Western Canada Business Litigation Blog

Dragooning Google: How long is the online arm of the law?

Posted in Commercial
Comment

On October 27 and 28, the British Columbia Court of Appeal heard the appeal in Equustek Solutions Inc. v. Jack, 2014 BCSC 1063, which will have significant implications for the ability of courts to deal with online wrongdoing, and which raises questions of how to balance a Court’s jurisdiction – and respect for the jurisdiction of other courts – with the worldwide reach of cyberspace, and to what extent foreign non-parties can be compelled to assist the Court when there is no claim against them.

Equustek manufactures networking devices for industrial equipment. After the breakdown of its relationship with a former distributor –  due to the distributor allegedly passing off Equustek’s products as its own and then developing a competing product – Equustek filed suit against it and a number of other defendants. In the course of the litigation, the defendants stopped conducting business in Vancouver, and now operate as a virtual company through an ever-expanding network of websites, defying Court orders and continuing to sell the alleged knockoffs. Certain of the defendants have had their Responses to Civil Claim struck out for this noncompliance, and an arrest warrant remains outstanding for the defendant Morgan Jack.

In a further effort to halt continuing sales, and in the apparent hope of avoiding having to seek out and try to shut down the various ISPs hosting the defendants’ web sites, Equustek obtained an injunction against Google Inc. in June of this year, requiring it to stop including the defendants’ web sites in any of its search results, effectively removing them from Google searches worldwide, the source of approximately 75% of the world’s search traffic. The hope was that this would effectively cripple the defendants’ business.

Google had voluntarily removed certain, specific web pages relating to the defendants, from its Canadian search page www.google.ca, but not from its search pages for other countries. In addition, Google would not block the “mother sites” that generated the individual web pages. This was insufficient for Equustek, as the defendants could simply generate new webpages as ones were blocked, and sold mostly to customers outside Canada in any event. Although Google provided the mechanism by which the majority of traffic reached the defendants’ websites – and thus generated sales, the Court did not agree that Google was aiding or abetting the Defendants in their contempt.

The Chambers Judge found that the Court had jurisdiction, or “territorial competence”, over Google. Its search page was not simply a passive website accessible in B.C., but was rather an interactive one which offered services based in part on data collected from the user, including IP address, location, and previous searches and online behaviour. In addition, Google’s selling of advertising space to B.C. residents strengthened the connection to B.C. The Court also found that B.C. was the appropriate forum for the proceeding, as opposed to California, which Google had argued.

The Court rejected Google’s arguments that removal of the defendants’ web sites from search results would constitute censorship, as Google regularly and voluntarily removed other websites from searches on other grounds. The Court also did not agree that Google’s First Amendment rights would be breached, making the order unenforceable in California where its servers were located. Last, the Court did not agree that the order was too broad just because the effect of the Order could extend worldwide, noting that even orders made enjoining conduct in B.C. could have effects outside the province. For example, an injunction to stop a company from shipping goods from a warehouse in B.C. could affect orders placed from around the world. The balance of convenience was found to favour granting the injunction.

The appeal was heard over two days and drew a number of intervenors, including the Canadian Civil Liberties Association, the International Federation of Film Producers and International Federation of the Phonographic Industry, the Electronic Frontier Foundation, and the Samuelson-Glushko Canadian Internet and Public Interest Clinic.

On appeal, Google argued that the Chambers Judge had erred in finding that the Court had jurisdiction over Google for all purposes, including with respect to sites located in other countries, not readily accessible by Canadian citizens, and designed to serve non-Canadians. Google further argued that the Chambers Judge erred in imposing a positive obligation on Google to assist the plaintiff where there was none, and in granting an injunction when the plaintiff had no underlying claim against Google. The plaintiff (unsurprisingly) contended that the Chambers Judge had come to the right decision, and that the injunction order represented a necessary and proper evolution of the law.

In deciding the appeal, the Court will have to consider how to balance the rights of an innocent, foreign, non-party with the need to enforce its process and authority in the face of brazen contempt, and to what extent search engine providers may be pressed into service to enforce Court orders against others. The Court will also need to decide how to balance the need to impose order – and indeed enforce orders – on the internet while respecting the territorial limits of its own jurisdiction. Whichever way the appeal is decided, the effect of it will be significant for cases involving everything from e-commerce, to misuse of confidential information, and defamation. There will only be more to come.

Silence can be golden: interlocutory restraints on defamatory speech

Posted in Defamation
Comment

A recent decision from the British Columbia Supreme Court is a reminder that interlocutory restraints on speech are possible in Canada, albeit in rare circumstances.

