Toronto-Dominion Bank v. Peat Marwick Thorne Inc.

Toronto-Dominion Bank v. Peat Marwick Thorne Inc. Collection Decisions of the Court of Appeal Date 1999-09-13 Docket numbers C30288 Judges Doherty, David H.; Austin, Allan McNiece; Sharpe, Robert J. Subject Civil Decision Content DATE: 19990913 DOCKET: C30288 COURT OF APPEAL FOR ONTARIO DOHERTY, AUSTIN and SHARPE JJ.A. BETWEEN: ) ) THE TORONTO-DOMINION BANK ) Bryan Finlay, Q.C., ) John A. Campion, Plaintiff/ ) Peter A. Downard and Appellant ) Paul F. Monahan ) for the appellant - and - ) ) PEAT MARWICK THORNE INC. ) in its capacity as Trustee of the ) Estate of ) Earl A. Cherniak, Q.C., LEIGH INSTRUMENTS LIMITED, ) Robert J. Morris, a bankrupt; THE PLESSEY COMPANY ) Susan B. Wortzman and plc; GEC SIEMENS plc; THE ) Lisa C. Munro GENERAL ELECTRIC COMPANY plc ) for the respondents, Plessey ) Defendants/ ) Peter F.C. Howard and Respondents ) Adrian C. Lang ) for the respondents, GEC ) ) ) Heard: August 30-31, 1999 On appeal from the judgment of the Hon. Mr. Justice Winkler dated June 24, 1998. BY THE COURT: [1] This is an appeal from the judgment of Winkler J. dismissing all of the appellant’s claims. Those claims were based on five letters of comfort provided to the appellant (the Bank) by the Plessey Company plc (Plessey) in connection with a series of loans made at the time of and following Plessey’s take-over of Leigh Instruments Limited (Leigh). The respondent, General Electric Company plc (GEC) was in effective control of Plessey when the fifth letter of comfort was provided (December 19, 1989) and the claims against it arise out of that letter. [2] The court dismissed the appeal at the conclusion of oral argument with reasons to follow. These are the reasons. [3] Justice Winkler’s reasons are reported at (1999), 40 B.L.R. (2d) 1. His detailed and careful review of the evidence and analysis of the issues have proved most helpful on the hearing of this appeal. The factual background necessary to an understanding of these reasons can be found in the reasons of Winkler J. [4] The trial took over a year. The wide ranging attack launched by the Bank at trial has been replaced on appeal by a focussed challenge to the trial judge’s finding that the appellant had failed to establish negligent misrepresentation by Plessey in respect of any of the five letters of comfort or by GEC in respect of the fifth letter of comfort. The Main Appeal [5] Mr. Finlay, with his usual consummate skill, advanced five grounds of appeal on behalf of the Bank. Four require him to convince us that the trial judge erred in his interpretation of the meaning of paragraph 3 of the letters of comfort provided by Plessey. Paragraph 3 reads: It is our policy that our wholly owned subsidiaries, including Leigh Instruments Limited, be managed in such a way as to be always in a position to meet their financial obligations including repayment of all amounts due under the above facility. [6] “The above facility” refers to the line of credit made available by the Bank to Leigh. That amount varied and reached $45 million when the fifth comfort letter was provided by Plessey in December 1989. [7] Throughout his submissions, Mr. Finlay stressed the differences between the contract claim advanced by the Bank and the tort claim in so far as they related to paragraph 3 of the comfort letters. He did not take issue with the trial judge’s analysis of the contract claim, but submitted that the trial judge erroneously applied the same analysis when interpreting paragraph 3 for the purposes of the negligent misrepresentation claim. [8] No doubt there are important differences between the two claims, however, the task of determining the meaning to be given to the words in paragraph 3 was common to both. Before considering the legal effect of those words, the trial judge had to determine what they meant. The same words in the same document cannot have one meaning in the context of a contract claim and a different meaning in the context of a tort claim. Once the meaning of the words is fixed, the legal effect of those words must be considered. It is at this stage of the interpretative process that distinctions between contract and tort claims can become important. [9] The process of determining the meaning to be given to words in a document is governed by the same principles regardless of whether the process is engaged in the context of a contract claim or a tort claim. Those principles are identified by the trial judge at pp. 105-111 and recently reviewed by the Supreme Court of Canada in Eli Lily and Co. v. Novapharm Ltd., [1998] 2 S.C.R. 129 at 166-167. Essentially, the process is captured in the following question: Bearing in mind the relevant background, the purpose of the