Court File and Parties
COURT FILE NO.: 18-76965 DATE: 16/02/2022 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
H. RICHARD SHANBAUM, TERRI H. SEMANYK, LYLE BRENNAN and PERRIN BRENNAN Plaintiffs/Moving Parties – and – SURFACE REAL ESTATE DEVELOPMENTS INC. Defendant/Responding Party
Counsel: Samuel Zakhour for the Plaintiffs/Moving Parties Nadia J. Authier for the Defendant/Responding Party
HEARD: February 10, 2022
DECISION ON MOTION TO AMEND STATEMENT ON CLAIM
Justice Sally Gomery
[1] The plaintiffs seek leave to amend their statement of claim. The motion granted in part, for the reasons set out below.
Background
[2] The parties dispute the interpretation and consequences of an indemnity agreement they signed in March 2015. In the agreement, the plaintiffs, as vendors of a residential property on Havelock Street in Ottawa, recognized that they could be liable to indemnify the purchaser, the defendant Surface Real Estate Developments Inc., for costs incurred in remediating environmental contamination on the property. Two and a half years after purchasing the Havelock Street property, the defendant advised the plaintiffs that it had incurred significant remediation costs. In response, the plaintiffs took the position that the defendant breached their obligations to the plaintiff under the agreement, rendering it null and void.
[3] The plaintiffs sued the defendant in June 2018. At paragraph 13 of the statement of claim, they set out how the defendant allegedly breached the agreement:
- The Plaintiffs state that Surface has failed to comply with the terms set out in the Indemnity Agreement, and by being in breach of the following provisions in that Agreement: (a) To provide proper notice to the vendors of a claim relating to the environmental condition of the property prior to incurring costs and commencing remedial work on the property; (b) To involve the vendors in the investigation, settlement and defence of any remediation claims prior to incurring remediation costs; (c) To provide a regulatory file expert report or other documentation to the vendors, in regard to the environmental condition of the property, hydrocarbon, contamination and/or remedial work that needed to be performed; (d) To provide a certificate to the vendors confirming that the remedial work on the property is complete and that no further funds were required to deal with remedial activities; and (e) To return to the vendors the full amount of the holdback funds of $75,000 plus interest if the above conditions were not met by the Defendant.
[4] The plaintiffs allege other breaches at paras. 14, 18 and 19 of the statement of claim. The defendant served a statement of defence and counterclaim in July 2018. The parties participated in discoveries and mediation. A trial record was filed in 2021, but no trial date has been set.
[5] The plaintiffs now seek to amend their statement of claim by adding the following two new paragraphs:
- The Plaintiffs state and plead that the Defendant breached their duty of good faith and fair dealing as set out in paragraph 13(a) – (e), and by failing to respond and cooperate with the Plaintiffs in relation to the contamination issue that arose.
- The plaintiffs plead the doctrine of contra preferentum (sic).
Analysis
Governing principles
[6] Rule 26.01 of the Rules of Civil Procedure provides that: “On motion at any stage of an action the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment”. The principles governing a r. 26.01 motion are well-established. The court must grant leave to amend unless (1) the responding party would suffer non-compensable prejudice; (2) the amended pleadings are scandalous, frivolous, vexatious or an abuse of the court's process or; (3) the pleading discloses no reasonable cause of action; 1588444 Ontario Ltd. v. State Farm Fire and Casualty Company, 2017 ONCA 42, at para. 25.
[7] There is however an additional consideration. A proposed amendment must comply with the rules that apply to all pleadings. Rule 25.06, for example, provides in part as follows:
25.06 (1) Every pleading shall contain a concise statement of the material facts on which the party relies for the claim or defence, but not the evidence by which those facts are to be proved. (2) A party may raise any point of law in a pleading, but conclusions of law may be pleaded only if the material facts supporting them are pleaded.
[8] The Ontario Court of Appeal has held that the rules applicable to all pleadings should be considered in the context of a motion to amend. In Marks v. Ottawa (City), 2011 ONCA 248, the Court noted that there is no absolute right to amend pleadings, and that the court has a residual right, notwithstanding r. 26.01, to deny leave to amend where appropriate. At para. 19, it noted that:
- The proposed amendment must be shown to be an issue worthy of trial and prima facie meritorious.
- No amendment should be allowed which, if originally pleaded, would have been struck.
- The proposed amendment must contain sufficient particulars.
The amendments sought here
[9] The plaintiffs in this case wish to make four new assertions in the amended pleading:
(i) A pleading that the defendant breached its duty of good faith as set out in paragraph 13(a) – (e) of the statement of claim; (ii) A pleading that the defendant breached its duty of fair dealing based on the same allegations; (iii) An allegation that the defendant, in addition to breaching its duty of good faith and fair dealing as set out in paragraph 13, also breached the duty “by failing to respond and cooperate with the Plaintiffs in addition to the contamination issue that arose”; and (iv) A pleading that the doctrine of contra proferentem applies.
