Royal Trust Corporation of Canada v. 502759 Ontario Ltd.

Royal Trust Corporation of Canada v. 502759 Ontario Ltd. Collection Decisions of the Court of Appeal Date 2000-06-23 Docket numbers C29914 Judges Austin, Allan McNiece; Moldaver, Michael James; Borins, Stephen Subject Civil Decision Content DATE: 20000623 DOCKET: C29914 COURT OF APPEAL FOR ONTARIO AUSTIN, MOLDAVER AND BORINS JJ.A. BETWEEN: ) ) ROYAL TRUST CORPORATION OF ) Duncan M. MacFarlane, Q.C. CANADA ) C. Gualtieri ) for the appellants Plaintiff ) ) ) - and - ) ) 502759 ONTARIO LIMITED, ALISA ) A. Irvin Schein DAVIES, SUSAN MCDOWELL, 603674 ) Stephen C. Nadler ONTARIO LTD., DAIMLER ) for the respondent INVESTMENTS LIMITED, CAROLINE ) JOSEPHINE FLIGHT, Executrix and ) Trustee of the ESTATE OF MCGREGOR ) CHARLES FLIGHT, Deceased, JAMES ) KEITH WICKENS and JAMES RICHARD ) REILLY ) ) Defendants ) (Appellants) ) ) Heard: May 17 and 18, 2000 ) On appeal from the judgment of Ground J. dated May 6, 1998 and amended July 17, 1998. AUSTIN J.A. (dissenting in part): [1] The appellants, 603674 Ontario Ltd. (“603”) and Daimler Investments Limited, Caroline Josephine Flight, Executrix and Trustee of the Estate of McGregor Charles Flight, and James Richard Reilly (“the guarantors”) were respectively the mortgagor and some of the original guarantors of a mortgage in the sum of $500,000 granted to the respondent, Royal Trust Corporation of Canada (“Royal”) for a term of five years. [2] Briefly stated, the facts are that 603 granted the mortgage to Royal in March 1989, the guarantors guaranteed performance by 603, 603 sold the property to Angelo Benakopoulos (“Benakopoulos”) and others in November of the same year and Benakopoulos sold to 502759 Ontario Limited (“502”) in December 1993. At the time of the sale to 502, terms of the mortgage were amended by an agreement between Royal and 502 and two other individuals who were added as guarantors. The mortgage went into default in 1994 and Royal took possession of the mortgaged property in November of that year. The property was sold under power of sale in 1996 for $250,000. Royal sued all concerned for the deficiency. [3] The guarantors took the position at trial that the transfer to Benakopoulos and the agreement between Royal and 502 relieved them of responsibility for the mortgage payments. The trial judge disagreed, but by reason of the inactivity of Royal on the sale, he reduced the liability of the mortgagor and guarantors by $75,000. He awarded Royal party and party costs notwithstanding Royal’s contractual entitlement to solicitor and client costs and notwithstanding an offer to settle which would have entitled Royal to solicitor and client costs under rule 49.10. The mortgagor and guarantors appeal and Royal cross-appeals. [4] The appellants raised four issues which they described in their factum as follows: (a) the applicability of Section 9 of the Land Registration Reform Act and the interpretation of conflicting provisions in the Standard Charge Terms (SCT) and the Guarantor Clause; (b) the distinction between a corporate “successor” and “assign”, and the applicability of Montreal Trust v. Birmingham and Manulife v. Conlin; (c) the issue of extension or renewal of the mortgage and the identity of the “Chargor” at material times; (d) novation. (A) Applicability of Section 9 [5] The Land Registration Reform Act, R.S.O. 1990, c.L.4 (“the Act”), s. 9 reads as follows: 9.(1) A charge shall be deemed to include a set of standard charge terms filed under subsection 8(1) if the set is referred to in the charge by its filing number. (2) A term deemed to be included in a charge by subsection (1) may, in a schedule to the charge, be expressly excluded or may be varied by setting out the term, appropriately amended. (3) Where a charge refers to more than one set of standard charge terms by their filing numbers, the charge shall be deemed to include only the set that was filed last. (4) Where there is a conflict between an express term in a charge and a term deemed to be included in the charge by subsection (1), the express term prevails. 1984, c. 32, s. 9. [6] The appellants took the position that where the liability imposed by the guarantor clause in the SCT was wider than that of the guarantor clause in the mortgage, that constituted a “conflict” within the meaning of s. 9(4) of the Act and by virtue of that subsection the clause in the mortgage would prevail over the clause in the SCT. [7] The trial judge disagreed. He pointed out that the mortgage itself expressly contemplated that the parties would be bound by the SCT. The mortgage contained the following provision: Standard Charge Terms – The parties agree to be bound by the provisions in Standard Charge Terms filed as number 8547 and the Chargor(s) hereby acknowledge(s) receipt of a copy of these terms. [8] The trial judge held that where the conditions of the two documents could live together, then the parties were bound by both. He found that the only “conflict” between the two documents was that the SCT imposed joint and several liability on the guarantors whereas the mortgage expressly provided that the guarantors would only be liable for certain specified and