document, and considering the entirety of the document, what would the parties to the document reasonably have understood the contested words to mean? [10] The Bank contends, and the respondents agree, that paragraph 3 contained a representation by Plessey to the Bank as to its policy with respect to the business affairs of Leigh. It is also common ground that the representation was a continuing one. The dispute centers on what the policy was represented to be. The Bank reads paragraph 3 as a representation by Plessey that it would manage Leigh’s affairs in such a way that Leigh would always be in a position to meet its obligations to the Bank. The Bank contends that it was entitled to rely on this representation as to Plessey’s policy unless and until given notice of a change in that policy. [11] The respondents, emphasizing the words “be managed” in paragraph 3, submit that the paragraph was not a representation that Plessey would manage the affairs of Leigh, but rather a representation that it was Plessey’s policy that its subsidiaries, including Leigh, should manage their own affairs in such a way as to be able to meet their financial obligations. The respondents rely not only on the language of paragraph 3, but on basic corporate law principles which they submit fixed the responsibility of management with the properly appointed officers of Leigh even though ultimate control of the company rested with the sole shareholder, Plessey. [12] Winkler J. accepted the respondents’ interpretation of paragraph 3. In reaching that conclusion, he emphasized the language of paragraph 3 considered in the context of the entire letter (pp. 111-16). He further held that his conclusion as to the meaning of the words in paragraph 3 was fortified by a consideration of the relevant background facts (pp. 116-18). [13] Winkler J. construed paragraph 3 in the course of his consideration of the contract claim and applied that construction to both the contract claim and the tort claim. For the reasons set out above, we think this was a proper approach. [14] There is some uncertainty as to the standard of review to be applied when addressing the appellant’s submission that the trial judge misconstrued paragraph 3 of the comfort letters. We will assume that no deference is due to the trial judge’s conclusion and that a correctness standard of review should be applied. [15] After giving careful consideration to Mr. Finlay’s submissions, we come to the same conclusion as the trial judge. We agree with the trial judge’s observation, at p. 141, that the appellant’s interpretation is inconsistent with the words “be managed” and would require that additional words be inserted in paragraph 3. The parties chose not to insert any such language. The phrase “be managed” does not suggest that Plessey itself would manage the affairs of Leigh. [16] Whatever doubt might exist if only the words of paragraph 3 are considered is dispelled by a consideration of the relevant factual background. The Bank and Plessey were sophisticated commercial entities. Both were familiar with letters of comfort. The Bank knew full well that the letter of comfort was not security in the traditional sense and that its commercial value depended very much on the relationship which existed between the lender and the provider of the letter of comfort. The Bank was very anxious to establish an ongoing relationship with Plessey, a very large multinational corporation. It was well known that Plessey would not provide any guarantee on loans made to Leigh by the Bank. The letter was crafted to avoid any suggestion that Plessey had any legal responsibility for the loans. The interpretation of paragraph 3 now advanced by the Bank would effectively put Plessey in the position of a guarantor subject to Plessey’s ability, on notice to the Bank, to change its “policy.” The interpretation urged by the Bank would give it almost exactly the security which it knew full well was not available to it when it chose to proceed with the loan in the hopes of doing more business with Plessey and its many subsidiaries. [17] It was argued before Winkler J. and here that the respondents’ interpretation of paragraph 3 meant that it amounted to no more than a “motherhood” statement having no real commercial purpose or value to the Bank. The trial judge, at pp. 116-18, considered and rejected this argument. He observed that other paragraphs in the letters contained valuable representations and undertakings by Plessey and that the third paragraph gave the Bank a basis, albeit not a legal one, upon which to request that Plessey stand behind the commercial activities of Leigh and honour Leigh’s debts. That request, while not based on any legal obligation, had substance and