Dan Hepburn
Friday, February 6th, 2015    Posted by Dan Hepburn (posts) and Alisha Parmar (posts)
Dan Hepburn
Dan maintains a general civil litigation practice with a particular focus on business disputes, lease disputes (both commercial tenancy and the lease of goods and machinery), employment law, debt collection, disputed estates and insurance law.
Alisha Parmar
Alisha comes to Kornfeld LLP from University of British Columbia as an Articling Student. Her primary area of interest lies in: general corporate commercial law.

It is rare that a reasonably straightforward statutory provision receives consideration by the Court of Appeal three times within little more than a decade. Section 73 of the Land Title Act RSBC 1996 c.250 (“LTA”) is such a provision. Those inclined to technical arguments may protest this hat-trick was actually a joint effort between section 73 and section 73.1, since the decision of International Paper Industries Ltd. v. Top Line Industries Inc., 1995 BCCA 2305 (“Top Line”) resulted in the enactment of section 73.1, which modified the effect of section 73. Nevertheless, this article provides an overview of the decisions in this saga and concludes with some practical comments.

Section 73 and Top Line

Our discussion begins with section 73 of the LTA, a section which, prior to 1996, received scant consideration from the Courts. Section 73 is reproduced in full below:

73

(1) Except on compliance with this Part, a person must not subdivide land into smaller parcels than those of which the person is the owner for the purpose of

(a) transferring it, or

(b) leasing it, or agreeing to lease it, for life or for a term exceeding 3 years.

(2) Except on compliance with this Part, a person must not subdivide land for the purpose of a mortgage or other dealing that may be registered under this Act as a charge if the estate, right or interest conferred on the transferee, mortgagee or other party would entitle the person in law or equity under any circumstances to demand or exercise the right to acquire or transfer the fee simple.

(3) Subsection (1) does not apply to a subdivision for the purpose of leasing a building or part of a building.

(4) A person must not grant an undivided fractional interest in a freehold estate in land or a right to purchase an undivided fractional interest in a freehold estate in land if the estate that is granted to or that may be purchased by the grantee is

(a) a fee simple estate on condition subsequent, or

(b) a determinable fee simple estate

that is or may be defeated, determined or otherwise cut short on the failure of the grantee to observe a condition or to perform an obligation relating to a right to occupy an area less than the entire parcel of the land.

(5) Subsection (4) does not apply to land if an indefeasible title to or a right to purchase an undivided fractional interest in

(a) a fee simple estate on condition subsequent in the land of the kind described in subsection (4), or

(b) a determinable fee simple estate in the land of the kind described in subsection (4)

was registered before May 30, 1994.

(6) An instrument executed by a person in contravention of this section does not confer on the party claiming under it a right to registration of the instrument or a part of it.

Top Line was the innocuous case that started it all. Prior to this case, it was generally accepted (or, as it turns out, assumed) that section 73 of the LTA meant leases longer than three years of unsubdivided parcels of land were unenforceable except as against the parties to the lease. That is, although the tenant was unable to register her interest under the lease at the Land Title Office, she would still have personal rights and obligations as against the landlord and vice versa.

In Top Line, the landlord and tenant executed a lease of unsubdivided land for a term of nearly five years, with a further option to renew. Like so many others, this lease was prepared without legal advice and neither party was aware of section 73. The matter was brought before the courts when the tenant decided to exercise its option to renew the lease and the landlord refused to allow the renewal.

The tenant argued that the lease and option to renew should be declared valid and enforceable between the parties, while the landlord contended that section 73 applied to nullify the lease. Interestingly, the lease had been the subject of earlier litigation and this was the first time the landlord was raising illegality under section 73 as an issue. The BC Supreme Court agreed with the tenant and found that section 73 allowed the lease to be enforceable as between the parties, including the renewal option.

However, the landlord successfully appealed the decision. The Court of Appeal held that the public policy behind section 73 was undermined by permitting in personam rights to be created via illegal leases. The public policy identified by the Court included protecting the Torrens land registration system and ensuring that municipal authorities retained control over subdivision.[1] As a result, Newbury JA held that the lease in Top Line was unregistrable, unenforceable (even between the parties to the lease), and invalid from the outset.

Section 73.1 and Idle-O No.1

The Court of Appeal’s ruling in Top Line came as a great surprise to real estate lawyers and industry and likely affected thousands of British Columbia leases in existence at the time. While abject panic may not have been the correct word to describe the reaction, it is safe to say that the decision in Top Line created great uncertainty and left many longstanding commercial relationships suddenly without any legal protection. This form of unregistered leases of unsubdivided land was particularly common in the agricultural sector, where plots of land and orchards had been leased out by farmers for decades if not generations in this manner.

The concern within the legal profession over the Court of Appeal’s decision in Top Line was such that the British Columbia Law Institute (“BCLI”), a non-profit society dedicated to law reform projects composed of notable lawyers and legal scholars, released a consultation paper titled “Leases of Unsubdivided Land and the Top Line Case”[2] calling for submissions from the profession. Common criticism of Top Line was summarized on page 4 of the consultation paper as follows:

The most commonly-heard complaint about the reasoning in Top Line was, as one commentator put it, that “[t]he court overstated the evils which s. 73 seeks to restrain. [citation omitted] Another critic remarked, “[t]here has been no demonstrable harm”[citation omitted] caused by leases in contravention of section 73. The damage has been contained because restrictions on subdivision are not the only tool that local governments have to control real estate development. The forerunner of section 73 was enacted in 1919. Since that time, local governments have imposed numerous licence and permit requirements—such as building permits and business licences—in order to regulate land use and development. In addition, zoning requirements have progressed since 1919. As a result, restrictions on subdivision are no longer the only or even the primary means that local governments have at their disposal to control real estate development.

