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February 2010
In this issue:
1. Firm Industry News
2. Fundamental Breach in Contract Eliminated
3. Legal Fees in a Simplified Rules Case
1. Firm and Industry News
2. Fundamental
Breach in Contract Eliminated
The Supreme Court of Canada has "laid to rest"
the doctrine of fundamental breach in Canadian contract law. Under
that doctrine, an innocent party could stop performing its obligations
under a contract if the other party had committed a breach that
was so "fundamental" that it denied the innocent party
of "substantially the whole" of the contract's benefit.
Even if the contract contained a clear and express "exclusion
clause" limiting liability, a fundamental breach allowed a
court to refuse to enforce this clause, thereby enabling the innocent
party to sue for damages that would have otherwise been excluded.
In Tercon Contractors Ltd. v. British Columbia
(Transportation and Highways), 2010 SCC 4 Province of British
Columbia issued a request for expression of interest ("RFEI")
for the design and construction of a highway. Six teams responded
with submissions including Tercon and Brentwood. A few months later,
the Province informed the six proponents that it now intended to
design the highway itself and issued a request for proposals ("RFP")
for its construction. The RFP set out a specifically defined project
and contemplated that proposals would be evaluated according to
specific criteria. Under its terms, only the six original proponents
were eligible to submit a proposal; those received from any other
party would not be considered.
The RFP also included an exclusion of liability clause
which provided: "Except as expressly and specifically permitted
in these Instructions to Proponents, no Proponent shall have any
claim for any compensation of any kind whatsoever, as a result of
participating in this RFP, and by submitting a proposal each proponent
shall be deemed to have agreed that it has no claim." As it
lacked expertise in drilling and blasting, Brentwood entered into
a pre?bidding agreement with another construction company ("EAC"),
which was not a qualified bidder, to undertake the work as a joint
venture. This arrangement allowed Brentwood to prepare a more competitive
proposal. Ultimately, Brentwood submitted a bid in its own name
with EAC listed as a "major member" of the team. Brentwood
and Tercon were the two short?listed proponents and the Province
selected Brentwood for the project. Tercon successfully brought
an action in damages against the Province.
The trial judge found that the Brentwood bid was,
in fact, submitted by a joint venture of Brentwood and EAC and that
the Province, which was aware of the situation, breached the express
provisions of the tendering contract with Tercon by considering
a bid from an ineligible bidder and by awarding it the work. She
also held that, as a matter of construction, the exclusion clause
did not bar recovery for the breaches she had found. The clause
was ambiguous and she resolved this ambiguity in Tercon's favour.
She held that the Province's breach was fundamental and that it
was not fair or reasonable to enforce the exclusion clause in light
of the Province's breach.
The Court of Appeal set aside the decision, holding
that the exclusion clause was clear and unambiguous and barred compensation
for all defaults.
The Supreme Court of Canada agreed on the appropriate
framework of analysis but divided on the applicability of the exclusion
clause to the facts. The majority found that the Province had breached
the tendering contract by entertaining a bid from an ineligible
bidder. Another majority of the Court found that the exclusion clause
did not bar the Tercon's claim for damages for the breaches of the
tendering contract. The exclusion clause, which barred claims for
compensation "as a result of participating" in the tendering
process, did not, when properly interpreted, exclude Tercon's claim
for damages. By considering a bid from an ineligible bidder, the
Province not only acted in a way that breached the express and implied
terms of the contract, it did so in a manner that "was an affront
to the integrity and business efficacy of the tendering process."
What is important in the decision is the establishment
of a framework of analysis when a claimant seeks to escape the effect
of an exclusion clause or other contractual terms to which it had
previously agreed. The first issue is whether, as a matter of interpretation,
the exclusion clause even applies to the circumstances established
in evidence. This will depend on the court's interpretation of the
intention of the parties as expressed in the contract. If the exclusion
clause applies, the second issue is whether the exclusion clause
was unconscionable and thus invalid at the time the contract was
made. If the exclusion clause is held to be valid at the time of
contract formation and applicable to the facts of the case, a third
enquiry may be raised as to whether the court should nevertheless
refuse to enforce the exclusion clause because of an overriding
public policy. The burden of persuasion lies on the party seeking
to avoid enforcement of the clause to demonstrate an abuse of the
freedom of contract that outweighs the very strong public interest
in their enforcement. Conduct approaching serious criminality or
egregious fraud are but examples of well?accepted considerations
of public policy that are substantially incontestable and may override
the public policy of freedom to contract and disable the defendant
from relying upon the exclusion clause.
In dealing with the elimination of "fundamental
breach of contract" and embracing the concept of freedom of
contract, Justice Binnie, writing for the Court stated:
...the principle is that a court has no discretion
to refuse to enforce a valid and applicable contractual exclusion
clause unless the [party seeking to avoid the exclusion clause]
can point to some paramount consideration of public policy sufficient
to override the public interest in freedom of contract and defeat
what would otherwise be the contractual rights of the parties.
