Western Canada Business Litigation Blog

Supreme Court clarifies balance between deterrence and protection in securities class actions

Posted in Class Actions

On December 4, 2015, the Supreme Court of Canada (the “SCC”) issued its decision in Canadian Imperial Bank of Commerce v. Green, 2015 SCC 60. In the highly anticipated decision, a deeply divided Court rendered their reasons for a trilogy of appeals that arose from securities class action cases against CIBC, IMAX Corporation, and Celestica Inc. In each case the plaintiff respondents sought damages under the common law tort of negligent misrepresentation as well as under the new statutory cause of action found at s. 138.8 of the Ontario Securities Act (the “OSA”) in respect of shares trading in the secondary market. In split decisions, the SCC dismissed the appeals of CIBC (4-3) and IMAX (4-3) and allowed the appeal of Celestica (4-3).

The CIBC decision clarifies two key issues in relation to commencing securities class actions that seek damages for alleged secondary market misrepresentations. The first issue relates to the appropriate limitation period for commencing such claims, as it was previously unclear whether the three-year period extended until the application for leave (or permission to advance the claim) was filed or until permission was granted. The second issue clarifies what standard is required for a court to grant a plaintiff leave to proceed with a claim for damages under the secondary market provisions found in the OSA.

Limitation Period: Clarifying the Confusion

The SCC found that Part XXIII.1 of the OSA was drafted as a comprehensive scheme and was therefore intended to work harmoniously with s. 28 of the Class Proceedings Act (the “CPA”). The purpose of s. 28 CPA is to suspend the limitation period in order to protect potential class members until the feasibility of the class action is determined. Accordingly, the SCC held that the Ontario legislature drafted the OSA to strike a delicate balance between efficiency and fairness for various market participants. To interpret the OSA otherwise, as the Ontario Court of Appeal had in their decision in the instant cases, would frustrate the legislative structures and their purposes at issue in these appeals.

Consequently, the SCC held that while the three-year limitation period is only suspended once the plaintiffs obtain leave to proceed under s. 138.8 OSA, the recent changes to the law indicate a need for judicial discretion and interpretation in determining the trio of cases. In July 2014 the Ontario legislature amended the OSA in order to clarify that the limitation period is suspended when a notice of motion seeking leave to proceed is filed in court, not when leave is granted. As these clarifying amendments were enacted while these three cases were before the courts, the SCC allowed claims to proceed against CIBC and IMAX through the court’s inherent jurisdiction to issue orders nunc pro tunc, a remedy which allows the court to “backdate” to a time prior to the expiry of the limitation period. This remedy was not available in Celestica, as leave had not been filed prior to the expiry of the limitation period and thus the limitation period would not have been suspended.

Given the legislative amendments to the OSA, future claims under Part XXIII.1 will not face the previously strict interpretation of the three-year deadline. As such, it is unlikely that this element of the SCC’s decision will have any major impact on future securities class action cases.

Leave Requirement: Reasonable and Realistic

Though divided on the issue of limitation periods, the SCC unanimously held the threshold that must be met by a plaintiff applying for leave under s. 138.8 OSA requires only a reasonable or realistic chance that the action will succeed. This decision affirmed the SCC’s prior ruling in Theratechnologies inc. v. 121851 Canada inc., which set a reasonably low bar for leave and certification of class actions. Though Theratechnologies was on appeal from the Quebec Court of Appeal and was based in Quebec’s Securities Act, the SCC noted that there is no difference in language between Quebec’s Act and the OSA. For this reason, the same threshold test for granting leave will apply in other common law provinces that have similar legislative schemes, as does British Columbia (see s. 140.8 Securities Act).

By reaffirming a low threshold to attain leave, the SCC has provided more certainty for statutory securities actions in common law provinces. As a result, the SCC’s decision signals that investors will have greater access to bring claims for alleged misrepresentations.