differing percentages of the mortgage debt. In this instance, s. 9(4) of the Act would apply and the mortgage provision would govern. I agree with the conclusion. [9] A decision to this effect was not required of the trial judge. Earlier in his reasons he noted that the parties were agreed as to the amounts in issue and as to the differing percentages owed by the individual guarantors. (B) Distinction Between a Corporate “Successor and “Assign” [10] In view of the conclusions reached by the trial judge on issue (A), the issue raised with respect to the difference between a “successor” and “assign” becomes irrelevant. In its “no prejudice” provisions, the mortgage referred to “successors and assigns” on one occasion, but only to “successors” on another. This would be relevant to the sale from 603 to Benakopoulos. As Benakopoulos was an “assign” and not a “successor”, the omission of the word “assign” would appear to serve to terminate the liability of the guarantors. The SCT however did not use the same language. Instead, they referred to “the Chargor or any other person liable for the payment of the money secured by the Charge”. That language would include the guarantors so that the omission of the word “assigns” in the mortgage document was of no significance in the final analysis. (C) The Issue of Extension or Renewal [11] The language of both the mortgage and the SCT expressly permitted Royal to grant extensions of the mortgage and to otherwise vary its terms without obtaining any further consent from either the original mortgagor (603) or the guarantors. An agreement was entered into between Royal and 502 to extend the term of the mortgage by ten months and to reduce the interest payable on the mortgage. The original mortgage was dated March 4, 1989. Its term was five years. The agreement between Royal and 502 was registered December 2, 1993. That is well within the original term of the mortgage. The parties to the agreement described it as an “extension agreement” and the document so described itself. [12] There can be no doubt that the document entered into between Royal and 502 was an extension agreement as expressly contemplated by the mortgage (with respect “to the mortgagor or any successor”), and by the SCT (with respect to “the Chargor or any other person liable for the payment of the money secured by the Charge”). There could be no doubt that 603 and the guarantors had consented in advance to the extension agreement entered into by Royal and 502, with the result that the extension agreement did not extinguish the liability of the guarantors. (D) Novation [13] The appellants argued that the arrangement between Royal and 502 constituted a novation, i.e. that by that agreement 603 and the original guarantors were released from any obligation under the mortgage. The trial judge found that “the Extension Agreement contains no language indicating an intention to enter into a new agreement or a novation but, on the contrary, specifically provides that the terms and conditions of the original mortgage continue in full force and effect…” He added: “[T]here is no evidence in the case at bar that RTC [Royal] intended to release the original Mortgagor or Guarantors; in fact the delivery of the notices of sale is evidence to the contrary.” In our view, no other conclusion was available to the trial judge. [14] As a result, I see no merit in any aspect of the appeal and I would dismiss it. The Cross-appeal [15] We are all of a different view with respect to both issues raised by the cross-appeal. An offer was made by another company, 10936654 Ontario Limited (109), to the then owner, 502, and the two entered into an agreement which was conditional upon the purchaser being approved by Royal for the assumption of an “existing” first mortgage by January 25, 1995. The mortgage had, in fact, matured in December 1994, prior to the making of the offer. The trial judge reduced the damages awarded to Royal by $75,000. because he held the view that it had acted improvidently with respect to this offer. [16] The buyer’s bank was not enthusiastic about lending the money and Royal was given two days to approve the assumption of its mortgage. By the time it got the buyer’s net worth statement, the offer had expired. The buyer refused to produce any further information and there the matter sat. [17] In deciding as he did, the trial judge said: It would seem to me to have made business sense to have signed the offer back with a longer period for RTC approval of the assumption of the first mortgage and inserting a condition that RTC would have to receive financial statements and be satisfied as to the financial viability of 109 and receive a statement of net worth and personal guarantee from Mr. Cumming. It would appear from the evidence that the transaction might have been salvageable on this basis and RTC would have realized at least $75,000 to be applied toward the amount outstanding on the mortgage… [18] What this statement reveals is that the trial judge overlooked the fact that it was not Royal which was the vendor, but 502. Accordingly, it was not within Royal’s power to sign the offer back, nor was Royal in a position to