Would You Insure This House?

    Unfit for Human Occupation

Anyone who has applied for insurance on a house or commercial building knows that the insurance agent will want to complete a questionnaire disclosing detailed information about the condition of the building.  If the insured gives false information, the insurer can revoke coverage for misrepresentation.  A lot of people are probably unaware that they have an ongoing legal obligation to inform their insurance company of any significant change in the condition of the insured property, and that the insurer can deny a claim because of failure to report a "material change in the risk".

 

The source of this obligation is a statutory condition that is incorporated into most property insurance policies in Canada: "The insured must promptly give notice in writing to the insurer or its agent of a change that is material to the risk and within the control and knowledge of the insured."  Matters that might be considered material include changes in use or occupation, major renovations, or alterations to electrical, heating, alarms, or other important building systems.

 

Insurance underwriters often dispatch an inspector to look at the home or building before issuing the policy.  The inspector may or may not have any particular qualifications in engineering or construction.  The fee paid for the inspection is small, and the inspections are often cursory.  With home insurance policies, the inspector generally does not enter the house, and the review carried out is often referred to as a "drive-by" inspection as the inspector does little more than visit the location to confirm that there is a building with no obvious pre-existing damage.

 

What happens if the inspector is in a position to note a condition about the building that is material to the risk, but that the insured has not disclosed to the insurance company? The insured could argue that the insurance company had knowledge of the state of the building, so the statutory condition doesn't apply.  The same argument might be raised in the face of a misrepresentation defence.

From the insurance company point of view, the inspection is for a very limited purpose and is not intended to confirm every detail in the insurance application.  Carrying out a thorough inspection would increase underwriting costs, which would have to be passed on to the insured through higher premiums.  The insured is in the best position to provide information about the property, and insurers should be able to rely on information in the insurance application without further inquiry.

 

In Mah v. Wawanesa Mutual Insurance Company, however, a majority of the Alberta Court of Appeal was prepared to impute the knowledge of the inspector to the insurance company.

 

The insured bought a run-down house from his brother.  The house had been insured by Wawanesa, and the brokerage representing Wawanesa took an application from the new owner and agreed to bind coverage pending acceptance of the application by the insurer.

 

The insurance company knew that the building was unoccupied.  Between the date of the new owner's application and the date the policy was issued, however, an official with the regional health authority attended at the property and posted a notice on the rear door stating that the house was unfit for human occupation.  The notice was on bright orange paper, and the trial judge concluded that the owner must have seen it when he came by the house to cut the grass and take away the trash.  The owner did not report the health department's order to the insurer.

 

The insurer asked the broker to check on the type of heating system and age of the house, and to provide a photo "to confirm the dwelling's continued existence".  The broker sent a retired surveyor to conduct an inspection.  For $100, the surveyor attended at the property, carried out a "walk-around inspection", and took several pictures.  He did not enter the building.  He submitted his photos to the broker, along with a one-page handwritten report describing what he had seen.  The broker passed this note and the photos on to  Wawanesa's underwriting department.  One of the photos showed the back door; the orange notice was visible, but the print was not readable.

 

Wawanesa issued the policy, but denied coverage when the property was damaged by fire, citing the failure of the insured to report the health authority's order declaring the house unfit.  The surveyor was not called to testify at trial, so it is not known whether he actually read the health department notice or not.  The trial judge dismissed the action, and the insured appealed.

The fact that the insurance company did not have actual knowledge of the health department order was not in dispute.  The case turned on what the surveyor knew, and whether or not that knowledge could be attributed to the insurer.

The reasons of the trial judge were a little vague regarding the state of mind of the surveyor.  The judge said that "one could assume" that the surveyor saw the health department notice, then took note of the fact that he did not testify.  This suggests that the judge drew an adverse inference from Wawanesa's failure to call the surveyor.  The judge had concluded that the owner must have seen the notice on one of his visits to the property.  The majority in the Court of Appeal said that on the same basis, the judge's assumption about the surveyor's knowledge amounted to a fact finding that the surveyor saw the notice too.

According to the majority, the surveyor was an agent of the broker, and since the broker was an agent of the insurer, the surveyor was "the insurer's agent's agent".  In law, the surveyor's knowledge was the broker's knowledge, and the knowledge of the broker must be imputed to its principal Wawanesa.

In addition, the statutory condition requires notice to the insurer "or its agent".  In the view of the majority, the notice need not come from the insured, and the health authority was actually a better source of information about the fitness of the building.  Since the surveyor/agent had notice, the condition was satisfied and the insurer could not avoid coverage.

Justice O'Ferrall, in his dissent, did not take issue with the idea that the surveyor's knowledge could be imputed to the insurer, or that notice to the surveyor would satisfy the statutory condition.  He did not accept that the trial judge had drawn a factual inference regarding the surveyor's knowledge, and felt that the evidence did not support the conclusion that the surveyor must have seen the health department order.

For homeowner's policies, the costs involved in carrying out a detailed inspection cannot be justified as a routine part of the underwriting process.  Nevertheless, it appears that anything visible from outside the home will be considered within the knowledge of an insurer who orders a "drive-by" inspection prior to issuing a policy.  Certainly, any plaintiff's lawyer faced with a misrepresentation or non-disclosure defence will want to obtain production of the insurer's inspection report.