In the future a party to a contract will no longer
be able to argue that it can circumvent a valid and applicable exclusion
of liability clause on the basis of an alleged "fundamental
breach" of the contract by the other party. Only if the party
seeking to avoid such a clause can identify some "paramount
consideration of public policy" or, as Justice Binnie later
terms it, "an overriding public policy" that outweighs
the very strong interest in enforcing contracts and their terms,
will the court oblige this request.
While the focus of Justice Binnie's analytic framework
pertains to exclusion clauses, he suggests that this category may
also include "other contractual terms", potentially signalling
that other valid and applicable contractual provisions that limit
parties' rights under a contract may be subject to the same analysis
as pure exclusion of liability clauses.
The Supreme Court's decision solidifies the enforceability
of clear and express exclusion clauses and other provisions that
limit liability under a contract. Given the "very strong public
interest in enforcement of contracts" affirmed by the Supreme
Court and the "narrow jurisdiction" that courts have to
override this freedom of contract on public policy grounds, it appears
that that the cases in which an otherwise valid and applicable exclusion
clause will not be enforced will be few and far between.
Rui Fernandes
3. The Ontario Superior Court Weighs In on the
Appropriateness of a Large Claim for Legal Fees in a Simplified
Rules Case
A recent ruling in the case of Southworks Outlet
Mall v. Bradley (2010) 10 O.R. (3d) 796 (Ontario Superior Court)
illustrates how the courts deal with two competing policy goals
in our court system: while, as a general rule, "costs follow
the event", there is often a practical limitation on how large
a costs award will be in the circumstances of any particular case.
The "costs follow the event" concept is
well known to litigation counsel and litigants in court cases. As
a general rule, the party who wins a lawsuit will be entitled to
a return of a significant portion of the legal costs expended in
obtaining the victory. This return may potentially be increased,
if the victorious party had submitted before trial a timely and
proper "offer to settle" to the other side, which reflected
a compromise with the "offering" party ultimately obtaining
a better result at trial than the earlier settlement offer. Many
will be familiar with these concepts, being a huge impetus towards
out of court settlements and 'zero based budgeting' towards trial:
there always should be confidence in the case, or a principled reason,
to go to trial to justify facing potential costs "exposure".
Of course, trials happen. Is there a limitation on
costs that will be awarded? What if a matter is not considered to
have been complex, or lengthy, but the winning party's claim for
costs is alleged by the 'losing party' to be disproportionate to
the case, and what it had reasonably assessed as being its costs
"exposure", if unsuccessful?
The Southworks Outlet Mall case provides some
guidance on how this costs exposure is to be assessed, and taken
into consideration by a litigant in the context of a 'Simplified
Procedure' case. As of the beginning of 2010, lawsuits commenced
in the Ontario Superior Court involving claims of less than $100,000
in terms of relief sought will be brought under the Simplified Procedure
regime. (Prior to the beginning of this year, the monetary limit
for Simplified Procedure cases was $50,000).
It should be noted that the goal of Simplified Procedure
cases is the attempt to expedite matters towards trial, with reduced
emphasis on procedural steps and resulting legal costs. Up until
this year, there were no examinations for discovery in Simplified
Rules cases. As of the beginning of 2010 there are now limited rights
to conduct oral examinations for discovery. In Simplified Procedure
cases a party may now ask questions on an examination for discovery
of up to a total of two hours duration. While this does not seem
like much, this is a welcomed development: the parties should be
able to keep the discovery costs somewhat 'in line', and in the
course of that time frame parties may be able to obtain certain
key facts or admissions to assist them in assessing the relative
strength or weakness of their case.
Southworks Outlet Mall v. Bradley
The plaintiff was successful in this lawsuit, which
involved two different court actions. One action was on a promissory
note. This involved the defendant both denying liability, as well
as bringing different "counter-claims" against the plaintiff
for relief in its own right. The other action involved grievances
arising from a landlord - tenant relationship. The trial of all
the matters lasted four days. The plaintiff recovered a total award,
including pre-judgment interest, of $87,805.12 in both actions.
The counter-claims were dismissed in the promissory note action.
The plaintiff sought the recovery for $121,965 in legal costs on
a "substantial indemnity" scale - that is, all of its
costs incurred on the matters, for the reasons set forth below.
Alternatively, the plaintiff sought the return of $83,610, being
the 'partial indemnity' standard calculation.