impose conditions extending the period it had for approval of the proposed purchaser’s assumption of the mortgage or its production of financial information. As the trial judge’s reduction of Royal’s recovery was based squarely on this “failure of RTC to take reasonable steps to follow up this offer or sign it back on some basis and attempt to salvage the transaction”, the reduction should be reversed and recovery given for the full amount of the claim. [19] Royal also appeals from the trial judge’s award of the costs of the proceedings to it on party and party scale. Royal’s position is that there are two reasons why costs should have been awarded on a solicitor and client basis The first is that under the terms of the mortgage it was entitled to solicitor and client costs. The second reason is that in its offer to settle of August 14, 1997, it offered to accept the sum of $271,792.61 plus interest, and the ultimate award exceeded this amount by approximately $15,000, thus bringing Royal within the ambit of rule 49.10. [20] The trial judge’s refusal to award costs on a solicitor and client scale was based solely upon his view of Royal’s improvident approach respecting 109’s offer to 502. . Because he was mistaken in this regard, and because there was no other basis for not giving effect to the terms of the mortgage, Royal is entitled to its costs on a solicitor and client basis. [21] In summary, I would dismiss the appeal and allow the cross- appeal. I would vary the judgment below by increasing 603’s liability to $393,104.61, Daimler’s and Flight’s each to $167,333.93 and Reilly’s to $71,223.20. I would further vary the judgment below by replacing the words “party and party” in paragraph 5 with the words “solicitor and client”. I would award Royal its costs of the appeal and of the cross-appeal, both on a solicitor and client basis. Released: June 23, 2000 “Austin J.A.” MOLDAVER J.A.: [22] I have read the reasons of my colleague Austin J.A. and I agree with his analysis and conclusions on all but one issue. That issue relates to the liability of the appellant guarantors and in particular, whether their liability was extinguished when RTC entered into the December 2, 1993 agreement with 502 extending the original term of the mortgage from April 1, 1994 to December 1, 1994. For reasons which follow, I am of the view that as a result of that transaction, the guarantors no longer remained liable to RTC. FACTS [23] My colleague has summarized the relevant facts and they need not be repeated. At issue is the extension agreement entered into between RTC and 502 on December 2, 1993 and its impact, if any, on the liability of the guarantors. [24] Upon executing the mortgage for which RTC seeks to hold them responsible, the guarantors agreed to be bound by the terms of a “Guarantor Clause” scheduled to the mortgage (Guarantee Agreement), as well as RTC’s Standard Charge Terms (Standard Terms). [25] The relevant extension clause in the Guarantee Agreement provides as follows: GUARANTEE AGREEMENT And it is hereby expressly declared … that no extension or extensions granted by the mortgagee to the mortgagor or any successor for payment of the moneys hereby secured … shall in any way modify, alter, vary or in any way prejudice the mortgagee or offset the liability of the covenantor in any way under this covenant. [Emphasis added.] [26] The relevant extension clauses in the Standard Terms provide as follows: STANDARD CHARGE TERMS Extensions 23. No extension of time given by the Chargee to the Chargor or any one claiming under the Chargor … shall in any way affect or prejudice the rights of the Chargee against the Chargor or any other person liable for the payment of the money secured by the Charge … [Emphasis added.] Guarantee 27. The guarantor, in consideration of the making by the Chargee to the Chargor of the loan secured by the Charge: (d) agrees that the Chargee may at any time and from time to time and without notice to, or any consent or concurrence by the guarantor, make any … extension … in the terms of the Charge … and that no such thing done by the Chargee … shall in any way release or diminish the liability of the guarantor under the Charge, so long as any moneys expressed by the Charge to be payable remain unpaid or the Chargee has not been reimbursed for all such losses, damages, costs, charges and expenses as aforesaid. [Emphasis added.] [27] The difference between the extension clause in the Guarantee Agreement and the extension clauses in the Standard Terms is self- evident. Under the former, the guarantors agree to remain liable in the case of extensions granted to 603 or its successors. Under the latter, their liability for extensions is unlimited. [28] The issue separating the parties is a narrow one. RTC concedes that if the extension clause in the Guarantee Agreement applies, then the guarantors are not liable because 502 is not a successor of 603 (see Montreal Trust v. Birmingham Lodge (1995), 46 R.P.R. (2d) 153 (Ont. C.A.) at 162-164). The guarantors, on the other hand, accept that if the extension clauses in the Standard Terms apply, they remain liable. Position of the Guarantors [29] The guarantors take