186] Perell J. provides a succinct summary of the general principles applicable to the common issues criterion at paras. 618 – 623 in Das:

618. … For an issue to be a common issue, it must be a substantial ingredient of each class member’s claim and its resolution must be necessary to the resolution of each class member’s claim: Hollick v. Toronto (City), supra at para. 18.

619. With regard to the common issues, success for one member must mean success for all. All members of the class must benefit from the successful prosecution of the action, although not necessarily to the same extent. The answer to a question raised by a common issue for the plaintiff must be capable of extrapolation, in the same manner, to each member of the class. See: Western Canadian Shopping Centres Inc. v. Dutton, supra at para. 40; Wuttunee v. Merck Frosst Canada Ltd., 2009 SKCA 43 (Sask. C.A.) at paras. 145 – 46 and 160; leave to appeal to S.C.C. refused, (2009), [2008] S.C.C.A. No. 512 (S.C.C.); McCracken v. Canadian National Railway, 2012 ONCA 445 (Ont. C.A.) at para. 183.

620. In Pro-Sys Consultants Ltd. v. Microsoft Corp., supra at para. 106, the Supreme Court of Canada describes the commonality requirement as the central notion of a class proceeding, which is that individuals who have litigation concerns in common ought to be able to resolve those common concerns in one central proceeding rather than through an inefficient multitude of repetitive proceedings.

621. The common issue criterion presents a low bar: Carom v. Bre-X Minerals Ltd. (2000), 2000 CanLII 16886 (ON CA), 51 O.R. (3d) 236 (Ont. C.A.) at para. 42; Cloud v. Canada (Attorney General), supra at para. 52; 2038724 Ontario Ltd. v. Quizno’s Canada Restaurant Corp., 2009 CanLII 23374 (ON SCDC), [2009] O.J. No. 1874 (Ont. Div. Ct.), aff’d 2010 ONCA 466, [2010] O.J. No. 2683 (Ont. C.A.), leave to appeal to SCC refused (2011), [2010] S.C.C.A. No. 348 (S.C.C.).

622. An issue can be a common issue even if it makes up a very limited aspect of the liability question and even though many individual issues remain to be decided after its resolution: Cloud v. Canada (Attorney General), supra. A common issue need not dispose of the litigation; it is sufficient if it is an issue of fact or law common to all claims and its resolution will advance the litigation for (or against) the class: Harrington v. Dow Corning Corp., 2000 BCCA 605 (B.C.C.A.), aff’g 1996 CanLII 3118 (BC SC), [1996] B.C.J. No. 734 (B.C.S.C.), leave to appeal to SCC ref’d. [2001] S.C.C.A. No. 21 (S.C.C.).

623. In the context of the common issues criterion, the some-basis-in-fact standard involves a two-step requirement that: (1) the proposed common issue actually exists; and (2) the proposed issue can be answered in common across the entire class: Hollick v. Toronto (City), supra; Fulawka v. Bank of Nova Scotia, 2012 ONCA 443 (Ont. C.A.); McCracken v. Canadian National Railway Company, supra; Williams v. Canon Canada Inc., supra; Martin v. Astrazeneca Pharmaceuticals PLC, 2012 ONSC 2744 (Ont. S.C.J.);Good v. Toronto Police Services Board, 2014 ONSC 4583 (Ont. Div. Ct.); Dine v. Biomet Inc., 2015 ONSC 7050 (Ont. S.C.J.), aff’d 2016 ONSC 4039 (Ont. Div. Ct.).

[187] The proposed common issues are set out at para. 3 above. Adjustment is required in light of the conclusions regarding the causes of action asserted.

[188] I indicated above that the claim that the prepayment provision is unconscionable is inadequately pleaded, and leave to amend would be given. Assuming the plaintiffs choose to amend, the issue is whether that claim gives rise to a common issue. In my view, it does not.

[189] At its core, the claim of unconscionability requires an individualized examination of the circumstances of the mortgagor, the advice, if any, that the mortgagor received with respect to the prepayment provision, and the unfairness or improvidence, if any, of the transaction when looked at as a whole: Barwin v. IKO Industries Ltd., 2015 ONSC 5994 at paras. 32-33. Borrowers have differing degrees of sophistication. Some had legal, mortgage or accounting advice, others did not. The fairness or improvidence of the transaction cannot be determined on a uniform basis. The loan amounts vary. The contracted mortgage interest rates vary. The length of the term of the loans vary. When in the term a borrower opted to prepay and by how much will also vary.