In Richardson v. Hunter, 2014 BCSC 1960, the court issued an interlocutory injunction to restrain the defendant from publishing words that suggest that the plaintiff engaged in criminal conduct. The remedy can be a significant one because, for most people who find themselves the subject of false and defamatory statements online, what they want more than anything is for the statements to stop and be taken down.

The plaintiff was (and is) a police officer serving with the RCMP. The defendant was charged and convicted of three criminal offences as a result of an investigation in which the plaintiff was an investigator (for the background facts to his convictions, see R. v. Hunter, 2006 BCCA 433). In response, the defendant wrote and published a lengthy document online, which the court referred to as a blog, entitled “Creating a Criminal, My story of how the RCMP turned Me into a Criminal.” The blog made allegations of criminal conduct against the plaintiff, including perjury, conspiracy and theft.

The plaintiff sued for defamation and applied for an interlocutory injunction with respect to the defendant’s blog. The court held that it is difficult to obtain an injunction restraining speech because the law puts a priority on freedom of speech. The public interest in freedom of speech ought not to be stifled in advance of a trial on the merits except in the very clearest of cases. The usual test for injunctive relief (a fair case to be tried) is insufficient. The plaintiff must meet a two-prong test: the words complained of must be (1) “manifestly defamatory” and (2) “impossible to justify”.

The court granted the injunction, but only in part. The court ordered that the defendant be restrained until further order of the court from writing words which suggest that the plaintiff has engaged in criminal conduct, including perjury, witness tampering, conspiracy, suborning perjury and theft. However, the court declined to restrain the defendant from stating that the plaintiff’s investigation was negligent, as it could not be said at this early stage of the proceeding that that allegation was “impossible to justify”.

The outcome of the Richardson case shows the potential for injunctive relief but also the strictness with which the standard will be applied.

Collapsing Real Estate Transactions: “Specific Performance” Revisited

Posted in Real Estate
Comment

Frequent readers of this blog may recall a post from October 2012, in which we wrote about a Supreme Court of Canada decision that some believed, at the time, would result in the “death knell” for the remedy of specific performance in Canada at least in respect of commercial real estate transactions.  Since then, many courts have indeed grappled with whether that particular remedy, which permits a purchaser to conclude a transaction and buy the property in question by way of a court order as opposed to obtaining an award of damages as compensation, is still part of the arsenal of remedies potentially available to aggrieved purchasers.

In a decision which was released this past Friday, the B.C. Court of Appeal, in practical terms, has confirmed that reports of the demise of the remedy of specific performance have been greatly exaggerated.

In that case, a vendor refused to close on a sale of commercial property in Burnaby, B.C.  The purchaser, who was still interested in buying the property, sued and sought as one of its remedies, an order for specific performance whereby it asked the court for an order allowing the sale to go through despite the alleged breach by the vendor.  The purchaser therefore filed a Certificate of Pending Litigation (“CPL”) against title to the property.  The vendor brought an interlocutory application under the Land Title Act to have the CPL removed as it argued that it was suffering hardship and inconvenience by the registration of the CPL on title to its land and that in any event the purchaser ought not to be entitled to the remedy of specific performance.  The Chambers Judge removed the CPL with the posting of $1.5million security by the vendor and asserted that the remedy of specific performance was not available to this purchaser.  The purchaser therefore filed an appeal.

The Court of Appeal, in a unanimous decision, held that on an interlocutory application pursuant to the Land Title Act, the Court is not fully and finally determining whether specific performance is in fact available to a purchaser but rather the test at that stage is whether it is “plain and obvious” that a claim for specific performance will not succeed after a trial on the merits.  Absent compelling evidence in that regard, the claim for specific performance ought to proceed to trial.  The Court noted that the landmark Supreme Court of Canada decisions in Semelhago and Southcott Estates were following a trial of those matters and although the legal principles arising from those cases regarding the availability of specific performance are clearly to be applied, it is likely only after a trial where those issues can be finally determined by the Court.  If there is a triable issue on the availability of specific performance, a CPL which is filed based on that remedy ought not to be removed.

Given the decision in Youyi, it is clear that at least for the time being in B.C., a claim for the remedy of specific performance in connection with failed commercial real estate transactions, together with the usual clogging of title to property by the filing of a CPL, is still alive and well and is a valuable and useful tool for aggrieved purchasers.  For landowners’, where property becomes encumbered by a CPL, it may prove helpful to move quickly to trial (or summary trial) in order to have a CPL removed, and a claim for specific performance dismissed, as opposed to seeking to have the CPL removed by way of an interlocutory application very early on in the litigation.  Once again, the seeking of timely legal advice regarding parties’ rights and remedies in response to a collapsing real estate transaction is critical.  We have argued as much on many previous occasions on this blog and Youyi provides yet another example of why that is extremely important.