the position that there is a conflict between the express extension clause found in the Guarantee Agreement and the extension clauses contained in the Standard Terms. To resolve that conflict, they rely on s. 9(4) of the Land Registration Reform Act, R.S.O. 1990, c. L.4 (“the Act”) which reads as follows: 9. (4) Where there is a conflict between an express term in a charge and a term deemed to be included in the charge by subsection (1) [Standard Terms], the express term prevails. In the alternative, the guarantors submit that if the relevant extension clauses are not in conflict, they nonetheless give rise to an ambiguity on the face of the mortgage which, as guarantors, they are entitled to have resolved in their favour. (See ManuLife Bank of Canada v. Conlin (1996), 6 R.P.R. (3d) 1 (S.C.C.) per Cory J. for the majority at pp. 10-14.) The s. 9(4) Issue [30] The trial judge rejected the s. 9(4) argument for the following reasons: I do not accept the submission of counsel for the Guarantors that the wording of the Mortgage and of the Standard Charge Terms is so inconsistent that the provisions of section 9 of the LRRA must be applied and that only the guarantor clause of the Mortgage is applicable. It appears to me that the only provisions which are in conflict are those dealing with the liability of the Guarantors where the guarantor clause in the Mortgage provides for liability of the respective Guarantors only to certain percentages of the mortgage debt, whereas the Standard Charge Terms provide for joint and several liability.1 In this situation, subsection 9(4) of the LRRA would be applicable and the provisions of the Mortgage would govern. With that exception, it seems to me that the provisions of the two agreements can be read together and that there is no conflict, although the provisions of the Standard Charge Terms are somewhat more extensive. [Emphasis added.] [31] In other words, the trial judge refused to apply s. 9(4) of the Act because in his view, the relevant extension clauses, though presumably inconsistent, were not “so inconsistent” that they gave rise to a conflict. Rather, he viewed the extension provisions in the Standard Terms as simply being “more extensive” than the provision in the Guarantee Agreement. [32] With respect, I do not agree with the trial judge’s analysis of this issue. In the passage quoted above, the trial judge differentiated between the extension clauses in issue, which he found not to be in conflict, and the apportionment of liability clauses, which he found to be in conflict. For my part, I am unable to see the logic of this distinction. [33] The trial judge found that the extension clauses contained in the Standard Terms were not in conflict with the express extension clause in the Guarantee Agreement on the basis that former were simply more extensive than the latter. If he is correct in this, it seems to me that the same logic should apply to the apportionment clauses. Applying the “more extensive” test to the apportionment clauses, one could argue that “the joint and several” liability clause in the Standard Terms was simply “more extensive” than the limited liability clause in the Guarantee Agreement. Surely, that cannot be right. [34] Under the apportionment clause in the Guarantee Agreement, the liability of the guarantors is limited to a certain percentage of the debt; under the “joint and several” clause in the Standard Terms, it is not. Likewise, under the Guarantee Agreement, the liability of the guarantors is limited to extensions granted to 603 or its successors; under the extension clauses in the Standard Terms, it is not. [35] In my view, the analogy is exact. In each case, the respective clauses are in conflict and the guarantors are entitled to have the conflict resolved in accordance with s. 9(4) of the Act. [36] Accordingly, I would give effect to the guarantors’ primary argument. The Ambiguity Issue [37] Even if I am incorrect on the primary issue, I would give effect to the guarantors’ alternative argument, namely, that the relevant extension clauses give rise to an ambiguity on the face of the mortgage, which, as guarantors, they are entitled to have resolved in their favour. The trial judge did not address this secondary argument. From this, I can only conclude that he was of the view that the case for the guarantors stood or fell on the s. 9(4) issue. With respect, I do not share that opinion. [38] Section 9(4) is a provision of general application. It is a statutory rule of interpretation that is triggered when a charge contains an express term that conflicts with a standard term. To the extent that the two terms are irreconcilable, s. 9(4) dictates that the express term prevails. [39] Manifestly, s. 9(4) is restricted to cases of conflict. It does not speak to cases of ambiguity or uncertainty; nor does it differentiate between the parties to a charge. In other words, in cases of conflict, the “favoured creditor” status, normally accorded to guarantors, has no application. An express term that favours the chargee will prevail over a conflicting standard term that favours the guarantor. In this sense, s. 9(4) supplants the ordinary rules of