Stipulated Remedy Clauses

Hillel David,
Associate

February 2017

By Hillel David, Associate Lawyer
First published in the Advocates' Quarterly volume 45, Number 4 - Reproduced by permission of Thomson Reuters Canada Limited. This is a condensed version. For the full article please download the pdf. Part 1 of 2 of condensed version - See part II.

The issues in 1465152 Ontario Limited v Amexon Development Inc.¹ include the interpretation and enforceability of contractual limitation of remedies clauses, particularly in the context of a claim that can be made under a concurrent tort.

Overview

The Landlord in Amexon wished to demolish a large commercial building in which the Tenant occupied leased premises, and redevelop the property. The Tenant refused to vacate, despite offers for compensation from the Landlord. The Landlord issued a notice to vacate and the Tenant sought and obtained an injunction. Section 13.07 of the lease provided:

Whenever the Tenant seeks a remedy in order to enforce the observance or performance of one of the terms, covenants and conditions contained in this Lease on the part of the Landlord to be observed or performed, the Tenant's only remedy shall be for such damages as the Tenant shall be able to prove in a court of competent jurisdiction that it has suffered as a result of a breach (if established) by the Landlord in the observance and performance of any of the terms, covenants and conditions contained in this Lease on the part of the Landlord to be observed or performed.

Interpreting Contractual Limitation Clauses

A limitation clause should be strictly construed against the party seeking to invoke it.² Clear and unambiguous language cannot, however, be circumvented through resort to the principle of strict construction. The primary rule of construction is that the language of a contractual provision should be interpreted in accordance with the ordinary and plain meaning of the words employed. The language of the stipulated remedy clause in Amexon, while not elegant, was clear and unambiguous. In the event of a breach of the lease by the Landlord, the clause manifestly limited the Tenant's remedies to a claim for damages.

Barring Or Limiting A Claim Made Under A Concurrent Tort

The fact that a contract contains an express clause that deals with the matter in issue is not sufficient, per se, to bar a claim under a concurrent tort duty of care where the latter provides some benefit or advantage (such as a lengthier limitation period, or a more beneficial assessment of damages) not available were the claim made in contract.³ A concurrent claim in tort can, however, be barred or limited, indirectly as well as directly, by an effectively-worded exemption or limitation clause in the contract.⁴ The general rule is summarized as follows:⁵

The rule is not that one cannot sue concurrently in contract and tort where the contract limits or contradicts the tort duty. It is rather that the tort duty, a general duty imputed by the law in all the relevant circumstances, must yield to the parties' superior right to arrange their rights and duties in a different way. In so far as the tort duty is not contradicted by the contract, it remains intact and may be sued upon.

When considering the question whether a contract precludes the plaintiff from suing in tort, the basic principle to be applied is: "[I]n assessing the rights and obligations of the parties, [the court] must commence with the contract. It must look to what the parties themselves had to say about those rights and obligations. "⁶

Section 13.07 of the lease in Amexon did not make express reference to trespass. This was held sufficient for a finding that the clause did not apply to a concurrent claim in the tort of trespass. That reasoning failed, however, to take into account the following principle regarding indirect contractual prohibition of a concurrent claim in tort:⁷

A concurrent or alternative liability in tort will not be admitted if its effect would be to permit the plaintiff to circumvent or escape a contractual exclusion or limitation of liability for the act or omission that would constitute the tort.

The principle was subsequently adopted in two later SCC decisions. The first was BG Checo, where the following was said:

We conclude that the actions in contract and tort may be concurrently pursued unless the parties by a valid contractual provision indicate that they intended otherwise. This excludes, of course, cases where the contractual limitation is invalid, as by fraud, mistake or unconscionability. Similarly, a contractual limitation may not apply where the tort is independent of the contract in the sense of falling outside the scope of the contract. . .⁸

. . .

