Informal Settlement Offers can have Significant Costs Implications

By Anna Fitz, Student-at-Law

The Alberta Court of Queen’s Bench recently provided important direction regarding the cost implications of informal settlement offers. In ILI’s Painting Services Ltd. v. Homes by Bellia Inc., the plaintiff provided paintwork for two large homes which the defendant was building. The defendant never paid for the work, and the plaintiff filed a lien on each property. In turn, the defendant argued it incurred remedial costs to repair deficiencies in the plaintiff’s work. The plaintiff made settlement offers of $50,000, which the defendant refused. The parties engaged in lengthy litigation culminating in extensive written submissions and a trial lasting three and a half days. At trial, the court found the defendant’s testimony regarding deficiencies was “wholly unreliable.” The court therefore found in the plaintiff’s favour and awarded it $58,652, exclusive of costs and interest.

After these proceedings had concluded, the parties brought costs submissions before the court. The plaintiff sought double costs from the date on which it made its offer, whereas the defendant argued enhanced costs were inappropriate. 

The court emphasized that costs are highly discretionary, and that as a guiding rule, the successful party is entitled to its costs. Rule 4.29 of the Rules of Court states a party who makes a formal offer and then receives more than that offer at trial is entitled to double costs. However, in this particular case, the offers were informal.

With that in mind, the court turned to analyzing when an informal or “Calderbank” offer merits enhanced costs. The defendant argued the plaintiff’s offers did not contain the “old formal offer type language” which would trigger enhanced costs. The court noted the offers were marked “without prejudice” and contained no reference to using the offers for obtaining costs after trial. 

However, the court found Alberta no longer requires such formality around informal offers. While doubled costs are not presumed, the court retains its wide discretion over costs. The court emphasized that costs rules are necessary to encourage reasonable settlement. Citing earlier authority, the court found informal offers should enhance costs awards where:

a)     The offer was a reasonable, genuine compromise;

b)    It gave a cost advantage if accepted;

c)     Adequate time for consideration was provided;

d)    The offer was unreasonably rejected; and

e)     The party making the offer fared better than if the offer was accepted. 

In this case, the settlement offer met all these criteria. The offer, though not significantly higher than the “bare quantum of the plaintiff’s claim, [was made] in the context of a strong case.” The plaintiff had also significantly bested this offer at trial when costs and interest were added to its award.

Having deemed enhanced costs appropriate in the circumstances, the court ultimately awarded double costs—though it noted there is no presumption of double costs in cases involving informal offers. In this case, the size and scope of the trial, as well as the amount of litigation involved, were out of proportion to the money at issue. The court emphasized that this created a risk of failure of access to justice, as the plaintiff may have decided to abandon its strong claim due to the costs involved. Furthermore, the defendant’s behaviour “increase[d] the duration and expense of litigation.” The defendant also gave contradictory evidence amounting to litigation misconduct—this in and of itself would have allowed an independent costs sanction. 

Takeaways:

This case highlights the danger of disregarding informal settlement offers. In this case, aside from costs and interest, the amount the plaintiff received was only $8,000 more than their settlement offer. However, factoring in the defendant’s conduct and the reasonableness of the offer, the court still exercised its discretion and awarded double costs. Lawyers should therefore be mindful that refusing an informal settlement offer could mean suffering significant costs consequences. 

McLennan Ross has a strong reputation in commercial litigation and is well-positioned to provide you with exceptional advice and representation. If you have any questions or concerns with respect to a contractual dispute or any other litigation matter, please do not hesitate to contact any member of our Commercial Litigation Team.

The Meaning of Value

By Cesar Agudelo and Peter Major, Q.C., Q. Arb

Determining what should inform the interpretation of a contract is a little bit like the debate of nature versus nurture – is the proper interpretation innate in the words and context of the document, or does it receive its meaning from the commercial environment?