Mah v. Wawanesa Mutual Insurance Company, 2013 ABCA 363


Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

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Any legal information provided is general in nature and may not apply to particular situations. It does not constitute legal opinion or advice. Please consult your lawyer regarding your specific legal issue.

Alberta Court Upholds Land Titles System

    Homestead Record, Alberta Archives

In Alberta, all interests in land are recorded in a Torrens registration system, often referred to as a "Land Titles" system.  A title search produces a certificate listing all registered interests in the parcel of land searched.  Anyone interested in acquiring the land can rely on the certificate as a complete list showing who owns the property and any mortgages, liens, or other interests effecting title.  Unregistered interests are not protected.  The only exception is in cases of fraud.

 

This system can sometimes lead to harsh results, as is illustrated in a recent case in the Albert Court of Queen's Bench.  A builder constructed a "show home" on a lot in a development, relying on a contract that said the developer had to transfer title in the lot to the builder once construction of the show home began.  All of the lots in the development were subject to a mortgage in favour of the Bank of Montreal.  The developer went into receivership without transferring title to the builder, although the builder had nearly completed the home.  The receiver sold the property, and it was agreed that the value of the home (as opposed to the lot itself) was in excess of $140,000.  This amount was placed in a trust account until entitlement to the proceeds could be determined in court.

 

The court concluded that the Bank's registered mortgage had priority over the unregistered equitable interest claimed by the builder based on unjust enrichment: Bank of Montreal v. 1323606 Alberta Ltd., 2013 ABQB 596.

 

The builder, Coco Homes Ltd., claimed an equitable interest in the proceeds, arguing that if the money went to the Bank it would be acquiring the benefit of the construction work without paying anything for it; essentially, an unjust enrichment argument.  Coco also relied on s. 69 of the Law of Property Act, RSA 2000, c. L-7, which creates a statutory lien in favour of someone who has made a lasting improvement to land in the belief that he owned it.

 

The Bank's case was based on s. 203(2)(a) of the Land Titles Act, RSA 2000, c. L-4.  Section 203 states that anyone dealing with a transfer, mortgage, or other interest in land is not bound by a trust or other interest in the land unless it is registered in the Land Titles system.  In addition, section 203(2)(b) provides that a party dealing with the land is unaffected by any notice of a trust or other unregistered interest in the land or by any rule of law or equity that might create an interest in the land.

 

Madam Justice Topolniski considered the public policy basis for the Torrens system, stating that the certificate of title "...is designed to meet a simple policy goal - to provide a clear, definitive mechanism to evaluate the status of land".  The objective of the system is to save purchasers and mortgagees the trouble and expense involved in going behind the register in order to investigate the validity of the owner's title.

 

The judge acknowledged that a Torrens system can impose hardships, noting that the legislation provides for compensation for those who suffer a loss out of an assurance fund.

Relying on decisions of the Supreme Court of Canada and the Ontario Superior Court, Justice Topolniski concluded that the legislation was a complete bar to the homebuilder's claim.  Under a Land Titles system, an unregistered interest has no effect on the registered title of a purchaser for value: United Trust Co. v. Dominion Stores Ltd., [1977] 2 S.C.R. 915.  Section 203 of the Act "represents an unequivocal abrogation of the doctrine of actual notice in Alberta such that, absent fraud, an unregistered interest cannot under any circumstances trump a registered interest.": Romspen Investment Corp. v. Edgeworth Properties, 2012 ONSC 4693.  The effect of s. 203 of the Land Titles Act is to extinguish Coco's claim, whether it arises out of common law, equity, or statute.

With respect to the argument under s. 69 of the Law of Property Act, the judge concluded that granting priority to an unregistered interest would defeat the intent of the legislature in adopting the Torrens system.  Section 69 applies where a person improves someone else's land "under the belief that the land was the person's own".  Although Coco had a contractual right to a transfer of title, it could not have held an honest belief that it owned the land at the time the developer went into receivership, so the claim under s. 69 failed.

Coco argued that the Bank could not take title to the improvements under the Nemo Dat rule (nemo dat quod non habet, or "no-one gives what he doesn't have").  Since the developer had not paid for the improvements, it didn't own them and couldn't mortgage them to the Bank.  The judge rejected this argument because fixtures permanently attached to the land become part of the land.

Finally, the court rejected the constructive trust argument, citing Supreme Court authority stating that a constructive trust cannot apply to the prejudice of a third party: Soulos v. Korkontzilas, [1997] 2 S.C.R. 217.

Although the outcome may seem like a windfall for the Bank, which did not finance the construction of the model home, on reflection it is fair.  The homebuilder was free to search title prior to starting work, and would have been aware that the lot was subject to a mortgage in favour of the Bank.  Coco could have insisted that the developer make arrangements to have the mortgage discharged before it built the home, and could have stopped work as soon as it became clear that the developer was not going to transfer title.

It is in the public interest that there should be a searchable registry available that provides an interested party with a complete picture of the state of title, so that people who buy, sell, and mortgage property know where they stand when they enter into a transaction.  As the judge determined, the legislature intended to provide such a registry when it created the Land Titles system, and giving registered interests priority over unregistered claims based on trust or statute is a necessary consequence.

