Tuesday, 13 November 2018

Streamlining Contractual Disputes with an Expert

By Richard Wong & Peter Major, Q.C.


Carefully drafted alternative dispute resolution (“ADR”) clauses can be tailored to parties’ needs in solving disputes in a timely manner. Binding arbitration has commonly been implemented to limit the time and cost spent in court by providing finality to the dispute at issue. Similarly, limits on discovery can streamline issues and in a recent Alberta Court of Queen’s Bench case, the Court confirmed that a properly drafted contractual clause can provide selected experts with significant decision making authority, including the ability to consider and resolve legal issues when fulfilling their mandate.

In Applied Industrial Technologies, LP v Sirois, 2018 ABQB 818 (“Applied”) Applied Industrial Technologies, LP (the “Purchaser”) was scheduled to purchase the shares of several companies known as the Reliance Group (the “Vendors”) pursuant to a share purchase agreement (“SPA”). A term of the SPA provided that disputes over certain adjustments to the purchase price of the Vendors were to be determined by a nationally recognized accounting firm “as expert and not arbitrator”, the expert’s determination was to “be final and binding on all parties” and “not be subject to appeal, absent manifest error”. 

In this case the Purchaser delivered a Closing Balance Sheet to the Vendors, who objected, thus engaging the expert determination process. The Vendors’ objection included the argument that the relevant figures for Reliance USA (one of the Vendors) at April 30, 2014 in the Closing Balance Sheet and the Combined Target April 2014 Net Profits Statement must be converted from US dollars to Canadian dollars at the prevailing exchange rate at closing, rather than at par. The parties selected a mutually agreeable expert pursuant to the SPA and the expert determined that the currency conversion must be made at the prevailing currency exchange rate at the closing date. 

The Purchaser applied to set aside the expert’s decision arguing that the expert’s professional qualifications (i.e., financial and not legal) meant that the expert could not decide questions of mixed fact and law including interpretation of the contract. As the expert was not an expert in law the parties would not have intended that it answer legal matters and was confined to only ascertain accounting practices, assess compliance with generally accepted accounting principles, and compile financial information based on same.

The Vendors and McLennan Ross LLP’s partner, Corbin Devlin, disagreed and were successful. In the reasons resulting in the dismissal of the Application, three issues the Court considered were whether an expert appointed under an expert determination clause in a share purchase agreement can decide questions of mixed fact and law, how the expert’s decision should be reviewed and whether the expert in this case committed a manifest error.

Mixed Fact and Law

The Court recognized that the SPA provided the Vendors’ representative an ability to object to “any item or aspect” of the Closing Balance Sheet or the Combined Target April 2014 Net Profits. The Court noted that the plain meaning of the phrase “any item or aspect” went far beyond calculations, compilations and accounting principles as argued by the Purchaser.

Additionally, the Court recognized that these were sophisticated parties engaging in a transaction worth over $200,000,000, and that any reasonable party in the same position with legal advice would know that expert determination clauses often refer to compilations, calculations, appraisals or valuations rather than “any item or aspect”, and that an aspect is even wider than an item. As such, the Court found that the parties must have known and should be presumed to have known there were issues of mixed law and fact which could arise in ascertaining the information or methods used in the Closing Balance Sheet that was provided.

Ultimately, considering the plain words of the contract and the contextual matters, the parties provided flexibility to design a suitable process to accommodate any specific matter in dispute, giving the expert broad discretion to determine the rules and procedures to be followed in the proceedings.

Standard of Review

Anytime a court is reviewing the decision of another body, the review is expected to be performed in accordance with a recognized standard. Sometimes that review known as the “correctness standard” enables a court to replace the other body’s decision if the law was applied incorrectly. On other occasions, a court will apply a “deferential standard” and defer to the findings and conclusions exercised by the other body. Here the Court acknowledged that an expert determination is binding unless the expert departed from the contractual instructions in a material respect or the contract otherwise provides. However, that may not always be the case. The Court noted that parties can install a safety valve in the contract clauses to challenge the contractually binding nature of the experts determination, if one is concerned that the expert’s determination were to contain a “manifest error”.

