The Supreme Court of Canada’s Opportunity to Keep Appellate Review Reasonable

By Connor Macdonald

Until recently, the standard of review for written contracts was correctness.[1] This principle remained largely intact until the Supreme Court of Canada’s landmark decision, Creston Moly Corp v Sattva Capital Corp.[2] In Sattva, the Supreme Court of Canada moved the law forward significantly, ruling that an appellate review of written contracts raises a question of mixed fact and law.[3] Accordingly, the Sattva decision changed the standard of review – from correctness – to reasonableness. As a result, appellate courts must now give deferential treatment to lower court rulings on contractual interpretations. Since Sattva, however, Canadian courts have been creating limitations on that deference. Most recently, the Ontario Court of Appeal did so in Union Building Corporation of Canada v. Markham Woodmills Development Inc.[4] Unfortunately, though, the Ontario Court of Appeal overstepped when it established another limitation on Sattva in Union Building, and the Supreme Court of Canada must now rectify its mistake.

The Case

In Union Building, the appellant, Markham Woodmills Development Inc. (“MWD”), and the respondent, Union Building Corporation of Canada (“UBCC”), disagreed over the terms of an agreement for purchase and sale relating to land (the “Agreement”). The parties contested the interpretation of one clause in the Agreement: Clause 17. The deal’s closing depended on the City of Markham (the “City”) agreeing to sever the land underlying the Agreement. Clause 17 made the MWD responsible for all obligations relating to the City’s approval, unless the obligations were onerous or unreasonable.

The City agreed to sever the land in question in exchange for a $407,582 fee. MWD refused to pay the fee; however, the deal closed because UBCC agreed to step-in and pay. After the deal closed, UBCC sought to recover the $407,582 from MWD, claiming that Clause 17 made MWD responsible for the fee. MWD disagreed. MWD claimed that it was not responsible for the fee because the fee was onerous and unreasonable. The case would, therefore, be decided on whether burdening MWD with the $407,582 fee would be unreasonable or onerous.

In the Superior Court’s decision, Lederer J avoided the case’s issue altogether and created an alternative one. He asked, was it onerous or unreasonable that MWD should bear the cost of the obligation imposed by the City? He did not ask whether the obligation itself was onerous or unreasonable. Lederer J focused on whether the type of fee was onerous or unreasonable, instead of focusing on whether the amount of $407,582 was onerous or unreasonable.[5] As a result, Justice Lederer’s decision was ultimately overturned by the Ontario Court of Appeal.[6]

Nevertheless, the Ontario Court of Appeal may have overstepped in its reasons for overturning Justice Lederer’s decision. Indeed, the appellate court was justified in reversing the decision. The Superior Court decision simply failed to address the issue of the case. Accordingly, the lower court decision could not have been reasonable and, thus, the deference demanded by Sattva could not have saved Justice Lederer’s decision. In reversing Justice Lederer’s decision, however, the Ontario Court of Appeal failed to focus on the lower court’s relevant error and incorrectly created another exception to the Sattva principle.

The Mistake

When weighing the decision to overturn the lower court’s decision, the Ontario Court of Appeal was required to consider Sattva, which established the appropriate standard of review. Sattva establishes that, in this case, the appropriate standard of review is reasonableness. Accordingly, Justice Lederer’s decision is owed a significant degree deference. Overturning the Superior Court’s decision, in this context, would amount to creating an exception to that deference.

The Ontario Court of Appeal was certainly correct when it decided that the Superior Court’s decision was unreasonable, but the decision wasn’t unreasonable for the reasons advanced by the Court of Appeal. The appellate court reasoned that the lower court’s decision was incorrect because the judgement was based on a provision in the Agreement that was not argued by the parties.[7] That is, the Superior Court relied on another clause in the Agreement to assist with interpreting Clause 17. As a result, the appellant was denied it’s right to procedural fairness, which warrants judicial intervention.[8] Procedural unfairness is not the reason why Justice Lederer’s decision was unreasonable, however. Justice Lederer’s decision was unreasonable because it did not address the issue raised by the litigants. Instead of considering whether the $407,582 fee was onerous or unreasonable, he considered whether the fee fell within the purview of Clause 17. As a result, Justice Lederer’s decision relied on principles of contractual interpretation to determine the breadth of Clause 17 despite their irrelevance to the issue.[9] In turn, the Ontario Court of Appeal (unfortunately) addressed these principles and created exceptions to Sattva where none were needed.