 

Ultimately, as a result of its consultations and analysis, the BCLI released a report titled: “Report on Leases of Unsubdivided Land and the Top Line Case”[3] (the “BCLI Report”). The BCLI Report recommended an amendment to the LTA and attached a model legislative amendment as a schedule to the report. Importantly, the model amending legislation specifically called for the amendments to the LTA modifying the effects of section 73 to have retroactive effect, protecting existing leases of unsubdivided parcels.

As a result of the BCLI Report and the wide concern voiced by industry and real estate lawyers over Top Line, the Legislature responded by enacting section 73.1. In the second reading of the enacting bill, the Honourable Wally Oppal, then Attorney General of the Province, described section 73.1 and referred to the Top Line decision as follows:

The amendment addresses the side effects of a 1996 decision, a court case that interpreted the act’s requirements on leases on unsubdivided land. The decision has resulted in confusion, extra costs for farmers and an unintended burden on local governments.[4]

Section 73.1 was, as such, specifically in response to the Top Line decision and provided that a lease for a parcel of land is not unenforceable between the parties to it, if the only reason for the unenforceability is noncompliance with section 73 or that the lease is unregistrable. In many respects, section 73.1 went further than the draft legislation recommended by the BCLI, which called for such leases to be deemed licences in land. Importantly, however, section 73.1 did not specifically follow the model form of the legislative amendment recommended by the BCLI and did not clearly set out that the amendment was to have retroactive effect. Whether this was through inadvertence or by design is up for debate. As it turns out, this drafting choice or omission was significant.

Idle-O Apartments v. Charlyn Investments, 2008 BCSC 840 [“Idle-O No. 1”] became the first decision to test whether section 73.1 reversed the effects of Top Line entirely. In Idle-O No.1, the lessor relied on Top Line to seek a declaration that a lease of 998-years was unenforceable for noncompliance with section 73. The lease had been entered into prior to section 73.1 coming into force and, again, the parties had entered into the lease without appreciating the significance of section 73. The key issue in Idle-O No.1 was whether section 73.1 applied retrospectively to cure an illegal lease entered into prior to its enactment.

The BC Supreme Court decided in favour of the lessee, holding that section 73.1 applied retrospectively. The Court, after reviewing the fallout from Top Line, including various criticism of the decision from practitioners and legal scholars, the BCLI Report and the legislative history and debate surrounding the amendment, held that as benefits-conferring legislation the provision intended to “abolish the hardship effects of the Top Line decision”.[5]

The BC Court of Appeal unanimously disagreed with the trial court’s interpretation of section 73.1. In allowing the appeal, the Court held that there “is no basis in law for concluding that the Legislature intended s. 73.1 to have retrospective effect”.[6] The Court stated that the established statutory interpretation principles did not support the lower court’s conclusion, and therefore, the lease was invalid and unenforceable. Since section 73.1 did not clearly indicate retrospective application, it could only protect those leases entered into after May 31, 2007; the day the section came into force.

Idle-O No. 2

While disposing of the issue of retrospective application, the Court of Appeal allowed various alternative claims of the lessee back to the BC Supreme Court for determination.[7] Despite the Court of Appeal’s unfavourable ruling, there seemed to be a glimmer of hope for the lessee. This hope turned out to be well-placed, as in Idle-O Apartments v. Charlyn Investments, 2013 BCSC 2158 (“Idle-O No. 2”), the BC Supreme Court found that proprietary estoppel applied and that a replacement “lease” should be granted.

In a long and carefully crafted decision, Watchuk J explained that it was unconscionable for the lessor to benefit from the lessee’s mistaken belief that it held a valid leasehold interest. The lessee (and lessor) had acted in accordance with the belief that there was a valid lease agreement for over 20 years. In doing so, the lessee had acted to its detriment by making substantial expenditures on the leased property and had missed an opportunity for subdivision, which would have made the validity of the lease a non-issue. Consequently, Watchuk J held that the four main elements for the modern test of proprietary estoppel had been met.

Watchuk J determined that the appropriate remedy under the doctrine of proprietary estoppel was to order the parties to enter into a replacement lease on terms identical to the original lease. Since the new lease was entered into after the enactment of section 73.1, the provision would work to give the lessee in personam rights under the new lease.

Watchuk J asserted that ordering an identical replacement lease did not circumvent the Court of Appeal’s decision nor was it contrary to the public policy behind section 73. The replacement lease was an equitable remedy flowing from the conduct of the parties and not from the original, illegal lease agreement.[8] Watchuk J further held that section 73.1 had clarified the public policy behind section 73 since the Top Line decision, and stated that the public policy applied in determining a remedy should not be restricted to that at the time of the breach, but should instead reflect its state at the time the remedy is issued.[9]

Idle-O No. 2, BC Court of Appeal

The lessor again appealed the decision on a number of grounds. Perhaps surprisingly, the BC Court of Appeal for the most part upheld the decision of the lower court in Idle-O Apartments v. Charlyn Investments, 2014 BCCA 451.

The Court of Appeal held the trial judge was correct in finding that the elements of proprietary estoppel had been met, and proceeded to consider whether ordering a replacement lease was appropriate. Interestingly enough, the Court of Appeal accepted the trial judge’s reasoning that, despite the obvious effect of the order, re-entering the lease was not a retrospective application of section 73.1. The Court held that it was open for the trial judge to fashion such a remedy through proprietary estoppel and commented that:

Indeed even if s.73.1 had never come into existence, it would have been open to the trial judge to fashion an equitable remedy in the form of a “lease” (in reality a court order) that is enforceable only between the parties and which thus poses little danger to third parties relying on the Torrens system of registration.[10]

As a result, the Court approved of the remedy of a replacement lease despite the public policy concerns expressed in Top Line and in the appeal of Idle-O No.1.

