Court File and Parties
COURT FILE NO.: CV-21-00660075-00CL DATE: 20220606
ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)
BETWEEN:
JOHWEL INVESTMENTS INC. and STONEBROOK II LIMITED PARTNERSHIP Applicants
– and –
DARLENE WELTON, STONEBROOK PROPERTIES INC. and DAVWEL INVESTMENTS INC. Respondents
Counsel: Timothy Pinos and Meghan Rourke, for the Applicants Sara J. Erskine and Ian Literovich, for the Respondent, Darlene Welton David M. Golden, for the Respondent, Davwel Investments Inc.
HEARD: May 11, 2022
REASONS FOR DECISION
DIETRICH J.
Overview
[1] On February 28, 2022, I released reasons for a decision in this application: Johwel Investments Inc. v. Welton, 2022 ONSC 325 (the “Decision”). The applicants had sought an order that a writ of execution (the “Writ”) obtained by the respondent Darlene Welton (“Ms. Welton”) did not attach real property held by the respondent Stonebrook Properties Inc. (“Stonebrook Inc.”). The applicants had also sought an order releasing to them funds that their counsel held in trust pursuant to an Order of Justice Hainey, dated April 20, 2021, pending the determination of whether the Writ attached.
[2] Ms. Welton had obtained the Writ in respect of a judgment awarded to her for unpaid commissions and compensation owing to her in respect of her employment contract with Stonebrook Inc. Further background facts are set out in the Decision.
[3] In the Decision, I found that the Writ did not attach the property held by Stonebrook Inc. because Stonebrook Inc. was a bare trustee, which held the property on trust for the beneficial owners. I declined to order a release to the applicants of the funds held in trust pending any argument that Ms. Welton wished to advance based on agency, if so advised.
[4] In their application record, the applicants included material that referred to the possibility that a bare trusteeship could be found to be an agency relationship in certain circumstances. But neither party made submissions on whether Stonebrook Inc. was or was not acting as an agent for the beneficial owners.
[5] Ms. Welton took the opportunity to advance an argument based on agency. The parties agreed to serve and file written submissions on the point and now make their oral submissions.
The Issues
[6] The issues before the court are:
- Did Stonebrook Inc. act as an agent for and on behalf of the beneficial owners?
- If so, does the agency relationship confer responsibilities on the beneficial owners requiring them to pay the amount owing on the Judgment?
Positions of the Parties
Ms. Welton
[7] Ms. Welton submits that, prior to the death of her husband, David Welton, the original beneficial owners of Stonebrook Inc. were the applicant Johwel Investments Inc. (“Johwel”) and the respondent Davwel Investments Inc. (“Davwel”). Each owned 50 per cent of the shares of Stonebrook Inc., which carried out the beneficial owners’ joint venture — the development of land held by Stonebrook Inc. into condominium units and the sale of those units[^1].
[8] Ms. Welton further submits that the co-tenancy agreement between Johwel, Davwel and Stonebrook Inc. required that expenses incurred in the development project were to be paid by Stonebrook Inc., and that any funds required in excess of third-party financing were to be contributed to Stonebrook Inc. by Johwel and Davwel so that Stonebrook Inc. could meet its liabilities. Therefore, Johwel and Davwel were, and are, contractually obligated to pay into Stonebrook Inc. the funds required to meet Stonebrook Inc.’s expenses, including the Judgment, before any profit from Stonebrook can be claimed by them.
[9] Ms. Welton asserts that this obligation creates an agency relationship between Johwel and Davwel as principals and Stonebrook Inc. as agent. The relationship imposes on Johwel and Davwel an obligation to pay her Judgment.