Bank of Montreal v. 1323606 Alberta Ltd., 2013 ABQB 596

Contact Richard Hayles at Billington Barristers:

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Any legal information provided is general in nature and may not apply to particular situations. It does not constitute legal opinion or advice. Please consult your lawyer regarding your specific legal issue.

When Is a Settlement Not a Settlement?

     The Alberta Court of Appeal

Settlement agreements often contemplate formal documentation that is to be prepared and executed later, most commonly a release "in a form satisfactory to counsel".  What happens if the form of the release proposed by one party's lawyer is not acceptable to counsel for the opposing party? That was the issue in Tessier v. City of Edmonton, a recent decision of the Alberta Court of Appeal.

 

The Settlement Discussions

 

This was an expropriation case.  During a break in the hearing before the Alberta Land Compensation Board, counsel for the property owners telephoned the lawyer for the City and offered to settle for $650,000, plus an additional amount of money that had been agreed previously.  Legal and expert fees were to be subject to a later negotiation.  Counsel for the City called back a few minutes later and, upon receiving confirmation that the owners would sign a release, accepted this proposal.

 

These terms, including the provision for a release, were confirmed later that day in an email from the City's lawyer to counsel for the owners.  On resumption of the hearing the following day, the lawyer for the owners advised the Board that the dispute had been settled, and asked that the case be adjourned subject to the execution of final documents and the payment of funds.  Two days later, however, the owners' lawyer told the solicitor for the City that his clients did not want to proceed with the settlement.  Counsel for the City took the position that a settlement had been concluded and sent opposing counsel a draft release.  In a letter the following day, the City's lawyer enclosed cheques for the settlement funds, to be held in trust pending execution and return of the release and the filing of a discontinuance with the Board.

 

Decision of the Board

 

The City applied to the Board for a determination as to whether or not there was a settlement.  When the lawyer for the owners was called as a witness, he testified that there was a settlement that had to be "papered".  The release he received from opposing counsel was typical of those he had previously negotiated with the City, except it had no confidentiality provision.  The Board ruled that there was a binding settlement, and the owners appealed to the Court of Appeal.

 

Decision on Appeal

 

The Court stated that the issue on appeal involved questions of contract law outside the Board's specialized expertise, so the standard of review was correctness.

 

The owners argued that the City's acceptance of the $650,000 offer was conditional because it contained additional terms that were set out in the release and the letter imposing trust conditions.  This was a counteroffer, and there was no deal as the counteroffer was never accepted.

 

The Court of Appeal rejected these arguments.  A settlement is a contract, and the contract is formed when the parties agree on the essential terms.  Once there is an agreement on essential terms, one party can tender a release on trust or escrow conditions without rescinding the agreement.  Although in some cases there will be a dispute over the terms of the release or the escrow conditions, that didn't happen in this case as the owners disavowed the settlement before the draft release was delivered.  In this situation, proffering a release or imposing trust conditions could not amount to a counteroffer.

 

In this case, it seems that the Board and the Court of Appeal were both influenced by the fact that the owners tried to back out of the agreement before the draft release was tendered, and that the objections to the release appeared to be an attempt to justify this after the fact.

 

Settled Law on Settlements

 

What if there is a genuine dispute over the terms of the release? These documents can be lengthy and complex, and are often the subject of much back-and-forth negotiation between counsel for the parties.  If counsel cannot reach an agreement about the terms of the release, is the settlement dead? Or can the court approve a release that the parties will be required to sign?

 

This issue has been the subject of previous litigation.  In Tessier v. Edmonton, the Court of Appeal referred to Fieguth v. Acklands Ltd., a 1989 decision of the British Columbia Court of Appeal.  The principles are well-established in the case law:

 

(1)     The question of whether or not a case has been settled is to be resolved by the application of the rules of contract formation;

 

(2)     Once there is an agreement on essential terms, the settlement is a binding contract;

 

(3)     A settlement implies an obligation to furnish a release, and if an action is outstanding, a consent dismissal as well;

 

(4)     A proposal to discontinue an action, with nothing more, does not amount to an offer to settle the underlying claim, so a release is not implied and need not be provided;

 

(5)     Settlement includes an implied right to a simple release of the claim that is the subject of the litigation, but unusual or additional terms, such as indemnity provisions, are not implied and have to be specifically agreed;

 

(6)     Once the parties agree on terms of settlement a contract has been formed, and this stage must be distinguished from later actions directed towards the execution or implementation of the settlement contract, such as the payment of funds or the proffering of a release;

 

(7)     Once the essential terms are agreed, subsequent conduct relating to the payment of funds, imposition of escrow terms, or the exchange of concluding documents in draft form will not vitiate the settlement unless one party goes so far as to repudiate the settlement agreement by refusing to carry out its terms;

 

(8)     In order to amount to repudiation, the conduct must constitute an unequivocal refusal to perform the contract, the equivalent of frustration or rescission of the contract;

 

(9)     If counsel cannot agree on a release, either party can apply to the Court for an order enforcing the settlement, which would include an order approving the release;

 

(10)    If there is an actual repudiation, the opposing party has the option of accepting the repudiation, which voids the settlement.  The litigation would then proceed as if there never was a settlement agreement.

