1397868 Ontario Ltd. v. Nordic Gaming Corporation (Fort Erie Race Track)

1397868 Ontario Ltd. v. Nordic Gaming Corporation (Fort Erie Race Track) Collection Decisions of the Court of Appeal Date 2010-02-05 Neutral citation 2010 ONCA 101 Docket numbers C50357 Judges O’Connor, Dennis; Juriansz, Russell G.; Rouleau, Paul S. Subject Civil Decision Content CITATION: 1397868 Ontario Ltd. v. Nordic Gaming Corporation (Fort Erie Race Track), 2010 ONCA 101 DATE: 20100205 DOCKET: C50357 COURT OF APPEAL FOR ONTARIO O’Connor A.C.J.O., Juriansz and Rouleau JJ.A. BETWEEN 1397868 Ontario Ltd. Plaintiff (Respondent) and Nordic Gaming Corporation, c.o.b. Fort Erie Race Track and Eddie Lynn Defendant (Appellant) Neil Rabinovitch and Douglas Stewart, for the appellant Brad Elberg and Trevor Guy, for the respondent Heard: October 30, 2009 On appeal from the judgment of Justice C. Anne Tucker of the Superior Court of Justice dated February 27, 2009, with reasons reported at 2008 CanLII 67402 (ON S.C.), 2009 CanLII 9402 (ON S.C.) and 2009 CanLII 9403 (ON S.C.). O’Connor A.C.J.O.: Background [1] The trial judge found the appellant (“Nordic”) liable for breaching a contract with the respondent (“139”) and awarded damages in the amount of $291,981.80. Nordic appeals the damages award. [2] On or about October 18, 2001, Nordic, carrying on business as Fort Erie Race Track, entered into a memorandum of understanding with 139 whereby 139 would provide the operating premises for Nordic’s off-track betting (“OTB”) operation in St. Catharines (the “agreement”). 139 would also provide a food and beverage service for the patrons of the OTB operation. [3] The trial judge found that Nordic breached the agreement in two ways. First, it breached Article 20 which provides in part: This agreement will run from this date October 18, 2001 through December 31, 2002, predicated on both parties obtaining all regulatory provincial and municipal approvals. The agreement will renew annually predicated that all the provisions in the agreement are being fulfilled. [Emphasis added.] [4] On December 24, 2002, Nordic gave 139 notice that it was not renewing the agreement and a week later removed all of its equipment from 139’s premises. Nordic does not allege that 139 was not fulfilling its obligations under the agreement. [5] The trial judge stated that the language of Article 20 was unequivocal and found that Nordic’s decision not to renew was a breach of the term of the agreement. She found that “a reasonable notice period [was] not applicable” in the circumstances and awarded 139 damages for the loss of profits for an 11-year period less a discount of 15 per cent for contingencies. [6] The trial judge also found that Nordic breached Article 22 of the agreement which provides in part: 22. The Association [Nordic] will grant the Company [139] the first right of refusal to bid on any other OTB location in St. Catharines. [7] Shortly after Nordic entered into the agreement with 139, Nordic entered into another memorandum of understanding with a third party to operate what would in effect be a competing OTB location in St. Catharines. Nordic did not give 139 an opportunity to bid on that location. To account for the loss of revenue resulting from the competing operation, the trial judge awarded damages for this breach by increasing the revenues in her calculation of the loss of profits for 139’s operations. In this manner, the trial judge integrated the damages resulting from the two breaches into a single award for the loss of profits. [8] Nordic does not appeal liability. It argues, however, that the trial judge erred in her damages award in two ways. First, she erred in awarding damages based on the loss of profits for an 11-year period. Second, she erred in calculating the loss of profits, in particular: by failing to deduct the costs of sales from revenues, by failing to impute a wage for the principals of 139 at least at the statutory minimum wage and by failing to calculate part-time wages in accordance with the evidence. The 11-year Period [9] Nordic argues that the trial judge erred in awarding damages for an 11-year period. It is Nordic’s position that the trial judge concluded that the agreement was neither for a fixed term, nor was it perpetual. Thus, it contends that the agreement must be terminable on reasonable notice. Nordic asserts that the trial judge did not apply the principles found in cases involving damages in lieu of reasonable notice to determine the correct period for the assessment of damages. An 11-year damages period is significantly beyond what the case law suggests. [10] 139 argues that the wording of Article 20 provides for a perpetual agreement and that the trial judge found such an agreement. In support of this argument, 139 relies on the wording of Article 20, as well as, the fact that 139 invested significant amounts of money in the premises solely to accommodate Nordic’s OTB operation. Further, 139 points to Article 13 of the agreement which provides for termination by either party on 30 days written notice if events occur that would frustrate the performance of the agreement such as Nordic losing its OTB licence, 139 losing its liquor licence or either party having significant operating losses in any one year. 139 argues that because the parties included a provision for termination in some circumstances, the court should not imply a reasonable notice provision for termination in others. Thus, it contends that the