[10] Ms. Welton asserts that the management system and control exerted by Johwel and Davwel over Stonebrook Inc. further demonstrate that there was an agency relationship. The co-tenancy agreement required Johwel and Davwel to form a Management Committee to give approvals and make decisions to be made by the co-tenants. Ms. Welton asserts that through the mechanism of the Management Committee, Johwel and Davwel exerted full authority over decision-making relating to Stonebrook Inc.’s activities. Ms. Welton also points to the “Beneficial Owner Agreement” with People Trust Company in which Stonebrook Inc. is referred to as the “Nominee” and “agent for and on behalf of the Beneficial Owner” as further evidence of the agency relationship. She asserts that Stonebrook Inc. had both actual and apparent authority as agent of Johwel and Davwel and, as principals of Stonebrook Inc., Johwel and Davwel are liable for the Judgment relating to her employment contract with Stonebrook Inc.
The Applicants
[11] The applicants submit that if Stonebrook Inc. is only a bare trustee and not an agent for Johwel and Davwel, Johwel and Davwel cannot be liable for the debts of Stonebrook Inc.
[12] The applicants further submit that even if, in addition to acting as a bare trustee, Stonebrook Inc. also acted as an agent for Johwel and Davwel, this characterization will not assist Ms. Welton. They submit that Ms. Welton is precluded from seeking recourse against Johwel and Davwel as principals of Stonebrook Inc. with respect to her employment contract for two reasons. First, if a party claiming under a contract sues the agent and obtains judgment, that party is precluded from making a subsequent claim against the principal. Second, Ms. Welton cannot succeed against Johwel and Davwel because she did not sue them, her claim is now statute-barred, and there is no legal basis on which to amend the Judgment to add new defendants or judgment debtors.
Legal Principles
[13] The issue of whether a bare trustee for the beneficial owners of property can be both a bare trustee and an agent was addressed in Trident Holdings Ltd. v. Danand Investments Ltd. (1988), 1988 CanLII 194 (ON CA), 64 O.R. (2d) 65.
[14] In Trident, the court, at pp. 73-74, referred to Scott, The Law of Trusts, 4th ed. (1987) where it is stated:
An agent acts for, and on behalf of, his principal and subject to his control; a trustee as such is not subject to the control of his beneficiary, although he is under a duty to deal with the trust property for the latter's benefit in accordance with the terms of the trust, and can be compelled by the beneficiary to perform this duty. The agent owes a duty of obedience to his principal; a trustee is under a duty to conform to the terms of the trust [Vol. 1, p. 88].
A person may be both agent of and trustee for another. If he undertakes to act on behalf of the other and subject to his control he is an agent; but if he is vested with the title to property that he holds for his principal, he is also a trustee. In such a case, however, it is the agency relation that predominates, and the principles of agency, rather than the principles of trust, are applicable [Vol. 1, p. 95].
The beneficiaries of a trust are not subject to personal liability to third persons on obligations incurred by the trustee in the administration of the trust.
The situation in the case of a trust is very different from that which arises in the case of an agency. An agent, acting within the scope of his employment, can subject his principal to personal liability in contract and in tort. A trustee is in an entirely different position. He is not empowered to act on behalf of the beneficiaries personally, and does not act subject to their control. His position is one of greater independence. His duty is to administer the trust property in accordance with the terms of the trust. He may have power to subject the trust property to the claims of third persons, but he is not an agent of the beneficiaries and has no power to subject them to such claims ... [Vol. IIIA, pp. 519-20].
It is true, however, that a trustee may be an agent as well as a trustee. Where he is a trustee because he held the legal title to the trust property, but where in addition he had undertaken to act for the beneficiaries and under their control, he is also their agent, and as such can subject them to personal liabilities by acts done by him within the scope of the employment. Where the trustees are also agents of the beneficiaries, the beneficiaries are personally liable upon contracts made by the trustees in the administration of the trust, unless it is otherwise provided in the contracts.
[15] The Court of Appeal also referred, at p. 75, to Maurice Cullity’s article in 7 E. & T.Q. 35 at p. 36 where Mr. Cullity states:
It is quite clear that in many situations trustees will also be agents. This occurs, for example, in the familiar case of investments held by an investment dealer as nominee or in the case of land held by a nominee corporation. In such cases, the trust relationship that arises by virtue of the separation of legal and equitable ownership is often described as a bare trust and for tax and some other purposes is quite understandably ignored.