In the recent decision from the Alberta Court of Appeal, Trico Developments Corporation v El Condor Developments Ltd, 2020 ABCA 132 the majority emphasized the importance of the commercial context when interpreting an agreement. However, the dissent by Justice Slatter calls into question the majority’s interpretation and relies more on the words in their contractual context. 

Background

At issue was the definition of the word ‘value’ as it was used in a Settlement Agreement between Trico Homes and El Condor. The two parties had formed a partnership in 2004 to develop property in southwest Calgary. They sold their respective interests in the lands to the partnership and in return they received partnership units equivalent to the relative market value of their contributions.

Later, El Condor decided to sell some of the lots to one of its affiliates, which Trico opposed. This resulted in a couple of civil actions that were eventually settled. One of those settlements resulted in the Settlement Agreement that was the subject of this litigation. 

In their Settlement Agreement, of July 12, 2006, El Condor agreed to purchase Trico’s units in the partnership using an asset valuation and to pay Trico its share of the profits earned but not distributed up to June 20, 2006. The Settlement Agreement set out a process on how to prepare the valuation of Trico’s units, and if the parties disagreed, El Condor would pay a portion, Trico would transfer its units, and then Trico could bring an action. 

The parties were unable to agree on the valuation. El Condor and Trico both conducted different valuations effective June 30, 2006.  The main difference stemmed from how they treated income tax and discount rates, but they were both considered fair market valuations by the valuation consultants hired by the parties. Since they could not reach an agreement, Trico filed an action, after which they both conducted fresh valuations. 

In its new valuation, El Condor did a fair market valuation using a discounted cash flow approach to account for the risk and time value of money. Trico’s valuation, on the other hand, did not use the discounted cash flow and did not consider the impact of taxation on value. Trico’s valuation consultant, Deloitte, acknowledged that it was not a market value valuation, and it only determined the ‘Partnership Income to be earned’ with no deduction for income taxes or time value of money. El Condor wanted the valuation that accounted for the deductions while Trico preferred the one without. The disagreement went to trial and the valuation method was the fundamental issue, in particular the interpretation of Clause 1 of the agreement, which stated the value of the units would be calculated in accordance to the steps outlined in its subclauses. 

At trial, Trico’s valuation was accepted over El Condor’s. The Trial Judge found that Clause 1 of the Settlement Agreement created a clear and express formula within the contract for valuation, thus modifying the definition of the word value. This meant that Trial Judge found the word ‘value’ in the contract did not mean ‘fair market value’, a definition normally assumed for that term; rather that it was linked to to the express formula of the contract.

 

Majority’s Decision

The majority of the Court of Appeal disagreed with the trial judge. The majority relied on the decisions of Sattva Capital Corp. v Creston Moly Corp, [2014] 2 SCR 633, IFP Technologies (Canada) Inc. v EnCanada Midstream and Marketing, 2017 ABCA 157, and Wickam Tools v Schuler AG, [1974] AC 235 for the following principles:

·   In a commercial contract it is certainly right that the court should know the commercial purpose of the contract (Sattva, at para. 47);

·   Courts ought not to sanction contractual interpretations disconnected from economic reality (IFP Technologies, at para 88); and

·   The more unreasonable the result, the more unlikely it is that the parties intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear (Wickam Tools, at 251).

The majority held that the word “value” had an ordinary definition consistent with “fair market value”. At para 39, the majority stated that Canadian courts have “considered the word 'value' when it is contained in legislation, regulations, contracts and other legal documents to be synonymous with market value or fair market value”. 

Based on the above principles, the majority held that Clause 1 of the Settlement Agreement did not hold a specific formula for valuation. There was no clear modification of the word ‘value’ in the term “value of those units.” As such, the word value gained its meaning from the commercial context in which it was drafted, which in this case meant ‘fair market value.” 

Furthermore, the majority found that should they have found a formula in Clause 1, it would have led to an absurdity such as excluding tax considerations. This clearly could not be the case because in any fair market valuation, there exists the assumption of a nominal third party, who would always consider the tax liability when determining how much to pay. Besides, there was nothing in the Settlement Agreement that showed El Condor was prepared to pay a premium for Trico’s units. 