The proposed pleading of the duty of good faith and fair dealing
[10] The proposed pleadings that the defendant breached its duty of good faith and fair dealing (items (i), (ii) and (iii) in the above list) offend r. 25.06(1) and (2). These pleadings are legal conclusion unsupported by any allegations of material facts in paragraph 13, or in the additional language in proposed item (ii).
[11] The duty of good faith requires that the parties perform their contractual obligations in an honest, non-misleading and non-deceptive way: Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 SCR 494, at para. 73, and C.M. Callow Inc. v. Zollinger, 2020 SCC 45, at paras. 38-40. A pleading that the defendant failed to comply with this duty is a conclusion of law. Further to r. 25.06(2), such a conclusion cannot be pleaded unless the plaintiffs have asserted material facts that could support it.
[12] There is no reference in paragraph 13, or in the proposed allegation of fact in proposed new paragraph 21, to any acts or omissions by the defendant, or any intention or statement of mind on its part, that could, if proved, allow the court to conclude that it breached its duty of good faith. The plaintiffs allege that the defendant failed to comply with its contractual obligation to keep them informed of remediation work and the costs incurred for that work. But there is no suggestion, in paragraph 13 or anywhere else in the statement of claim, that the defendant knowingly misled the plaintiffs or deceived them, acted in bad faith or for an improper purpose.
[13] A pleading of breach of the duty of fair dealing likewise cannot be made in the absence of an allegation of conduct by the defendant that would, if proved, support an argument that it breached this duty. The plaintiffs’ assertion of a duty of fair dealing is puzzling on its face because this duty is generally invoked only in the context of franchise and employment contracts, contexts involving a power imbalance. But, even assuming that a duty of fair dealing could arise in the context of this case, there are no material facts pleaded that would support a finding that the defendant breached that duty.
[14] The proposed addition of an allegation that failed “to respond and cooperate with the Plaintiffs in addition to the contamination issue that arose” adds nothing. It is vague and, in my view, adds nothing to the statement of claim that was not already alleged. It is not an allegation that would, if proved, give rise to a conclusion that the defendant breached the duties that the plaintiffs now seek to plead.
[15] At the hearing of this motion, the plaintiffs’ lawyer suggested that simply alleging breaches of the indemnity agreement was enough to ground a pleading that the defendant breached its duty of good faith and fair dealing. This is incorrect. Not every contractual breach gives rise to a consideration of these duties. A party may fail to perform its contractual obligations carelessly or inadvertently, without any bad faith or any intention to mislead or deceive. Something more than simple non-compliance with contractual obligations is required before a party can be found to have acted dishonesty or deceptively or unfairly.
[16] Mr. Zakhour also argued that the plaintiffs do not need to allege specific examples of how the defendant breached its duty of good faith and fair dealing, because r. 25.06(1) says that a plaintiff is not required to plead the evidence by which alleged facts are to be proved. No one is suggesting that the plaintiffs would be required to state how they intend to prove their case. But they must, at a minimum, set out the case that the defendant must meet. That is the very reason for r. 25.06(1).
[17] The importance of notice of a plaintiff’s case, through pleadings, was mentioned in Bhasin. The defendant argued that the plaintiff’s statement of claim failed to plead that it had breached a duty of good faith. The Supreme Court rejected this argument, stating at para. 19 that the “allegations in the statement of claim clearly put the questions of improper purpose and dishonesty in issue. These facts are sufficient to put Can-Am’s good faith in issue. The question of whether this conduct amounted to a breach of the duty of good faith is a legal conclusion that did not need to be pleaded separately.”
[18] We have the opposite problem here. If statement of claim alleged conduct by the defendant that could, if proved, lead to a conclusion that it had breached its duty of good faith and fair dealing, then the proposed pleading of such breaches would be permissible, although not truly necessary. Since there are no such allegations, however, the proposed pleading is impermissible.
The proposed pleading of contra proferentem
[19] Contra proferentem is a principle of contractual interpretation. The proposed new paragraph 22 does not assert that the defendant used its superior bargaining position to impose the terms of the indemnity agreement on the plaintiffs. It seems that the plaintiffs simply seek to plead the principle as a point of law.
[20] The addition of a plea of contra proferentem would have very questionable value. The plaintiffs have not pleaded any material facts that would support a finding that the indemnity agreement was negotiated and signed in circumstances that would attract the application of this interpretive principle. If the plaintiffs seek to rely on contra proferentem at trial, the defendant could well argue that they had no notice of any facts that would support the plaintiffs’ position on this point, and that plaintiffs should therefore not be allowed to raise it.
[21] Technically speaking, however, the addition of a point of law unsupported by material facts would not offend r. 25.06(2), which prohibits only conclusions of law from being pleaded without any supporting allegations of fact.