[190] By contrast, I find that the common issue requirement is satisfied in this case as it relates to whether the defendants were entitled to use a shortened amortization period and/or properly disclosed same because:

a. The determination of whether the defendants were entitled to use and/or ought to have disclosed the use of a shortened amortization period is common to the claims of class members;

b. The determination of that issue is necessary to the resolution of each class member’s claim;

c. The issue arises from standard contract wording used by the defendants;

d. There is some basis in fact to conclude that the defendants have used a shortened amortization period for the purpose of calculating the prepayment penalty payable by class members; and

e. The issue is one that can be answered in common across the class.

[191] The following common issues are present in this case:

1. In calculating the prepayment penalty payable pursuant to the defendants’ standard charge terms, were the defendant mortgagees entitled to use a different amortization period for the comparator mortgage than that in the mortgagor’s mortgage contract?

2. If not, did the defendant mortgagees breach the terms of the mortgage contract and/or their obligation to act in good faith and in a commercially reasonable manner?

3. Did the defendants comply with their disclosure obligations with respect to the manner of calculation of the prepayment penalty?

4. If the answer to (1), (2) or (3) above is “no”, is there any juristic reason for receipt of the extra money received by the Bank from the use of the shortened amortization period?

5. Do the following acts or omissions of the defendants warrant an award of punitive damages:

i. A breach of the Plain Language Promise as defined in the Amended Statement of Claim;

ii. A breach of the defendants’ disclosure obligations as required by legislation and regulation; and

iii. The failure of the defendants to disclose the use of a shortened amortization period when the prepayment penalty was charged or subsequently?

6. If the answer to issue (5) is “yes”, should an award of punitive damages be made against any of the defendants and, if so, in what amount?

s. 5(1)(d) – Preferable Procedure

[192] Section 5(1)(d) of the CPA requires that a class proceeding be “the preferable procedure for the resolution of the common issues.” At first blush, one might believe that the focus of the preferability analysis lies exclusively on the common issues. The case law makes clear that the analysis is broader. The inquiry asks whether a class proceeding would be a fair, efficient and workable procedure for the resolution of the issues, keeping in mind not only the common issues, but the individual issues that will remain after the common issues are resolved: Fairview Donut Inc. v. The TDL Group Corp., 2012 ONSC 1252 at para. 347.

[193] In Markson v. MBNA Canada Bank, 2007 ONCA 334 (leave to appeal to SCC refused), Rosenberg J.A. summarized the approach to the preferable procedure requirement at paras 69-70 as follows:

(1) The preferability inquiry should be conducted through the lens of the three principal advantages of a class proceeding: judicial economy, access to justice and behaviour modification;

(2) “Preferable” is to be construed broadly and is meant to capture the two ideas of whether the class proceeding would be a fair, efficient and manageable method of advancing the claim and whether a class proceeding would be preferable to other procedures such as Joinder, test cases, consolidation and any other means of resolving the dispute; and

(3) The preferability determination must be made by looking at the common issues in context, meaning, the importance of the common issues must be taken into account in relation to the claims as a whole.

As I read the cases from the Supreme Court of Canada and appellate and trial courts, these principles do not result in separate inquiries. Rather, the inquiry into the questions of judicial economy, access to justice and behaviour modification can only be answered by considering the context, the other available procedures and, in short, whether a class proceeding is a fair, efficient and manageable method of advancing the claim.

[194] The court should consider the following factors in assessing preferable procedure:

a. the nature of the proposed common issues;

b. the individual issues that will remain after determination of the common issues;

c. the factors listed in the Act (see s. 6 CPA);

d. the complexity and manageability of the proposed action as a whole;

e. alternate procedures for dealing with the claims asserted;

f. the extent to which certification furthers the objectives underlying the CPA; and

g. the rights of the plaintiffs and defendants: Chadha v. Bayer Inc., (2003), 2003 CanLII 35843 (ON CA), 63 O.R. (3d) 22 (C.A.).

[195] The proposed representative plaintiff bears the onus of showing there is some basis in fact that a class proceeding is preferable to any other reasonably available means of resolving class member claims. If the defendant relies on a specific non-litigation alternative, the defendant has the evidentiary burden of raising that alternative: Fischer v. IG Investment Management Ltd., 2013 SCC 69 at paras. 48-49.