Out-of-Province Class Actions go to the Supreme Court of Canada

Posted in Class Actions

On November 5, 2015, the Supreme Court of Canada (the “SCC”) granted leave to appeal in two related cases: Endean v. British Columbia, 2014 BCCA 61, and Parsons v. Ontario, 2015 ONCA 158. The resolution of these two cases will shape the scope of inter-jurisdictional coordination for national class actions in Canada by determining whether or not provincial judges may sit outside their own jurisdiction when supervising a settlement in a national class action.

These cases stem from multi-jurisdictional claims pertaining to individuals infected with Hepatitis C by the Canadian blood supply between 1986 and 1990. Separately, these claims were certified as class proceedings in the provinces of British Columbia, Ontario, and Quebec. In 1999 the class proceedings culminated with the signing of a national settlement agreement. The Supreme Court of British Columbia, the Superior Court of Justice for Ontario, and the Superior Court of Quebec were each assigned a supervisory role over the implementation and enforcement of this settlement agreement. Included in the settlement agreement is the condition that any court order issued by one of the aforementioned courts, would only take effect upon materially identical orders being issued by the other two courts.

Such a condition created problems with the coordination of the settlement agreement between the three jurisdictions. This was exemplified in 2012 when class counsel sought an extension to the time allotted for making a claim for compensation. To help facilitate this application, class counsel proposed a single hearing before the three supervisory judges at one location – the proposed location was Alberta, a neutral jurisdiction in this matter. Doing so would have avoided hearing separate motions in each of the three provinces. In response, the Attorneys Generals of the respective provinces objected to their judges sitting outside their territorial boundaries.

As a result, class counsel sought direction from the courts in all three of the provinces. In separate decisions, two of the three courts held that the inherent jurisdiction of the courts permitted judges to sit outside their territorial jurisdiction if the court had personal and subject matter jurisdiction over the parties and the issues to the proceeding.

The first court to hold that judges were permitted to sit outside the territorial boundaries of their court was the Ontario Court of Appeal in Parsons. Here the Court considered whether Ontario judges had jurisdiction to sit outside the territorial boundaries of the province of Ontario. The Court held that a judge of the Ontario Superior Court may participate in joint motions outside of Ontario when supervising a settlement agreement in a national class action.

In Quebec, the Superior Court of Quebec in Honhon v. Canada (Procureur general), 2013 QCCS 2782, held the same result as the Ontario Court of Appeal in Parsons.

However, the British Columbia Court of Appeal did not follow this line of authority and, instead, applied the English common law rule that prevented judges from sitting outside of England. The Court held that British Columbian judges have no jurisdiction to conduct hearings outside the province of British Columbia by reasoning that allowing judges to do so would endanger the open courts principle. The Court went on to state that if this principle is to be contravened, it is for the legislature to authorize.

Following these decisions, there now stands conflicting authorities on the question at issue. As a result, the Ontario and British Columbia decisions have been appealed with leave to appeal to the SCC granted. Whether the SCC will favour the English common law rule applied in the British Columbia decision or the approach used in the Ontario decision and subsequently affirmed in the Quebec decision, remains to be seen. What is certain though is that whichever the result of these appeals, together they will shape the scope of inter-jurisdictional coordination for national class actions in Canada.

The Franchises Act, Shifting the Balance of Power to Protect British Columbia’s Franchisees

Posted in Commercial

On Tuesday October 20, 2015, Bill 38, the Franchises Act, successfully passed third reading. The Government of British Columbia first introduced the bill on October 6, 2015, and it is now in its final stage of enactment. The Franchises Act will come into force upon Royal Assent which is expected to be granted towards the end of 2016 or early in 2017.

Once in force, the legislation would make British Columbia the sixth province to adopt a regime for the regulation of franchises. The framework used for drafting the Franchises Act is based on the model franchise act recommended by the Uniform Law Conference and the 2013 report of the British Columbia Law Institute.

The Government of British Columbia cited the concern that franchisees are often disadvantaged with respect to the relational balance of power between franchisors and franchisees as being the motivation for enacting the Franchises Act. This imbalance can occur as a result of the fact that while franchisees make significant capital investment into a franchise, they often have a lack of knowledge, experience and access to expert advice, and are reliant on the information provided by the franchisors.