Le Dain J. [in Central Trust] recognized that liability in tort can be limited or excluded by the terms of a contract. A plaintiff will not be permitted to plead in tort in order to circumvent a contractual clause which excludes or limits the defendant's liability.⁹

The second was Bow Valley Husky, where the plaintiff was not permitted to avoid the effect of contractual exemption clauses by making a claim for breach of a duty to warn, when that duty did not arise independently of the contract. As stated there:¹⁰

The parties' planned obligations must be given appropriate pre-eminence. Where those planned obligations negate tort liability, contract "trumps" tort. . .It follows that a tort claim cannot be used to escape an otherwise applicable contractual exclusion or limitation clause.

In Amexon, the conduct of the Landlord that constituted the tort of trespass was one and the same as the conduct which constituted the breach of the contractual covenant for quiet enjoyment. The conduct of the Landlord which constituted the tort of trespass:

was not "'an independent tort' unconnected with the performance of the contract",¹¹ or a "tort [that was] independent of the contract in the sense of falling outside the scope of the contract",¹² but rather "was one connected with the performance of the contract";¹³ and

did not involve "acts independent of the contractual relationship between the parties because they would not have been made had the parties not been in a contractual relationship".¹⁴

The Landlord's duty not to commit a trespass did not "arise independently of the contract".¹⁵ To the contrary, the acts of the Landlord which the Tenant sought to enjoin were directly and intimately connected to the lease agreement.

The courts in Amexon considered only the first question: whether there was an actionable concurrent tort. They failed to proceed to a consideration of the second issue: whether the stipulated remedy clause in the contract limited the remedies not just for a claim in contract, but also for a claim under the concurrent tort of trespass. While there undoubtedly was a concurrent claim in trespass, that was not sufficient per se to permit the Tenant to circumvent or escape the impact of the stipulated remedy clause.¹⁶ The claim in trespass "constituted an attempt to avoid [an] express contractual [limitation], something that cannot be done".¹⁷

The Absence of a Demolition Clause

The CA in Amexon adopted the view of the application judge that the lease agreement did not contain a demolition clause, and that the failure by the Landlord to have negotiated the inclusion of such a clause was telling.¹⁸ That argument, however, does not apply where the contractual provision is clear on its face.¹⁹ Intention implied from the absence of contractual language cannot override intention demonstrated by clear and unambiguous contractual language.

The Enforceability of The Stipulated Remedy Clause – The Tercon Test

One of the reasons given by the application judge in Amexon for the refusal to apply the stipulated remedy clause was: "[T]he parties cannot oust the jurisdiction of a court of equity." To the extent that that remark was intended to mean that a court is entitled to disregard or nullify the agreement made by the parties because of general concerns about equitable considerations, there is ample authority for the incorrectness of that view, including the appellate decisions in Peachtree II,²⁰ Birch,²¹ and Aqua,²² and culminating in the SCC Tercon decision.²³

In Elsley Estate²⁴ the court emphasized the importance of holding parties to their contractual bargain,²⁵ a consideration that has only increased in weight in more recent case law. In Peachtree II, Sharpe J.A. referred to Elsley and adopted the statement that the common law rule refusing to enforce penalty clauses was "an inroad upon freedom of contract".²⁶ He also referred to:

...the policy of upholding freedom of contract. Judicial enthusiasm for the refusal to enforce penalty clauses has waned in the face of a rising recognition of the advantages of allowing parties to define for themselves the consequences of breach.²⁷

The leading decision is now Tercon, where the following was said:²⁸

[T]he principle is that a court has no discretion to refuse to enforce a valid and applicable contractual exclusion clause unless the plaintiff. . .can point to some paramount consideration of public policy sufficient to override the public interest in freedom of contract and defeat what would otherwise be the contractual rights of the parties.

. . .

[F]reedom of contract will often, but not always, trump other societal values. The residual power of a court to decline enforcement exists but, in the interest of certainty and stability of contractual relations, it will rarely be exercised.

The modern approach is that a forfeiture clause will be enforced unless it is shown that it leads to an unconscionable result.

