Archive for the ‘Litigation and ADR’ Category

Devin Lucas
Thursday, July 30th, 2015    Posted by Devin Lucas (posts) and Alisha Parmar (posts)
Devin Lucas
Devin Lucas maintains a general civil litigation practice with a focus on corporate and commercial litigation and landlord tenant and real property disputes. His commercial litigation experience includes contractual disputes, employment matters, and debtor-creditor law.
Alisha Parmar
Alisha joined Kornfeld LLP as an associate in 2015 after completing her articles with the firm.

The Supreme Court of British Columbia recently clarified renewal rights in the context of a commercial lease in The Zone Bowling Centre (2002) Ltd. v. 14100 Entertainment Blvd. Investments Ltd., 2015 BCSC 524.

The decision stresses the importance of parties to a lease reading and understanding their rights and obligations in the context of a lease renewal clause.  If the lease requires it, it is prudent for the tenant to exercise the option to renew in time and in writing.  If the tenant fails to do as the lease requires and instead enters into lease renewal negotiations with the landlord, the tenant does so at his own peril and with no guarantee that the landlord will allow the tenant to remain at the leased premises.  As this case demonstrates, courts are loathe to interfere with contractual certainty as bargained between two commercial parties and subsequent negotiations may not be enough to revive the right of renewal if it is not validly exercised by the tenant.

Summary of Facts

The Zone Bowling Centre (“the Zone”) operated a popular bowling alley and brew pub in the Riverport Sports & Entertainment Park in Richmond, British Columbia.  The Zone, as tenant, had entered into a lease with 14100 Entertainment Blvd. (the “Original Owner”), as landlord, for the premises (“Premises”).  The initial term of the lease was 10 years ending on April 30, 2014, with three lease renewal options, each for an additional five years.  Prior to expiry of the initial term, the Original Owner sold the Premises and assigned the lease to 0984972 BC Ltd. (the “New Owner”).

Under the lease, the landlord covenanted with the Zone to grant a renewal of the lease, if the Zone:

1)      gave notice to the landlord that the Zone “wishes to obtain a renewal of this Lease” not earlier than twelve months and not later than nine months before the expiry of the initial term;

2)      was not in breach of any covenant or condition of the lease at the time of the renewal notice to the landlord; and

3)      had duly and regularly observed and performed the covenants and conditions contained in the lease.

The lease further required that any notice provided under the lease be in writing.

As the initial term was to expire on April 30, 2014, the cut-off date for the Zone to exercise the first renewal option was July 31, 2013.  However, the Zone did not exercise its renewal option until August 2013 and even then, it failed to do so in writing.  Further, throughout the term of the lease, the Zone was late in paying rent and, in fact, rent was overdue on July 31, 2013.

Despite this, after missing the cut-off date, the Zone entered into lease renewal negotiations with the Original Owner and later, the New Owner, as landlord.  These discussions broke down in July, 2014.  At this time, the New Owner informed the Zone that it did not consider that the option to renew had been validly exercised and instead considered the Zone to be an overholding tenant on a month to month tenancy.

On October 27, 2014, the New Owner gave the Zone written notice terminating the lease effective November 30, 2014.  In spite of this, the Zone continued to occupy the Premises based on the its view that it had properly exercised the renewal option.  The Zone then brought a petition, seeking a declaration that it had properly exercised the option to renew.

The Decision

The issue before the Court was whether or not the Zone had exercised the first renewal option under the lease.  To determine whether the option had been validly exercised, the Court analyzed whether the three conditions precedent set out in the lease had been met by the Zone.

Based on the evidence before the Court, Mr. Justice Bowden found that the Zone had not exercised the renewal option by July 31, 2013.  Furthermore, Mr. Justice Bowden held that during the period from June 1, 2013 to September 25, 2013 the Zone was in arrears in paying rent and, therefore, was in breach of its duties under the lease during the time that the Zone had allegedly exercised its renewal option.  Finally, on account of the Zone being consistently in default of its obligation to pay rent, it could not be said that the Zone had “duly and regularly performed its obligations” throughout the 10 year term of the lease.

Even so, the Zone argued that the respondents had waived strict compliance with the lease and the conditions precedent to the exercise of the option by accepting rent when payments were overdue, and that the respondents were precluded from alleging a breach of the lease as a basis for denying the renewal, given the continuing lease renewal negotiations among the parties.

The Court found the respondents’ late acceptance of rent payments did not amount to a waiver of their right to require the Zone to strictly comply with the preconditions to exercise the option to renew – at most, it could amount to a waiver of the landlord’s  right to terminate the lease on the basis of the Zone’s breach of its obligation to pay rent.  Further, as the Court found that there was no evidence that the respondents had promised the Zone it could exercise the renewal option without providing notice in writing, nor by providing notice after the cut-off date specified in the lease, the landlord was not precluded from insisting on enforcing its strict legal rights in connection with the renewal option

Finally, although the Court noted the potentially significant adverse impact on the Zone’s business, the Court found that the alternative remedy of “relief from forfeiture” – which often allows tenants who have been in breach one opportunity to reinstate it – was not available to the Zone in this case. By failing to exercise the option properly the Zone had not forfeited an existing tenancy, but instead had simply lost the right of renewal, so relief from forfeiture could not apply.