“Is Too Much Communication a Bad Thing?” The Perils of Correspondence with Experts in Civil Cases

Posted in Civil Procedure
Comment

Authors: Kinji Bourchier and Amy Nathanson.

In the recent Ontario Superior Court case of Moore v. Getahun, 2014 ONSC 237 (“Moore”) the Court answered yes to this question and took a very restrictive approach to communications between counsel and experts.  Almost all civil litigators across the spectrum of cases deal with experts. Experts can play a significant, if not pivotal role in civil proceedings.  As someone with special knowledge, training or skill, the role of an expert is to assist the judge in areas that are beyond his or her scope of knowledge.  As set out in Rule 11-2 of the Court Civil Rules an expert had a duty to assist the court and not to be an advocate for any party.  The fact an expert’s duty to be impartial has been codified in the BC Rules of Court underscores the importance of an expert being impartial.  A finding that an expert is not impartial and is acting as an advocate can result in the exclusion of an expert’s report or it may go to weight.

Moore v Getahun

Moore is a medical malpractice action arising out of the medical care the plaintiff received after a motorcycle accident.  The plaintiff alleged that the defendant failed to meet the standard of care of a general orthopedic surgeon and that the defendant’s casting of his fractured wrist caused a serious condition called Compartment Syndrome.

The most controversial portion of the decision relates to the Court’s comments on the objectivity of experts and permissible interactions between counsel and experts, because they represent a marked departure from generally acceptable practices.

The Court’s comments were directed at the defendant’s expert, Dr. Taylor, who had provided an opinion on the issues of causation and the appropriate standard of care.  When reviewing Dr. Taylor’s file, counsel for the plaintiff found notes referring to a 90 minute phone call with defence counsel.  When cross examined Dr. Taylor’s evidence was that once he was happy with his draft report he sent it to counsel for their comments, and during the call counsel made suggestions and he made corrections to his report.

Ultimately, the Court found that the practice of counsel reviewing and commenting on draft versions of an expert’s report is not proper and in the course of the decision made some very strong comments regarding appropriate communications between counsel and experts:

The expert’s primary duty is to assist the court. In light of this change in the role of the expert witness, I conclude that counsel’s prior practice of reviewing draft reports should stop. Discussions or meetings between counsel and an expert to review and shape a draft expert report are no longer acceptable. [emphasis added] [para. 50]

The practice of discussing draft reports with counsel is improper and undermines both the purpose of Rule 53.03 as well as the expert’s credibility and neutrality … [emphasis added][para 52]

The Court found that Dr. Taylor had breached his duty of impartiality by participating in the call with counsel and making changes to his report during the call, but lay the blame for this squarely at the feet of defence counsel.  While the Court found that Dr. Taylor’s opinion itself was not changed as a result of suggestions by counsel, it found that it was “certainly shaped” by defence counsel’s suggestions.

The Moore decision has been appealed.

Issues Arising from Moore

Not surprisingly, this case has generated a strong reaction from counsel both in Ontario and across Canada.  The most common response is that there are legitimate and entirely proper reasons for counsel to review and comment on an expert’s report and that doing so does not interfere with an expert’s duty to be impartial.

Experts are engaged because they have special expertise in an area, but having expertise does not necessarily mean that these professionals have experience in writing reports or writing for an audience outside their particular field.  Counsel play an important role in ensuring that an expert’s report is of assistance to the court and is in a form and at a level that can be readily understood.  By reviewing a draft report, counsel can ensure that an expert had not strayed beyond the scope of their expertise, provided an opinion on an ultimate issue, or based their opinion on incomplete or inaccurate facts.

The Holland Group (a group of practitioners in Ontario in medical malpractice cases) has published aPosition Paper expressing its strong concerns on Moore in this regard and setting out potential undesirable consequences from the decision.  The consequences cited in their Position Paper include:

(i)                 Increased Litigation Costs

Counsel may need to retain multiple experts, which will significantly increase litigation costs.  For example, if an expert report proves to be non-responsive, poorly written or unhelpful, counsel will likely discard the report and start fresh by retaining a new expert.  Counsel may also retain a “shadow expert” that they can consult with freely in an addition to retaining an expert to provide a report.

(ii)               Unhelpful Expert Reports

By reviewing draft reports counsel are able to assist in identifying errors and ensure that the report is in the proper form for the court.  If counsel are not able to review and comment on draft reports, expert reports will be less focused and comprehensive and may contain improper assumptions or opinions.