Since the SPA contained a “manifest error” clause, the Court concluded it could conduct a review that should be performed on a deferential standard for a variety of reasons. First, the review involved contractual interpretation which is a question of mixed fact and law. If the same issue arose from the decision of a trial judge, that decision could only be interfered with in the case of a palpable and overriding error or the decision was unreasonable. Likewise, in Canadian appellate courts, the term manifest error has been equated with conclusions that are clearly wrong or palpable errors. Palpable errors are those which are so obvious that they can easily been seen or known; readily or plainly seen. Secondly, if the same issue arose out of an arbitration, the appeal would be limited to questions of law and the standard of review, except in limited circumstances, is one of deference if the arbiter’s decision was reasonable. Thirdly, even in administrative law cases, a reviewing court must consider multiple criteria, as set out in Dunsmuir v New Brunswick, [2008] 1 SCR 190, to avoid imposing a correctness standard and undercutting the integrity of the process to be used.  

In this case, the court found by its interpretation of the SPA that the parties’ words did not simply except an “error”. The parties chose to except only “manifest error”. The word “manifest” must have been intended to express a higher standard than simply looking to see whether some error is apparent from the papers. The parties’ choice to include words of limitation implies deference to the expert’s determination, especially as they did not insert a clause to bifurcate the review standard. Additionally, the Court concluded that taking the plain language of the contract in its context, the parties’ choice of the words “manifest error” indicates the parties wanted the opinion of a financial expert, not the Court, and a speedy process with some degree of finality.

No Manifest Error

This blog does not leave room for explaining multiple reasons why the Court did not find that the expert committed a manifest error in arriving at its decision but the analysis used reflected the Court’s concern that deferential standards are critical for protecting the integrity of the decision making process, respecting the expertise of the decision maker, and recognizing that in many questions, reasonable minds can differ over the outcome. The Court found that an error is manifest or obvious where it is unreasonable: the conclusion is outside the range in which experts could reasonably differ. If the conclusion is within the range and sufficiently intelligible in the context of any contractually required reasons, as it was here, an error is not “obvious” or manifest.

With a strong reputation in commercial litigation, McLennan Ross LLP is well positioned to provide you with the best advice and representation. If you have any questions or concerns with respect to the ADR mechanisms in you contracts, your rights to engage such processes or any other matter, please contact do not hesitate to contact a member of our Commercial Litigation Team.

Tuesday, 9 October 2018

Quick Auto and the Principle of Unconscionability

By: Eric Appelt, Student-at-Law and Peter Major, Q.C.
 
Many business people are familiar with the basic requirements of an enforceable contract; clear offer and acceptance, some form of value given, and a ‘meeting of the minds’ between the contracting parties. These features are all necessary in the formation of a binding agreement, and the absence of any may provide the basis for one party’s challenge of the contract. What may be surprising to some, however, is the existence of another element, lurking beneath the surface of all contractual arrangements; the principle of unconscionability. A recent Manitoba Queen’s Bench decision – Quick Auto Lease v Jason Hogue et al., 2018 MBQB 126 [Quick Auto] – shed light on the role of unconscionability in the context of lending transactions, and what creditors and debtors should be aware of in entering same.
The principle of unconscionability applies where an inequality of bargaining power between parties is used to extract a substantially unfair bargain in favour of the ‘stronger’ party. Many jurisdictions have addressed issues surrounding unconscionability through legislation aimed at protecting the ‘weaker’ of the two parties. Manitoba’s Unconscionable Transactions Relief Act, CCSM c U20 [Act], for example, allows a court – after having regard to all surrounding circumstances, including risk – to relieve all or a portion of a loan that is found to be excessive, harsh or unconscionable. Lenders and borrowers residing in Alberta should note that the wording in our own legislation (the Unconscionable Transactions Act, RSA 2000, c U-2) is virtually identical to that of Manitoba.
While unconscionability is a concept that can play a role in all contracts (as an equitable remedy), it should be noted that the aforementioned Act applies specifically to proceedings dealing with the lending of money. Under the Act, unconscionability is available as a statutory remedy. It is this context – unconscionability as it relates to lending contracts – that will be the focus of this particular blog post.
Section 2 of the Act was at center stage in the Quick Auto case. In Quick Auto, the lessee obtained a 2001 vehicle from the lessor by way of a financing lease with option to purchase. The acquisition cost ($18,273) differed significantly from the total transaction cost ($37,912), and the 29.9% interest rate was to be bumped up to 36%, compounded daily, in the event of default. The lessee did ultimately default, and subsequently brought an action under section 2 of the Act for relief from the loan.
The Court reiterated the general test to be applied in circumstances of alleged unconscionability, which is two-fold. First, the debtor is required to demonstrate the inequality of the parties and “improvidence” of the bargain. If the debtor is able to do so, the burden then shifts to the creditor to show the agreement was freely entered into by the parties and fair and reasonable in the circumstances. Only where the creditor is unable to satisfy this burden will a court be able to set aside the agreement as “unconscionable”.
In applying this test to the facts of Quick Auto, the Court found various aspects of the particular lease agreement to expose it as an unconscionable one:

·       Despite the agreement opening with the statement “We’ve written this Lease Agreement in simple and easy-to-read language because we want you to understand its terms…”, the agreement was long, complicated, and contained dense provisions, printed single-spaced, in exceedingly small font;

·       The lessee was not allowed to terminate the agreement under any circumstances (or set-off its claims for losses against rental payments due), notwithstanding any potential breach by the creditor;

·       The pre-default interest rate (29.9%) was significantly higher than prevailing interest rates at the time of the agreement, and the post-default interest rate (36%) breached section 4 of Canada’s Interest Act, RSC 1985, c I-15; and

·       The lessee was required to insure the vehicle in the form of a “Mortgage Endorsement (Broad Form SPE – 23 or Equivalent)”, though this form was not set out or defined in any way.
The Court ultimately held that, considering the risk and total circumstances surrounding the loan, the agreement was clearly unconscionable pursuant to section 2 of the Act. Accordingly, the lessees were relieved of any further obligations under the arrangement.

While cases such as Quick Auto may represent the ‘extreme’ end of the spectrum, business realities suggest that some inequality of bargaining power between parties is quite common. This inequality will not always meet the statutory threshold of being ‘unconscionable’, but it is nonetheless important for those regularly involved in lending transactions (and entering contracts, more generally) to inform themselves of these rules. This is because it is not difficult to imagine a less egregious arrangement that nonetheless meets the test for unconscionability as laid out in Quick Auto.
For creditors – especially those viewed as being sophisticated and experienced in their particular industry – this means avoiding some of the red flags emphasized in Quick Auto. Plain and ordinary language, reasonable terms, and a willingness to assist the debtor in meeting its procedural obligations should all be standard practice, particularly when entering in to agreements with potentially vulnerable debtors (such as the elderly or those with language difficulties). Debtors, meanwhile, can avoid the litigation process (and associated costs) altogether by seeking independent legal advice to ensure all contractual terms are understood and complied with, and perhaps taking some time to ‘shop around’ and get an idea for standard market rates.
McLennan Ross LLP has years of experience and a strong reputation in a variety of practice areas, including drafting, reviewing and litigating commercial contracts. If you or your company have questions regarding unconscionability, enforcement of contracts, or any other litigation-related issue, please do not hesitate to contact any member of the McLennan Ross Commercial Litigation practice group.

Friday, 24 August 2018

A Small Step Toward Faster Justice: Mandatory Dispute Resolution

Authors: Matthew Ryan, Summer Student and Peter Major, Q.C.