[196] Access to justice is one of the underlying goals of the CPA. In Fischer, the Supreme Court of Canada held that access to justice has a procedural and substantive dimension. The procedural aspect looks at whether the claimants have a fair process to resolve their claims. The substantive aspect focuses on the results to be obtained and whether the claimants will receive a just and effective remedy for their claims if established. When considering alternatives to a class-action, the court must ask whether the alternative has the potential to provide effective redress for the substance of the plaintiff’s claims and will do so in a manner that provides suitable procedural rights. The type of remedy sought is a relevant factor.

[197] I am satisfied that a class proceeding is the preferable procedure in this case for the following reasons:

a. The common issues represent a significant component of the plaintiffs’ claim; in fact, determination of the common issues may well resolve liability in its entirety;

b. The individual issues that will remain will be focused primarily on damages;

c. Resolution of the common issues will measurably advance the litigation and dispute between the parties;

d. The amounts at stake vary but are generally quite modest. Proceeding by way of a class proceeding achieves judicial economy and access to justice;

e. The defendants’ internal review process is not independent and provides no procedural safeguards;

f. The regulatory alternatives provide non-binding recommendations that if not accepted, lead mortgagors back to court;

g. The cost of litigation on an individual or even group basis outweigh the amounts in issue and make their economic viability doubtful;

h. The CPA insulates class members with the exception of the representative plaintiff from liability for costs which is not the case otherwise;

i. If successful, the litigation has the prospect of deterring the defendants and other financial institutions from engaging in similar practices;

j. The narrowed scope of this litigation focuses the issues such that they can be addressed efficiently;

k. If the matter proceeds to a common issues trial, the matters in issue as defined by the common issues are manageable;

l. Proceeding as a class proceeding has the added advantage of case management; and

m. The rights of the plaintiffs and defendants will not be prejudiced by proceeding in this manner.

[198] I am mindful of the assertion by the defendants that the damages issues will be difficult given the passage of time, the number of transactions and some of the variables that may be in play. For example, a borrower may have been charged a prepayment penalty but the amount was refunded when they purchased another property soon after and took out a mortgage through one of the defendants. Bank records may not be accessible or may be incomplete. These concerns exist whether the action proceeds as a class proceeding or by way of individual actions. Further, if the common issues are resolved in favour of the defendants, those issues are moot.

[199] In my view, a class action is the preferable procedure. It achieves or at least has the strong potential to achieve each of judicial economy, access to justice and deterrence. It provides a fair, efficient and workable method to address the plaintiffs’ claims.

s. 5(1)(e) – Representative Plaintiff and Litigation Plan

[200] The last criterion for certification is that there be a representative plaintiff who would adequately represent the interests of the class without a conflict of interest on the common issues and who has produced a workable litigation plan.

[201] The proposed representative plaintiff, Mr. Jordan, has a claim which fits within the claim being asserted on behalf of the class. He has demonstrated his commitment and willingness to act as a representative plaintiff. There is no evidence of any conflict of interest. No objection is taken to his ability to be a representative plaintiff.

[202] Mr. Jordan has retained experienced class proceeding counsel. As mentioned previously, this action is part of national class proceedings. The Siskind firm is involved in the litigation in the other jurisdictions.

[203] The litigation plan filed reflects the broader claim made in the Amended Statement of Claim and will have to be adapted after certification. That is not uncommon in class proceedings. Litigation plans evolve coincident with the litigation itself. The plan provided was appropriate and demonstrated counsel’s extensive past experience in matters of this sort.

[204] I find that Mr. Jordan is an appropriate representative plaintiff and the s. 5(1)(e) criterion is satisfied.

Conclusion

[205] This action is certified as a class proceeding. Counsel are requested to prepare a draft order in accordance with my decision above for my signature.

[206] With respect to costs, if the parties cannot agree upon same, they may make written submissions not to exceed 5 pages within 21 days of release of this decision.

Original signed by Raikes, J.

Justice R. Raikes

Released: February 21, 2019

Schedules “A” and “B” attached to original decision

COURT FILE NO.: 5303/11CP

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Robert Jordan and Paulina Danao

Plaintiffs

– and –

CIBC Mortgages Inc.

Defendant

REASONS FOR JUDGMENT

Raikes, J.

Released: February 21, 2019