However, the Court did find that the remedy fashioned by the trial judge was too broad and was not the “minimum equity necessary to do justice” between the parties.[11] Based on factors external to the parties’ expectations, including, for example, the consideration that the sewage system of the leased property was at capacity, the Court found it appropriate to reduce the duration of the new lease the parties were to enter. Thus, instead of being for 998 years, the replacement lease would only be for the duration of the lives of the current directors of the lessee and those directors’ children.[12]

 

Comments

In conclusion, the above cases provide a broad survey of legal principles which will likely have repercussions outside of the realm of property law. Focussing on the implications for long-term leases of unsubdivided property alone, the decisions have provided some clarity on sections 73 and 73.1 and bring some practical points to the forefront. At an immediate level, the relevance of Top Line will eventually fade with the passage of time and the expiry of all but the most lengthy leases of unsubdivided parcels of land.

Lessors and lessees who entered into long-term lease agreements of unsubdivided land after May 31, 2007 can rest assured knowing that their lease agreements will be upheld as between the parties to the agreement. However, the parties should still be alive to the fact that long-term unregistrable leases do present a host of other issues including enforcing their interests against third parties.

For lease agreements entered into prior to May 31, 2007, those seeking to uphold the lease may be able to rely on equitable grounds, like proprietary estoppel or unjust enrichment, to give effect to the terms of the agreement. As demonstrated in the Court of Appeal’s recent decision in Idle-O No. 2, this does not entail the lease will be upheld on identical terms, and section 73 still renders such leases prima facie unenforceable. Bottom line is that it is still somewhat of an expensive ‘crapshoot’ to rely on the Courts to uphold the original bargain and parties to such leases would be well advised to seek legal advice to protect their interests and investment. In fact, parties would be well served to seek out such advice on a pre-emptive basis before there is any discord in the landlord tenant relationship.

There are also lessons of general interest and application to take from the still ongoing saga of Top Line. While both Top Line and the Idle-O cases impress the importance of being aware of the law prior to entering lease agreements, it is important in this case to acknowledge that at the respective times those leases were entered into it is highly unlikely that even the most thoughtful of real estate lawyers could have predicted the Court of Appeal’s ruling in Top Line.

What is also somewhat surprising to the authors about the Court of Appeal decisions in Idle-O No 1. and No. 2 is that the Court did not choose to revisit Top Line, but rather approved of a remedy in equity to work around its harsh results. The Court of Appeal’s original decision in Top Line struck a very odd balance between holding parties to their contractual dealings and the purported policy consideration that were relied upon by the Court to justify the harsh effects of the ruling. These purported policy considerations were widely criticized by legal scholars and practitioners and largely debunked by the BCLI Report. Ultimately, the Legislature did not appear to share the Court’s policy concerns.

Ideally, the correctness of Top Line would have been weighed upon by the Supreme Court of Canada as a final arbitrar of the debate. Leave to appeal to the Supreme Court of Canada has not been sought on Idle-O No. 2, however, and the practical relevance of the debate will ultimately be rendered all but moot as time passes.

Lastly, the choice of the legislature to not include clear language giving the amendment retroactive effect only adds to the intrigue of the Top Line saga. The authors are inclined to view the failure of the legislature to give section 73.1 retroactive effect as inadvertent and in error, particularly in light of above comments of then Attorney General Oppal to the Legislature. It is unclear what, exactly, would be served by limiting the remedial effect of the amendment on this basis.




[1] Top Line, at para. 17 and 18

[3] BCLI report no. 39; July 2005

[4] Hansard, 2007: Third Session, 38th Parliament, Volume 20, Number 9 at page 7917

[5] Idle-O No.1, at para. 101

[6] Idle-O Apartments v. Charlyn Investments, 2010 BCCA 460 at para. 4

[7] Ibid at para. 38

[8] Idle-O No.2 at para. 184

[9] Idle-O No.2 at para. 186

[10] Idle-O Apartments v. Charlyn Investments, 2014 BCCA 451 at para. 68

[11] Ibid, at paras. 83 to 86

[12]Ibid, at para. 85

Posted by Dan Hepburn (posts) and Alisha Parmar (posts) | Filed under Real Estate Law | ...
Herb Silber, Q.C.
Monday, January 26th, 2015    Posted by Herb Silber, Q.C. (posts)
Herb Silber, Q.C.
Herb Silber, QC brings a strong combination of experience, knowledge and empathy to the arbitration process as Arbitrator or Counsel. Herb’s approach creates the positive, respectful atmosphere critical to a successful arbitration process.

In my last Case Comment, I examined some of the elements of the recent watershed Supreme Court of Canada decision, Sattva Capital Corp v. Creston Moly Corp, which provides a complete compendium on the application of the principles that are engaged where leave to appeal an arbitration award to the British Columbia Supreme Court is sought.

One of the elements I did not address in that Case Comment was the residual discretion of the Supreme Court to deny leave even where the substantive requirements of a Leave Application are met. Some of those factors were alluded to in the Sattva decision and include the conduct of the parties and the urgent need for a final answer.

An application of those principles can be found in a recent B.C. Supreme Court decision representing one of the first post Sattva cases, Owners, Strata Plan BCS 3165 (“Owners”) v. KBK No. 11 Ventures Ltd. (“KBK”), which was successfully argued by Shane Coblin of our firm. In that case, while the Court decided largely that the issues sought to be appealed were matters of fact or mixed fact and law and therefore did not satisfy the requirement that leave to appeal an arbitration award can only be founded on a question of law, nevertheless, the Judge did address the question of whether he should exercise his discretion to refuse the granting of leave to appeal, and in doing examined the two grounds referenced above.