Slow courts are bad for the economy. Inefficient justice discourages investment, since businesses and investors cannot be certain that their property and contract rights can be effectively upheld. Even if an investor is confident about the strength of their claim, sluggish justice makes lawsuits more expensive­—to a point where would-be plaintiffs are sometimes better off abandoning their claims altogether. This uncertainty about the efficacy of the justice system creates a disincentive for businesses to enter contracts in the first place.
The World Bank’s Doing Business survey measures the ease of starting and conducting businesses across the world. One of the survey’s key metrics is the time taken to enforce a contract through the courts. While this survey does not measure individual Canadian provinces, the nation ranks a dismal 114 out of 190 countries for the enforcement of contracts. This is one of the worst rankings for an OECD nation, coming ahead of only Slovenia and Greece. The pain is felt in Alberta too, where lead times for civil trials can sometimes extend past three years.
In January 2016, the Court of Queen’s Bench of Alberta submitted a proposal to the provincial and federal governments to increase the number of full-time judges to fix the clogged justice system. This proposal was justified by the rapid increase in Alberta’s population coupled with slow or non-existent increases to the number of judges sitting on the Court of Queen’s Bench. Continued population growth has led Alberta to maintain the highest ratio in Canada for population to Superior Court Justices, with one Superior Court Justice for every 63,000 Albertans. By comparison, the national average was one Justice for every 35,000 Canadians when the proposal was made in 2016. In light of this, the Court requested an additional ten Justices to be appointed to the Court of Queen’s Bench. Since this proposal, only four have been added and that may only offset some of the pending judicial retirements on the near horizon. Now in 2018, justice remains as slow as ever.
 
Proposed changes by the Alberta Court of Queen’s Bench
In an attempt to speed up justice, the Court of Queen’s Bench of Alberta has proposed mandatory dispute resolution before litigants can book a trial date. This means that parties must participate in some form of dispute resolution, either through a Judge-run Judicial Dispute Resolution (JDR) or through a private mediator. This process is meant to offer parties an opportunity to settle disputes without encountering the time and expense of a trial. Although JDR services also depend on the Court’s resources, they can ultimately reduce court backlogs if parties settle and avoid a trial. The Court of Queen’s Bench is seeking feedback from the legal community and the public regarding this proposal. If implemented, this requirement will take effect January 1, 2019.
Dispute resolution can be effective in many cases where parties are open-minded and interested in settling. This is common with commercial litigation, where litigants often remain conscious of their litigation risk and enter disputes with their bottom line in mind. However not all parties in a civil dispute will navigate a lawsuit guided by pure economics. Dispute resolution can be a waste of time where one or both parties are rooted in their positions and unwilling to negotiate a settlement. Those who value principles over profit won’t find a resolution without a trial. In those cases, mandating dispute resolution will only slow things down by requiring parties to enter a dispute resolution process that is guaranteed to fail. This doesn’t necessarily mean the Court’s proposal is a bad idea. Mandated dispute resolution can still reduce wait times for trials if enough litigants are willing to engage with dispute resolution with a genuine interest in settling the dispute.
McLennan Ross partner Don McGarvey has offered his opinion on the proposed changes during recent interviews with the Edmonton Journal and CBC Radio. While the proposed requirement for dispute resolution is a step in the right direction according to McGarvey, it’s not enough to address the current backlogs facing the Court. Instead, the onus lies with the provincial and federal governments to ensure the justice system has adequate resources. This means hiring not only more Superior Court Justices, but also more support staff.
Along with increasing court resources and alternative dispute resolution, the World Bank’s Doing Business survey also identifies best practices for efficient civil justice. Some of these include: maintaining a specialized commercial court or division, expanding case management systems, court automation, and computerization. Alberta courts have well established court management systems firmly in place, they have ongoing improvements in computerization both in the courtrooms and administration offices, they are separated into different practice areas and over the past decade they have been earnest in trying to speed up processes through certain specializations. Unfortunately, the efficiency and success of all of these efforts often goes unnoticed or is unable to reach their full potential so long as judicial vacancies and sometimes razor-thin levels of support staff remain the status quo in Alberta.
If you are contemplating litigation but are already discouraged by the concern with the delay, or you are presently in litigation without seeing light at the end of the tunnel, understanding the value of the mandatory dispute resolution process would be of great value. Even better, if you think you and your opposing party are willing to consider settlement without a trial, this proposed change can accelerate the prospect of settlement or certainly help each of you narrow the issues that may need to be resolved at trial.
The commercial litigation group at McLennan Ross has years of experience assisting clients with these issues and are always happy to guide the way.