Tercon then established a three-part test for the determination of whether to refuse to enforce a contractual term.²⁹ Just as "There is nothing inherently unreasonable about exclusion clauses",³⁰ there is nothing inherently unreasonable about an agreement that the obligations undertaken by one of the parties to the contract will not be subject to all of the usual remedies or means of enforcement, so long as the result is not unconscionable in that some real remedy, such as a claim for damages, remains available.³¹ The modern approach is that a forfeiture clause will be enforced unless it is shown that it leads to an unconscionable result.³² The test for unconscionability was considered in Birch.³³ Most importantly in Amexon, the result of a refusal to issue an injunction would not have been unconscionable. There was therefore no basis for granting an injunction instead of holding the Tenant to its bargain by limiting its remedies to a claim for damages. The following comments were applicable in Amexon:³⁴

The most that can be said is that the [Tenant] was presented with a standard form agreement which he could accept or reject as he saw fit. There was no evidence of pressure or duress or the other usual indicia of unconscionability.

. . .

In summary, we see no justification for rewriting the agreement entered into by the parties.

The final part of the Tercon test required the Tenant to identify the existence of an overriding public policy that outweighed the very strong public interest in the enforcement of contracts. The application judge in Amexon made brief reference to two matters. He said:

1. "The Landlord is walking away from its fundamental promise. . .I do not read s. 13.07 as applying when the Landlord commits not just a breach of covenant, but a complete repudiation of its grant and consideration"; and
   
   
2. "This is not a balanced win-win but an effort by the Landlord to make more money by denying or rescinding its bargain. Allowing landlords to evict tenants because something better has come along is fraught with a risk of abuse. "

The first position taken by the application judge was merely a restatement of the fundamental breach of contract doctrine which was jettisoned in Tercon. The whole point of that decision is that a contract provision which satisfies the tripartite test must be enforced regardless of whether it is associated with what previously was described in the case law as a fundamental breach of contract. If the application judge was relying on this first position as an "overriding public policy that outweighs the very strong public interest in the enforcement of contracts", then he was using circular and incorrect reasoning. The "overriding public policy" necessary to justify the refusal to enforce a contract provision must be something other than the fact that there has been a "fundamental breach" of the contract.

The second position taken by the application judge was, although couched in different language, similarly based on the discarded doctrine of fundamental breach of contract. In addition, it was based on the false premise that the Landlord was "denying or rescinding its bargain". The application judge failed to appreciate that the stipulated remedy clause was designed in anticipation of, and to govern, precisely the sort of situation where "something better has come along" for the Landlord. The Tenant must, or at least should, have known that. It is difficult to imagine any other objective purpose for the inclusion of the clause in the contract. The parties expressly agreed to a limitation of the Tenant's remedies should the eventuality of a breach of contract by the Landlord materialize. That was the bargain made by the parties. Contrary to the view expressed by the application judge, the Landlord was not "denying or rescinding its bargain", but rather was enforcing that bargain.

The application judge furthermore erred in saying that the Landlord's conduct did not result in a "balanced win-win" situation. The Tenant would have been placed in equivalent (in fact better) premises in an adjoining building, or elsewhere, and would have been made whole by an award of damages for any loss or harm sustained. The Tenant did not identify any genuine detriment or harm that would have resulted from its relocation for which it would not have been fully compensated.

The theoretical possibility of abuse is not a basis for refusing to apply well-established principles.

The application judge's comment that "Allowing landlords to evict tenants because something better has come along is fraught with a risk of abuse" was another error. That statement involved a hypothetical possibility. There undoubtedly is a risk of abuse in a situation where a landlord evicts a tenant prior to the expiry of the term of the lease, but the fact is that there was no abuse in Amexon. A risk of abuse is not the same as actual abuse. Operating an automobile is fraught with the risk of negligent driving, but that is not a reason to prevent all driving. The theoretical possibility of abuse is not a basis for refusing to apply well-established principles.

The CA's view that "A commercially unreasonable interpretation of s. 13.07 would result if the Landlord could act without lawful authority to bring the Lease to an end and reoccupy the premises, and then rely on the disclaimed Lease to prevent the Tenant from restraining the Landlord's unlawful conduct",³⁵ involved flawed reasoning.