parties agreed that, absent the occurrence of the specific events set out in Article 13, the agreement was to run in perpetuity. [11] The trial judge recognized the competing positions of the parties. While she did not expressly state that the agreement was perpetual in nature, it is implicit in her reasons that she concluded it was. She rejected Nordic’s submission that she should imply a reasonable notice provision for termination into the agreement. [12] In my view, the trial judge erred in the analysis that led her to conclude the agreement was perpetual. [13] When the term of a contract is not fixed and there is no provision for termination on reasonable notice, a court may treat a contract as either perpetual in nature or as an indefinite term contract into which the court implies a provision of unilateral termination on reasonable notice: see, for example, Credit Security Insurance Agency Inc. v. CIBC Mortgages Inc. (2006), 268 D.L.R. (4th) 725 (Ont. S.C.), aff’d (2007), 279 D.L.R. (4th) 559 (Ont. C.A.); Rapatax (1987) Inc. v. Cantax Corp. (1997), 145 D.L.R. (4th) 419 (Alta. C.A.), leave to appeal to S.C.C. refused, [1997] S.C.C.A. No. 307; Shaw Cablesystems (Manitoba) Ltd. v. Canadian Legion Memorial Housing Foundation (Manitoba) (1997), 143 D.L.R. (4th) 193 (Man. C.A.). In determining this issue, courts typically look to the specific terms of the contract as well as to the relationship between the parties and the surrounding circumstances. As the majority of the court explained in Shaw at para. 15, “the essence of the cases is simply that each of the decisions turns on the particular agreement under consideration and the circumstances surrounding it.” [14] While at one time there was a presumption that contracts of an indefinite term were perpetual, modern authorities tend to accept that the matter is to be determined on the basis of ordinary principles of interpretation, without the aid of a presumption in favour of perpetuity: John D. McCamus, The Law of Contracts, (Toronto: Irwin Law, 2005) at 739 - 740. Further, some types of contracts, including those of employment, partnership or personal services, which depend upon mutual trust between the contracting parties, naturally give rise to an implied right to terminate upon reasonable notice: Shaw, at paras. 23 and 29. [15] In my view, the path taken by the trial judge to reach the conclusion that the agreement was perpetual was flawed in three respects: a) she erred in attaching undue weight to the language of Article 20 of the agreement; b) she failed to fully consider the relationship of the parties to the agreement; and c) she failed to consider all the circumstances surrounding the agreement. [16] The trial judge stated that the language of Article 20 was unequivocal and implicitly found that it created an agreement that was perpetual in nature. For convenience, I repeat the relevant portion of Article 20: This agreement will run from this date October 18, 2001 through December 31, 2002, predicated on both parties obtaining all regulatory, provincial and municipal approvals. The agreement will renew annually predicated that all the provisions in the agreement are being fulfilled. [17] While Article 20 says that the agreement will renew annually, it does not state that the agreement is perpetual. A perpetual relationship, particularly in a business relationship such as the one that is the subject of the agreement, can involve significant commitments by both parties and has the potential for substantial long-term effects. One might expect that an intent to be bound in this manner would be expressly stated. Moreover, on the literal reading of Article 20, either party could cause the agreement to terminate at renewal time by not fulfilling a provision in the agreement. That does not seem consistent with an intent to create a relationship in perpetuity. In at least two cases courts have held that contracts with provisions worded similarly to Article 20 were not perpetual: see Bernard—Norman Specialties Co. v. S.C. Time Inc. (1989), 71 O.R. (2d) 278 (H.C.J.) and Treen Gloves & Safety Products Ltd. v. Degil Safety Products (1989) Inc. (1990), 33 C.P.R. (3d) 74 (B.C. S.C.). [18] I do not agree with the trial judge that the language of Article 20 unequivocally points to a perpetual agreement. I think the language of Article 20 calls for a close and full examination of the other factors the courts consider when deciding whether to construe a contract as being perpetual. In this case, it was important that the trial judge have regard to the relationship of the parties and the surrounding circumstances. Before turning to those matters, I will address two other provisions in the agreement. [19] Article 6 of the agreement supports an argument that the agreement is not perpetual. It reads as follows: The Company [139] will provide all Food & Beverage to the patrons of the teletheatre at no cost to the Association [Nordic]. The Association realizes that the Company is entitled to retain all revenues generated through the sale of Food & beverage, until such time that the Association chooses to become the operator of the complete facility. [Emphasis added.] [20] Under the agreement, one of the main sources of revenue for 139 was to be derived from the sale of food and beverage[1]. However, Article 6 suggests that Nordic has the right to take over “the complete facility” which appears to include providing food and beverage. While it is not clear what