On the matter of the conduct of the parties the Court considered the behaviour of the Owners in their attempt to delay the hearing of the arbitration, including commencing a futile Supreme Court of BC Action four days before the arbitration was scheduled to start and spending four days on a failed application to stay the Arbitration Hearing, as well as the Owners’ failure to acknowledge and pay any of their financial obligations to KBK, even the ones for which no appeal was sought.

The Owners’ failure to pay even those obligations they were not contesting gave support to KBK’s claim to the urgency of obtaining a final answer so it would not be unduly burdened financially. As a result the Court exercised its discretion, in particular, on the basis of the urgent need for a final outcome, to deny the Leave Application even if the Owners had met the other burdens for a successful Leave Application.

As mentioned previously, given the other findings of the Court, the Judge’s refusal to exercise his discretion in favour of granting leave to appeal was not critical in this case. However, it does stand as a cautionary tale that the objectives that are set out in Rule 19 of the British Columbia International Arbitration Centre Rules, that I have noted in a prior Case Comment, i.e. that the process should “strive to achieve a just, speedy and economical determination on its merits” are to be ignored at one’s peril.

On a personal note, since my last Case Comment, I was honoured to have been appointed a Queen’s Counsel (QC) by the Government of British Columbia. I want to thank all of you who conveyed your support and good wishes.

Posted by Herb Silber, Q.C. (posts) | Filed under Litigation and ADR | ...
Shafik Bhalloo
Tuesday, October 28th, 2014    Posted by Shafik Bhalloo (posts) and Alisha Parmar (posts)
Shafik Bhalloo
Shafik Bhalloo has been a partner of Kornfeld LLP since 2000. His practice is focused on labour and employment law, and on commercial and civil litigation. He is also an Adjudicator on the Employment Standards Tribunal and an Adjunct Professor in the Faculty of Business Administration at Simon Fraser University.
Alisha Parmar
Alisha comes to Kornfeld LLP from University of British Columbia as an Articling Student. Her primary area of interest lies in: general corporate commercial law.

By Alisha Parmar and Shafik Bhalloo

Introduction

Non-competition clauses are hardly a rarity in employment contracts. The classic non-competition clause seeks to protect the business of an employer by prohibiting a former employee from, generally speaking, competing with the employer once the employment relationship is terminated.

It is well-established that courts are unsympathetic towards non-competition clauses. It has been recognized under the doctrine of restraint of trade that non-competition clauses are contrary to public policy, since they “interfere with individual liberty of action and because the exercise of trade should be encouraged and should be free”.[1] As a result, non-competition clauses are prima facie unenforceable, unless the party trying to enforce the clause is able to demonstrate that it is reasonable. In Aurum Ceramic Dental Laboratories Ltd. v Hwang (“Aurum”), the Court summarized the criteria to be met to find a non-competition clause reasonable:

(a)    the clause protects a legitimate proprietary interest of the employer;

(b)   the restraint is reasonable between the parties in terms of:

  1. temporal length;
  2. spatial area covered;
  3. nature of activities prohibited; and
  4. overall fairness;

(c)    the terms of the restraint are clear, certain and not vague; and

(d)   the restraint is reasonable in terms of the public interest with the onus on the party seeking to strike out the restraint.[2]

Failure to meet any one of the criteria above renders a non-competition clause unenforceable. However, until recently, the state of the law was ambiguous as to whether more nuanced clauses would even be considered non-competition clauses, and therefore whether or not such clauses could avoid the reasonableness test completely. For example, where a clause is not prohibitory per se, but instead imposes some other burden on the employee for competing, it was unclear whether it would be considered a non-competition clause at all. The BC Court of Appeal recently addressed this issue in Rhebergen v Creston Veterinary Clinic Ltd. (“Rhebergen”), and clarified that a creative non-competition clause is still a restraint of trade.[3]

The Facts of Rhebergen

Rhebergen involved an employee, Dr. Stephanie Rhebergen, and her employer, Creston Veterinary Clinic (“CVC”). CVC is exceptionally isolated in that the closest clinics to CVC are 60 miles away and require a trip over the Canada-US border. The majority of CVC’s business is drawn from a handful of dairy farms located in the Creston, British Columbia area.

As a newly licenced veterinarian, Dr. Rhebergen decided to enter into an associate agreement with CVC, wherein she would be paid to work with CVC for three years. The agreement provided that Dr. Rhebergen would be paid $65,000 for each of the three years. It also stated that Dr. Rhebergen would have to pay CVC if, within three years after the agreement was terminated, she set up practice in Creston, or within a 25 mile radius of CVC’s place of business in Creston (the “Clause”). Specifically, Dr. Rhebergen would have to pay $150,000 if her practice was set up within one year of terminating the agreement, $120,000 if her practice was set up within two years, and $90,000 if it was set up within three years.

A little over a year into the agreement, differences arose between Dr. Rhebergen and CVC, and the agreement was terminated. A few months later, Dr. Rhebergen sought a declaration that the Clause was unenforceable, so that she could “set up a mobile dairy veterinary practice in Creston and vicinity”.

Summary of Trial Decision

Mr. Justice Betton gave brief reasons and found that the Clause was in fact a non-competition clause, even though it did not directly prohibit Dr. Rhebergen from competing. The judge then applied the criteria from Aurum and found that the Clause did not meet the test for reasonableness because it was ambiguous, and therefore unenforceable. CVC appealed the decision, including appealing the finding that the Clause constituted a restraint of trade to begin with.