(iii)             The Emergence of “Professional Experts”

Counsel may become wary of working with new or untested experts and will gravitate towards experienced experts whose ability to provide cogent reports and evidence has been proven, leading to the emergence of “professional experts.”  It was precisely this “hired gun” approach to experts that motivated changes to the Ontario rules dealing with experts.

Implications for Practice in British Columbia

While lawyers in Ontario are faced with how Moore will be applied pending appeal, Moore has not yet been cited in any B.C. decisions and is at odds with recent B.C. decisions dealing with this issue.

In Conseil scolaire francophone de la Colombie-Britannique v. British Columbia (Education), 2014 BCSC 851, the BC Supreme Court issued reasons on the admissibility of the report of the plaintiff’s expert, (the “Martel Report”).  The defendants had objected to the admissibility of the Martel Report on the basis that it lacked impartiality and independence after Prof. Martel provided evidence on cross examination that she had met with plaintiff’s counsel several times to review her report and she also consulted with them over the phone.  Prof. Martel’s evidence was that the input of plaintiff’s counsel was limited to proof-reading and suggestions for clarification and that they did not influence the substance of her report in any way.  Prof. Martel had not provided drafts of her report and rarely exchanged emails with plaintiff’s counsel so there was almost no record of the extent of counsel’s involvement in the drafting of her report.

The Court found that it is “quite proper” for counsel to provide feedback on the form of an expert report to ensure it is useful to the court.  The Court also disagreed with the suggestion from counsel for the defendants that counsel should retain records to demonstrate the extent of their involvement in the expert report, noting that the failure of counsel to retain such records ought not raise the suspicion of improper involvement.

In Maras v. Seemore Entertainment Ltd., 2014 BCSC 1109, the BC Supreme Court provided reasons on a pre-trial voire dire on the admissibility of various expert reports.  In his decision Mr. Justice Abrioux held that: “counsel have a role in assisting experts to provide a report that satisfies the criteria of admissibility.” and cited the following excerpt from Surrey Credit Union v. Wilson (1990), 45 B.C.L.R. (2d) 310 (S.C.):

There can be no criticism of counsel assisting an expert witness in the preparation of giving evidence.  Where the assistance goes to form as opposed to the substance of the opinion itself, no objection can be raised.  It would be quite unusual in a case of this complexity if counsel did not spend some time in the preparation of witnesses before they were called to give evidence.  It is no less objectionable to engage in the same process when the witness to be called is an expert.  Indeed, had the process been followed here much of the objectionable material might have been avoided.

In contrast to Moore, instead of placing limits on the interaction between counsel and experts the case seems to place a positive duty on counsel to explain to an expert their role in providing expert evidence, including the boundaries of their opinion evidence.

While Moore has not been adopted in BC, the decision is a good reminder for counsel to consider how they deal with experts and ensure that their practices fulfill their duties as officers of the court and will not undermine the credibility of their expert.

This article was prepared with input from Amy Nathanson.

Supreme Court of Canada strikes down court hearing fees as unconstitutional

Posted in Constitutional
Comment

The Supreme Court of Canada struck down the court hearing fees imposed by the province of British Columbia as being unconstitutional because they prevent access to the courts in a manner that is inconsistent with section 96 of theConstitution and the underlying principle of the rule of law.

The Case History

The SCC’s October 2, 2014 decision in Trial Lawyers Association of British Columbia v. British Columbia (Attorney General), 2014 SCC 59, arose from a family law action in the Supreme Court of British Columbia. The parties were not represented by lawyers, and the trial took 10 days. Under a schedule of hearing fees contained in the BC Supreme Court Civil Rules, the hearing fees would have amounted to $3,600, which the trial judge found was almost the net monthly income of the family.

The Rules in BC impose no fee for the first three days of trial, $500 per day for the fourth through tenth days of trial, and then $800 per day from the eleventh day onwards. The Rules also contain an exemption from paying the hearing fees if the court finds that a person is “impoverished” (or, in the words of the former rules that were in place during the trial at issue, “indigent”).

The trial judge held that the hearing fee provision was unconstitutional. The Court of Appeal agreed, but held as a matter of remedy that the provision could be saved by reading in the words “or in need” to the exemption provision.

The Majority Judgment

A majority of the SCC held that the hearing fee scheme should be struck down as unconstitutional and that the legislature should be left to enact new provisions, should they choose to do so. The court accordingly allowed the Trial Lawyers Association’s appeal with respect to the remedy and dismissed the Attorney General’s cross appeal on the finding of unconstitutionality.

