DATE: 20010111

DOCKET: C34440

 

 

COURT OF APPEAL FOR ONTARIO

 

MORDEN, GOUDGE and FELDMAN JJ.A.

 

 

BETWEEN:	)
	)
THE HI-TECH GROUP INC. (FORMERLY M C CLUB SERVICES, INC.)	) ) )	Robert Rueter and Young Park, for the appellant
Plaintiff	)
(Appellant)	)
	)
- and -	)
	)
	)
SEARS CANADA INC.	) )	Jerome R. Morse and Susan B. Wortzman, for the respondent
Defendent	)
(Respondent)	) )
	)
	)	Heard:  November 8, 2000

 

On appeal from a judgment of John A. B. Macdonald J. dated May 29, 2000.

 

MORDEN J.A.:

 

[1]               This is an appeal by the plaintiff from a summary judgment granted by John A. B. Macdonald J. dismissing one of the plaintiff’s claims in this action.

[2]               The grounds of the appeal are that the motions judge erred: (1) in interpreting the termination provision in an agreement between the plaintiff and the defendant; (2) in holding that extrinsic evidence relating to the agreement was inadmissible; and (3) in granting partial summary judgment, on part only of a larger claim, in the circumstances of this case.

[3]               The facts, in so far as they are relevant to the issues that must be addressed on this appeal, are as follows.  The plaintiff is in the business of organizing and managing consumer clubs on behalf of retailers, such as the defendant, to offer benefits and costs savings to consumer members as well as increase retail sales for the retailer.

[4]               The plaintiff entered into an agreement with the defendant dated May 1, 1994 which established the “Mature Outlook Program” that was designed for the defendant’s customers who were over 50 years of age.  Customers purchased membership in the program for $9.99.  Out of this membership fee, the plaintiff received $8.99 and the defendant kept $1.00.  The plaintiff provided various benefits to members and administered the program.  The defendant provided other benefits, notably discount coupons on purchases by members.

[5]               The term of the agreement is set forth in section 4.1 as follows:

The term of this Agreement will commence as of the date first above written [May 1, 1994] and will end at midnight on May 31, 1995 (“Initial Term”) subject to termination as hereinafter provided.  Thereafter, it will automatically renew for successive terms of one year, subject to termination by either party upon 120 days prior written notice.  Upon any such termination, if the Program is to continue in operation under the management of SEARS or a third party, SEARS and MANAGER [the plaintiff] will agree on procedures for the orderly transfer of MANAGER’s functions to SEARS or SEARS designee, and MANAGER will be compensated for its reasonable costs incurred therein.            [Emphasis added.]

[6]               The program was established in May, 1994.  The defendant delivered a notice of termination to the plaintiff on February 21, 1996, to be effective no later than June 30, 1996.  The plaintiff’s position was that under section 4.1 of the agreement, the notice was ineffective to terminate the agreement before May 31, 1997.  Put shortly, it submitted that the 120 days notice was to precede the commencement of the renewal term beginning on May 31, 1996 and, if it did not, the agreement would renew automatically for a further year from that date.

[7]               The plaintiff commenced this action in November 1996.  In its statement of claim, it claimed damages in the amount of $12,000,000 based on various alleged breaches of the agreement by the defendant.  One of the breaches, the one in question in the motion and in this appeal, is the alleged breach of the termination provision described in the preceding paragraph.

[8]               The defendant, after delivering its statement of defence, brought a motion for “partial summary judgment” dismissing the claim against it relating to the termination of the agreement.  This was a claim for damages for the period July 1, 1996 to May 31, 1997.  The motions judge granted the relief sought.  The formal judgment provided that “partial summary judgment be granted to the defendant, dismissing the plaintiff’s claim for damages for breach or repudiation of the agreement dated May 1, 1994, on the basis that the defendant did not validly terminate the Agreement effective June 30, 1996”.

[9]               Both the plaintiff and the defendant filed extrinsic evidence on the motion for summary judgment and, indeed, in the statement of claim the plaintiff pleaded as material facts what it considered to be the general effect of part of this evidence.  This related to its “significant start-up costs for the Program” and the expectation that the program would not become profitable until it had been established for some time.  The plaintiff also alleged that it relied on the automatic renewal clause to reduce the risk it was assuming.  It submitted that this clause would provide a reasonable opportunity for it to obtain a return on its initial investment in establishing the program under the agreement.