construction that apply to guarantee agreements. Section 9(4), however, does not speak to cases of ambiguity or uncertainty. To the extent that the clauses in issue give rise to an ambiguity, the ordinary rules of interpretation, which treat guarantors as “favoured creditors”, apply. [40] Before going further, I wish to make it clear that when I speak of “ambiguity”, I am not using the term in its ordinary sense to connote a word or phrase that is capable of more than one meaning. In that respect, I acknowledge that looked at individually, the respective extension clauses are plainly worded and unambiguous. Rather, I use the term to connote the uncertainty surrounding the intention of the parties as it relates to extensions in the face of differently worded clauses in the same contract that do not have the same meaning or effect and that are capable of producing very different results.2 [41] Based on the trial judge’s reasons, it is apparent that he was satisfied that the extension clauses in issue, though somewhat inconsistent, could nonetheless live together. While that finding was admittedly an important one, it did not relieve the trial judge from the responsibility of reviewing the contract as a whole with a view to discerning the true intention of the parties as it related to extensions. [42] With respect, I am not at all certain that the trial judge engaged in this analysis. Having determined that the clauses in issue could live together, he seems to have ignored the extension clause in the Guarantee Agreement altogether, as if it did not exist, and focussed exclusively on the extension clauses contained in the Standard Terms. Presumably, with the extension clause in the Guarantee Agreement off the table, he concluded that the wording in the Standard Term extension clauses was plain and unambiguous and that it alone reflected the true intention of the parties. In other words, he resolved “the intention issue” by choosing to give effect to the extension clauses most favourable to RTC. [43] In my view, the trial judge erred in adopting this approach. On its face, the mortgage contained two very different clauses relating to the same subject matter. The record is silent as to the negotiations between RTC and the guarantors that gave rise to the Guarantee Agreement. It is common ground, however, that the extension clause in the Guarantee Agreement is narrower and more favourable to the guarantors than the comparable clauses in the Standard Terms. This should have been obvious to RTC at the time. If it was, absent evidence to the contrary, the only reasonable inference to be drawn is that the parties negotiated the narrower extension clause contained in the Guarantee Agreement. The only other possibility, which I discount out of hand, is that RTC unilaterally chose to confer a benefit on the guarantors by limiting their liability to extensions involving 603 or its successors. [44] On the other hand, it may be that RTC did not direct its mind at all to the different wording and effect of the extension clauses; or if it did, perhaps it mistakenly concluded that they were the same. [45] In my view, it was incumbent on the trial judge to consider these scenarios in an attempt to discern the true intention of the parties as it related to extensions. Had he done so, he may well have concluded that the parties had in fact negotiated the express extension clause in the Guarantee Agreement and that it reflected the true intention of the parties. Failing this, in the face of differently worded extension clauses that did not have the same meaning or effect and that produced two very different results, I am of the view that at a minimum, he should have been left in a state of uncertainty about the intention of the parties and that he should have resolved that uncertainty in favour of the guarantors. To do otherwise would be to reward RTC for its carelessness in either failing to direct its mind at all to the differently worded extension clauses or in failing to appreciate that they did not have the same meaning or effect. CONCLUSION [46] The extension agreement between RTC and 502 constituted a material change in the loan agreement sufficient to discharge the guarantors. (See K.P. McGuiness, The Law of Guarantee (2nd ed. 1996), at ¶¶10.23 and 10.51.) It follows, in my view, that the liability of the guarantors was extinguished when, without their knowledge or consent, RTC consummated the extension agreement with 502. Accordingly, I would allow the guarantors’ appeal and dismiss the claim against them. The guarantors are entitled to their costs at trial and their costs on the appeal and cross- appeal. Released: June 23, 2000 “M. Moldaver J.A.” “I agree S. Borins J.A.” _______________________________ 1 Under the Guarantee Agreement, the liability of the respective guarantors is limited to a certain portion of the debt. Under the Standard Terms, their liability is joint and several for the entire debt. 2 See for e.g. Hillis Oil and Sales v. Wynn’s Canada, [1986] 1 S.C.R. 57 where the court compared the wording of two termination clauses in a distributorship agreement and found that the different wording gave rise to an ambiguity.