863935 Ontario Inc. v. 1576949 Ontario Inc.

 

863935 Ontario Inc. (Applicant) v. 1576949 Ontario Inc. (Respondent)

 

Ontario Superior Court of Justice

 

L.A. Pattillo J.

 

Heard: June 3, 2009

Judgment: June 12, 2009

Docket: 06-CV-323997

 

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Counsel: L. Keown for Applicant

 

R. Malen for Respondent

 

Subject: Property; Corporate and Commercial; Civil Practice and Procedure; Contracts

 

Real property — Mortgages — Priorities — Between types of creditors — Registered mortgagees — Effect of postponement agreement

 

Applicant entered into agreement of purchase and sale with respect to development property — On closing, purchaser provided vendor take-back mortgage to applicant and also granted mortgage to respondent — Applicant, purchaser and respondent entered into priorities agreement in respect of mortgages — Both mortgages went into default — Applicant commenced sale proceedings and entered into agreement with third party purchaser — Applicant could not obtain mortgage discharge statement in respect of respondent’s mortgage — Applicant brought application for order directing respondent to deliver discharge statement and for reference to Master to determine amount owing under mortgage — On consent order was granted that provided for discharge of mortgage on payment into court of specified amount — Request for reference to Master was also granted — Purchase and sale order was not completed and monies were not paid into court — Reference was adjourned when applicant advised respondent that it was its position that priorities agreement did not grant respondent priority in respect of interest owing — Applicant brought motion for order clarifying terms or consent order and for order interpreting priorities agreement — Respondent’s mortgage had priority over applicant’s in respect of both permitted advances as defined in agreement and interest thereon — Interpretation of priorities agreement as including interest on permitted advances was consistent with commercial interests of parties at time agreement was entered into — Mortgage secured both principal and interest on money loaned by respondent to permit development of property.

 

Civil practice and procedure — Judgments and orders — Amending or varying — Consent orders

 

Applicant entered into agreement of purchase and sale with respect to development property — On closing, purchaser provided vendor take-back mortgage to applicant and also granted mortgage to respondent — Applicant, purchaser and respondent entered into priorities agreement in respect of mortgages — Both mortgages went into default — Applicant commenced sale proceedings and entered into agreement with third party purchaser — Applicant could not obtain mortgage discharge statement in respect of respondent’s mortgage — Applicant brought application for order directing respondent to deliver discharge statement and for reference to Master to determine amount owing under mortgage — On consent order was granted that provided for discharge of mortgage on payment into court of specified amount — Purchase and sale order was not completed and monies were not paid into court — Reference was adjourned when applicant advised respondent that it was its position that priorities agreement did not grant respondent priority in respect of interest owing — Applicant brought motion for order clarifying terms or consent order and for order interpreting priorities agreement — Judge was not functus — Matter was not res judicata in that there was no argument before judge as to priorities under priorities agreement — There was no evidence that issue of priority of interest between parties was ever resolved by consent of parties — Respondent’s mortgage had priority over applicant’s in respect of both permitted advances as defined in agreement and interest thereon.

 

Cases considered by L.A. Pattillo J.:

 

Angle v. Minister of National Revenue (1974), 1974 CarswellNat 375, 28 D.T.C. 6278, 1974 CarswellNat 375F, [1975] 2 S.C.R. 248, 47 D.L.R. (3d) 544, 2 N.R. 397 (S.C.C.) — referred to

 

Eli Lilly & Co. v. Novopharm Ltd. (1998), 227 N.R. 201, 152 F.T.R. 160 (note), 1998 CarswellNat 1061, 1998 CarswellNat 1062, 161 D.L.R. (4th) 1, [1998] 2 S.C.R. 129, 80 C.P.R. (3d) 321 (S.C.C.) — considered

 

Hillis Oil & Sales Ltd. v. Wynn’s Canada Ltd. (1986), 1986 CarswellNS 147, 1986 CarswellNS 147F, 171 A.P.R. 353, [1986] 1 S.C.R. 57, 25 D.L.R. (4th) 649, 65 N.R. 23, 71 N.S.R. (2d) 353 (S.C.C.) — referred to