The majority held that, while the province has the jurisdiction to establish hearing fees under its powers to administer justice pursuant to section 92(14) of the Constitution, 1867 it could not exercise that power in a way that violates section 96 of theConstitution, which protects the core jurisdiction of the superior courts. In the majority’s view, hearing fees that deny people access to the courts infringe on the core jurisdiction of the superior courts that is protected by section 96. The example of the litigants in the family law case before the court illustrated the adverse effect of the fees in practice. Like the trial judge, the majority found that “impoverished” must be read in its ordinary sense, and the exemption could not be expanded as the Court of Appeal had proposed. They did not accept the arguments that hearing fees promote efficiency and fairness by weeding out unmeritorious cases and encouraging shorter trials or that trial judges could address the problem through cost awards.

The Dissent

In a vigorous dissent, Justice Rothstein stated that the hearing fee scheme does not offend any constitutional right, and that courts should refrain from micromanaging the policy choices of governments when they act within the sphere of their constitutional powers. He summarized his views at paragraph 82 as follows:

In engaging, on professed constitutional grounds, the question of the affordability of government services to Canadians, the majority enters territory that is quintessentially that of the legislature. The majority looks at the question solely from the point of view of the party to litigation required to undertake to pay the hearing fee. It does not consider, and has no basis or evidence upon which to consider, the questions of the financing of court services or the impact of reduced revenues from reducing, abolishing, or expanding the exemption from paying hearing fees. Courts must respect the role and policy choices of democratically elected legislators. In the absence of a violation of a clear constitutional provision, the judiciary should defer to the policy choices of the government and legislature. How will the government deal with reduced revenues from hearing fees? Should it reduce the provision of court services? Should it reduce the provision of other government services? Should it raise taxes? Should it incur debt? These are all questions that are relevant but that the Court is not equipped to answer. I respectfully dissent.

The Implications of the Decision

In the short term, the decision leaves the government of BC with the task, if it chooses to do so, of fashioning a new scheme of hearing fees and exemptions that would withstand constitutional scrutiny. The decision may also have implications for other provinces with similar hearing fee schemes in place. In the longer term, the decision is important in developing the constitutional requirements of access to justice. The constitutionality of other costs and financial barriers to the courts may be questioned in future cases. But Justice Rothstein’s dissent also raises important questions as to the proper limits of the court’s role in fashioning public policy, particularly when the question involves competing demands for scarce fiscal resources.

Pick Your Poison Wisely: Choosing the Right Remedy to Address a Defaulting Tenant

Posted in Real Estate
Comment

Deciding what to do with a defaulting commercial tenant can be a trap for the unwary. A recent decision from the BC Court of Appeal has confirmed that once a landlord has elected to pursue a certain remedy or course of action as against a defaulting tenant, that election may well be irrevocable such that a landlord may not “switch horses” and later elect to pursue a different course of action for the exact same breach.

In Delane Industry Co. Limited v. PCI Properties Corp., PCI Waterfront Leasing Corp., 2014 BCCA 285, a landlord had initially elected to distrain for past arrears of rent in the amount of well over $100,000 and indeed some of the tenant’s property was sold to pay down the arrears. However, a large amount of arrears remained outstanding following completion of the distraint.  Accordingly, the landlord purported to terminate the lease in reliance on a Notice of Default that had been provided prior to levying distraint on the tenant’s property. In other words, in response to the breach by the tenant, the landlord elected to affirm the lease by seizing and selling the tenant’s assets but then later sought to terminate for that same breach because the distraint did not pay the arrears in full. The tenant applied for a declaration from the Court that the lease had not been effectively terminated. The Trial Judge granted the declaration sought and indicated the landlord ought to have provided a new notice of default if it subsequently wanted to terminate the lease after completion of the distraint. The Court of Appeal dismissed the appeal of the landlord and confirmed that the landlord ought to have given a new notice of default but only if that notice was based on a new default on the part of the tenant. In other words, the Court of Appeal held that once the landlord had elected to levy distraint, that election affirmed the lease and was irrevocable. If the landlord wanted to subsequently terminate the lease, it had to rely on a fresh default and issue a new default notice. It was not entitled to simply rely on the fact that arrears were still outstanding after the distraint had concluded because the lease had already been affirmed by the landlord’s election to levy distraint in the first place.

The result in this decision may surprise some commercial landlords or property managers.  However, the decision reinforces the idea that, once again, steps taken by landlords at the outset in response to a defaulting commercial tenant are critical and, in that regard, landlords need to be fully apprised of their options in light of their stated goals in addressing the tenancy in question. Oftentimes, the goal of levying distraint is to simply ‘send a message’ to a tenant whereas other times a landlord may be content to terminate a lease for the smallest of defaults in order to regain possession of the premises so that it can start afresh with a new tenant.  ‘Kneejerk’ reactions to a tenant’s default may therefore prejudice the ability of a landlord to ultimately achieve a desired result. The seeking of timely legal advice at the outset is the most prudent course of action as that will help landlords hopefully avoid the pitfalls which inevitably arise when dealing with troublesome tenants.