To alleviate this concern, the Franchises Act seeks to regulate the sales of franchises in British Columbia by, among other things, establishing requirements for pre-sale information disclosure and providing franchisees with added legal rights and protections relating to dispute resolution.

Specifically, the Franchises Act will require franchisors to disclose and produce, prior to the parties entering into a franchise agreement, a franchise disclosure document (the “FDD”). The FDD will often include items such as a description of the business opportunity, a list of all fees and costs a franchisee must pay to operate and acquire the business, and details of any litigation involving the franchisor or its associates.

In addition to these disclosure requirements, the Franchises Act will further shift the balance of power by providing franchisees with legal remedies in the event of a material misrepresentation or failure to comply with the outlined FDD requirements by the franchisor. The remedies available to franchisees will go as far as potentially allowing for rescission of the franchise agreement depending on the specific circumstances.

Furthermore, franchisees will benefit from the jurisdictional provisions introduced in the Franchises Act that prohibit any attempts to restrict the application of the law of British Columbia to a franchise agreement, or to mandate a venue outside British Columbia for dispute resolution. It has been observed that that this could save franchisees from potentially exposing themselves to the significant costs associated with litigation in the home jurisdiction of a franchisor as it is often the case that franchisors in the relationship are based outside of British Columbia.

While it may seem that the Franchises Act introduces changes that heavily lean in the favour of franchisees, the franchisors’ interests have not been completely overlooked by the legislators. The Franchises Act will benefit franchisors and facilitate compliance with the added disclosure requirements by incorporating a substantial compliance component to the regime. Franchisors will be able to rely on this substantial compliance provision when preparing the FDD. Such a measure could help franchisors avoid the types of litigation often seen in Ontario where franchisees sue based on minor incompliances with disclosure requirements in the overriding statute.

Assuming Royal Assent is granted to the Bill, future prospective franchisees in British Columbia will be entitled to access to the levels of information and the legal protections currently afforded to franchisees in most of Canada. On the other hand, franchisors will be given some leeway towards complying with the new disclosure requirements under the substantial compliance provisions.

Critics of anticipated changes raise the concern that the added regulatory burden introduced in the Franchises Act could inhibit business in British Columbia. Though franchisors accustomed to conducting business in the provinces where regulatory regimes over franchsises are in place will likely be unaffected by the new regulatory scheme, franchisors that deal exclusively within British Columbia will be forced to adapt to these changes and could face added costs in doing so. Whether or not the critics are correct that these new burdens will encumber franchisors in British Columbia to such a point that business is negatively affected remains to be seen. However, if the five previously mentioned provinces’ willingness to adopt regulatory regimes is any indication, this should not be the case.

Wish special thanks to articling student Andrew Ross for his assistance with the preparation of this article. 

What is a pre-judgment garnishing order?

Posted in Commercial

Pre-judgment garnishing orders have been called “unique and extraordinary”.  They are one of only two forms of pre-judgment execution available in B.C., the second being the far more onerous Mareva injunction. What is a pre-judgment garnishing order and what does it do?

A pre-judgment garnishing order is a way of securing funds from a debtor to satisfy a judgment you have yet to obtain. Courts treat them as “an extraordinary remedy” because, as a general rule, a plaintiff is not entitled to judgment execution against a defendant without first obtaining a judgment. A pre-judgment garnishing order can be obtained despite the fact that the defendant debtor has not granted security over its assets to the plaintiff creditor. Using a garnishing order, a plaintiff can cause a person or institution (i.e., banks, credit unions, etc.) indebted to a defendant to pay the amount the person or institution owes to the defendant into court. That money is then held pending a decision about the plaintiff’s claim. If the plaintiff obtains judgment, the money is used to satisfy it.

Garnishing orders are authorized by the Court Order Enforcement Act, R.S.B.C. 1996, c. 78 (“COEA”). To obtain a garnishing order, a plaintiff must swear an affidavit setting out the nature of their claim, the actual amount of the debt, claim or demand, that it is justly due and owing and, most importantly, that all just discounts have been made. The courts have held that a plaintiff’s claim must be for a “liquidated sum”. That means the debt must be readily capable of calculation. For example, a loan is a “liquidated sum” because it is for a certain sum, but a claim for general damages is not.