 

Minott v. O’Shanter Development Co. (1999), 117 O.A.C. 1, 42 O.R. (3d) 321, 168 D.L.R. (4th) 270, 1999 CarswellOnt 1, 99 C.L.L.C. 210-013, 40 C.C.E.L. (2d) 1 (Ont. C.A.) — referred to

 

Statutes considered:

 

Rules of Civil Procedure, R.R.O. 1990, Reg. 194

 

R. 59.06(1) — considered

 

MOTION for order clarifying terms of order and interpreting agreement.

 

L.A. Pattillo J.:

 

1        The Applicant, 863935 Ontario Inc. seeks an Order amending my Order of January 15, 2007 to clarify the terms of a reference ordered therein and in that regard more specifically seeks an interpretation of an Inter-Creditor Priorities Agreement dated July 16, 2003 entered into between the Applicant, the Respondent, 1576949 Ontario Inc. and 1557911 Ontario Inc. (“155”) (the “Priorities Agreement”).

 

2        The Priorities Agreement provides for the priorities between mortgages granted by 155 to both the Applicant and the Respondent on July 17, 2003. The issue to be determined is whether the Priorities Agreement provides priority in respect of interest owing under the Respondent’s mortgage.

 

Background

 

3        On November 2, 2002, the Applicant and 155 entered into an agreement of purchase and sale whereby the Applicant agreed to sell development property located in Uxbridge, Ontario (the “Property”) to 155. Following a subsequent dispute between the parties, the purchase and sale agreement was amended in accordance with a settlement agreement executed December 13, 2002.

 

4        On July 17, 2003, the agreement of purchase and sale was completed and the Applicant sold the Property to 155 for $3,300,000. On closing, 155 provided a vendor take back mortgage to the Applicant in the principal amount of $2,600,000 (the “Applicant’s Mortgage”). On the same date, 155 granted a mortgage to the Respondent in the face amount of $3,750,000 (the “Respondent’s Mortgage”). The Respondent’s Mortgage was registered first.

 

5        As part of the closing, and as provided for in the amended agreement of purchase and sale, the Applicant, 155 and the Respondent entered into the Priorities Agreement which provided, in part, that the Respondent’s Mortgage would be subordinate to the Applicant’s Mortgage save and except to the extent that the Respondent’s Mortgage secured the “Permitted Advances” advanced under the Respondent’s Mortgage to 155 in respect of an initial cash advance to be applied towards the balance due on closing of the purchase of the Property and subsequent advances in respect of Hard Costs and Soft Costs for the purposes of servicing and developing the Property for residential purposes.

 

6        Subsequently both the Applicant’s Mortgage and the Respondent’s Mortgage went into default. The Applicant commenced Notice of Sale proceedings under its mortgage and subsequently entered into an agreement of purchase and sale for the Property with a third party which was scheduled to close on February 15, 2007. In the absence of being able to obtain a mortgage discharge statement from the Respondent, the Applicant commenced an Application for, among other things, an order directing the Respondent to deliver to it a discharge statement in respect of its mortgage and directing a reference to the Master to determine the amount properly owing under the Respondent’s Mortgage.

 

7        The Application came before me on January 15, 2007, at which time, based on a written consent signed on behalf of both the Applicant and the Respondent, filed, and in the absence of any argument, I granted an Order which provided, among other things, that the Respondent’s Mortgage be discharged upon the Applicant paying into Court $3,029,800.00. The Order further provided that the issue of the amount owing to the Respondent under its mortgage was referred to the Master to conduct a reference to determine the amount owing and for payment out of Court of all monies standing in court to the credit of the Application as the Master determined.

 

8        Subsequent to my Order, the purchase and sale agreement for the Property between the Applicant and the third party was not completed. Accordingly the Respondent’s Mortgage was not discharged and no monies were ever paid into Court. Nevertheless, the parties considered it appropriate to proceed with the reference before the Master to determine how much was owing to the Respondent under its mortgage.