By focusing on Justice Lederer’s use of interpretive principles, the Ontario Court of Appeal produced an incoherent decision. The reasoning in Union Bridge is difficult – if not impossible – to reconcile with well-established principles of contract law. “The cardinal interpretive rule of contracts… is that the court should give effect to the intention of the parties as expressed in their written agreement. Where that intention is plainly expressed in the language of the agreement, the court should not stray beyond the four corners of the agreement.”[10] Likewise, it’s trite law that courts must interpret individual contractual provisions in light of the contract as a whole.[11] Notwithstanding these established interpretive principles, the Ontario Court of Appeal reversed the Superior Court’s decision on the grounds that interpreting a particular clause, through the lens of another, amounts to procedural unfairness. As a result, the appellate court has apparently suggested that well-established principles of contract law can ground an appeal. Ironically, the Ontario Court of Appeal has established that failing to read contracts as a whole (i.e. the inverse of the Union Building decision) also provides the grounds for a successful appeal.[12]

The Solution

The Court of Appeal could have – and should have – decided Union Building without contradicting any well-established principles of contract interpretation. Justice Lederer’s decision is unreasonable because it did not consider Clause 17 properly. As established in PDM Entertainment Inc. v. Three Pines Creations Inc, failing to analyze the contractual terms at issue can justify overturning a lower court decision.[13] Had the Ontario Court of Appeal followed that decision, the Superior Court’s decision could have been justifiably overturned. Likewise, reversing Union Building on the basis of PDM would not have created a new exception to Sattva, nor would it have created an apparent conflict with established contract law principles. The appellate court could have ignored Justice Lederer’s erroneous pursuit of grounding the decision in trite law, and it could have written a decision that focused on the Superior Court’s mistake: failing to consider the provision at issue, Clause 17.

Thankfully, the Supreme Court of Canada can correct Union Building. By granting leave, the Supreme Court of Canada has the opportunity to nullify the exception to Sattva that the Ontario Court of Appeal mistakenly created. The outcome of the appellate decision is certainly correct, but it should not have created another limitation in Sattva. Another limitation was not required. Moreover, the law of judicial review must remain coherent. Following fundamental principles of contract interpretation cannot, per se, make a decision unreasonable – especially when failing to follow them renders a decision unreasonable. Accordingly, the Supreme Court must seize the opportunity to clarify the apparent contradiction created by Union Building and re-establish the deferential principle created by Sattva.

[1] King v Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80 at para 20.

[2] 2014 SCC 53 [Sattva].

[3] Ibid at para 50.

[4] 2018 ONCA 401 [Union Building].

[5] Union Building Corporation of Canada v. Markham Woodmills Development Inc., 2017 ONSC 4514 at paras 28–30.

[6] Union Building, supra note 4 at paras 14–15.

[7] Ibid at para 15.

[8] Ibid at paras 13, 15.

[9] Granted, if Justice Lederer had determined that Clause 17 was ambiguous, importing maxims of contractual interpretation may have been necessary. If that were the case, the appellate court’s decision may have been different. Unfortunately, Lederer J never raised the issue of ambiguity and, therefore, such speculation has little value.

[10] KPMG Inc. v Canadian Imperial Bank of Commerce, [1998] OJ No 4746 at para 5.

[11] See e.g. Bow Valley Husky (Bermuda) Ltd. V Saint John Shipbuilding Ltd., [1997] SCR 1210 at para 118; Toronto Dominion Bank v Leigh Instruments Ltd. (Trustee of), [1999] OJ No 3290 at para 9.

[12] 1298417 Ontario Ltd. v Lakeshore (Town), 2014 ONCA 802 at para 8.

[13] 2015 ONCA 488 at paras 42–43 [PDM].

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