Provided the evidence in support is sufficient, the court will issue a pre-judgment garnishing order, all without notice to the defendant. The garnishing order is served on the garnishee (i.e., the bank) who is then compelled to pay any money owed to the defendant (up to the value of the plaintiff’s claim) into court. The plaintiff must then give notice of the garnishing order to the defendant. The garnished funds remain in court until either judgment is given or the garnishing order is set aside.

If successful, a garnishing order is a powerful tool as it deprives a defendant of the use of its property (i.e., its money). It can provide a strategic advantage in subsequent negotiations with a defendant. Unlike Mareva injunctions, a plaintiff is generally not responsible for any resulting damage to a defendant caused by an improper garnishment (i.e., if the plaintiff ultimately loses).

Because of their extraordinary nature, the courts require plaintiffs to strictly and meticulously comply with the requirements in the COEA for the issuance of a garnishing order. A common response to a garnishing order is for a defendant to apply to set it aside. In general, a garnishing order can be attacked on two grounds: the supporting materials were flawed in some way or the court “considers it just in all the circumstances” to set the garnishing order aside. When reviewing the evidence in support of a garnishing order, the courts will not require perfection by a plaintiff but there must not be any confusion or uncertainty over the basis of the underlying claim. If the garnishing order is set aside, the defendant gets some or all of their money back.

If you are an unpaid creditor and are going to have to sue your debtor in order to recover, then you might want to consider using pre-judgment garnishment to assist you. As this form of pre-judgment execution can be quite technical, it would be a good idea to seek legal advice on how to do this properly.

BC Court of Appeal Tackles the “Thorny Issue” of Chattels vs. Fixtures: Tenants Beware!

Posted in Commercial

In a recent decision from the BC Court of Appeal, the court once again had to struggle with the often difficult issue of what is a “chattel” and what becomes a “fixture” during the course of a commercial tenancy.  In the result, the court confirmed that the test of a chattel v. fixture is not a subjective one, but rather is objective.  Accordingly, although parties to a commercial lease may be able to agree on what can or cannot be removed from the leased premises at the end of the lease, that will not be determinative of the rights of others, including, for example, assignees.

To read more, click here.

One Remedy or More? The Supreme Court of Canada Clarifies Contractors’ Rights Under Builders’ Lien Legislation

Posted in Construction, Real Estate

On September 18, 2015, the Supreme Court of Canada issued its reasons in Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel, 2015 SCC 43.  Although the judgment concerned the interpretation of the Manitoba Builders’ Lien Act, it has implications for owners, contractors and others in the construction industry across Canada, including remedies available to industry participants in British Columbia under the BC Builders Lien Act.  The decision will no doubt have an important procedural impact on how liens ought to be discharged during the currency of a project where the claim is disputed.

The facts of the case were rather unremarkable.  A dispute arose between a contractor and subcontractor on the construction of a stadium at the University of Manitoba.  The dispute was not resolved and the subcontractor filed a claim of builders’ lien.  In order to ensure funds did not cease to flow on the project, the contractor secured the discharge of the lien by posting a lien bond in court for the full amount of the claim.  As the claim was still not resolved in a timely fashion, the contractor subsequently sought a declaration that it was entitled to use further funds it received from the owner disregarding any trust claim the subcontractor may have, given that the lien bond had already been posted in court securing the subcontractor claim.  In other words, the contractor took the position the lien bond was security for not only the lien claim but also any trust claims that may arise.  The Manitoba Court of Queen’s Bench initially sided with the contractor but that decision was overturned at the Court of Appeal.  The Supreme Court of Canada dismissed the appeal, essentially holding that the lien bond was not posted as security for both the lien claim and any trust obligations.  The remedies available to the subcontractor – i.e., a lien claim and a trust claim, could co-exist and the mere fact of securing of one did not discharge the other.