[10]          In its evidence filed on the motion the plaintiff furnished details to support the allegation.  It is the plaintiff’s position that this evidence, which it submits relates to the genesis and one of the aims of the transaction, supports the interpretation that the agreement was to renew automatically for one year periods subject to 120 days notice of termination before a renewal date.

[11]          The defendant challenges this evidence and, in fact, relies on evidence that the plaintiff was prepared to accept the risk of the contract running not longer than its initial term.

[12]          Both parties filed and relied upon evidence of earlier drafts of the agreement and on the parties’ conduct under the agreement, submitting that this evidence casts light on its meaning.

[13]          In his reasons, the motions judge referred to several decisions respecting the correct test to apply on a motion for summary judgment under Rule 20.  He then said:

In Guarantee Company of North America v. Gordon Capital Corporation, [1999] 3 S.C.R. 423, Iacobucci and Bastarache JJ for the Court determined at pp. 434-5 the proper test for a summary judgment motion by reference to both Irving Ungerman Ltd. v. Galanis (1991), 4 O.R. (3d) 545 (C.A.)and Dawson v. Rexcraft Storage and Warehouse Inc. (1998), 164 D.L.R. (4th) 257 (Ont. C.A.) among the cases, and concluded that the appropriate test is to determine whether the Applicant has shown that there is no genuine issue of material fact requiring trial.  If the Applicant establishes that, the Respondent must then “establish his claim as being one with a real chance of success”: Hercules Management Ltd. v. Ernst & Young, [1997] 2 SCR 165 at para.15.  In determining whether the test (in two parts) has been met, I must recognize my limited role as determined or described in Transamerica Occidental Life Insurance Co. v. Toronto-Dominion Bank (1999), 44 O.R. (3d) 97 at 110d-e.

[14]          The motions judge then reviewed the basic submissions of the parties and examined “the law which determines how to ascertain the meaning of a written agreement”.  In doing so, he made several references to the reasons of Iacobucci J. for the Supreme Court of Canada in Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129 particularly, passages in paragraphs 52, 54, 55, 57, 58 and 59.

[15]          A major issue considered by the court in Eli Lilly was the admissibility of extrinsic evidence to aid in the interpretation of the agreement in question in that case.  Iacobucci J. concluded that the agreement did not contain any ambiguity that could not be resolved by reference to the text itself and “[n]o further interpretive aids are necessary” [para. 57].  He then said at paragraph 58:

More specifically, there is no need to resort to any of the evidence tendered by either Apotex or Novopharm as to the subjective intentions of their principals at the time of drafting.  Consequently, I find this evidence to be inadmissible by virtue of the parol evidence rule: see Indian Molybdenum Ltd. v. The King, [1951] 3 D.L.R. 497 (S.C.C.) at pp. 502-503.

[16]          The motions judge in his reasons said:

If it were open to the parties to lead evidence of “surrounding circumstances”, that evidence could not properly include evidence of the subjective intention of either one party (per Iacobucci J. in Lilly para. 54) or of all parties to the agreement (per Iacobucci J. in Lilly at para. 59).  The surrounding circumstances, if admissible in evidence, will encompass factors which assist the Court “to search for an interpretation which, from the whole of the contract would appear to promote or advance the true intent of the parties at the time of entry into the contract”.  See Consolidated Bathurst Export Ltd. v. Mutual Boiler & Machinery Insce. Co., [1980] 1 SCR 888 at p. 901, Kentucky Fried Chicken v. Scotts Food Services Ltd. (1988), 41 BLR (2d) 42 (OCA) at p. 51.

However, I conclude that, as a question of law, it is not open to the Respondent in the circumstances here to lead such evidence, based on the authority of Eli Lilly v. Novopharm (supra).

                                                ….

Where, as here, the agreement is a negotiated commercial agreement, it should be interpreted objectively, rather than from the perspective of one or the other of the parties: see Kentucky Fried Chicken at p. 51 (supra).

In my opinion, based on these legal principles, the Applicant has established that there is no genuine issue of material fact which requires a trial to determine what the parties intend by their termination language in para. 4.1, interpreted in the light of all of the contractual language.  The Respondent has failed, in my opinion, to establish that its claim has a real chance of success, whether it is its claim that it has the right to lead evidence in aid of interpretation of the contract, or its claim of breach of para. 4.1 of the agreement.