New Frontiers – Mining Litigation in Canada for the Activities of Foreign Subsidiaries

Posted in Negligence
Comment

In June, 2014, a Notice of Civil Claim was filed in the British Columbia Supreme Court in the case of Adolfo Garcia v. Tahoe Resources Inc. (“Garcia”).  In Garcia, the plaintiffs have sued a Canadian parent company that conducts mining activities through a foreign subsidiary in Guatemala.  This is the first time this type of claim has been bought in British Columbia. This claim parallels the claim brought in Ontario in Choc v. Hudbay Minerals Inc. (“Choc”).  The courts in Ontario have refused to strike the claim in Choc and it appears to be heading to trial.

Historically, corporations have relied upon the separate legal personality of subsidiary corporations to shield the parent corporation from direct legal liability for the activities of the subsidiary.  Garcia and Choc are examples of plaintiffs, usually backed by non-governmental organizations, using traditional legal principles in an attempt attach liability directly to the parent corporation for the activities of a foreign subsidiary. Importantly, these claims have been brought in Canadian, not foreign, courts. Accordingly, corporations conducting activities abroad should take note of these types of claims because, absent a strong judicial rebuke, the use of this litigation strategy is likely to increase.

The plaintiffs in Garcia are seven Guatemalan individuals. The pleadings allege that they were shot by security personnel during a protest at mine owned by the subsidiary of the defendant.  The plaintiffs claim damages, saying that the defendant, a Canadian parent corporation, is directly liable for battery. Battery is a legal term for a claim for the intentional use of force to the body of another person without consent. Alternatively, the plaintiffs claim that the defendant is vicariously liable for battery through its wholly owned Guatemalan subsidiary or for the battery committed by the security personnel. Finally, the plaintiffs claim that defendant was negligent in failing to prevent the use of excessive force by its security personnel. The plaintiffs also seek punitive damages.

Choc involves three actions that have been consolidated into one claim before the courts in Ontario. There the plaintiffs’ claims are based primarily on allegations that the defendants has direct liability for negligence in failing to prevent harms committed by mine security personnel. The plaintiffs also allege that the defendant was vicariously liable for torts of its subsidiary and its subsidiary’s employees. In July of 2013, the  Superior Court of Ontario ruled that Choc should proceed to trial and refused to strike the claim on either legal or jurisdictional grounds.

Garcia and Choc are both examples of the use of traditional and well known legal principles – battery, negligence and vicarious liability – in an effort to have claims against Canadian parent companies adjudicated in Canada.  The legal principles are not new but how they are being used is novel. Canadian corporations doing business abroad can expect the use of this legal strategy to increase. Ultimately, the use of this strategy means that Canadian corporations ought to be  prepared to defend their activities and the activities of their subsidiaries in Canadian courts.

“Additional Rent” and a Tenant’s “Proportionate Share”

Posted in Real Estate
Comment

Most commercial leases contain terms that require tenants to pay additional rent. Additional rent is usually a share of the costs and charges incurred to operate the property. These costs can include municipal taxes, insurance premiums, repair and maintenance costs and common area utility charges. In any given year, these charges change and fluctuate.  Landlords often provide an annual estimate which tenants pay subject to a year-end reconciliation. Lease terms governing these types of costs are often general in nature because it is not possible to contemplate all the variables and, at the same time, have the same additional rent provision apply to all the tenants in a commercial building.

As a general rule, tenants are obliged to pay their “proportionate share” of these types of costs.  How do landlords calculate the “proportionate share”? Ordinarily, this is calculated based on the relative square footage occupied by each tenant. That makes sense for fixed costs such as taxes, insurance and common area utility costs.  But what happens when one tenant obtains a greater benefit from these additional costs than others? Are the other tenants obliged to subsidize that tenant or is there a more equitable manner in which to allocate such costs? What authority does a landlord have to apply different methods of calculation for different types of common expenses?

A recent commercial leasing case provides an illustration of a landlord’s ability to change the method of calculating additional rent and an example of doing so based on the benefit received by the particular tenant as opposed to square footage. In this case, the tenant operated a hot yoga studio. The lease had an additional rent clause that required the tenant to pay:

“. . .its proportionate share of the Lessor’s costs and charges required in the general day-to-day operations of the property, . . .”

The lease also provided that for expenses charged to the building “as a whole,” the tenant agreed to pay its “proper and fair share of said charges.”