value in the commercial world revealed by the extensive evidence heard by the trial judge. [18] The trial judge, drawing on the language used by the English Court of Appeal in Kleinwort Benson v. Malaysia Mining, [1989] 1 All E.R. 785, referred to paragraph 3 of the letter as imposing a “moral obligation” on Plessey or as constituting a “gentleman’s agreement” between the Bank and Plessey. We prefer the description of the commercial value of comfort letters in general and this one in particular provided in the factum of the respondent GEC. Counsel wrote: … In this marketplace, both parties have experience in situations where a parent, for reasons it deems appropriate, refuses to give a legally binding assurance and a bank, for reasons it similarly considers appropriate agrees to accept something less, perhaps believing that when, and if, “push comes to shove”, the parent would pay for any or all of the “non-legal” commercial considerations of reputation, fear of adverse publicity, higher future borrowing costs and a myriad other reasons and possibilities depending on the circumstances. [19] The interpretation given to paragraph 3 by the trial judge did not render the letters of comfort valueless and it cannot be said that his interpretation yields a commercial absurdity. The Bank’s primary submission must be rejected. The trial judge correctly construed paragraph 3 of the letters of comfort. [20] The second ground of appeal assumes that the Bank’s interpretation of paragraph 3 of the comfort letters is correct and goes on to contend that as Plessey had no such policy, paragraph 3 contained a misrepresentation. Obviously, the accuracy of the representation in paragraph 3 must be considered in the light of the meaning given to that paragraph by Winkler J. and affirmed by this court. The trial judge considered whether Plessey had a policy as he had found it described in paragraph 3. After an extensive review of the evidence (pp. 136-42), he concluded that Plessey had such a policy and that it remained in operation throughout the relevant time. This finding is clearly one of fact to which deference is due. There was ample evidence to support the finding. [21] The Bank’s third submission relates only to the fifth letter of comfort. The trial judge found that the fifth letter, like the first four, did not contain a material misrepresentation. He further held, at p. 146, that in the circumstances existing when the fifth letter was provided, the Bank could not reasonably have relied on any representation in the letter. In coming to that conclusion, the trial judge placed considerable emphasis on the concluding language of the fifth letter. In that letter Plessey indicated that the letter “does not constitute a legally binding commitment.” That language did not appear in the earlier letters. [22] As we are satisfied that the fifth letter contained no misrepresentation, it is not necessary to address the reliance argument. We will do so for the sake of completeness. The trial judge was entitled on all of the evidence to come to the conclusion that he did. His finding was reached not only on the basis of the closing language in the letter, but on all of the circumstances existing as of December 1989 when the fifth letter was provided. By that date, Plessey had been the subject of a hostile takeover and was controlled by commercial entities, one of which was the respondent, GEC, which had no ongoing working relationship with the Bank and no apparent need to look to the Bank for financing in the future. The commercial considerations which may have prompted Plessey to respond favourably to the Bank’s request that Plessey honour these debts were not operative after Plessey itself was acquired by GEC and another corporate entity. [23] The fourth submission made by the Bank is directed at GEC. The Bank seeks to hold GEC jointly liable with Plessey, the author of the letter, for negligent misrepresentation. This ground of appeal must fail as we are satisfied that the fifth letter did not contain any misrepresentation, and in any event any representation in that letter could not reasonably be relied on by the Bank. [24] The Bank’s fifth submission is somewhat different. For the purpose of this submission, the Bank accepts the interpretation of paragraph 3 given by the trial judge and adopted by this court. Counsel submits that even on that interpretation, the representation became untrue or at least misleading by January or February 1990 when Plessey realized that Leigh’s continued fiscal viability was uncertain. Counsel submits that the continuing nature of the representation in paragraph 3 of the letters required Plessey to put the Bank on notice when it became clear to Plessey that Leigh