 

Guy Tessier and Vanna Tessier v. City of Edmonton, 2013 ABCA 308

 

Contact Richard Hayles at Billington Barristers:

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Any legal information provided is general in nature and may not apply to particular situations. It does not constitute legal opinion or advice. Please consult your lawyer regarding your specific legal issue.



No Juries For Insurance Misrepresentation Cases

     Does trial by jury lead to chaos in the courtroom?

In a decision released Friday, the Alberta Court of Appeal denied the plaintiff's application for a jury trial in a life insurance claim: Coulter v. Co-operators Life Insurance Company.  The two Justices in the majority agreed that the insurer's misrepresentation defence was a claim for equitable relief which cannot be tried by a jury.  The dissenting Justice, who characterized the misrepresentation defence as statutory rather than equitable, would have permitted a jury trial.

The Misrepresentation Defence

 

The life insured was a long-time policyholder with Co-operators who applied for additional coverage less than two years before his death.  After investigating the claim, Co-operators paid the benefit on the original policy, but denied the additional benefit, taking the position that it was entitled to void this coverage as the life insured had misrepresented important facts on the recent application.  Co-operators relied on ss. 652 and 653 of the Alberta Insurance Act, R.S.A. 2000, c. I-3, which state that misrepresentation of a material fact in the life insurance application renders the coverage voidable by the insurer within the first two years after coverage takes effect.

 

The Alberta statutory provisions are derived from uniform life insurance legislation, and similar provisions are in effect in all the common law provinces and territories of Canada.

 

When the beneficiary sued, Co-operators raised the misrepresentation issue in its statement of defence, citing the Insurance Act provisions.  The defendant was content to defend on this issue, and did not counterclaim for rescission of the insurance contract.  The beneficiary applied for a jury trial, but this application was denied by the Chambers Judge, who directed that the trial should proceed by judge alone.

The Majority Decision
 

In the majority opinion, Mr. Justice Cote referred to the historical distinction between the common law courts and courts of equity.  In civil cases, the common law courts could award damages for breach of contract and other legal wrongs.  A broader range of remedies was available in the equity courts, including specific performance and declaratory relief.  Jury trials were available in the common law courts, but not in the courts of equity, where cases were decided only by judges.

 

Although the two courts are now joined into one, the distinction between common law and equity remains, and juries are not permitted in cases in which equitable relief is claimed.

 

There was no dispute that the plaintiff was claiming damages for breach of the insurance contract, and that this was a common law claim.  According to Mr. Justice Cote, however, the defence raised by Co-operators was essentially a claim for rescission of contract.  This was an equitable remedy, and since common law courts are restricted to damages, a jury could not decide the misrepresentation question.  The Chambers Judge was therefore correct in denying the application for a jury trial.

 

Justice Cote was careful to point out that although the reasons for denying the plaintiff a jury trial may seem to be based on a technical historical distinction, there are sound policy reasons for restricting equitable relief to judges.  Equitable remedies are discretionary.  In exercising their discretion judges are guided by previous cases, and by principles established in maxims such as "Delay defeats equities", and "He who seeks equity must do equity".  In the view of Mr. Justice Cote, the distinction between the principled exercise of a discretion and "mere sympathy or fairness" would be "almost impossible" to explain to a jury.  These cases are therefore unsuited to trial by jury.

 

In a claim for breach of contract or tort, on the other hand, the judge instructs the jurors that they must award damages if they conclude that the evidence supports certain findings of fact; there is no discretion involved.

The Dissent

 

In his dissenting judgment, Mr. Justice O'Ferrall seemed to accept that equitable claims involving the exercise of discretion are unsuited to trial by jury; in his view, however, the insurance company was not claiming equitable relief at all.

 

"Rescission" was not specifically pleaded.  In its statement of defence, Co-operators said that it was entitled to "void the policy" by virtue of the Insurance Act provisions.  This was a statutory defence rather than an equitable claim, and "What the jury would be asked to do in this case is determine whether or not the insured ... made a misrepresentation with respect to a fact or facts material to the insurance."  In his opinion, this was the kind of factual question that juries are especially well qualified to decide.  There is a presumption in favour of the right to trial by jury, which should be respected.

 

For the majority, however, Mr. Justice Cote pointed out that the Insurance Act provisions did not purport to displace the role of equity or replace the equitable remedy of rescission of contract.  The statute did not provide a comprehensive code for misrepresentation cases, such that it could be concluded that the legislature intended to occupy "the whole field" and do away with the role formerly carried out by courts of equity.

A View From the Bleachers

 

Justice Cote is right to prefer a principled or policy-based approach over reliance on the historical accident of the division between equitable and common law courts.  Where legal issues are more important to the case than factual issues, judges have an extensive knowledge of the law that jurors lack.  Jurors, on the other hand, are just as qualified as judges to decide whether or not a witness is lying, or to assess evidence and make findings of fact.

The jury is an important institution in our society.  Justice is delivered by members of the community who can bring a diversity of background and experience to the courtroom, rather than by a judicial "expert" with extensive, but perhaps narrow, training in one area (the law).  The jury introduces a populist, democratic element into our system of justice.  Trial by jury is a long-standing right that should only be taken away for cogent reasons.

It is conventional wisdom that an insurance company never wants to face a jury.  The man in the street will always be blinded by sympathy and emotion, it is thought, and will side with the individual plaintiff over the big, impersonal corporation every time.