Thus, despite its efforts, the Zone was not able to salvage its option to renew.  (It was later reported that the parties had reached an agreement after this decision was handed down and the Zone was able to continue operating at the Premises.  We do not know the terms of that agreement.)

This case is a reminder to all contracting parties that if they intend to engage in negotiations during the currency of a contract, they should never do so without securing a legally enforceable agreement by the other side that it will not require strict compliance with the contract terms while the negotiations are underway.

 

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Posted by Devin Lucas (posts) and Alisha Parmar (posts) | Filed under Litigation and ADR, Real Estate Law | ....
Lana Li
Thursday, May 21st, 2015    Posted by Lana Li (posts)

Under the Family Law Act, S.B.C. 2011, c. 25 (the “FLA”) unless property is “excluded property”, property owned by at least one spouse upon separation is family property and presumptively to be equally divided.  “Excluded property” includes property which is owned by one of the spouses before the relationship began, inheritances to a spouse and gifts to a spouse from a third party (s. 85(1) of the FLA).

In VJR v SKW, 2015 BCSC 593, a husband successfully argued that a $2 million payment to him was a gift, by way of inheritance, from his former employer, with whom he had developed a father-son relationship.  However, upon receiving the $2 million payment, the husband then used the funds to purchase property registered in his wife’s name only and to pay off family debts.  The husband argued that he had just placed the property in the wife’s name to protect him and his family from his creditors and that the wife held the entire property in trust for him.  The wife argued that the husband had gifted the money to her based upon how the property was registered and his use of the money to pay family debt.  The Court held that the husband could not argue that the registration of the property to the wife was to shield him from his creditors and then argue the property was held in trust for him.  The Court would not assist a sham arrangement and help the husband to establish a trust arrangement for his benefit.  It determined that the husband had gifted the property to the wife, such that it was found to be family property, and the net sale proceeds were divided equally between them.  Even if the $2 million payment was “excluded property”, it was significantly unfair not to divide it with the wife as she had contributed to the property, the household, and she had supported the husband for over 10 years, which helped him to develop his relationship with his former employer.

Therefore, if property is “excluded property”, it is best to keep it separate, such as putting the money in a separate bank account, and not use it to purchase family property or pay down family debt.

Herb Silber, Q.C.
Wednesday, March 25th, 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.

This topic can be divided into two parts – research of the facts and research of the law. This comment will focus on whether an Arbitrator can conduct independent research of the facts outside of the evidence presented at the Arbitration.

The British Columbia Court of Appeal has recently addressed this issue in a criminal case, R. v. Bornyk 2015 BCCA 28. I believe the Court’s findings are instructive for arbitration as well. In this case, the trial judge did his own reading of expert articles on the reliability of finger print evidence, which was key to the finding of guilt or innocence and concluded that the expert evidence presented by the prosecution was not reliable. The Appeal Court admonished the trial judge for doing so and overturned the not guilty verdict. The Court noted that ‘ It is basic to trial work that a judge may only rely upon the evidence presented at trial, except where judicial notice may be taken…” (which can only arise in exceptional circumstances where there is indisputable accuracy of the assertion, such as January 1, 2015 fell on a Thursday). The Court went on to state:

“[11] By his actions, the judge stepped beyond his proper neutral role and into the fray. In doing so, he compromised the appearance of judicial independence essential to a fair trial. While he sought submissions on the material he had located, by the very act of his self-directed research, in the words of Justice Doherty in R. v. Hamilton (2004), 189 O.A.C. 90, 241 D.L.R. (4th) 490 at para. 71, he assumed the multi-faceted role of ‘advocate, witness and judge’.”

As noted in the passage above, even where the trier of fact gives the parties an opportunity to make submissions on the factual findings made by relying on extrinsic evidence that is not sufficient as it ultimately for the trier of fact to ensure a fair trial, in this case not introducing evidence on his own initiative.

The Arbitrator must also conduct a ‘fair hearing.” One distinction between an arbitrator and a trial judge is that Arbitrators are often chosen because of their particular knowledge or expertise in an area and it may be reasonably expected by the parties that the Arbitrator will not ignore this expertise. However, general knowledge of the industry is not a substitute for the requirement that evidence on a specific matter ought to be expected to be presented by one or other of the parties so the other party has an opportunity to test the proposition on cross examination or respond with their own evidence. Given the requirement to conduct a fair hearing and to avoid being the “advocate, witness and judge”, it is best practice, in my view, for the Arbitrator to tread carefully on assumptions he or she makes based on their “general knowledge” of an industry and when in doubt, offer the parties the opportunity to address the issue if they choose to do so by the parties presenting evidence.

One area that an arbitrator can initiate a process is to order a view or inspection of property (see Section 29 (1) (d) of the BCICAC Rules). Thus if the Arbitrator concludes, as an example, where value is in issue, that he or she wishes to view a real property after hearing evidence in connection with the same, the appropriate practice, in my view, is for the Arbitrator to give notice to the parties of his or her desire to view or inspect the property. At that point an Order should be made to that effect, notice of the date and time of attendance given to the parties so that the parties and their representatives may be present, and given an opportunity to provide comments when the view or inspection takes place.

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Posted by Herb Silber, Q.C. (posts) | Filed under Litigation and ADR | ....
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 joined Kornfeld LLP as an associate in 2015 after completing her articles with the firm.

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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