The tenant occupied 14.37% of the commercial space. As part of its business, the tenant installed nine showers, two steam generators, and other water-consuming equipment and fixtures. In all, the number of water fixtures in the leased premises went from four to 26. In addition, the tenant upgraded the municipal water connection from a ¾ inch pipe to a 2 inch pipe. This was all done without objection from the landlord. The building water consumption went up by more than 100%, as did the municipal water costs.

For the first two years of the lease, the tenant was charged additional rent equal to 14.37% of the overall operating costs, including municipal water charges. The landlord eventually figured out that water consumption and cost had shot up after the hot yoga studio began operations. Two years into the lease, the landlord sought to change the allocation of the water charge paid by the hot yoga tenant for 14.37% of that cost to an amount equal to the tenant’s proportionate share of the water actually consumed.

The tenant objected arguing that the calculation of “proportionate share” was based on square footage for all other expenses. To decide water cost using consumption instead made the lease ambiguous, inconsistent, unreasonable and unfair. Relying on the doctrine of contra preferentem (a doctrine of contractual interpretation where, in the case of ambiguous wording, the contract is interpreted against the party who drafted it), the tenant argued that since the landlord drafted the lease, he should bear the risk of any such ambiguity.

Though the amounts in issue were relatively small, the dispute ended up in court. The Court sided with the landlord and held that “proportionate share” could be calculated in any way that was commercially fair. Relying on the principle that commercial leases should be interpreted in accordance with sound commercial principles and good business sense, the court reasoned:

“. . . the only reasonable conclusion is that “proportional share” means that the tenant should pay for its fair share of the water it uses. To decide otherwise means the other tenants and the landlord will be paying for far more water than they use. If the words “proportional share” were to be based not on the appropriate or proportional share of water used by the tenant but on square footage, it would have been simple to state that in the lease.”

If you think your “additional rent” is unfair, or if you feel other tenants ought to bear a greater share of common expenses than square footage ratios allow, then this case provides a persuasive argument in support of your positon. It is also a cautionary tale about understanding your lease before you sign it. If you are unsure how additional rent is calculated, sort it out before you sign the lease. That will avoid an unpleasant surprise after the fact when your expected additional rent costs are much greater than you anticipated.

Commercial Arbitration May Not Be as Confidential as You Think

Posted in Commercial
Comment

Choosing commercial arbitration over conventional litigation cannot guarantee confidentiality of the process, as a recent decision of the BC Supreme Court shows. The prospect of keeping a commercial dispute confidential has long been recognized as one of the main advantages of arbitration over litigation in the courts, along with the speed of the process, the ability to choose one’s decision-maker, and easier enforcement of awards internationally. Confidentiality is certainly enhanced by resolving a dispute through arbitration, and in most cases that confidentiality will be maintained. However, businesses should be aware that the possibility that an arbitration award will be appealed to a judge of the court carries with it the risk that confidentiality may be eroded.

McHenry Software Inc v. ARAS 360 Incorporated concerned a dispute between two software developers, McHenry and ARAS, over their contract to integrate and market their respective proprietary software. When the relationship broke down, the parties commenced arbitration proceedings in Vancouver in accordance with the arbitration clause in the contract. The arbitrator ordered the parties to enter into a confidentiality agreement for the purposes of the proceeding and the matter was subsequently heard in November 2013. Eventually, both parties appealed the arbitration decision. McHenry applied to the court for sealing and confidentiality orders over the two court files to seal the arbitration award (i.e., the written decision of the arbitrator) to preserve the privacy of the dispute.

McHenry submitted that the arbitration award contained commercially sensitive information as well as various details of the company’s past business dealings which, it claimed, cast the company in a bad light. McHenry argued that public disclosure of this information would impede the company’s ability to find new partners and commercialize its software.

Mr. Justice Ehrcke considered whether the circumstances merited a discretionary sealing order, applying the Supreme Court of Canada’s test in Sierra Club of Canada v. Canada (Minister of Finance) which requires an applicant to overcome a strong presumption in favour of open court proceedings. The judge agreed that a sealing order should only be granted when necessary “to prevent a serious risk to an important interest, including a commercial interest, in the context of litigation because reasonably alternative measures will not prevent the risk”. Even if there are compelling reasons, the applicant also needs to show that the salutary effects resulting from the confidentiality order outweigh the overarching public interest in open and accessible court proceedings as well as in the right to free expression.

Ultimately, Mr. Justice Ehrcke denied the application on the basis that there was no real and substantial risk to an important commercial interest. Further, he held that there is no general principle that the confidentiality of arbitration proceedings carries over to court proceedings when the arbitration is appealed. In such cases, any expectations of privacy in arbitration will give way to considerations of public policy in open court proceedings and free expression.

