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Combined Air Mechanical Services v. Computer Room Services Corp., 2015 ONSC 610

General agreed to incorporate sub’s price and work together on bidding the prime contract. General carried the price in its bid to the owner, listed the sub and another sub as the possible mechanical subs, and listed the sub’s project manager in its bid to the owner. After general was awarded the contract, general obtained another quote from another sub, which was far lower than the first, and cut out the first sub. The judge held that the general breached contract A.

He also held that the general breached its duty of honesty and good faith; it issued its quote to the owner using the sub’s bid, knowing it had no intention of using the sub if it could find a lower price, but kept the sub in reserve to do the work if it could not. The sub was awarded its lost profit calculated as follows:

bid price less actual cost of the sub who actually was given the work.

In addition, the sub was given its profit on all extras.

Overreach

When a lawyer acts for a mortgagee who is attempting to recover the money due under the mortgage, the lawyer reviews the mortgage and then claims the amounts due in accordance with its terms. However just because the mortgage calls for a particular rate of interest or amounts due on the happening of a particular event, are these terms enforceable? As usual, it all depends. In that regard, we note the decision of the Ontario Court of Appeal in P.A.R.C.E.L. Inc. v. Acquaviva, 2015 ONCA 331.

Security

A mortgagee loaned money to a mortgagor. As security for the loan, the mortgagor executed a note and granted a mortgage against the mortgagor’s lands. The mortgage did not refer to the note, but the note referred to the mortgage. It was common ground that the note and mortgage secured the same loan.

The mortgage was not exceptional – other than some terms that we will discuss later. It referenced monthly payments, an interest rate of 0.75% per year, and a due date. The note, however, stated that,

“The Principal Amount outstanding at any time, and from time to time, when not in default, shall bear interest at 0.75% per annum. In the event of default mentioned herein by the Borrowers, [sic] then the interest rate applicable shall be calculated at the rate of 10% per annum after demand, default and pre and post judgment.”

We often see a mortgage referencing and incorporating the terms of a promissory note. However, this transaction was unusual. We initially thought that the mortgagee in this transaction might have been sloppy, but then realised that it was more likely that the mortgagee knew exactly what it was attempting to accomplish – using the back door to circumvent the Interest Act (Canada).

Attack

Section 8(1) of the Interest Act provides:

“No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.”

The mortgagor argued that the interest clause in the note violated the Act. The mortgagee argued that the Act referred to “interest secured by mortgage” and that the clause in the note was therefore enforceable. After all, that impugned interest clause was not incorporated into the mortgage. It seemed that the mortgagee was quite content to obtain a personal judgment against the mortgagor for the extra interest and leave the mortgage to secure the lesser sum of interest. To put matters into context, the difference between the two interest provisions was about $50,000 and was rising each day.

Single Loan

The motions judge held in favour of the mortgagee – mostly because the mortgagor did not argue the provisions of the Act at the motion. It raised the Act only on appeal.

The question before the Court of Appeal was whether the Act “applies to the single loan secured by both the Note and the Mortgage, where the terms of the Note provide for escalated interest on default but where the Mortgage, which admittedly secures the Note, contains no such provision.”

The Court concluded that “the arrears of principal and interest in question are ‘secured by [a] mortgage on real property’ and that s. 8 of the Interest Act therefore applies to the debt instruments entered into by the parties, including the Note.” The Court therefore concluded that the interest escalation clause was ineffective.

The Court gave a number of reasons for its decision.

1. S. 8 was enacted to protect property owners against abusive lending practises.

2. The mortgage and note secured payment of the principal liability, a single loan.

3. S. 8 does not stipulate that the prohibited interest rate be imposed under the terms of the mortgage instrument itself; it refers only to a rate, which could be imposed elsewhere, that is secured by a mortgage.

4. The proposition that the mortgagee asserted “is contrary to common sense and, if accepted, would result in commercial uncertainty, as well as fundamental unfairness to the appellants.” The commercial uncertainty that the Court referenced was the spectre of two different interest rates applying to the same loan.

3 months’ interest

The mortgagee claimed for three months’ interest in accordance with section 17 of the Mortgages Act. That claim was not unusual. However, it claimed that interest at the 10% rate set out in the note rather than the 0.75% rate set out in the mortgage. Very confusing logic. The Court, consistent with its previous ruling, held that the appropriate rate was 0.75% and therefore reduced the claimed amount of $9,965.00 to $747.38.

Judgment Debtor Examinations

Kristina Zakhary Professional Corp v. Age-less Dermal Therapy Inc. 2015 SCJ

Director was to be examined in a judgment debtor examination as a representative of the corporate debtor. Before the examination, the creditor commenced another action against corporations and the director personally alleging a fraudulent conveyance. The director refused to attend at the judgment debtor examination; the creditor moved for an order requiring her to do so; the Master refused to grant the order stating that it would be unfair to allow the director to be examined twice.

The creditor appealed to a judge of the Superior Court of Justice, who allowed the appeal. He indicated that the creditor had a right to the judgment debtor examination; further, as long as the questions were proper for a judgment debtor examination, it was irrelevant if the questions also related to issues or property being dealt with in the new action.

CIC Seminar

Jonathan Speigel and Rose Avarino will be speaking at the CIC Trade Debt Recovery through the Ontario Court System Seminar – please email CICTORONTO@rogers.com or call 905-426-7929 to register

Click here for more information:

Trade-Debt-Recovery-Flyer-Oct-21-2015

Arbitration

Carillion Construction Inc. v. Imara (Wynford Dr) Ltd. 2015 Ont SCJ

Owner wanted to invoke arbitration clause with general. Master refused for two main reasons. First, the owner had issued its own civil action against general and then waited 7 months to seek a stay to the general’s actions. During that time, multiple liens were registered, claims were issued, and a reference joined them into a single court proceedings. Therefore, the owner acted inconsistently with an election to arbitrate and waived arbitration under the contract. In any case, the owner unduly delayed its request for arbitration. Second, there were approximately 6 actions and 10 lien claims involving the general and the owner and another 50 lien claims involving subs of the general. The arbitration clauses were different in the prime contract than in the subcontracts and the owner did not want the subs to be involved in the arbitration with the general. This would be unfair to the general and would lead to multiple trials; for that reason also, the owner was estopped from insisting on arbitration.

Construction documents

Total Meter Services Inc. v. Aplus General Contractors Corp. 2015 Ont SCJ
Subcontractor brought summary judgment motion.

It seemed apparent that subcontractor had not delivered all documents called for under the contract, including warranty documents and as-builts. Subcontractor claimed that it did not have to deliver the documents because contractor had not paid it in full. The judge refused to grant the motion and held that a 10% holdback of the entire contract was not unreasonable because the documents were important.