 

9        On the eve of the reference, the Applicant advised the Respondent that it was its position that the Priorities Agreement did not entitle the Respondent to any priority in respect of interest owing under the Respondent’s Mortgage. The Respondent disagreed with this position. As a result, the reference was adjourned and the Applicant commenced this motion claiming:

 

(a) An order amending my Order of January 15, 2007 and in particular, an Order providing further directions with respect to the ordered Reference to determine the amount properly owing under the Respondent’s mortgage; and

 

(b) An order interpreting the Priorities Agreement and declaring that any interest owing under the Respondent’s mortgage does not constitute or fall within the definition of “permitted advance” and therefore does not take priority over the Applicant’s mortgage.

 

10        By way of preliminary objections, the Respondent submits that I cannot deal with the Applicant’s motion because my Order has been issued and entered and I am therefore functus. The respondent further submits that because the issue raised by the Applicant has already been determined on consent, the issue is res judicata.

 

11        I do not consider that I am functus or that the issue for consideration is res judicata such that I cannot deal with it. Rule 59.06 (1) provides, in part, that an order that requires amendment “in any particular on which the court did not adjudicate” may be amended on motion in the proceeding. There was no argument or adjudication by me on January 15, 2007 concerning the issue of priorities under the Priorities Agreement.

 

12        The type of res judicata relied upon by the Respondent on this motion is issue estoppel which prevents a party from re-litigating an issue decided in an earlier proceeding: Minott v. O’Shanter Development Co. (1999), 42 O.R. (3d) 321 (Ont. C.A.) at para. 16. One of the essential elements necessary to establish res judicata is that the same issue has been decided: Angle v. Minister of National Revenue (1974), [1975] 2 S.C.R. 248 (S.C.C.). As I have noted, the issue of priorities under the Priorities Agreement and specifically whether interest under the Respondent’s Mortgage was entitled to priority over the Applicant’s Mortgage was not determined by the court on January 15, 2007. Nor is there any evidence that it was ever resolved by the consent of the parties. Accordingly, res judicata is not applicable.

 

13        The Priorities Agreement is a six-page document which contains seven preamble paragraphs setting out the background behind the Priorities Agreement, including the initial agreement of purchase and sale between the Applicant and 155; the amendment of the agreement of purchase and sale by the settlement agreement; the Applicant’s Mortgage and the Respondent’s Mortgage and the fact that the purchase and sale agreement sets out the priorities between the Mortgages. The Priorities Agreement itself contains six sections: 1. Definitions; 2. Consents; 3. Subordination and Priority; 4. Information and Default; 5. The Borrower and 6. General.

 

14        The operative section of the Priorities Agreement is paragraph 3.1 which provides as follows:

 

3.1 863935 and 1576949 hereby agree that the 1576949 Security shall be subordinate to the 863935 Security and the 863935 Security shall have priority over the 1576940 Security in respect of all rights, title, interest which 1576949 may have over the Property in connection with the 1576949 Security, save and except to the extent that the 1576949 Security secures the Permitted Advances advanced by 1576949 to the Borrower which shall have priority over the 863935 Security.

 

15        The Priorities Agreement defines the “1576949 Security” as the 1576949 Mortgage (para. 1.1(b)) and the “863935 Security” as the 863935 Mortgage (para. 1.1(j)). “Permitted Advances” are defined at some length in paragraph 1.1(d) to mean closing proceeds and hard and soft costs relating to the development of the Property for residential purposes.

 

16        Both the Applicant and the Respondent submit that the wording of the Priorities Agreement is clear and unambiguous. The Applicant submits that because the definition of “Permitted Advances” deals only with principal amounts and not interest, interest is not included. The Respondent submits that paragraph 3.1 grants priority to the extent that its mortgage secures Permitted Advances and its mortgage specifically secures not only principal but interest too.