The Court of Appeal

Although the majority of the Court allowed the appeal, the minority and majority only differed on whether the Clause met the criteria for reasonableness. Notably, the majority of the Court of Appeal endorsed Mr. Justice Lowry’s reasoning that the Clause was indeed a non-competition clause.

The decision of Mr. Justice Lowry is illuminating, as it includes an extensive review of the English and Canadian authorities regarding whether a clause is a restraint of trade or not. In reviewing the jurisprudence, Mr. Justice Lowry commented that two strands of authority have been established by modern jurisprudence: the “formalist” approach and the “functionalist” approach. The formalist approach was relied on by CVC to argue that because the Clause does not prohibit Dr. Rhebergen from practicing outright, it cannot be a non-competition clause.

Mr. Justice Lowry noted that this approach requires a clause to be structured as a prohibition in order to constitute a restraint of trade. Under this view, clauses that simply impose a burden on the employee cannot be non-competition clauses. This may be counterintuitive, as “mere disincentives to post-employment competition are not sufficient to trigger the doctrine, even if those disincentives operate as effectively at dissuading competitive conduct and participation in the marketplace as a prohibition”.[4] In conducting a review of the various authorities, Mr. Justice Lowry noted that the jurisprudence in Ontario favours the formalist approach.

The functionalist approach, on the other hand, asks whether “the clause at issue attempts to, or effectively does, restrain trade, in which case it will be captured by the doctrine and subjected to reasonableness scrutiny”.[5] Mr. Justice Lowry noted that the functionalist approach has been widely accepted in English law, and that it is clear that a strict prohibition is not required for the doctrine of restraint of trade to apply. Mr. Justice Lowry then went on to determine that the functionalist approach is the preferred approach:

In my view, the functionalist approach established in English law is to be preferred as the legal basis for determining whether clauses that burden employees with financial consequences, whether by payment or forfeiture, they would not otherwise have for engaging in post-employment competition constitute a restraint of trade. In the words of Lord Wilberforce, it is a matter of the effect of the clause in practice over its form.[6]

In applying this reasoning to the Clause, Mr. Justice Lowry found that it was a non-competition clause because “it compromises the opportunity to compete with the clinic Dr. Rhebergen would otherwise have”.[7] The majority agreed with Mr. Justice Lowry’s finding that the Clause was a non-competition clause, and the Court of Appeal unanimously accepted that the functionalist approach governs in British Columbia.

Comments

Although the Clause in Rhebergen was ultimately allowed to stand by the majority, the decision and the unequivocal adoption of the functionalist approach has implications for employers.

For one, the BC Court of Appeal has now made it clear that it will be the effect and not the form of the clause which will be determinative. Employers intending to restrain the post-employment activities of their employees will not be able to disguise the proverbial wolf in sheep’s clothing – a non-competition clause by any other name will still be unenforceable if it is unreasonable.

A second possible effect of Rhebergen is that the functionalist approach will capture a larger range of restrictive clauses. Recall that the test under the functionalist approach captures even those clauses that “attempt to” restrain trade. Although only time will tell exactly what type of clause this will apply to, proactive employers will want to think carefully about and exercise caution in imposing post-employment burdens on employees, lest they be deemed non-competition clauses.


[1] Shafron v KRG Insurance Brokers (Western) Inc. 2009 SCC 6 at para 6

[2] Aurum Ceramic Dental Laboratories Ltd. v Hwang (1998) 77 A.C.W.S. (3d) 161 (BC SC) (“Aurum”) at para 11

[3] Rhebergen v Creston Veterinary Clinic Ltd., 2014 BCCA 97 (“Rhebergen”)

[4] Ibid, at para 29

[5] Ibid

[6] Ibid, at para 42

[7] Ibid, at para 43

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Herb Silber, Q.C.
Wednesday, October 8th, 2014    Posted by Herb Silber, Q.C. (posts)
Herb Silber, Q.C.
Herb Silber, QC brings a strong combination of experience, knowledge and empathy to the arbitration process as Arbitrator or Counsel. Herb’s approach creates the positive, respectful atmosphere critical to a successful arbitration process.

Sattva Capital Corp v. Creston Moly Corp, 2014 SCC 53 (Sattva)

In the past I have posed the question as to whether Arbitration can be more cost effective and efficient than a court process. The recent Supreme Court of Canada decision, Sattva, provides a complete compendium on the right to appeal a decision of an arbitrator. The upshot of that case is to clarify (if it had been required) that the right to appeal an arbitrator’s decision, particularly when the subject matter of the arbitration is the interpretation of a contract, is very limited- even more so than an appeal from a decision of an inferior court. The result is that it presents another benefit to the insertion of an arbitration clause in an agreement for those parties who wish to ensure that, in the event of a dispute, the outcome of a decision by the arbitrator is likely to be final, thus limiting the cost and enhancing the efficiency of this alternative dispute mechanism. Sattva represents the latest pronouncement of the Supreme Court of Canada’s philosophical adherence to providing parties access to justice by limiting the ability to appeal an arbitrator’s decision, thus ensuring that the more financially robust party will not be able to “tilt the playing field.”

Briefly, the facts in Sattva involved a contractual dispute over a finder’s fee that Sattva alleged was owing to it. In particular, under their contract, Sattva was to be paid a fee of US $1.5 million in shares. The issue that the arbitrator was asked to consider was the date the shares were to be valued. Nine million shares hung in the balance based on the alternative dates each of the parties contended for.

The Court first dealt with principles of contract interpretation and concluded that as most contracts involved a consideration of mixed fact and the law, the right to appeal under S. 31 of the Arbitration Act, SBC 2004, which is limited to questions of law, would rarely be able to be resorted to. The result of this is that in arbitrations involving an interpretation of a contract, which is most often the case, the arbitrator’s decision is likely to be final.

