Stipulated Remedy Clauses
By Hillel David, Associate Lawyer
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.
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:
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
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
The principle was subsequently adopted in two later SCC decisions. The first was BG Checo, where the following was said:
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
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:
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 leading decision is now Tercon, where the following was said:28
. . .
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 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:
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 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
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.
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