Thursday, 26 July 2018

Email Communication and Formation of Contract

Author: Peter Major, Q.C. and Cesar Agudelo, Summer Student

Electronic communication continues to grow and, by most observations, it is becoming indispensable in our social discourse. The advantages of instantaneous communication allow for people to connect quicker and expand their circle of contacts. At the same time, this access to instantaneous communication carries risk. A flippant or ill-tempered remark sent in the course of a speedy exchange could later prove embarrassing or destructive to a relationship. Should the same cautionary tale apply to business negotiations? Can a careless or poorly considered email or text bind you to an agreement that you did not intend?
 
In two recent cases, appellate courts closely scrutinized the role that email exchanges played in business relationships. The first case, Cana v Standard Innovation, 2018 ONCA 145, was heard by the Ontario Court of Appeal and it had to decide if two separate agreements were created amid several email exchanges between the parties. The Defendant, Standard Innovation, was the patent holder of a popular sex toy called “We-Vibe”. The Plaintiff, Cana, was a distributor of adult sex health and wellness products. The parties entered negotiations for Cana’s exclusive distribution of the We-Vibe. The relationship eventually soured and Cana sued Standard Innovation for breach of contract, among others claims. In that claim, Cana alleged that three different agreements formed, only two of which are of concern here: 
  1. A Mainstream Agreement whereby Cana would be the exclusive distributor of the We-Vibe in mainstream stores such as drug stores; and
  2. An Adult Stream Agreement whereby Cana would be the sole distributor of the popular toy through adult sex shops and websites.

In analyzing the Mainstream Agreement, the facts identified that between August and September 2009, Cana signed one copy of the Mainstream Agreement while Standard signed an identical yet separate copy. There was no one document that could be clearly identified as the one contract for the Mainstream Agreement. Subsequently, the parties exchanged emails discussing and modifying some of the terms of the documents that had been signed. Cana argued that the Mainstream Agreement was formed when both parties signed a copy of the document. Standard Innovation, pointed to the subsequent email exchanges and discussion of the terms as proof that there was no agreement, but rather an ongoing negotiation.

In the Adult Stream Agreement, the parties signed different copies of the document held out as the agreement while continuing to negotiate the terms of that agreement. These negotiations also continued well into 2010. Notwithstanding these negotiations, Cana argued that the email exchange was proof that an agreement had been reached, while the Standard Innovation argued that the emails proved that these were mere negotiations so no agreement was ever finalized.

The Ontario Supreme Court held that there was no Mainstream Agreement or Adult Stream Agreement established and dismissed the claim. The Ontario Court of Appeal reversed the trial court’s decision regarding the Mainstream Agreement but upheld its findings regarding the Adult Stream Agreement. The difference in the Court of Appeal’s findings illustrate what the Court considers important when analyzing the role that email communications play in contract formation and interpretation.

The Court of Appeal agreed with the trial court on the approach for analyzing contract formation and interpretation. Implicit in their decisions are the principles established by the Supreme Court of Canada in Sattva Capital Corp. v Creston Moly Corp. 2014 SCC 53. A contract should be interpreted by objectively determining the intention of the parties at the time that they entered into the contract in light of the factual matrix of the surrounding circumstances. In the Cana case, the two courts arrived at different conclusions. Each court agreed that the main factors to determine contract formation are: the wording and content of the contract, where one exists; the conduct of the parties; the factual or business context at the time of formation; and lastly, and less importantly, other evidence that may help solve uncertainties.
 
The difference in their conclusions and the palpable error of the trial court was not in finding that the email exchange overcame the written contract, but in forgetting to apply the principle of agreements signed by counterpart. The trial judge characterized the email exchanges of partially signed copies as “two unique offers.” The Court of Appeal disagreed and found there to be one, executed agreement signed in counterpart. The Court noted that the parties “conducted themselves in this manner until the relationship broke down in May 2010.” The Court also considered the subsequent email exchange as “negotiations concerned with relatively minor matters of the kind that would be expected to arise within the framework of a long-term exclusive distribution agreement.”
 