To begin with, it is clear that s. 13.07 was intended to survive a breach of the lease by the Landlord. That was its whole purpose. It was therefore inappropriate to say that the Landlord was relying on a "disclaimed lease". Similarly, the clause was plainly intended to preclude the Tenant from having access to any remedy other than damages in the event of a breach by the Landlord, so that it was incorrect to say that the Tenant ought not to have been "prevented from restraining the Landlord's [breach of contract]".

Second, why is an interpretation which gives effect to the plain meaning of a contract provision that clearly was intended to govern in the type of situation that transpired, a commercially unreasonable interpretation? To the contrary, it was a commercially unreasonable interpretation not to enforce the bargain made between the parties where the result was not unconscionable. It cannot be said that reading a clause out of a contract is a commercially reasonable interpretation or result.³⁶

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¹ 2015 ONCA 86, affirming an unreported decision delivered by handwritten endorsement. A separate costs endorsement is reported at 2014 ONSC 4384. An application for leave to appeal to the SCC was dismissed (2015 CanLII 38341, 2015 CarswellOnt 10072), although a settlement had been made between the parties shortly prior to the release of that dismissal.
² Bow Valley Husky (Bermuda) Ltd. v Saint John Shipbuilding Ltd. [1997] 3 S.C.R. 1210 at para. 114
³ BG Checo International Ltd. v British Columbia Hydro & Power Authority [1993] 1 S.C.R. 12 at paras. 13-15 and 42.
⁴ BG Checo, at paras. 15-16, 21 and 42.
⁵ BG Checo, at para. 16.
⁶ BG Checo, at para. 7.
⁷ Central Trust Company v Rafuse [1986] 2 S.C.R. 147 at para. 59(3).
⁸ BG Checo, at para. 21.
⁹ BG Checo, at para. 101 (Iacobucci J. dissenting on other grounds). See also paras. 124-26 and 130.
¹⁰ Bow Valley, at para. 27.
¹¹ Central Trust at para. 16.
¹² BG Checo, at para. 21.
¹³ Central Trust at para. 17.
¹⁴ Central Trust at para. 16.
¹⁵ Bow Valley, at para. 31.
¹⁶ Central Trust, at para. 59(3).
¹⁷ Bow Valley, at para. 31.
¹⁸ At para. 17 of the CA reasons for decision.
¹⁹ Unifund Assurance Company v D.E. 2015 ONCA 423 at para. 27.
²⁰ Peachtree II Associates – Dallas LP v 857486 Ontario Ltd. (2005) 76 O.R. (3d) 362, C.A.
²¹ Birch v Union of Taxation Employees, Local 70030 2008 ONCA 809.
²² Aqwa v Centennial Home Renovations Ltd. , (2003) 24 C.C.E.L. (3d) 16, Ont. C.A.
²³ Tercon Contractors Ltd. v British Columbia (Minister of Transportation & Highways) [2010] 1 S.C.R. 69.
²⁴ J.G. Collins Insurance Agencies Ltd. v Elsley [1978] 2 S.C.R. 916.
²⁵ Dickson J. said (at para. 47): "It is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum. It has no place where there is no oppression. "
²⁶ Peachtree II, at paras. 32-33.
²⁷ Peachtree II at para. 34.
²⁸ Tercon, at paras. 82 and 117 respectively, Binnie J. dissenting on other grounds.
²⁹ Tercon, at paras. 121-23 (original emphasis).
³⁰ Tercon, at para. 82.
³¹ There is no difference in principle between a stipulated remedy clause and a clause which excludes either certain types of damages (such as consequential damages) or all damages for certain types of conduct (such as negligent conduct). Each of the latter is enforceable if sufficiently clear and if not unconscionable in the circumstances of the case.
³² Peachtree II, at paras. 23, 26, 27 and 32; Birch, at paras. 38-39.
³³ Birch, at paras. 41-45.
³⁴ Aqwa, at paras. 4 and 5 respectively.
³⁵ At para. 16 of CA reasons for decision.
³⁶ The principle that a contract provision ought not to be interpreted in a manner that would render it meaningless has been described as a "fundamental rule": Reliance Petroleum Ltd. v Stevenson [1956] S.C.R. 936 at para. 46.

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