The point to take away from this case is that commercial arbitration, while generally a private and confidential process, cannot guarantee complete confidentiality in all cases. An appeal of an arbitration award to the court is always a possibility, notwithstanding the Supreme Court of Canada’s recent decision inSattva Capital Corporation v. Creston Moly Corporation which significantly narrowed the scope for appeal (see Craig Ferris’ recent blog post on this case). The confidentiality that attaches to arbitration does not automatically carry over to the court, and the court will apply a very rigorous and high standard before closing its process to the public.

The Difference a Day Can Make: When a Strata Council pulls out the Rules

Posted in Real Estate
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Governing and managing a strata property can be messy and difficult.  Strata owners are generally a disparate group with little in common beyond ownership in the strata.  From among this group, a strata council must be elected, usually all volunteers who, to one degree or another, are reluctant participants and untrained in strata governance.  Yet, it is the members of the strata council who are often required to address the misconduct of individual owners and make decisions about what may, or may not, take place on strata property.  What are they to do?

In many cases, listening to the competing sides in any strata dispute and making common sense suggestions on route to a consensual resolution of an issue will suffice.  It is certainly the most reasonable way to solve problems, provided everyone behaves reasonably.  But what if that is not possible?

The short answer is that the strata council has recourse to its bylaws and the Strata Property Act to impose solutions and compel appropriate behavior in the right circumstances.  In other words, they can pull out the rules and use them to force a resolution of the particular issue.  This can be messy and can take some time, but these are legal tools designed specifically to assist in bringing resolution to the often rough edges of communal living arrangements such as stratas.  Earlier blogs illustrate the use of such powers. This blog is not about the scope of those powers or how and when to use them.  Rather, the point here is that if a strata council is going to “pull out the rules” on an intransigent owner or tenant, then you better make sure to get it right or the process may backfire.

A recent case in Chilliwack provides a good example.  The strata in question (like many) had a prohibition on the rental of units.  One of the owners wanted to rent out his unit in order to ameliorate a financial crisis he was experiencing.  He found some tenants and moved them into his unit.  He knew of the rental prohibition but did not raise the issue with the strata council until after his tenants moved in and complaints about them of excessive noise and other problems had been made to the council.  In a rather ham-fisted and technically improper way, the strata owner made a request to the strata council for an exemption to the rental prohibition on the grounds of financial hardship.

Section 144 of the Strata Property Act (the SPA) allows strata owners to appeal to their council for an exemption from any rental ban on the grounds of hardship.  This section sets out both a procedure for such a request and its timing.  In this case, the strata council members had already decided to levy “significant fines” against the owner for breaching the rental ban and the conduct of his tenants in the hope the resulting financial impact would compel the owner to get rid of the tenants.  Rather than requiring the owner to follow the legislated procedure properly, the council treated the owner’s appearance at one of their meetings as the required hearing on the issue of “hardship”.  At the end of that meeting, they told the owner that, despite his presentation, they were not going to lift the rental ban.  The fines would remain and continued to increase.  In the end, the fines were over $16,000.

When the strata council finally sued the owner to collect these fines, the Court rejected their claim because of a day.  Put shortly, having resorted to the “rules” to deal with this transgressing owner, the strata council failed to follow those rules properly.  Though they had verbally told the owner his hardship appeal was dismissed, they failed to deliver to the owner the “decision in writing” “within one week after the hearing”.  Instead, they gave him this letter 8 days after the council meeting, one day late.  Under the SPA, where there has been a hardship hearing, a council is required to give the owner its decision in writing “within one week”.  If they do not, the requested rental exemption is deemed to be allowed.

In this case, the Court held that the strata council failed to give its decision in writing to the owner within a week (even though they verbally advised him of the result immediately).  As a result, the owner was “deemed” by the SPA to be allowed to rent his unit.  As a result, all the fines imposed on the owner for illegally renting his unit were invalid and set aside.

Though the court did not rely on it as part of its decision, there was also the suggestion that the strata council had made up its mind on the “hardship” issue before they ever heard from the owner.  While understandable, that is also improper.  As a matter of fairness, decision makers like strata councils are required to keep an open mind about an issue they must decide until they have heard from all the parties entitled to address them on the matter.  Unfairly prejudging a matter is also a ground on which courts will set aside or invalidate a strata decision.

If you are a strata council member, the take away is that if you are going to invoke “the rules” to combat a recalcitrant tenant or owner, you better make sure you do it properly and according to the bylaws and SPA.  If you do not, the courts are not going to uphold the sanctions or outcomes you intend to impose.  It’s better to get a bit of legal advice at the outset than to end up spending far more in legal fees later to lose in court because you misread or misapplied “the rules”.