The distinguishing characteristic of the bare trust is that the trustee has no independent powers, discretions or responsibilities. His only responsibility is to carry out the instructions of its principals – the beneficiaries. If he does not have to accept instructions, if he has any significant independent powers or responsibilities, he is not a bare trustee …
Analysis
[16] In the Decision, I found that Stonebrook Inc. was a bare trustee that had no significant independent powers or responsibilities. In other words, it had no discretion.
[17] The co-tenancy agreement among Davwel, Johwel and Stonebrook Inc. (though never executed) states that its purpose was to establish the terms, provisions, and conditions governing their respective interests in the real property held by Stonebrook Inc., which is specifically referred to therein as the “Nominee.” The agreement states that the Nominee is to “hold registered title to the Property, as bare trustee and for the benefit of the Co-Tenants [Davwel and Johwel]” and that the Nominee confirms acceptance of its appointment as bare trustee.
[18] The co-tenancy agreement confers no powers on Stonebrook Inc. Its function is to hold legal title to the land. However, the co-tenancy agreement also provides for the establishment of a Management Committee directed by the co-tenants to make any decision required or permitted to be made by the co-tenants with respect to any agreement made between the co-tenancy or the Nominee and any person. A decision of the Management Committee is binding on the co-tenants and the Nominee.
[19] This nominee arrangement between the applicants and Stonebrook Inc. was known to Ms. Welton. She refers to it in her own affidavit evidence in this application and in her action against Stonebrook Inc. that resulted in the Judgment.
[20] Given the terms of the co-tenancy agreement, Stonebrook Inc. was not exercising any power or discretion because none was conferred on it by the co-tenancy agreement. It had no ownership rights other than its legal title to the real property. However, it was doing the bidding of the beneficial owners as directed by them through the Management Committee. In my view, an agency arrangement was created between the applicants, as principals, and Stonebrook Inc., as agent. A similar set of facts existed in Trident, in which the Court of Appeal concluded, with reference to The Law of Trusts, that the agency relationship predominated over the trust relationship.
[21] In Trident, the Court of Appeal also referred to Napev Construction Ltd. v. Lebedinsky (1984), 7 C.L.R. 57, in which Ewaschuk J. dismissed the plaintiff’s action against the beneficiaries, stating, at p. 63:
Where a contracting party is an agent for a principal not a party to a contract, the principal may directly sue or be sued. The reason is that the agent is the mere conduit for the principal and for that reason, the contract is that of the principal and not the agent.
[22] Applying the above-referenced law in The Law of Trusts, I find that an agency relationship existed in addition to the bare trust relationship between the beneficial owners and owners and Stonebrook, in so far as Ms. Welton’s employment contract was concerned.
[23] Relying on the principle set out in Napev Construction, I also find that Johwel and Davwel, though not parties to Ms. Welton’s employment contract, could have been sued by Ms. Welton as principals of Stonebrook Inc., which acted as their agent.
[24] Unfortunately for Ms. Welton, she did not sue Johwel and Davwel. She sued Stonebrook Inc. and United Lands Corporation Limited and obtained the Judgment against them. She did not sue or obtain a judgment against Johwel and Davwel.
[25] Further, where an agent is personally liable on a contract, both the agent and principal are jointly liable on the contract, and the third party may obtain judgment against either the principal or the agent, but not both: Canadian Encyclopedic Digest, “Agency”, (Thomson Reuters Canada, 4th ed.), at IX.1(b).
[26] There is only one cause of action on the contract. When judgment is obtained and issued against the agent, the cause of action in contract merges into the judgment and no further proceeding can be taken against the principal. The ordinary rule is that the principal and agent may be liable to the other contracting party in the alternative, which alternative liability continues until the election of the latter to accept one, either the principal or agent, as his debtor: Murray v. Delta Copper Co. (1925), 1925 CanLII 32 (SCC), [1926] S.C.R. 144. See also AGB Halifax Enterprises Inc. v. Wood Street Development Inc. (1999), 1999 CanLII 7338 (ON CA), 125 O.A.C. 274.