might not be able to manage itself so as to meet its obligations to the Bank. If this submission is accepted, the Bank is entitled to recover the advances made to Leigh after Plessey knew that Leigh’s prospects were not good. [25] We cannot accept this submission. There is nothing inconsistent with the continued existence of a policy that Leigh should manage its affairs so as to be able to meet its financial obligations and the existence of circumstances which imperiled Leigh’s ability to conduct its affairs in accordance with that policy. The policy may remain extant even if circumstances make compliance difficult or doubtful. [26] The trial judge conducted an extensive review of the evidence surrounding Leigh’s slide into insolvency in late 1989 and early 1990. He reviewed the extensive efforts made by Plessey and its owners to salvage Leigh’s business. He concluded, at p. 142, that the policy referred to in paragraph 3 of the letters remained in place throughout the material period of time right up until immediately before the bankruptcy of Leigh. We see no basis for interfering with that finding. [27] There is a second reason why this submission must fail. It is premised on the representations made in the fifth letter of comfort. As indicated above, we agree with the trial judge’s conclusion that the Bank could not reasonably rely on any representation in that letter. Consequently, even if we accepted the Bank’s argument that the representations in paragraph 3 became misleading some time in January or February 1990, the Bank could still not establish the requisite reliance on the representations. [28] We affirm the order of Winkler J. dismissing the Bank’s action. The Costs Appeal [29] The Bank also seeks leave to appeal the costs order made by Winkler J. He ordered that the respondents should have their costs on a solicitor-and-client scale. The Bank submits that the trial judge should have awarded costs on a party-and-party basis. [30] The determination of an appropriate costs order is within the discretion of the trial judge. This court will only interfere with the exercise of that discretion if it is satisfied that the order is unreasonable or premised on some error in principle. [31] The trial judge referred to the appropriate statutory authorities and instructed himself that an order of costs on a solicitor-and-client level should be made only in “exceptional” and “rare” cases. [32] In holding that this was a case for costs, the trial judge said: In my view, this is one of the “rare” and “exceptional” cases where an award of solicitor and client costs is warranted. The plaintiff advanced numerous allegations of fraud and deceit on the part of the defendants. These allegations included: allegations that Colin Justice intentionally make false and misleading statements to the bank regarding Leigh'’ financial statements; that Justice intentionally misrepresented Leigh’s financial condition to the bank; that Plessey, GEC and GEC Siemens plc intentionally misrepresented the affairs of Leigh to the Bank in order to induce the bank to lend money to Leigh; and that the fifth and last comfort letter was delivered to the bank fraudulently, and that this fraud was perpetrated, in part, by Ross Anderson. These allegations were pursued unrelentingly through to the conclusion of trial. Indeed, the plaintiff raised a novel allegation of fraud concerning Mr. Anderson in its written argument, despite the fact that it had not been pleaded and the defendants had no opportunity to lead evidence to refute it. All of these allegations of fraud and deceit were held to be wholly unsupported by the evidence. [33] The above-quoted observations of the trial judge are fully supported in the record and, in our view, provide ample reason for the costs order made by the trial judge. [34] Mr. Finlay submitted that the trial judge erroneously accepted the respondents’ submission that their offer to settle the action by the payment of $15 million made in 1996 was evidence that they did not simply “walk away” from their “moral obligation” under the comfort letters. We agree that the offer of payment made some 6 years after the litigation commenced says little about the respondents’ sense of their “moral obligations.” We do not think, however, that this mischaracterization of the motivation for the settlement offer warrants interference with the costs order made by the trial judge. That order was fully justified in the light of the unfounded allegations made by the Bank and the conduct of the trial by the Bank. [35] We would grant leave to appeal the costs order, but dismiss that appeal. [36] The respondents are entitled to their costs on the appeal on a party-and-party basis. Released: September 13, 1999