The Claim for Substantial Indemnity Costs
The successful plaintiff advanced the following arguments
in favour of its recovery of Substantial Indemnity costs - essentially
100 cents on the dollar - as opposed to the standard rule of recovering
'Partial Indemnity' or a scaled down amount of costs:
i) The Defendant [or at least one of them] "Misbehaved"
I mentioned above the fact that this "elevated"
scale of costs recovery is usually adopted with the interplay between
an offer to settle and the ultimate result at trial. The Court also
has the discretion to award such an elevated level of costs where
the other "paying" party is to be criticized or admonished
for unfavourable behavior in the lawsuit seen to have had the effect
of extending the litigation. The plaintiff alleged that there was
"reprehensible" conduct by the defendants giving rise
to the cause of action [the underlying conduct, resulting in the
litigation] and in the conduct of the lawsuit itself. Specifically,
one of the counterclaims advanced concerned what was ultimately
found by the Court to be a groundless attempt by one of the defendants
[in alleging sexual harassment] to avoid payment of a legitimate
debt due and owing the plaintiff. In this respect the Court ruled
that while litigation conduct like this must be discouraged, that
there was already sufficient disincentive built into the court process
- with the risk of an award of costs on a partial indemnity scale
- that such abuse by a litigant would not be of rampant concern
so as to cry out for 'general deterrence' with an award of substantial
indemnity costs. The facts of the case did not amount to "one
of those rare and exceptional ones in which the law requires the
use of a substantial indemnity award of costs to mark the court's
disapproval".
ii) The Defendants Engaged in Fraudulent Activity,
which should be Admonished
As a matter of simple principle [no doubt, in trying
to keep any costs award in line with the amount initially in issue,
regardless of what conduct came to pass] in a very terse reasons
for judgment the Court ruled that fraudulent activity on the part
of one or more defendants will not in and of itself entitle plaintiff
to the elevated position of recovering "substantial indemnity"
costs.
iii) The Offers to Settle
The plaintiff argued that it was entitled to a "substantial
indemnity" award on the basis of offers to settle that had
been sent to the defendant before trial. The plaintiff had on two
occasions delivered to the defendant an offer to settle both actions
for $35,000 plus costs. This offer was never accepted. It was met
with only a counter-offer for the payment of $10,000, inclusive
of costs. The Court applied the general rule that where an award
of damages at trial is manifestly more favourable to the plaintiff
than it was looking for in an earlier offer to settle, the plaintiff
should have most of its costs on a substantial indemnity basis.
Accordingly the Court then addressed whether the plaintiff should
recover its calculated demand for legal costs at 100 cents on the
dollar.
The Court noted however that in any circumstance -
including a case such as this calling for 'substantial costs' indemnity
that a costs award must be "fair, reasonable and in accord
with the reasonable expectations of the losing side". In this
regard the defendants complained that the costs sought of $121,965
were excessive in light of the plaintiffs total damages recovery
of $87,805.12. The Court agreed that the costs demand was something
patently 'out of whack', with the claim for the recovery of costs
exceeding the damage award by some 50%, and by virtue of the fact
that the two actions had proceeded under the Simplified Rules regime
of the court. The Court noted that, as concerns actions taken under
the Simplified Rules, that, "… that alone should reasonably
lower the expectations of the losing party as to the costs which
might be awarded".
The Court then looked to the fact that the issues
in the action were rather basic, involving the collection of a debt
evidenced by a Promissory Note, and the enforcement of a commercial
landlord's remedies. The Court cited concern for the successful
lawyer's billing rate in a case of this nature - being a senior
lawyer at a 'national law firm' - relative to the nature of the
claims and the amount of damages sought in the case.
The Court then reviewed the basic steps taken in the
case, and pared down the winning party's costs demands by an analysis
of the steps that were taken in the case, with what a 'reasonable
adversary' in the position of the losing defendant would have reasonably
expected to be subjected to in losing the case.
In the result, the Court reduced the plaintiff's cost
recovery to $50,000 from the overall demand for a costs recovery
of $121,965.
Conclusion
A couple of noteworthy items should be taken from
this decision.
First, litigants must accept that litigation involves
risk, not only in terms of the final result never being guaranteed,
but also that with a negative result there will generally be the
requirement to pay certain of the winning side's legal costs. Thus,
a healthy 'zero-base budget' approach must always be taken in determining
whether to take a case to trial.
The above said - and secondly - even where the decision
to take a matter to trial can be justified on the basis of tremendous
confidence, or with the need for an important precedent to be set
- the system will not countenance a 'damn the torpedoes' approach
in terms of the winning party seeking to recover exorbitant legal
costs. While the "Offer to Settle" regime is intended
to motivate settlement, and penalize to some extent those who turn
their backs on giving due credence to reasonable offers received
from an adversary, the court system, and in particular the Simplified
Rules regime, still vests in the Court a discretionary oversight
on the awarding of costs.
Gordon Hearn
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