The Dissent

Slatter J.A. took a different approach. He began by interpreting the word value in the contractual, rather than the commercial context. He found there was a clear formula in the process set out in Clause 1. 

In contrast to the majority, the dissent held the Settlement Agreement failed to clearly define the word ‘value’ in the conventional sense of the word. It was the overall context of the document that gave it meaning. At para. 60, Slatter J.A. held, “Stating that the word ‘value’ has a fixed legal meaning serves to extract that word from the contract ‘as a whole’, and gives it a predetermined meaning…” and “any meaning must yield to the express terms of this contract.”

The dissent did not neglect to apply a commercial context to the interpretation of the Settlement Agreement. Instead, he finds the commercial sense that best reflects his interpretation of Clause 1. He notes, at para 63, that the partnership income is not taxed at the partnership level, rather the income is allocated to the partnership units and is taxed at the partner level. As such, Trico would have received its allocation on a pre-tax basis and would then have been assessed tax on those amounts.

Takeaway

The problem with the majority’s decision is that it inverted the framework for interpreting contracts, by going outside the contract first and drawing from the commercial context. Sometimes these common terms, i.e. ‘value’, used in industry may have variations from one judicial decision to another. It adds a level of uncertainty where certain important terms lack definition in the document. Slatter J.A. was right to point out that the context of the contract should be interpreted first before considering the commercial context. It could be that in the end the majority would have reached the same outcome, but by jumping so quickly to the commercial context, the majority has added a level of uncertainty to commercial agreements. 

Nevertheless, the decision of the majority reminds us how important it is to define key terms in a contract. The difference in the interpretation of the term ‘value’ in Clause 1 of the Settlement Agreement resulted in a difference of several million dollars. Even the dissent reminds us that we should define terms of art. As Slatter J.A. pointed out, the term may not have a fixed legal meaning. Parties relying in terms of art for the industry are well advised to define these regardless of the unspoken understanding between the parties. 

McLennan Ross has a strong reputation in commercial litigation and is well-positioned to provide you with exceptional advice and representation. If you have any questions or concerns with respect to a contractual dispute or any other litigation matter, please do not hesitate to contact Cesar Agudelo, Peter Major, Q.C., or any member of our CommercialLitigation Team.

Condo Litigation – Section 67 of the Condominium Property Act

By Madyson Dietrich, Student-at-Law and Peter Major, Q.C.

As condo development increases across Canada, especially in urban centers, we can expect an influx of litigation over the interpretation and application of condo legislation and their bylaws. One common trend in Alberta is the reliance on section 67 of Alberta’s Condominium Property Act, (“CPA”) in the litigation process to enforce reasonable behavior.

Section 67 allows the Court, on application by an “interested party”, to impose certain remedies if improper conduct has taken place. Interested parties include condo owners, condo corporations, members of the condo board, or any other persons with a registered interest in a condo unit. Sometimes referred to as the ‘oppression section’, section 67 seeks to restrain unfair conduct. Oppression remedies are also available under the Alberta Business Corporations Act, but the degree of conduct required under section 67 of the CPA may be less onerous than its counterpart, at least for the moment.

Remedies under section 67 include:

·         Directing an investigator to be appointed to review the improper conduct and report to the Court;

·         Directing improper conduct to cease;

·         Giving directions on how matters are to be carried out to avoid recurring issues;

·         Awarding compensation in respect of any losses resulting from improper conduct;

·         Awarding costs; or

·         Providing any other directions that the Court considers appropriate.

Improper Conduct Warranting a Section 67 Remedy

Improper conduct can mean a number of things including non-compliance with the CPA, its regulations or the condo’s bylaws, as well as conducting business affairs of a condo corporation or exercising condo board powers in an oppressive or unfair manner.