This is not necessarily the case.  Several years ago, defence-side insurance lawyers in Ontario began to serve jury notices routinely in personal injury cases, believing that their clients would be better served by the practical, common-sense approach of jurors.  Whether to seek a jury trial is a question that both plaintiff and defence counsel should ask themselves in every case; it is a strategic decision that depends on more than just the sympathy factor.  A precedent that denies the life insurance beneficiary her claim to a jury trial cuts both ways, as insurers will not be able to put their defences to juries in future cases.

What about the Coulter case? Although it is easy to see how the discretionary aspects of certain equitable remedies, such as injunctions and specific performance, might be difficult for jurors without any legal training, it is unclear how equitable principles or maxims could come up in a misrepresentation case.  The issue is whether or not the insured misrepresented important facts on the application.  This is something a jury can decide.  Since the conduct of the insurance company is not in issue, maxims like "He who seeks equity must do equity" or "He who comes to equity must come with clean hands" don't have any bearing.  Delay is not a factor, as the insurer can only raise non-fraudulent misrepresentation within the two year incontestability period established by the insurance legislation.

 

The availability of jury trials in misrepresentation cases should be based on a pragmatic assessment of the real issues in the case, and not on the somewhat arbitrary fact that "rescission" of contract is historically a remedy granted by courts of equity.

 

Coulter v. Co-operators Life Insurance Company, 2013 ABCA 295

 

Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

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Any legal information provided is general in nature and may not apply to particular situations. It does not constitute legal opinion or advice. Please consult your lawyer regarding your specific legal issue.

Zoning Error No Bar to Sale of Business

    The purchaser learned the business
    wasn't zoned for a dry cleaning facility

 

Chang Lee agreed to buy a Toronto dry cleaning business.  Although the business had been in operation for more than 15 years, neither the purchaser nor the vendor knew that the City had changed the zoning two years before the date of sale, and that the location was no longer zoned for the operation of an on-site dry cleaning facility.  Could Mr. Lee get out of the deal? The Ontario Court of Appeal said no.

 

The decision contains a concise summary of the law on mistake in contracts, covering mutual mistake, common mistake, and equitable mistake.  This area of law can be confusing.  It often seems that the rule is that a mistake doesn't get you out of a contract, except when it does.  This well-reasoned decision of the Court of Appeal shows how the policy basis for the law should determine the application of the doctrine in specific situations.

 

The Zoning Change

 

The parties negotiated an agreement of purchase and sale through a real estate broker using a standard form provided by the Ontario Real Estate Association.  Mr. Lee was to buy all the assets of the business, including the lease, goodwill, and trade name, for $340,000.  Neither Vendor nor Purchaser consulted a lawyer until after the agreement had been signed.

 

The contract contained an "entire agreement" clause stating that there were no representations, warranties, or conditions other than those expressed in the agreement itself.  The only reference to zoning was a clause stating that the parties weren't relying on the broker for information on zoning, and that they had been told to seek professional advice.

 

The business had been operated as a dry cleaning plant continuously since 1995.  The Vendor acquired it in 2005, and had obtained a license every year from the City authorizing the operation of a dry cleaning business.  Apparently the business license was renewed at least once after the change in zoning.  Although the City had given notice of the change as required by statute, the Vendor was unaware of the change and the topic of zoning never came up during the negotiations.

 

Summary Judgment

 

The case was decided on a summary judgment motion.  The motion judge considered mutual mistake, where each party is mistaken about a different matter and there is no contractual consensus, as well as the doctrine of common mistake, where the parties share an erroneous assumption about a fundamental fact.  She concluded that there was a common mistake that "the property was properly zoned, such that the dry-cleaning business was a permitted use."

 

The motion judge also concluded that Mr. Lee was entitled to relief on equitable grounds.  Although equitable mistake seems to have been abandoned by courts in England after the 2003 decision of the Court of Appeal in Great Peace Shipping v. Tsavliris Salvage, [2003] Q.B. 679, this decision has not yet been adopted in Canada.  In equity, a contract can be set aside where the parties are under a common misapprehension as to a fundamental fact and the party seeking to avoid the contract is not at fault.  The motion judge found that the Vendor would be unjustly enriched if the deal went through, as the purchase price was based on a shared belief that the location was properly zoned.

 

The Court of Appeal Decision

 

The decision of the Court of Appeal was delivered by Strathy, J.A.  He concluded that the motion judge had made three errors:

 

(1)   She made a palpable and overriding error in the assessment of the evidence when she found that the parties both assumed that dry cleaning was a "permitted use";

 

(2)   She erred in law by putting the onus on the Vendor to show that the business could continue to operate as a dry cleaners, when the onus should have been on the Purchaser to show that it could not;

 

(3)   She erred in law by putting the risk of mistake on the Vendor, when under the principle of caveat emptor it should have been on the Purchaser.

 

The decision turns on a principle in zoning law called the doctrine of "legal non-conforming use".  A change in zoning law does not prevent a property from being used for a particular purpose where that use was legal at the time of the change, so long as the property continues to be used for that purpose.