[27] Even if the rule of alternative liability and the doctrine of merger did not apply in this case, Ms. Welton would be out of time to commence a claim against Johwel and Davwel. Pursuant to the basic limitation period under the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B., s. 4., Ms. Welton would have had to bring her action on or before the second anniversary of the day on which the claim was discovered.
[28] Ms. Welton was actively involved in Stonebrook Inc. beginning in 2005. She was married to David Welton from 2004 until his death in 2013. She was a vice-president and director of Davwel from 2012 to 2014. She was aware that Stonebrook Inc. carried out the development project for Johwel and Davwel, which she knew were the ultimate owners and beneficiaries.
[29] In 2013, David Welton and Davwel commenced an action against Johwel and others, including Stonebrook Inc. Davwel pleaded that Stonebrook Inc. was a nominee corporation used to carry out development projects for Johwel and Davwel. In Ms. Welton’s action, on the examination for discovery of Sidney Dick in September 2015, Mr. Dick testified that Stonebrook Inc. was a bare trustee. In October 2015, Ms. Welton amended her Statement of Claim in a second lawsuit against Stonebrook Inc. and pleaded that Stonebrook Developments was a project of Johwel and Davwel carried out by Stonebrook Inc. In 2016, Ms. Welton deposed that she was fully aware that Davwel and Johwel developed properties through nominee corporations. In January 2017, Mr. Dick deposed that the “Stonebrook Development was undertaken as a co-tenancy joint venture between Johwel and Davwel with Stonebrook as bare trustee holding all assets and incurring all liabilities, revenues and expenses in trust for Johwel and Davwel as beneficial owners on a 50/50 undivided basis” (emphasis added). On April 10, 2019, Ms. Welton’s counsel was given documentation relating to the approval of Johwel’s purchase of Davwel’s interests in the Stonebrook developments. The agreement stated that Stonebrook Inc. was a bare trustee for Johwel and Davwel.
[30] Based on this chronology, Ms. Welton discovered that Stonebrook Inc. was a nominee of Johwel and Davwel over eight years ago. She first raised over three years ago the argument that Stonebrook Inc. was not a bare trustee but, rather, a corporation incorporated to develop real estate into condominium units.
[31] When Ms. Welton commenced her action in 2012, she did not name Johwel or Davwel as defendants, and she never amended her pleadings to add them. Once a limitation period has expired, no new parties may be added to the litigation: Limitations Act, s. 21.
[32] For these reasons, I conclude that Johwel and Davwel, as principals of Stonebrook Inc., which acted as their agent for certain purposes, are not personally liable for the Judgment. Accordingly, the funds held in trust by Cassels Brock & Blackwell LLP pursuant to Justice Hainey’s Order of April 20, 2021 may now be released to the applicants.
Costs
[33] Neither party submitted a Costs Outline. They agree to attempt to resolve the matter of costs as between themselves. If they are unable to do so, they may attend at a scheduling appointment to schedule a brief hearing on costs of the application. If they have not booked a scheduling appointment by June 20, 2022, I will assume that the matter of costs is resolved.
Dietrich J.
Released: June 6, 2022
COURT FILE NO.: CV-21-00660075-00CL
DATE: 20220606
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
BETWEEN:
JOHWEL INVESTMENTS INC. and STONEBROOK II LIMITED PARTNERSHIP
Applicants
– and –
DARLENE WELTON, STONEBROOK PROPERTIES INC. and DAVWEL INVESTMENTS INC.
Respondents
REASONS FOR DECISION
Dietrich J.
Released: June 6, 2022
[^1]: Following David Welton’s death, Johwel acquired all of Davwel’s interests in Stonebrook Inc. and transferred those interests to the applicant Stonebrook II Limited Partnership.