In The Owners Condominium Corporation No. 0211096 v Clayton, 2019 ABQB 877, the Court granted a section 67 remedy to a condo corporation who claimed that an owner was not complying with the bylaws. The owners had a dog and the condo corporation subsequently enacted a bylaw prohibiting dogs, which was to be grandfathered in. Despite the enactment of the new bylaw prohibiting dogs, the owners decided to get another dog.

While the Court was sympathetic to the owner’s situation, it held that permitting the owners to keep the dog in these circumstances would be unfair to other residents who follow the bylaws and policies and are entitled and expect the condominium corporation to enforce the bylaws as required under the CPA. Finding otherwise may impair or limit a condo corporation’s ability to enforce their rules in the future. The Court made an order under section 67 for an order to relocate the dog.

In Condominium Corporation No. 0613837 v Tien Ngoc Ho, 2019 ABQB 967, a condo corporation applied for declaratory relief under section 67 that they were absolved from all responsibility and liability with respect to the repairs of a unit. The owner’s unit was damaged as a result of a leak in another owner’s unit. The condo corporation maintained proper insurance but hired a contractor themselves to complete the repairs because the deductible exceeded the cost of repairs. The owners disputed the repairs claiming that their unit was unlawfully entered and the repairs were poor quality.

While the Court held that a trial was necessary to determine the issues (namely the quality of workmanship), it did not dismiss the application suggesting that this situation may properly warrant a section 67 remedy. However, the Court interestingly noted that section 67 is often used as a catch-all to enforce reasonable behavior, which is not its intended purpose.

Improper Use of Section 67

While section 67 is available to ensure enforcement of bylaws and proper exercise of powers by a condo corporation and board, the Court has notably dismissed a number of applications that improperly rely on section 67. For instance, in The Owners Condominium Corporation No. 1710419 v Condominium Corporation No. 1710627, 2019 ABQB 655, a residential condo corporation sought relief against a commercial condo corporation under section 67 after a dispute over shared expenses and nuisances in a mixed development.  

The two condo corporations had entered into a prior agreement, and the Court therefore questioned whether section 67 was an appropriate vehicle for resolution. It appeared that this dispute was contractual and section 67 would not apply. The Court noted that section 67 was designed to deal with issues arising within the administration of a condominium corporation and its relationship with owners.

In Owners: Condominium Plan No 7921815 (Pepperwood Village) v MacMillan, 2019 ABQB 642, a condominium corporation attempted to use section 67 to order an owner to cease and desist from making harassing statements to and about the condo corporation, managers, and legal service providers unless she was on the Board of Directors or had written authorization.

The Court refused to grant a remedy under section 67 since the owner’s communications were not in any sense a “use of her unit in the condominium development” and did not amount to improper conduct under the CPA.

Conclusion

Section 67 remains a useful tool as it is designed to govern the behavior between condo corporations and owners, as well as condo corporations and third parties. Condo corporations may rely on section 67 to ensure enforcement of bylaws, payment of condo fees, and compliance with special assessments. Similarly, unit owners may rely on section 67 to ensure that the condo corporation and board members are adhering to bylaws and ensure that bylaws accord with the CPA.

While section 67 is an important provision in the CPA, there appears to be increased reliance on the provision to enforce any reasonable behavior. Parties should not rely on section 67 as a “catch-all” section for any dispute and should still seek to resolve disputes by applying ordinary principles of contract and tort law where possible.

In instances involving true improper conduct in the context of the CPA, parties should seek to ensure that the evidentiary record allows a court to award the remedy sought under section 67 by way of Originating Application. Complicated findings of fact may require a full trial and further pleadings to be filed.  

With a strong reputation in commercial litigation, McLennan Ross LLP is well-positioned to provide you with exceptional advice and representation. If you have any questions or concerns with respect to the Condominium Property Act, or any other litigation matter, please do not hesitate to contact Madyson Dietrich or Peter Major, Q.C., or any member of our Commercial Litigation Team.