 

17        In order to determine the contractual intent of the parties to an agreement, it is necessary to consider the words they used in drafting the document, possibly read in light of the surrounding circumstances at the time or the factual matrix as it has sometimes been called. Where the words are clear and unambiguous on their face, it is unnecessary to consider any extrinsic evidence. Finally, evidence of the parties’ subjective intention is not to be taken into account: Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129 (S.C.C.), per Iacobucci J. at para. 54-55.

 

18        In reviewing the Priorities Agreement as a whole and in particular paragraph 3.1, I am in agreement with the parties that the wording of that paragraph is clear and unambiguous. As a result, it is unnecessary to consider any extrinsic evidence in interpreting the words.

 

19        Nor have I considered any of the evidence which has been filed on the motion of the parties’ subjective intentions prior to or after the execution of the Priorities Agreement. Such evidence is inadmissible having regard to the parole evidence rule: Eli Lilly, supra, at para. 58.

 

20        Paragraph 3.1 provides that the Applicant’s Mortgage has priority save and except to the extent that the Respondent’s Mortgage secures the Permitted Advances. The Respondent’s Mortgage secures all debts and liabilities owing by 155 which includes interest. To the extent that the Respondent’s Mortgage secures the Permitted Advances, it also secures interest thereon. In my view, therefore, the Respondent’s Mortgage has priority over the Applicant’s Mortgage in respect of both Permitted Advances, as defined and interest thereon.

 

21        If all that was at issue was the meaning of “Permitted Advances” then I agree with the Applicant’s submission that interest is not included. But those words cannot be regarded as standing alone. They must be viewed in the context of not only the clause in which they are contained but also the entire Priorities Agreement: Hillis Oil & Sales Ltd. v. Wynn’s Canada Ltd., [1986] 1 S.C.R. 57 (S.C.C.).

 

22        In Eli Lilly, supra, at para 56, Iacobucci J. stated, in part:

 

56 When there is no ambiguity in the wording of the document, the notion in Consolidated-Bathurst that the interpretation which produces a “fair result” or a “sensible commercial result” should be adopted is not determinative. Admittedly, it would be absurd to adopt an interpretation which is clearly inconsistent with the commercial interests of the parties, if the goal is to ascertain their true contractual intent. However, to interpret a plainly worded document in accordance with the true contractual intent of the parties is not difficult.

 

23        In my view, an interpretation of paragraph 3.1 of the Priorities Agreement to include interest owing on Permitted Advances under the Respondent’s Mortgage is consistent with the commercial interests of the parties at the time they entered into the Priorities Agreement as gleaned from its provisions.

 

24        As outlined in the preambles to the Priorities Agreement, the purpose of granting a priority to the Respondent ahead of the Applicant’s vendor take back mortgage was to enable 155 to borrow money to both purchase and develop the Property. To the extent that the Respondent lent 155 money for that purpose, it would be entitled to interest on the money. The Respondent’s Mortgage secured both the principal and the interest. To interpret the Priorities Agreement to restrict the Respondent’s priority to just principal payments in such a context makes no commercial sense.

 

25        Finally, paragraph 6.6 of the Priorities Agreement provides that in the case of any conflict between the terms of the Priorities Agreement and the purchase and sale agreement, the terms of the purchase and sale agreement shall prevail. In my view, the interpretation of paragraph 3.1 of the Priorities Agreement to include interest owing on Permitted Advances is not in conflict with the terms of the purchase and sale agreement. On the contrary, such an interpretation is consistent with terms of section 2.1(d) of the purchase and sale agreement, as amended by the settlement agreement.

 

26        Accordingly, an Order should issue amending my Order of January 15, 2007 to provide that in determining the amount owing under the Respondent’s Mortgage as provided in paragraph three of my Order, the Master shall also determine the amount of the “Permitted Advances” under the mortgage as that term is defined in the Priorities Agreement and any interest thereon.

 

27        The Respondent has been successful on this motion and is entitled to its costs on a partial indemnity basis. At the end of the argument, counsel agreed that a fair and reasonable amount for partial indemnity costs on the motion would be $12,000.00 inclusive of disbursements and GST. The Applicant will therefore pay to the Respondent costs of the motion fixed at $12,000.00.

 

Order accordingly.