would happen with respect to the balance of the agreement if Nordic chose to follow this course, Article 6 is an indication that the relationship created by the agreement may not be perpetual. [21] 139 argues that Article 13 supports an interpretation that the agreement is perpetual. The trial judge referred to Article 13 in her analysis. However, it is not clear that she accepted 139’s argument as to its interpretative value. In any event, I do not accept that Article 13 adds much to the analysis one way or the other. Unlike the termination provision in Credit Security, Article 13 does not say that the agreement may only be terminated in the circumstances set out. Article 13 provides for termination in specific circumstances. It does not address the issue of whether the contract should contain a provision for termination upon reasonable notice. Implying a term allowing for termination on reasonable notice would not contradict the express terms of the agreement found in Articles 13 or 20. [22] I will now turn to the relationship of the parties. In her analysis, the trial judge considered only one feature of that relationship and she appears to have attached considerable weight to what she called the “unique nature of the relationship”. She observed that if Nordic terminated the relationship, 139 could not replace or substitute Nordic with another OTB operator and that “there was no way [139] could mitigate its damages”. As the trial judge explained, “[i]t was not a bargain that could be replaced, substituted, or mitigated when this breach occurred.” [23] While the fact that 139 could not mitigate its damages in the case of termination may be a relevant factor to consider in determining if the agreement is perpetual, there were other facets of the relationship that the trial judge did not consider which pointed away from a finding that the parties intended to be bound to one another forever. At the time they entered into the agreement, Nordic and 139 were virtual strangers. They had never done business together and had no relationship of any kind. Nordic was entering into an OTB agreement with 139 for the first time. Ms. Raseta, 139’s principal, and her husband had operated restaurants in the Niagara region for many years; however, they did not have any previous experience with an OTB operation. [24] The agreement contemplates that the two parties would work together with 139 operating a food and beverage service and maintaining the premises, and Nordic running the OTB operation in the premises. Thus, they would have to work together closely and co-operation would be important. While the relationship created by the agreement was not one of employment, partnership or, strictly speaking, for personal services – which are the types of contracts into which courts routinely imply terms of termination on reasonable notice – it did involve many of the same components, such as the need for trust, confidence and satisfaction. [25] The trial judge also did not consider the surrounding circumstances to the agreement. The origins of the agreement are important. In 2000, Nordic learned that it could operate an OTB location in the Niagara region. Initially, it sought to rent the premises at 444-446 Scott Street in St. Catharines from a company called York Bancroft Corporation (“York Bancroft”) with the idea of running the entire operation itself. An offer to lease and a draft lease were prepared with a five-year term and two renewals, one for five years and a second for two years. Nordic then learned that the Ontario Racing Commission did not permit it to hold a liquor licence off its own premises (the race track). As a result, an arrangement was struck whereby York Bancroft would lease the premises to 139 (York Bancroft was owned by Ms. Raseta’s daughter-in-law and a partner). A lease agreement was prepared, but not executed, under which 139 would lease the premises from York Bancroft for an initial five years with the same options for renewal as in the other draft lease. 139 entered into the agreement with Nordic. 139 agreed to operate the food and beverage service and to allow Nordic to operate its OTB operation on the premises. Other than its interest arising from the unexecuted lease, 139 had no interest or rights to use the premises. [26] These circumstances, in my view, point away from the agreement being perpetual in nature. The premises were the key to the agreement. Nordic needed a place to run its OTB operation. When it sought to lease the premises, it contemplated doing so for a limited period of time, a five-year term with renewals up to a 12-year period in total. Moreover, 139, at best, had a leasehold interest of limited duration. [27] However, there are aspects of the surrounding circumstances which could point to a perpetual agreement. Most significantly, was the large cost incurred by 139 in order to install fixtures in the premises. In passing, the trial judge indicated that this amount was $117,700, but made no clear finding on the point. This sum of money could have taken 139 many years to recover. Thus, it may be argued that it would be unusual for 139 to agree to enter a contract that could be terminated on reasonable notice where such a significant initial investment was needed. [28] Accordingly, while it may be true, as the trial judge found, that 139 would not have other OTB options if Nordic terminated the agreement, I am satisfied that the trial judge should have considered the other