 

Additionally, the Court weighed in on the test to be applied by a court reviewing an arbitral decision, if it has the jurisdiction to do so. The Court’s approach was to re-iterate the importance it places on giving great latitude or deference to the arbitrator in his decision making process. This stems from recognition of the importance of maintaining the integrity of the arbitral process. As the Court noted at paragraph 89 of Sattva, arbitration often is chosen “…to obtain a fast and final resolution…” Later at paragraph 105, the Court observed that “… it may be presumed that [because the parties choose their decision maker] such decision makers are either chosen based upon their expertise in their area which is the subject matter of the dispute or are otherwise qualified in a manner acceptable to the parties.” For these reasons, the Court identified that the test for overturning an arbitral decision should be akin to that of overturning a decision by an administrative tribunal-reasonableness. This presents a high bar to overturn an arbitral decision.

The Sattva case represents, in my opinion, a high water mark in the promotion of an efficient and cost effective process that the parties can look to if they choose to have any disputes that may arise in their commercial relationship governed by arbitration.

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Posted by Herb Silber, Q.C. (posts) | Filed under Litigation and ADR | ...
Shafik Bhalloo
Monday, September 29th, 2014    Posted by Shafik Bhalloo (posts) and Alisha Parmar (posts)
Shafik Bhalloo
Shafik Bhalloo has been a partner of Kornfeld LLP since 2000. His practice is focused on labour and employment law, and on commercial and civil litigation. He is also an Adjudicator on the Employment Standards Tribunal and an Adjunct Professor in the Faculty of Business Administration at Simon Fraser University.
Alisha Parmar
Alisha comes to Kornfeld LLP from University of British Columbia as an Articling Student. Her primary area of interest lies in: general corporate commercial law.

 

INTRODUCTION

In today’s workplace, privacy is an evolving issue and Canadian privacy law is developing rapidly. Perhaps surprisingly, only a handful of Canadian jurisdictions, (including British Columbia, Saskatchewan, Manitoba and Newfoundland) have privacy legislation that creates a statutory tort or civil right of action for invasion of privacy. Until recently, most Canadian jurisdictions could only rely on legislative schemes that applied in very specific contexts – there was no general remedy for an invasion of privacy, unless the claimant managed to successfully establish the existence of a common law right to bring a civil action.

That changed when the common law tort of invasion of privacy was given teeth by the Ontario Court of Appeal in Jones v Tsige, 2012 ONCA 32 (“Jones”), wherein the Court definitively recognized the common law cause of action for intrusion upon seclusion. In Jones, the tort of intrusion upon seclusion enabled the plaintiff to recover not insignificant damages for the invasion of her privacy where no legislative scheme applied and where she had suffered no pecuniary loss.

But the bite of Jones and the tort of intrusion upon seclusion do not stop there. This year, the Ontario Superior Court of Justice relied on Jones to certify a class action proceeding against an employer for, inter alia, vicarious liability of an employee’s tort of intrusion upon seclusion. While the case, Evans v The Bank of Nova Scotia, 2014 ONSC 2135 (“Evans”), has yet to proceed to trial, the decision is one to watch out for. Whether or not the employer is ultimately found liable for the employee’s breach of privacy, Evans serves as a reminder that the law around breach of privacy is progressing swiftly and that employers must keep up.

JONES V TSIGE

The Facts

The plaintiff, Ms. Jones, and the defendant, Ms. Tsige, were both employees of the Bank of Montreal (“BMO”). Another coincidental common factor was that Ms. Jones’ former husband had formed a common law relationship with Ms. Tsige. However, Ms. Jones and Ms. Tsige did not know each other, and they worked at different branches of the BMO in different positions.

By virtue of her position with the BMO, Ms. Tsige had access to Ms. Jones’ personal information, and on at least 174 occasions, using her computer at her workplace, Ms. Tsige did in fact access Ms. Jones personal information. The information included Ms. Jones’ date of birth, marital status, language spoken, residential address, and details of her financial transactions in her personal accounts with the BMO.

The BMO discovered Ms. Tsige’s activities and confronted her. Ms. Tsige admitted to the BMO that she had no legitimate reason for accessing Ms. Jones’ personal information. Instead, Ms. Tsige explained she had been accessing Ms. Jones’ information since she was in a financial dispute with her common law spouse (Ms. Jones’ former husband) and wanted to find out if he was paying Ms. Jones child support. Notably, Ms. Tsige did not make any copies of or disseminate Ms. Jones’ personal information.

The BMO disciplined Ms. Tsige by meting out a five-day suspension and denying her a yearly bonus. The BMO also issued her a warning that future repetition of her conduct would result in termination of her employment. Ms. Tsige was asked to review and discuss the BMO privacy principles and standards.

The Ontario Superior Court

Ms. Jones lodged an action in the Ontario Superior Court of Justice asserting that her privacy interest in her confidential banking information was “irreversibly destroyed” and claimed damages of $70,000 for invasion of privacy and breach of fiduciary duty, and punitive and exemplary damages of $20,000 against Ms. Tsige.

The Court held there was no fiduciary duty owed by Ms. Tsige to Ms. Jones and dismissed the breach of fiduciary duty claim, finding there was no fiduciary relationship between them in the traditional or non-traditional sense.

With respect to the invasion of privacy claim, the Court rejected the notion that in Ontario a common law tort of invasion of privacy exists. As a result, the privacy claim was also dismissed. The Court stated that in spite of the dismissal, Ms. Jones was not without remedy because she could bring an action for invasion of privacy under the federal Personal Information Protection and Electronic Documents Act, 2000 c. 5 (“PIPEDA”).