The result serves to confirm that contractors and subcontractors have a variety of remedies available to them to ensure payment on a construction project – that proposition, in and of itself, is not controversial.  However, perhaps the most surprising aspect of the decision was the court also confirmed that if trust money had been posted into court as opposed to a lien bond, the result may have been different.  This is because the court expressly acknowledged that payment of trust funds into court as security for a claim will not result in a breach of trust and, therefore, such a payment could secure not only a lien claim but also any trust obligations.  The court reasoned that the subcontractor would not recover twice on a lien claim and on a trust claim and that if for a variety of reasons the lien claim was not successful, the trust claim would still be available.

As a result of this decision, the manner in which lien claims are secured pending their determination by a court may result in a change of practice.  Previously, either lien bonds or letters of credit have been posted as security to discharge liens during the currency of a project.  However, if actual funds are posted instead, such funds may also stand in the place of trust rights or trust obligations that a contractor may have.  What remains to be seen is whether other trust claimants may then complain that their trust rights ought to be secured in the same fashion.  Regardless, it is clear that the protection afforded to contractors and subcontractors in builders’ lien legislation across Canada has been fortified by this decision.

What happens in Ecuador… no longer stays in Ecuador. The Supreme Court of Canada eliminates a jurisdictional barrier to cross-border enforcement action

Posted in Commercial

On September 4, 2015, the Supreme Court of Canada issued its decision in Chevron Corp v Yaiguaje, 2015 SCC 42. In a unanimous decision, the Court dismissed Chevron’s appeal, holding that Canadian courts have jurisdiction to enforce a foreign judgment whether or not the original dispute or the parties to it had any connection to Canada.  The decision will have far-reaching implications for multi-nationals with subsidiaries in Canada.  In effect, the Supreme Court of Canada has ruled that Canadian courts have jurisdiction to enforce valid judgments of foreign courts, whether or not the underlying dispute or the defendant relates to Canada.

In the case, the plaintiffs (a group of indigenous Ecuadorian villagers) sought enforcement of a $9.51 billion judgment made against Chevron Corp. by the Ecuadorian courts. The judgment sum consisted of environmental and punitive damages relating to oil extraction activities. The action was brought in Ontario against Chevron Corp. and its indirect Canadian subsidiary, Chevron Canada Limited (which has significant assets in Canada but which was not a party to the Ecuadorian judgment).

Chevron Corp. brought a motion to set aside service and stay the action for lack of jurisdiction, arguing that, following the Supreme Court of Canada’s decision in Club Resorts Ltd v Van Breda, 2012 SCC 17, a ‘real and substantial connection’ between the court in which enforcement is sought (in this case the Ontario court) and the parties or the subject matter of the original dispute is required to establish jurisdiction. The Supreme Court of Canada rejected this argument and confirmed that its decision in Van Breda applies only to first instance cases and not to actions for enforcement.

The decision made it clear that the sole requirement for the Canadian court’s jurisdiction in enforcement actions is that the original foreign court had valid jurisdiction. The jurisdiction of the Ontario court over Chevron Corp. derives from the existence of the foreign judgment, not from any connection between Ontario and the dispute. The judgment emphasized the generous and liberal approach traditionally taken by Canadian courts to the recognizance and enforcement of foreign judgments.

One aspect which remains unsettled is the effect of the Court Jurisdiction and Proceedings Transfer Act (CJPTA), which is in force in a number of provinces, notably British Columbia, Nova Scotia and Saskatchewan. The CJPTA explicitly states that a foreign judgment will create a rebuttable presumption of jurisdiction for the enforcing court. The Supreme Court of Canada recognised that the CJPTA, or a similar act, might change the position. As Ontario had not enacted any such legislation, the Court did not need to rule on the point. Therefore, there remains a possibility of enforcement action in provinces in which a version of the CJPTA is in force for a judgment debtor to mount a jurisdictional challenge.

The decision has undoubtedly increased litigation risk for mining, commodities and other multi-national companies operating through affiliated companies in foreign jurisdictions. Such companies will need to be prepared for the risk of being held liable in Canada for the actions of their subsidiaries or parent companies in other jurisdictions. Any assets in Canada may potentially be the target of enforcement actions and the companies may face increased public scrutiny in Canada as a result of such actions.