[17]          The motions judge then dealt with the interpretation of s. 4.1 in the agreement:

In my opinion, the Respondent’s argument that termination rights may be exercised only on a May 31^st renewal date, and only on 120 days written notice given prior to the renewal date is inconsistent with and incompatible with the usual and ordinary meaning of the language which the contracting parties used.  That language is clear and unambiguous in its meaning, and it determines clearly the rights of the parties to terminate the agreement: either party may terminate the agreement by written notice delivered on the other party 120 days prior to the date of termination.

In my opinion, the case is like Lilly (supra.)  The language used in the agreement, in its relevant provisions is so clear and unambiguous that the meaning the parties intended to give to that language may be determined simply by having reference to the agreement itself.  In the result, no further interpretive aids are necessary (per Iacobucci J. in Lilly at para.[57]) and it is “unnecessary to consider any extrinsic evidence at all” (per Iacobucci J. in Lilly at para.[55]).  Given the applicability of these conclusions of Iacobucci J., I conclude that evidence of “surrounding circumstances” is not admissible herein.  In para. [55] of Lilly, after he had mentioned that there is some jurisdiction to read contractual language in the light of “surrounding circumstances”, Iacobucci J. held that “it is unnecessary to consider any extrinsic evidence at all when the document is clear and unambiguous on its face.”  Surrounding circumstances are before the Court only if established by extrinsic evidence; that is, evidence of matters extrinsic to the contractual document.

[18]          According to Eli Lilly, the first step in the process of determining the admissibility of extrinsic evidence in this case is to determine whether the text of s. 4.1 of the agreement is clear and unambiguous.  On this question I disagree, with respect, with the views of the motions judge.  I think that the provision is ambiguous in the sense that it is reasonably susceptible of more than one meaning.  One of them supports the plaintiff’s position.

[19]          For convenience, I repeat the most relevant part of s. 4.1:

The term of this Agreement will commence as of the date first above written [May 1,1994] and will end at midnight on May 31, 1995 (“Initial Term”) subject to termination as hereinafter provided.  Thereafter, it will automatically renew for successive terms of one year, subject to termination by either party upon 120 days prior written notice.…[Emphasis added.]

[20]          The plaintiff’s submission, which I think is reasonably open to it to make, is that the statement “it will automatically renew for successive terms of one year” is the dominant part of the sentence that is “subject to” the phrase providing for termination on 120 days prior notice.  The court should read the renewal term and the notice provision together and not in opposition to each other.  This is done by reading the notice provision as qualifying the automatic renewal.  In other words, there will be an automatic renewal unless appropriate notice is given.  There is no ability under s. 4.1 to abridge the renewal term; there is only the right to prevent further renewal by giving appropriate notice.

[21]          The plaintiff’s submission continues along the following lines.  To read s. 4.1 otherwise is to give no meaning to the provision for an initial term and for subsequent automatic one year terms.  If it had been intended that the parties could terminate the agreement at any time on 120 days notice, there would be no point to the stipulation of an initial term and of successive renewal terms of one year.  If the contract could be terminated at any time, the provision of the successive terms serves no purpose.  Support is also found in the use of “prior” in the phrase “prior written notice”.  Prior to what?  The plaintiff answers that the 120 days notice must be read as being “prior” to the end of the annual term then in effect.  If it is not, the word “prior” ismere surplusage.

[22]          The defendant has not responded to the submission that the “subject to” clause relates to the automatic renewal feature in the preceding clause but does respond to the submission relating to treating as redundant the provision of an initial term and successive renewal terms.  The defendant submits that it bears upon merely a question of the “efficiency” of the language used and has no bearing on the meaning of the term.  Against this response the plaintiff relies upon the principle of interpretation that effect must, if possible, be given to every word and every clause in an agreement: Brown Bros v. Popham, [1939] 4 D.L.R. 662 (Ont. C.A.) at 670; and 13 Halsbury’s Laws of England, 4th ed. Reissue, at para. 174.