The Ontario Court of Appeal

Ms. Jones appealed the Superior Court’s ruling to the Ontario Court of Appeal only on the ground that Ontario law does not recognize the tort of invasion of privacy. The Court of Appeal reversed the lower Court’s decision, recognized the tort of intrusion upon seclusion, and awarded Ms. Jones damages.

In order to come to the conclusion that the tort of intrusion upon seclusion exists in Ontario, the Court of Appeal conducted an extensive review of Canadian, American, and English jurisprudence on the tort of invasion of privacy. The Court found the comments of Professor Prosser particularly compelling, and stated that if Ms. Jones did have a cause of action for the invasion of her privacy, it would fall in Professor Prosser’s first category of invasion of privacy, namely intrusion upon seclusion.[1]

For her case, Ms. Tsige submitted that the existing Ontario and federal legislative framework addressing privacy is an adequate basis for the Court to refuse to recognize the emerging tort of intrusion upon seclusion. To that end, Ms. Tsige argued that expansion of the law in the area should be left to Parliament and the legislature.

The Court of Appeal considered and rejected this argument, pointing out the various deficiencies in the legislative framework with respect to Ms. Jones’ case. Namely, the legislation that Ms. Jones could use, PIPEDA, only deals with “organizations” that are within federal jurisdiction and does not address the existence of a civil cause of action for invasion of privacy within provincial jurisdiction. In addition, Ms. Jones would only be able to use PIPEDA to lodge an action against the BMO, not Ms. Tsige, and the statute would not permit her to recover damages. Further, the Court of Appeal identified that existing Ontario legislation does not provide for a private cause of action between individuals; it merely addresses individual privacy rights in the context of governmental and other public institutions.

The Court of Appeal then confirmed the existence of a right of action for intrusion upon seclusion, reasoning as follows:

Recognition of such a cause of action would amount to an incremental step that is consistent with the role of this court to develop the common law in a manner consistent with the changing needs of society.

For over one hundred years, technological change has motivated the legal protection of the individual’s right to privacy. In modern times, the pace of technological change has accelerated exponentially…

It is within the capacity of the common law to evolve to respond to the problem posed by the routine collection and aggregation of highly personal information that is readily accessible in electronic form. Technological change poses a novel threat to a right of privacy that has been protected for hundreds of years by the common law under various guises and that, since 1982 and the Charter, has been recognized as a right that is integral to our social and political order.

The Legal Elements of Intrusion upon Seclusion

The Ontario Court of Appeal expressly adopted the key features of intrusion upon seclusion as delineated in the Restatement (Second) of Torts (2010). The legal elements are that:

  1. The defendant’s conduct must be intentional, which includes reckless conduct;
  2. The defendant must have invaded, without lawful justification, the plaintiff’s private affairs or concerns; and
  3. A reasonable person would regard the invasion as highly offensive causing distress, humiliation, or anguish.

The Court of Appeal opined that recognizing intrusion upon seclusion as a cause of action does not pose a serious risk of opening the proverbial “floodgates”. The Court stated only “deliberate and significant invasions of personal privacy” are caught by the tort and not de minimus cases:

Claims from individuals who are sensitive or unusually concerned about their privacy are excluded: it is only intrusions into matters such as one’s financial or health records, sexual practices and orientation, employment, diary or private correspondence that, viewed objectively on the reasonable person standard, can be described as highly offensive.

Nonetheless, the Court indicated that a plaintiff is not required to establish actual loss or damages as part of the cause of action. In this respect, the tort of intrusion upon seclusion is similar to the statutory causes of action for invasion of privacy which exist under the legislative schemes implemented in the four provinces, including British Columbia.

Having said this, the Court stated that where the plaintiff has suffered no pecuniary loss, only “symbolic” or “moral” damages are appropriate to acknowledge the wrong done. After considering Ontario case law and the Manitoba Privacy Act, the Court of Appeal established the upper range for damages where no pecuniary loss is suffered at $20,000. The Court then awarded Ms. Jones $10,000, the mid-point of the range, stating that Ms. Tsige’s conduct was “highly offensive to the reasonable person and caused humiliation, distress and anguish”, but that it did not qualify as “exceptional circumstances” meriting an award of punitive or exemplary damages – those awards were to be left for “truly exceptional circumstances”.

EVANS V THE BANK OF NOVA SCOTIA

The Facts

Evans also involves another major bank, the Bank of Nova Scotia (“BNS”), where an employee illegitimately accessed customer information. The employee, Mr. Wilson was a mortgage administration officer for the BNS, and as such had access to highly confidential customer information.

Over the course of approximately one year, Mr. Wilson accessed the files of 643 customers of the BNS and forwarded private information to his girlfriend. His girlfriend then distributed the information to individuals who used it to commit identity theft and other fraud. Unlike Jones, it was law enforcement and not the bank that uncovered the scheme. The arrangement and Mr. Wilson’s involvement was exposed by the Calgary Police in the course of executing a search warrant against individuals who were attempting to use the information to perpetrate fraud in Alberta. Mr. Wilson was confronted and confessed to improperly printing and accessing customer profiles for individuals who had applied for mortgages.

The BNS gave notice to the 643 individuals whose profiles had been accessed by Mr. Wilson (the “Notice Group”). Over 130 individuals from the Notice Group have since informed the BNS that they have been victims of identity theft or fraud. The BNS compensated those individuals for their financial losses and offered each individual in the Notice Group a complimentary subscription to credit monitoring and identity-theft protection service.

In spite of these efforts, the BNS, in addition to Mr. Wilson, was named as a defendant in a class action, with the class being the entire Notice Group. The Ontario Superior Court certified the Notice Group’s class action for, inter alia, the BNS’ vicarious liability for intrusion upon seclusion.