[22] The defendant objects strenuously to the proposed addition of a plea of contra proferentem. One of the plaintiffs, Richard Shanbaum, made admissions during his examination for discovery that would be inconsistent with a finding that the plaintiffs lacked an opportunity to negotiate the terms of the indemnity agreement. The defendant contends that, if this amendment is permitted, this would be tantamount to granting the plaintiffs leave to withdraw those admissions. It argues that this would give rise to non-compensable prejudice.
[23] I do not accept this argument. There is no prejudice. If the amendment is granted, this would in no way foreclose the defendant from relying on Mr. Shanbaum’s discovery evidence to contradict whatever other evidence the plaintiffs might lead to argue that there was a power imbalance.
[24] The defendant relies on two cases, Philips v. Disney, 2018 ONSC 1021 and Liu v. The Personal Insurance Company, 2019 ONCA 104. Both involve attempts to withdraw formal admissions and are therefore readily distinguishable. Philips involved a motion by a defendant under r. 51.05 to amend her statement of defence to withdraw explicit admissions and replace them with a completely new defence. Liu involved a party’s attempt to resile from a formal admission of fact that she made on an earlier motion.
[25] The defendant has not cited any authority for the proposition that an amendment to a pleading should be refused because it could contradict an admission that a witness made during pre-trial discoveries. The only impact of permitting the amendment would be to allow the plaintiffs to argue that they had put the defendant on notice of an argument they intend to advance. Allowing the plaintiffs to plead contra proferentem does not magically erase admissions of fact made by Mr. Shanbaum at discovery. It simply means that, notwithstanding those admissions, the plaintiffs think they will be able to persuade a judge that this doctrine applies in interpreting the contract.
[26] Relying on Marks, the defendant also argues that the proposed amended pleading is untenable. A court should consider the tenability of a proposed amendment in the context of a r. 26.01 motion in the same way it would analyze the tenability of a claim in a r. 21.01(1)(b) motion; Brookfield Financial Real Estate Group Ltd. v. Azorim Canada (Adelaide Street) Inc., 2012 ONSC 3818, at para. 24. Rule 21.01(1)(b) allows a court to strike a pleading to strike out a pleading on the ground that it discloses no reasonable cause of action. The pleading of contra proferentem does not add a cause of action or transform the plaintiffs’ cause of action for breach of contract into something new and untenable. Had the plaintiffs pled contra proferentem in their statement of claim from the outset, there would be no basis for striking it on a r. 21.01(1)(b) motion.
[27] Finally, I reject the defendant’s argument that prejudice flowing from the proposed amendment ought to be presumed, based on 1588444 Ontario Ltd. v. State Farm Fire and Casualty Co., 2017 ONCA 42. In the State Farm case, the moving party waited eight years before seeking leave to amend. The Court of Appeal held that prejudice arising from pleading amendments may be presumed where a party fails to seek leave under r. 26.01 for an unduly long period of time. In this case, the plaintiffs waited 3.5 years after launching this lawsuit before advising defence counsel about proposed amendments to the statement of claim. I do not find that the plaintiffs have waited so long that prejudice ought to be presumed. Even if I had, I do not find that the defendant has established any possible prejudice as a result of the proposed amendment.
[28] I therefore conclude that the plaintiffs should be given leave to plead contra proferentem. I reach this conclusion reluctantly because I frankly do not think that the amendment has any value beyond providing notice to the defendant that the plaintiffs intend to argue, notwithstanding the absence of any alleged facts that would support it, that the contra proferentem doctrine applies to the court’s interpretation of the parties’ agreement. The plaintiffs did not need to amend their statement of claim to do this. They could have simply advised opposing counsel of their intention. But, given the imperative language in r. 26.01, the distinction between a point of law and a conclusion of law in r. 25.06(2), and the lack of any prejudice to the defendant flowing from the amendment, I conclude that the plaintiffs’ proposed amendment must be allowed.
Disposition
[29] The motion is granted for the limited purpose of permitting the plaintiffs to amend their statement of claim to add a plea of the doctrine of contra proferentem. The plaintiffs shall have ten days to serve and file their amended statement of claim. The defendants shall have ten days from service to file an amended statement of defence and counterclaim, if necessary. No trial date shall be fixed until the expiry of the deadline for the defendant to file their amended pleading. The parties are directed to obtain a trial date once this deadline has passed, either by seeking a hearing date directly from the case management office or seeking to have this case spoken to at the next available trial management court after amended pleadings have been exchanged.
[30] The plaintiffs won the motion, but only in part. As already mentioned, they did not need to bring this motion to amend in order to give notice to the defendant of their intention to raise an argument of contra proferentem at trial. The defendant successfully opposed the potentially more consequential amendments to plead a breach of duty of good faith and fair dealing. Their opposition was, however, based almost entirely on arguments that I have rejected.
[31] I conclude that both parties incurred expenses unnecessarily on this procedural motion. In these circumstances, I decline to award costs to either of them.