The Court did not ignore the email evidence, but relied on it mainly to clear up uncertainties. For example, it highlighted an email where the Standard Innovation said “I look forward to growing the mainstream market with you,” as evidence confirming the existence of an agreement while noting that they could now do a term for the sex toy industry. The Court also relied on the Standard Innovation’s internal emails to interpret their intention and understanding the relevant events dealing with formation and intention. The emails indicated that Standard Innovation considered the Mainstream Agreement as ‘done’. The email evidence supported the Court’s interpretation of the written contract, the conduct of the parties and the factual context.
 
The Adult Stream Agreement was resolved differently. Ironically, there was a fully executed document, but in Cana’s own emails they requested a clean copy after this executed copy was signed. The negotiations on major terms, contained in some of these emails, continued. The Court took this, and other evidence to mean, that Cana themselves did not consider it an enforceable agreement. Also, and unlike the Mainstream Agreement, the parties did not conduct their business in accordance to the agreement.
 
At the end of this analysis, the Court concluded that there was no written contract, no conduct to support an agreement and the factual context evidenced an ongoing negotiation. Furthermore, the Court found that the email exchange was too uncertain to support the formation of an agreement and no one email accidentally bound the parties.
 
The second case, Skylink Express Inc. v Innotech Aviation, 2018 NSCA 32 was heard by the Nova Scotia Court of Appeal. The Plaintiff, Skylink and the Defendant, Innotech had a long business relationship dating back to 1998. Their relationship was grounded on a lease where Skylink became Innotech’s tenant for hangar space with accompanying office and parking space. Over the years, the parties renewed and amended their agreement and they had a specific process for amendments where they would negotiate an addendum to the original lease.
 
In 2014 the parties negotiated a renewal. Innotech offered Skylink three options, a one, three and five year lease. The longer the lease, the lower the rate of rent. Skylink chose the five year lease with the lowest rent. Before executing the addendum, however, Skylink sent an email asking Innotech: “If the need arose, and Skylink needed additional space or to change the type and number of aircraft they had, would they be able to do so via an Ad Hoc Addendum?” Innotech confirmed that this would be agreeable. After this confirmation, the parties executed the addendum to their original agreement.
 
A few months later, Skylink lost a major deal, resulting in a reduction of business. In turn, Skylink attempted to rely on its email exchange with Innotech to reduce the amount of space it rented and to ultimately terminate the agreement. After Skylink failed to pay rent, Innotech made an application for a declaration that Skylink was in breach of their lease.
 
Skylink argued that the email exchange before the execution of the addendum to the original lease constituted a collateral agreement. Both, the trial court and the Court of Appeal disagreed.
 
First, the parties had a long history of doing business and their established method of amending the agreement weighed heavily. If anything, the email exchange supported this practice. Secondly, Skylink’s argument would allow it to unilaterally modify the contract and pass its business losses to Innotech. Thirdly, the intention of the parties was clear from the evidence. Skylink chose the longer of the leases when it had the option of a one year term, plus witnesses for Skylink testified that they had not anticipated a reduction in business.
 
Like the Court in Cana, the Nova Scotia Court of Appeal put more weight on the written contract, the conduct of the parties and the factual or business context.
 
The take away from these two cases is that emails and presumably other electronic exchanges during business negotiations can be an important part of the factual matrix courts will look to in determining whether a contract is formed, enforceable or left open. Emails and texts are just as useful as any other evidence the courts are required to review to find out what the parties intended, if a contract was formed and when it was formed. If you are engaged in electronic communications in business, think twice before you send the flippant or ill-tempered remark. There is a good chance a judge won’t see your comment in the same light you thought when you sent it and when reviewed years later.
 
With a strong reputation in commercial litigation, McLennan Ross LLP is well positioned to provide you with the best advice and representation. If you have any questions or concerns about this or any other matter, please contact any member of our Commercial Litigation Team 

Streamlining Contractual Disputes with an Expert

By Richard Wong & Peter Major, Q.C. Carefully drafted alternative dispute resolution (“ADR”) clauses can be tailored to parties’ ...