Vicarious Liability and Intrusion Upon Seclusion

The Ontario Superior Court relied on the Supreme Court of Canada’s decision Bazley v Curry, [1999] SCR 534 (“Bazley”) for the rationale to impose vicarious liability on an employer. In Bazley, McLaughlin J (as she then was) stated:

The fundamental question is whether the wrongful act is sufficiently related to conduct authorized by the employer to justify the imposition of vicarious liability…

In determining the sufficiency of the connection between the employer’s creation or enhancement of the risk and the wrong complained of, subsidiary factors may be considered. These may vary with the nature of the case. When related to intentional torts, the relevant factors may include, but are not limited to, the following:

    1.  the opportunity that the enterprise afforded the employee to abuse his or her power;
    2.  the extent to which the wrongful act may have furthered the employer’s aims (and hence be more likely to have been committed by the employee);
    3.  the extent to which the wrongful act was related to friction, confrontation or intimacy inherent in the employer’s enterprise;
    4.  the extent of power conferred on the employee in relation to the victim;
    5.  the vulnerability of potential victims to wrongful exercise of the employee’s power.

[Emphasis in original]

The Ontario Superior Court further specified that “vicarious liability ‘is strict, and does not require any misconduct on the part of the person who is subject to it’: Straus Estate v Decaire, 2011 ONSC 1157, 84 C.C.L.T. (3d) 141 at para. 49.”

Applying this legal test to the conduct of the BNS, the Court found that, at least to the extent required to certify the class action, the BNS had enabled Mr. Wilson to commit the tort of intrusion upon seclusion:

[BNS] created the opportunity for Wilson to abuse his power by allowing him to have unsupervised access to customer’s private information without installing any monitoring system… Wilson was given complete power in relation to the victims’ (customers) confidential information, because of his unsupervised access to their confidential information. Bank customers are entirely vulnerable to an employee releasing their confidential information. Finally, there is a significant connection between the risk created by the employer in this situation and the wrongful conduct of the employee.

Furthermore, the Court’s decision to certify the class action for the tort of intrusion upon seclusion was not influenced by the BNS’ admission of responsibility to compensate the Notice Group for any financial losses. The BNS submitted that it accepted liability for the pecuniary losses of the individuals, as evidenced by the BNS’ willingness to financially compensate the members of the Notice Group that came forward as being victims of fraud. The Court refused to accept the BNS’ argument that it was not liable for further damages through vicarious liability for the tort of intrusion upon seclusion. Conversely, the Court distinguished the two types of damages and stated that the BNS’ “admission of responsibility to pay for the pecuniary damages suffered is a different situation from the absence of claim for compensatory damages”.

COMMENTS

Jones and Evans raise a number of thought-provoking issues for employers to consider, and the ramifications of the two cases extend well beyond Ontario.

Though it has yet to proceed to trial, Evans clearly brings to light the necessity of employers to keep up with the demands of privacy law. Employers who are neglectful in this regard may be held liable for not only the pecuniary damages associated with illegitimate access or use of private information, but also the moral or compensatory damages that may flow from a successful claim of vicariously liability for intrusion upon seclusion or applicable statutory causes of action for invasion of privacy.

In an increasingly technological world, employers have the responsibility to adequately supervise employees in their access to confidential or private information when such access is granted by virtue of employment. To this end, employers should have up-to-date privacy policies in place and ensure that employees are aware of what constitutes unauthorized access or use of private information. Employers should take active measures to ensure that these policies are implemented and followed, and it is recommended that the policies include mechanisms to monitor employee access to private information in order to identify potential abuse. Being proactive and having effective policies in place may assist employers in decreasing liability in the event that a claim of vicarious liability for an invasion of privacy is brought against the employer, or, in any event, may reduce the number and severity of potential claims by exposing unauthorized access sooner rather than later.

In addition, while the courts in British Columbia are not bound by the decisions of Ontario courts, the decision of the Ontario Court of Appeal in Jones and that of the Ontario Superior Court in Evans may still be relied upon as persuasive authority. In particular, the two decisions may be used to delineate the scope of privacy protection afforded in other jurisdictions, including provinces with general privacy legislation, since “privacy” is not defined in the statutes.

Moreover, Jones is a well-reasoned decision with an extensive overview of the relevant jurisprudence, legislation and authoritative academic literature on the tort of invasion of privacy. The Ontario Court of Appeal took judicial notice of the role of technological change and the growing threat it poses for privacy, making a highly persuasive case for other courts to “develop the common law in a manner consistent with changing society”.

Finally, the tort of intrusion upon seclusion may affect individuals outside of Ontario even before a decision is made to import the new cause of action to other jurisdictions. The Notice Group in Evans includes individuals who are residents of British Columbia and New Brunswick. The BNS attempted to argue that as against those 35 individuals, the claim of vicarious liability for intrusion upon seclusion could not disclose a reasonable cause of action, since the two jurisdictions have not yet recognized the tort.

The Ontario Superior Court chose not to preclude these individuals from utilizing the cause of action and instead commented that “[w]hile the Courts in British Columbia and New Brunswick have not as of yet recognized the tort of intrusion upon seclusion, I was not given caselaw to suggest that they have definitively shut the door on this cause of action.” In the end, the courts of British Columbia may decide to open the door to intrusion upon seclusion, and employers should be prepared for if, and when, they do.


[1] William Prosser, Law of Torts, 4th ed. (West Publishing Company, 1971) at p. 389:

  1. Intrusion upon the plaintiff’s seclusion or solitude, or into his private affairs.
  2. Public disclosure of embarrassing private facts about the plaintiff.
  3. Publicity which places the plaintiff in a false light in the public eye.
  4. Appropriation, for the defendant’s advantage, of the plaintiff’s name or likeness.

 

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