The ruling dealt only with jurisdiction, and the corporate structure separating the two Chevron entities should ultimately prevent enforcement. Other defences, such as forum non conveniens, may still apply. However, the Supreme Court of Canada’s decision clearly eliminates jurisdiction arguments with regard to enforcement of valid foreign judgments.

The decision is in keeping with a continuing trend in Canada towards multi-nationals facing actions from foreign plaintiffs in their home jurisdiction, which I blogged about in December last year. Two cases which have not yet proceeded to trial (Adolfo Garcia v. Tahoe Resources Inc. and Araya v. Nevsun Resources Ltd.) concern claims brought against a parent company for the activities of its foreign subsidiary. Both cases will be important and will be closely watched by commodities companies operating in multiple jurisdictions.

The statutory tort of Breach of Privacy

Posted in Privacy

Privacy is important. It is a matter of much current debate as changes in technology and the law arguably makes it more difficult to maintain and protect. Does the internet make privacy impossible? Is the passage of Bill C-51 a threat to individual privacy? Is the escalating use of drones a privacy concern? The answers to these questions are varied and uncertain. But how does the law treat privacy?

To begin, there is no common-law claim for breach of privacy. As a result, in B.C. the Legislature enacted the Privacy Act which came into force in December 2007. The Privacy Act is short, running to only five sections.  It creates a “statutory tort” making it unlawful for anyone “wilfully and without a claim of right, to violate the privacy of another.” However, the nature and degree of privacy a person is entitled to is only “that which is reasonable in the circumstances, giving due regard to the lawful interests of others.” Further, in determining if there has been a breach of privacy, the court will look at “the nature, incidence and occasion of the act or conduct and to any domestic or other relationship between the parties.” This seems simple enough but, in practice, is very difficult to assess given the myriad situations and the individual sensitivities that could give rise to a privacy concern.

As with many areas of the law, assessing whether a breach of privacy has taken place often involves looking at past cases and how the courts dealt with them. Of particular importance are decisions from appeal courts which define the law and its application. The Privacy Act has not had a lot of appellate consideration to date. However, a recent appellate decision, Fouad v. Wijayanayagam, does provide some guidance. The decision establishes that a person’s motive in seeking information will not turn an otherwise lawful information request into a breach of privacy. Put another way, if the impugned conduct was not itself a privacy breach, the fact it was undertaken for “nefarious” motives is irrelevant.

In this case, Dr. Fouad sued Dr. Wijay for invasion of privacy relying on the Privacy Act. Within the context of a wider dispute among a number of doctors, Dr. Wijay called the local hospital and sought information about Dr. Fouad’s qualifications. This was done, in part, to sow doubt about Dr. Fouad. The trial judge found this conduct to be a violation of the Privacy Act. He reasoned that simply asking for access to private information about Dr. Fouad with such a motive was a breach of privacy. The Court of Appeal disagreed on two grounds.

First, an unfulfilled request for private information does not amount to a privacy breach. In other words, simply asking for information which you are not given is not a privacy breach. Second, a lawful request for otherwise publicly available information, whatever the motive of the person asking, cannot be turned into a breach of privacy.

If you are seeking sensitive personal information about someone, you should be mindful of the limits imposed by the Privacy Act. Before you go too far, it may be wise to consider what a court would make of your request. If there is any doubt about it, you would be better not to make the request and invite a lawsuit.

Exercise Caution: Lease Renewal Clauses and Standard Form Leases in Gurudutt

Posted in Real Estate

A recent Ontario Superior Court case will be of interest to commercial landlords and tenants alike.

In 1251614 Ontario Ltd v. Gurudutt, the tenant signed a 10 year lease that granted the tenant the right to renew the lease for 2 further terms of 5 years each, with rental rates to be negotiated at the time of renewal and settled by arbitration, if necessary. In addition, the lease stated:

“Any such renewal to be on the same terms and conditions as are contained in this Lease except…the form of the renewal Lease shall be, at the landlord’s option, a lease extension agreement or a new lease in the landlord’s then standard form.” (emphasis added)

To read more, click here.