 

Although dry cleaning was no longer a "permitted use" after the change in zoning, it was likely still a "lawful use" in that the Purchaser would be able to continue that use as a legal non-conforming use.  The parties shared a lay person's understanding that the Purchaser would be able to operate the business as it had been operated by the Vendor.  If the Purchaser had a more technical understanding of the difference between a permitted use and a use that could be lawfully continued, his mistake was unilateral.  If he shared the Vendor's belief that the use could be continued, this was not a mistake unless it could be shown that the business could no longer operate as a dry cleaner.  This is where the onus of proof becomes an issue.

 

In response to an inquiry from the Purchaser's lawyer just before closing, the City had advised that dry cleaning was not a permitted use, but took a neutral stand on whether it constituted a legal non-conforming use.  No-one had applied to the City for that determination.  The motion judge said there was no evidence that the City would allow the current use to continue.  In doing so, she put the onus on the Vendor to show that the use would be allowed by the authorities.  Since the Purchaser was a Plaintiff seeking to rescind the contract, the onus was actually on the Purchaser to demonstrate that the use could not be continued.  In the absence of any evidence, the Purchaser had failed to establish this part of his case.

 

Strathy, J.A. also pointed out that the law of mistake could not be used to transfer contractual risk from one party to another.  The Purchaser had not insisted on making the contract conditional on zoning, although there were other conditions in the contract and zoning conditions are often inserted in such agreements.  The contract contained an acknowledgement that the parties had been urged to obtain independent advice on zoning.  By signing the agreement without any zoning conditions, and by failing to obtain independent confirmation of the zoning, the Purchaser had assumed this risk.

 

Placing the risk of zoning problems on the Purchaser is also consistent with the principle of caveat emptor, under which the buyer is expected to inquire into risks associated with the transaction.

 

For the same reasons, equitable mistake could not assist the Purchaser.  Relief in equity is only available where the Plaintiff is not at fault.  Mr. Lee was at fault in that he had failed to take reasonable measures to protect himself, either by investigating the zoning or by negotiating a warranty with respect to the use.

 

Analysis

 

The law of mistake in contracts seeks to reconcile two competing values.  On the one hand, the economy will function better if business people can be sure that contracts will be enforced as written.  Thus the law favours certainty.  On the other hand, fairness seems to require that a contract should be set aside where the parties' agreement is based on a set of facts that turn out to be untrue.

 

The decision of Strathy, J.A. illustrates how the courts balance the values of certainty and fairness by putting limits on the scope of the doctrine of contractual mistake.  The mistake must be mutual.  It must involve facts that are fundamental to the contract.  The onus is on the Plaintiff to show that there was a mistake.  The doctrine of mistake cannot be used to reallocate a risk that one party assumed in the contract itself, or to reverse the rule of "let the buyer beware".  Mistake does not assist someone who failed to conduct an investigation before signing the contract, or to insert standard provisions into the contract that would have protected his interests.

 

It is unclear why the parties to this case did not seek a ruling that the continued operation of a dry cleaning facility was a legal non-conforming use; this could have saved a lot of time and legal costs.

 

Query: shouldn't a standard form agreement for the purchase of a business contain a provision dealing with zoning? A clause stating that the Vendor warrants that the current use can be continued could be deleted in transactions where it doesn't apply.

Lee v. 1435375 Ontario Ltd., 2013 ONCA 516

 

 

 Contact Richard Hayles at Billington Barristers:

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Supreme Court: Disqualification Is Not the Only Remedy for Law Firm Conflict of Interest



    The Supreme Court of Canada

McKercher LLP is a substantial law firm in Saskatchewan.  The Canadian National Railway Company retained McKercher from time-to-time on a variety of matters, and as of late 2008, McKercher was representing CN on three files: a personal injury claim, a real estate acquisition, and a receivership.  In that same time frame McKercher accepted a retainer to act against CN in a class action claiming that CN had overcharged farmers in Western Canada for the transportation of grain.
 

McKercher did not inform CN that it planned to initiate the action on behalf of the class.  The law firm hastily terminated its existing CN retainers before serving CN with the statement of claim in the class action, claiming $1.75 billion.  This was the first notice that CN received that McKercher was acting in a class action against CN.  CN applied for an order removing McKercher as solicitor of record for the class action plaintiffs, claiming conflict of interest, and the motion judge granted the order.  This decision was reversed by the Saskatchewan Court of Appeal.
 

A further appeal to the Supreme Court of Canada raised two issues: (1) can a law firm act against a current client on a matter unrelated to the client's existing files? (2) if not, does the firm's conflict of interest result in automatic disqualification, or should alternative remedies be considered?

The "Bright Line Rule"
 

In a decision released July 5, the court found that McKercher was in a conflict position, invoking the "bright line rule" from its earlier decision in R. v. Neil, 2002 SCC 70, [2002] 3 SCR 631.  Under the bright line rule a law firm cannot represent clients adverse in interest without first obtaining the clients' consent, even if the two matters are unrelated.
 

In its ruling in the McKercher case, the Supreme Court emphasized certain important aspects of the bright line rule.  The rule is based on a fiduciary's duty of loyalty.  It assumes that conflict of interest is inherent and inescapable in certain situations.  For that reason the rule cannot be rebutted or attenuated.
 