factors that I have mentioned in determining whether the agreement was perpetual or not. Had the trial judge properly considered all of the relevant factors, she may very well have come to a different conclusion. [29] For the reasons I set out below, I would order a new trial for purposes of calculating 139’s damages. Given that I would order a new trial, I would also remit to that trial the issue of whether the agreement is perpetual or an agreement into which the court should imply a term of reasonable notice for termination. Calculation of Damages [30] In calculating 139’s damages for the loss of profits, the trial judge concluded that because Nordic initially proposed lease arrangements that could have lasted for a 12-year period, Nordic would have anticipated that the OTB operation would continue for that period. It had been operating for about one year when Nordic gave notice that the agreement would not be renewed. Hence, the trial judge concluded that an 11-year damages period was appropriate. [31] Having determined that 139 should be compensated for the loss of profits for an 11-year period, the trial judge next engaged in the exercise of calculating damages. [32] Nordic alleges that the trial judge made three errors in calculating damages, the most significant of which was that she failed to deduct the cost of sales of beverages (including liquor) and food in calculating the loss of profits. The evidence of the experts indicated that the cost of sales was between 29 and 50 per cent of revenues. [33] After the trial judge released her judgment and reasons, counsel for Nordic moved to amend the decision under rule 59.06(1). Nordic argued that the trial judge’s calculations were in error because she had failed to deduct the cost of sales. In supplementary reasons released on February 27, 2009, the trial judge declined the invitation to reconsider the issue and indicated that her decision on damages “was based on a global assessment of all of the evidence and lack of evidence”. She went on to say that she could not and would not parse out one or two items and change them because to do so would undermine the ratio of the whole decision. [34] I appreciate that the trial judge was confronted with a difficult task in assessing damages in this case. However, her reasons explain how she came to the damages award and it is apparent that she did not account for the cost of sales. Clearly, the cost of sales is an integral part of any loss of profits calculation. Importantly, a deduction for the cost of sales could have a significant impact on the calculation of 139’s loss of profits. In oral argument on appeal, 139’s counsel indicated that if 40 percent of revenues is used to calculate the cost of sales it would “decimate” the damages award. Whatever the case, the failure to deduct the cost of sales could be significant. [35] 139 contends that if the damages award is to be reopened, there is a good argument that the trial judge underestimated 139’s damages. 139 did not cross-appeal because it says it was content with the overall damages award. However, it identifies a number of instances where it says the trial judge miscalculated 139’s damages to its detriment. Specifically, 139 asserts that the trial judge underestimated 139’s gaming revenues and that she overestimated certain expenses, including those for salary payments. If the damages calculation is to be reopened, these errors need to be addressed. [36] All of this leads me to conclude that the trial judge’s calculation of 139’s loss of profits was flawed. In my view, there must be a new trial on the issue of damages. I would leave to the new trial Nordic’s other arguments namely, that the trial judge erred in imputing a labour cost to 139 for the services of the Rasetas in an amount less than statutory minimum wage for the hours worked and that the trial judge erred in basing a factual finding with respect to the hours worked by a part-time employee on an assumption in an expert’s evidence. [37] We were told on appeal that at trial 139 had advanced two bases upon which the trial judge could award damages. The first was the one the trial judge adopted – damages based on 139’s loss of profits. The second was a claim for damages based on costs incurred by 139 as a result of having entered into the agreement. On appeal the parties did not address the issue of whether 139 could pursue a claim for damages incurred as a result of entering into the agreement in the event those damages exceed the loss of profits. I leave that issue for the new trial. [38] I have not specifically addressed the damages resulting from Nordic’s breach of Article 22 of the agreement (the first right of refusal). The trial judge integrated the calculation of those damages with damages arising from Nordic’s breach by terminating the agreement. That seems like a sensible approach to take on the new trial. [39] In the result, I would allow the appeal, set aside the judgment below and order a new trial in accordance with these reasons. At the request of the parties, I will not address the issue of costs. If the parties are unable to agree on the issue of costs, I would direct that they make brief written submissions to this court within 15 days of the release of this judgment. RELEASED: “DOC” “FEB 05 2010” “Dennis O’Connor A.C.J.O.” “I agree R.G. Juriansz J.A.” “I agree Paul Rouleau J.A.” [1] 139 was entitled to receive 1% of the annual wagering conducted at Nordic’s OTB operation.