The Tricky Question of Drafting an Enforceable Restrictive Covenant

Posted in Real Estate

Restrictive covenants are commonly used for a wide variety of reasons.  They can ensure access across property or be part of a wider community plan.  They can define the use land can be put to or protect it for a singular purpose.   They are intended to be a commitment that runs with the land rather than just an obligation or benefit for the current owners.  There is no standard form of covenant for the very reason that they are generally drafted for particular reasons with specific properties in mind.  In each case, the covenant must be clear as to its scope and purpose and be capable of application into the future whoever the land owners are and whatever changes take place in the nature of the surrounding area.  As a result, while it may be easy to envision what a covenant is intended to do, it can be quite another thing to properly articulate it in a written document.

The risk of not properly drafting a covenant is that it will, at some future date, be challenged by someone who does not like it and risk being found invalid by the courts.  A recent Court of Appeal decision illustrates this very outcome.  A developer with a vision built a hotel strata on the shores of Lake Okanagan.  The idea was simple.  Units could be purchased as either primary residences or holiday spots for families.  The hotel would provide services such as housekeeping, maintenance, food and beverages and a front desk.  Units that were not occupied full time were to be put into a rental pool operated by the management company that provided the services.  Units would be rented to the public and the revenue shared between the strata unit owner and the operator.

In order to make the plan work, each strata unit was encumbered by a covenant that provided rentals to the public must be done in accordance with a rental pool management agreement administered by the rental manager.  This ensured revenue for the maintenance of the strata and a cohesive hotel operation run by the management company.  Units rented outside this arrangement would get the benefits of a hotel without contributing to the cost of its operation.  The covenant was intended to avoid this unfairness.  Seems simple.

However, the covenant came under attack by one strata owner who, having moved out, wanted to rent his unit free from the obligations imposed by the rental pool agreement.  The hotel managers sued him seeking an injunction compelling the rental of his unit through their office in accordance with the rental pool management agreement.  The owner counterclaimed seeking an order under the Property Law Act that the covenant was unenforceable on the grounds of uncertainty.  The trial judge, no doubt mindful of the chaos to the hotel operation if the covenant was struck down, found it to be sufficiently clear as to be enforceable.  The Court of Appeal disagreed.

The problem really centered on the fact that the covenant did not contain a complete description of the rental pool agreement.  In short, while it was a detailed document, it only referred indirectly to the “Rental Pool Management Agreement” as the agreement made between the owner and the hotel manager setting out its terms and as may be amended from time to time.   What this meant is that no owner could, by looking at the covenant alone, know with any certainty what obligations they had under the Rental Pool Management Agreement.  To find out, they had to look outside the covenant itself.  Further, the Rental Pool Management Agreement had not existed when the covenants were originally registered and, after it was created, had changed a number of times over the years.  The rental pool agreement also gave the hotel operator the ability to change terms (such as the profit share) without an owner’s agreement.

The Court of Appeal did not like this because it meant there was no real certainty to the terms of the covenant.  What the covenant meant was dependent entirely on an external document that was effectively only an “agreement to agree”.  It was whatever the hotel operator and owner may ultimately agree to.  Such “agreements” are legally unenforceable.   The covenant did not contain a mechanism to resolve cases where no agreement was reached.  The law requires that covenants be absolutely clear so that “present and future owners may know with precision what obligations are imposed upon them.”  As the covenant in this case did not meet that standard, it was held unenforceable and struck from the title to the owner’s unit.

While the decision illustrates the clear line courts seek to draw on the requirements needed to make sure a covenant is enforceable, it also throws into peril the operation of this hotel as a practical matter.  If you seek to have a covenant be enforceable now and into the future, you would do well to make sure it is drafted carefully.  If you are burdened with a covenant you don’t particularly like, there may be hope for its cancellation if you can demonstrate it is not entirely clear in its expression.  It may be worth challenging in court.  The only downside, besides time and cost, is that you may be wrong: it is enforceable.  In that case, you are really no worse off.