The scope of the rule is limited, however.  It only applies where the immediate interests of the client are directly adverse in the two matters.  It applies only to the client's legal interests, as opposed to business or strategic interests, so the rule is not triggered where the firm accepts a retainer on an unrelated matter from a company that is a business competitor of another client.  It should not be raised as a tactic in an effort to disqualify the law firm when the client has no real concern that its interests will be adversely affected (the Court suggested that an institutional client would not be permitted to abuse the rule by retaining a single lawyer in one office of a national firm, expecting that this would disqualify all other lawyers with that firm from acting against the client).  It does not apply in circumstances where it is unreasonable for the client to expect that the firm will not act against it in unrelated matters.  For instance, it is accepted practice that lawyers who handle work for "professional litigants" such as governments, banks, and other large institutions may act against these clients in unrelated matters.

 

The decision of the Court was delivered by Chief Justice McLachlin, who said that McKercher's concurrent representation of CN and the class action plaintiff "fell squarely within the scope of the bright line rule."  The legal interests of CN and the Western farmers who made up the class were adverse.  CN was not trying to abuse the rule, and it was reasonable for CN to expect that its lawyers would not act for plaintiffs that were suing CN for $1.75 billion.
 

McLachlin, C.J. went on to find that McKercher was in breach of other duties.  A law firm has a duty of commitment to its client's cause, and should not summarily drop a client in order to avoid a conflict of interest.  The firm also owes its client a duty of candour and is required to advise the client of any developing matters that could effect the retainer.  The failure to advise CN of its intention to act for the class action plaintiff constituted a breach of this duty of candour.

The Disqualification Remedy
 

Disqualification from acting in the pending litigation is the normal remedy when a law firm is in breach of the bright line rule, and this is the remedy that the motion judge had granted to CN.  The Court recognised that disqualification is not always appropriate, however, and sent the case back to the motion judge for a determination of the proper remedy.
 

The Courts exercise a supervisory jurisdiction over the administration of justice.  This includes an inherent jurisdiction to remove law firms as solicitors of record in pending litigation.  The factors that militate in favour of disqualification are: (1) the potential for the misuse of confidential information; (2) the risk of compromised or impaired representation; and (3) the need to uphold the integrity and reputation of the administration of justice.
 

McLachlin, C.J. was of the view that there was no potential for the disclosure or misuse of confidential client information in the instant case.  There was no prior or current retainer giving McKercher access to confidential information that would be directly relevant to the claim brought by the Western grain farmers.  The motion judge concluded that McKercher, by virtue of its involvement in previous CN litigation, had acquired a unique understanding of the strengths, weaknesses, and attitudes of CN with respect to litigation, and that this general knowledge was confidential information.  The Court of Appeal, on the other hand, said that a general understanding of CN's litigation strengths and weaknesses did not constitute confidential information.  The Supreme Court seems to have accepted this view, as the Chief Justice concluded that there was no confidential information at risk.
 

Since McKercher's other CN retainers had been terminated, there was also no concern that McKercher would fail to provide CN with strong representation in the concurrent matters out of a desire to favour its new clients.  The only remaining concern, then, was whether or not allowing McKercher to continue to act for the class would damage the integrity and reputation of the administration of justice.
 

Where there is a need to protect confidential information, or a risk of impaired representation, Madame Justice McLachlin said that disqualification is generally the only suitable remedy.  In cases where the concern is the protection of the reputation of the justice system, disqualification may be required in order to send a message that the law firm's disloyal conduct is condemned by the courts; this is not, however, necessary in every case.
 

In cases involving the protection of the integrity of the judicial system, factors that may point in another direction include: (1) delay in bringing the motion for disqualification; (2) prejudice to the new client's ability to retain counsel of choice; (3) difficulty on the part of the new client in finding alternative counsel; and (4) the fact that the law firm acted in good faith, reasonably believing that acceptance of the new retainer did not breach the bright line rule or law society conflict regulations.  Since these issues were not before the motion judge, and there was no evidence on these points, and it was necessary to remit the remedy question to the lower court.

Up to now, lawyers might have thought that a finding of conflict of interest would automatically result in disqualification.  It is understandable that the Supreme Court would want to allow flexibility in the area of remedies; disqualification is a blunt instrument that cannot suit every case.  If a firm is disqualified, even early in litigation, new counsel will have to be retained and briefed.  This causes delay.  Some of the work that the former firm has done will have to be repeated by the new firm, and thousands of dollars in fees may be wasted and unrecoverable.  Although the Supreme Court ruling does not permit a litigant to use disqualification for purely tactical purposes, even when this is not the case disqualification constitutes a serious tactical disadvantage to the party that has to retain new counsel.  This party, the new client, has not done anything wrong, so there is always an element of unfairness when a litigant's counsel of choice is disqualified.

Although in principle remedial flexibility is a good idea, it is difficult to understand how it could be applicable in this case.  The fact that the bright line rule applies even when the two retainers are unrelated was established by the Court's decision in R. v. Neil in 2002, so it seems unlikely that the McKercher firm had a good faith belief that the new retainer fell outside the rule.  Certainly McKercher could not have been surprised when CN moved for disqualification.