[23]          What is said in Eli Lilly respecting the admissibility of extrinsic evidence has no application in this case if I am right that s. 4.1 is ambiguous.  Indeed, because words always take their meaning from their context, evidence of the circumstances surrounding the making of a contract has been regarded as admissible in every case: Prenn v. Simmonds, [1971] 1 W.L.R. 1381 (H.L.) at 1383-1384; Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen, [1976] 1 W.L.R 989 (H.L.) at 995-996; Hill v. Nova Scotia (A.G.), [1997] 1 S.C.R. 69 at 78-79; Waddams, The Law of Contracts, 4th ed. (1999), at p. 232.

[24]          A frequently quoted and useful statement respecting surrounding circumstances is that of Lord Wilberforce in Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen, supra, at pp. 995-996.  After indicating that particular evidence in that case “would exceed what is permissible” in construing the contract in question, he went on to say:

But it does not follow that, renouncing this evidence, one must be confined within the four corners of the document.  No contracts are made in a vacuum: there is always a setting in which they have to be placed.  The nature of what is legitimate to have regard to is usually described as “the surrounding circumstances” but this phrase is imprecise: it can be illustrated but hardly defined.  In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.

[25]          The contract in this case must be interpreted in the context of properly admissible evidence.  This process cannot be fully carried out until findings of fact have been made on the evidence.  From at least the first part of the 19th century it was the function of the jury to find the surrounding circumstances as part of the process of interpreting documents: 13 Halsbury’s, supra, at para. 166.

[26]          This court is clearly not in a position to make the proper findings because the evidence is open to differing interpretations and inferences, and differing views on what weight should be given to it.  In short, it gives rise to a genuine issue for trial.  It will be the responsibility of the trial judge, in the context of the issues arising at the trial and the submissions made on them, to determine the extent of the admissibility of the evidence and to make the proper findings on it.

[27]          In view of my conclusion on the first two grounds of appeal it is not necessary to deal with the ground of appeal relating to the impropriety of granting a partial summary judgment in the circumstances of this case.

[28]          There is one further matter on which I shall comment and I do so with respect.  It may be seen from the reasons of the motions judge that he applied the test governing a motion for summary judgment set forth in Guarantee Co. of North America v. Gordon Capital Corporation, [1999] 3 S.C.R. 423 at 434-5.  This test, which is framed as a two-part test, involves, the moving party (1) “show[ing] that there is no genuine issue of material fact requiring trial” and “therefore summary judgment is a proper question for consideration” and then (2), if this showing is made, the responding party must then “establish his claim as being one with the real chance of success”.

[29]          In support of the first part of the test the Supreme Court cites, in addition to its own recent decision in Hercules Managements Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, two decisions of this court: Dawson v. Rexcraft Storage and Warehouse Inc. (1998), 164 D.L.R. (4th) 257 at 267-268 and Irving Ungerman Ltd. v. Galanis (1991), 4 O.R. (3d) 545 at 550-51.  It may be inferred from this that the court approved these decisions and considered them to be consistent with its approach.

[30]          These two Ontario decisions, Dawson more fully than Irving Ungerman, make it clear that: (1) the legal or persuasive burden is on the moving party to satisfy the court that there is no genuine issue for trial before summary judgment can be granted (this is what rule 20.04(2) says); and (2), by reason of rule 20.04(1), there is an evidential burden, or something akin to an evidential burden (because the motions judge does not find facts), on the responding party to respond with evidence setting out “specific facts showing that there is a genuine issue for trial”.  Failure of the responding party to tender evidence does not automatically result in summary judgment.  The “evidential burden” is described by this court (Catzman, Austin, and Borins JJ.A.) in Lang v. Kligerman, [1998] O.J. 3708 in paras. 8 and 9[1] and by the High Court (Griffiths J.) in Kaighin Capital Inc. v. Canadian National Sportsmen’s Shows (1987), 58 O.R (2d) 790 at p. 792[2].

[31]          The short point is that the motions judge, having considered all of the evidence and the parties’ submissions on it, must be satisfied that there is no genuine issue for trial before he or she may grant summary judgment.  This is the legal burden resting on the moving party and it never shifts.  I do not think that Guarantee Co. of North America intended to detract from this.

[32]          For the foregoing reasons, I would allow this appeal, with costs on a solicitor and client basis, set aside the judgment of the motions judge, and make an order dismissing the defendant’s motion, with costs on a solicitor and client basis.

“J.W. Morden J.A.”

“I agree S.T. Goudge J.A.”

“I agree K. Feldman J.A.”

 

Released: January 11, 2001