In addition to the finding that McKercher was in conflict, there are also the findings that McKercher breached its duty of commitment by terminating the earlier retainers in order to get around conflict rules, and that the firm breached its duty of candour by failing to advise CN that it was putting together a massive class action against CN.  If the Court wants to send a firm message condemning this kind of conduct on the part of lawyers, this case would seem to support that message.  CN did not delay in bringing its motion, the class action litigation was then in an early stage, and the Western grain farmers ought to be able to find another Western firm that has the capacity to handle a large and complex class action lawsuit.

It seems improbable that any remedy but disqualification could be appropriate, but we will have to await the decision of the motion judge on the issue of remedy.
 

Canadian National Railway Co. v. McKercher LLP, 2013 SCC 39
 

Contact Richard Hayles at Billington Barristers:

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Court Upholds "Wind-Driven Rain Exclusion"

    A Little Rain Must Fall

You asked your broker to make sure you had good coverage for your business, so you figure you can focus on your customers now and shouldn't have to worry about high winds, rains, or ice storms.  Maybe you should think again.

Many commercial property policies exclude water damage to the interior of the building or building contents unless wind or hail creates an opening in an exterior wall, allowing rain or other precipitation to enter the building.  This type of exclusion, known as a "Wind-Driven Rain Exclusion", can be an unwelcome surprise to the business owner when rain seeps into the building during a storm.

That's what happened to Vernon and Judy Smith, Alberta farmers who returned from a summer vacation to find that the insulation and contents of their barn had suffered water damage.  There had been a heavy snowfall the previous winter, and according to an expert who examined the roof after the loss, the weight of a 4' accumulation of snow in March had loosened seams and fasteners in the metal roofing.  Damage to the building and contents from the rain in July amounted to some $70,000.

The barn was covered under a Farm Property Policy issued by Wawanesa.  That policy contained an exclusion for damage to the interior of the building caused by rain, "unless an opening in the roof or wall is made by wind or hail and the rain...enters concurrently through this opening".

The case was tried by Madam Justice Veit in Grande Prairie on the basis of an agreed statement of facts.  The judge relied on the established principles of interpretation applicable to insurance policies:

• the insurance company bears the onus of establishing that an exclusion clause applies;
• the insurer's burden of proof is on a balance of probabilities;
• the words in the policy are to be given their natural and ordinary meaning;
• exclusion clauses in insurance contracts should receive a narrow interpretation in favour of the insured;
• coverage provisions, on the other hand, are construed broadly;
• the court may consider the reasonable expectations of the parties, but only if that will help to resolve an ambiguity in the language of the exclusion clause.
  
  

The Smiths argued that the policy must be ambiguous, because they thought they would be covered for the kind of damage that occurred.  The judge pointed out, however, that the standard for ambiguity is not the subjective expectations of the insured, but the objective intention of the parties as determined by reading the policy as a whole.  Like any contractual language, the words in an insurance policy mean what an impartial bystander would think they mean.

Based on this objective or "reasonable man" test, the judge was unable to find any ambiguity.  There was therefore no basis to bring in evidence outside the contract, or to consider the expectations of the parties.

There was also no reason to invoke the contra proferentem doctrine and construe the policy against the insurance company.  This principle applies where there are two reasonable interpretations of the policy language; the court is to prefer the interpretation that advances the position of the insured over an interpretation that is in the interests of the insurance company.  Although the plaintiffs argued that the exclusion clause could have been written in a way that would make the meaning more clear, the possibility that different  wording might better convey the insurance company's intent didn't mean that there was ambiguity or that there were two possible interpretations.  Justice Veit concluded that she had to give effect to the plain language of the policy and reject the claim for interior damage.

The judge did not analyze the wording of the exclusion closely, but it is easy to see why she thought that the exclusion applied.  Although the loosening of the roof seams and fasteners might be construed as an "opening" in the roof, this damage was clearly caused by the weight of the snowfall in March and not by wind or hail.  Furthermore, the rainwater didn't  enter the building "concurrently" with the damage to the metal roof - the roof seams had been damaged in March, but the water penetrated the building in July.

The decision is in keeping with established insurance law.  Nevertheless, this kind of exclusion, as well as other common exclusions such as the exclusion of damage caused by overland flooding, do not meet the expectations of business and home owners who rely on insurance to protect them against weather-related disasters.

People don't have the time to read their policies and carefully and consider every clause that might limit coverage in the context of every contingency that could arise.  Insurance buyers are not insurance professionals; they lack the background and specialized knowledge to fully understand common policy provisions.  It is anomalous that documents created by insurance specialists are to be interpreted under a "natural and ordinary meaning" standard.   The words used in insurance policies and the way the policies are structured do not really have any equivalent in natural and ordinary communication.

Most business people place their insurance through brokers.  The broker has an obligation to inquire about the business, figure out what assets need to be protected, obtain appropriate coverage, and explain any exclusions or limitations in coverage.  If the insured could have purchased a policy without the exclusion, and the broker failed to recommend this or caution the insured about the effect of the exclusion, the insured may have recourse against his broker.

Smith v. Wawanesa Mutual Insurance Company, 2013 ABQB 369, http://www.albertacourts.ab.ca/jdb_new/public/qb/2003-NewTemplate/qb/Civil/2013/2013abqb0369.pdf

Contact Richard Hayles at Billington Barristers:

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Any legal information provided is general in nature and may not apply to particular situations. It does not constitute legal opinion or advice. Please consult your lawyer regarding your specific legal issue.