- Canadian Elevator Industry Education Program v. Gilby, 2012 NSSC 274

SUPREME COURT OF NOVA SCOTIA Citation:- Canadian Elevator Industry Education Program v. Gilby, 2012 NSSC 274 Date: 20120927 Docket: Hfx. No. 383979A Registry: Halifax Between: The Canadian Elevator Industry Educational Program -and- Andrew Gilby LIBRARY HEADING Judge: The Honourable Justice Robert W. Wright Heard: July 17, 2012 in Halifax, Nova Scotia Written Decision: September 27, 2012 Subject: Small Claims Court Appeal - error of law -

interpretation of stipulated remedy clause in contract - treatment of solicitor-client costs.

Summary: In 2001 the appellant, a union sponsored educational body, entered into a contract with the respondent whereby it agreed to provide a four year training program to enable the respondent as a student to acquire the necessary skills and experience to become a mechanic in the elevator industry. In exchange for being provided with this training program free of charge, the respondent agreed to accept employment in the elevator industry, only with a unionized employer, for a period of five years thereafter.

The student further agreed that the cost of training provided by the appellant over the four year period was $10,000 and that in the event of a breach, the appellant would be entitled to recover the full cost of training, along with solicitor-client costs for any collection proceedings and interest at a specified rate. The respondent completed the four year training program following which he accepted employment with a unionized employer for approximately four and half years thereafter.

At that point, however, he accepted employment with a new employer who was non- unionized and thereby committed a breach of the contract. The appellant initially brought an action for recovery of the full $10,000 plus legal expenses and interest in the Supreme Court of Nova Scotia but the proceeding was later transferred to the Small Claims Court for trial. At the time of the transfer, the parties agreed that the solicitor-client costs referenced in the contract would be treated as a “ monetary award in respect of a matter or thing arising under a contract ” as described in s.9 (

a) of the Small Claims Court Act .

In his decision rendered January 30, 2012 the adjudicator upheld the contract in all respects except one. He decided that because the stipulated remedy clause in the contract was not pro-rated to the unexpired portion of the five year payback period during which the respondent was obligated to serve a unionized employer, it took on the character and quality of a penalty and coloured the entire contract.

He therefore decided to sever that part of the stipulated remedy clause which called for the recovery of the full cost of training, and essentially replaced it by ordering that the respondent pay only a pro-rated amount to reflect the unexpired portion of the five year payback period. Rounding that off to 10%, the adjudicator therefore awarded the appellant $1,000 plus prejudgment interest of $100. He declined to order costs of any kind. The appellant then brought this appeal. Issues:

(1) Should the stipulated remedy clause be interpreted as a genuine pre-estimate of damages (which is enforceable) or a penalty (which is not enforceable)?

(2) Did the adjudicator err in applying the doctrine of severance in the manner described?

(3) Did the adjudicator err in declining jurisdiction to award recovery of legal expenses in the manner proposed before him?

(4) Did the adjudicator err in his

interpretation of the interest provision in finding that it pertained only to legal expenses payable as opposed to any damages payable under the contract? Held:

(1) The adjudicator erred in his

interpretation of the contract in characterizing the stipulated remedy clause as a penalty clause rather than a genuine pre-estimate of damages. He was lead to that error by erroneously judging the terms of the contract and its surrounding circumstances as at the time of the breach rather than at the time the contract was made. Given its proper

interpretation, the stipulated remedy clause was valid and the respondent was required to pay the full cost of training of $10,000.

(2) The statutory phrase “ a monetary award in respect of matter or thing arising under a contract ” should be interpreted as referring to a form of damages. A claim for solicitor-client costs could not be transformed into a claim for damages by an agreement made by counsel. Since the jurisdiction of the Small Claims Court cannot be contracted out of, the agreement so made was void. In the result, the adjudicator was correct in declining jurisdiction to award any recovery for legal expenses.

(3) The adjudicator erred in his

interpretation of the interest provision by finding that it pertained only to legal fees payable under the contract, rather than to the damages recoverable. The appellant was therefore entitled to recover interest at the specified rate in the contract on the full $10,000 from the date of the breach. THIS INFORMATION SHEET DOES NOT FORM PART OF THE COURT'S DECISION. QUOTES MUST BE FROM THE DECISION, NOT THE COVER SHEET.

SUPREME COURT OF NOVA SCOTIA Citation: Canadian Elevator Industry Education Program v. Gilby - 2012 NSSC 274 Date: 20120927Docket: Hfx. No. 383979A Registry: Halifax Between: The Canadian Elevator Industry Educational Program Appellant -and- Andrew Gilby Respondent Decision Judge: The Honourable Justice Robert W. Wright Heard: July 17, 2012 at Halifax, Nova Scotia Written Decision: September 27, 2012 Counsel: Counsel for the Appellant - Raymond Larkin, Q.C. Counsel for the Respondent - Devin Maxwell

Wright, J. INTRODUCTION [ 1 ] This is an appeal from the decision of Small Claims Court adjudicator Stephen Johnston dated January 30, 2012 in which he awarded the claimant Canadian Elevator Industry Educational Program ( “ CEIEP ” ) the sum of $1,000 (plus prejudgment interest of $100) for breach of contract by the defendant Andrew Gilby.

CEIEP, successful in only part of its claim, now appeals that decision to this court. [ 2 ] This proceeding originated by way of Notice of Action in the Supreme Court of Nova Scotia filed on February 15, 2010 in which CEIEP sought recovery of the amount of $10,000 from the defendant for breach of contract, plus interest as therein provided, together with legal fees and disbursements on a solicitor-client basis. That action was later transferred to the Small Claims Court of Nova Scotia by election of the defendant dated March 19, 2010.

The trial took place before the adjudicator on October 12, 2011 with both parties represented by counsel. THE AGREEMENT AND ITS PERFORMANCE [ 3 ] The Agreement between the parties arose from the creation of CEIEP by the International Union of Elevator Constructors. The objective was to create a training program to develop expertise in the elevator industry where none existed before.

To that end, CEIEP offers a four year training program to successful candidates whereby they can acquire specialized skills and knowledge to be employed in the elevator industry. [ 4 ] Funding for the program and the relationship of the parties is set out in the second recital of the Agreement which is part of the record before this court and which reads as follows: The Student understands the Program will expend significant resources, effort and money for training and/or upgrading of the Student in the establishing or specialized skills and knowledge for use in the construction, service and maintenance sectors of the elevator industry.

The training provided by the Program will result in substantial benefit to the Student. The training provided by the Program arises from and is funded by The Canadian Elevator Industry Educational Program Agreement and Declaration of Trust established through collective bargaining agreements entered into between unionized employers and unionized employees in the elevator industry and is intended to strengthen the unionized sector within the industry. [ 5 ] Mr.

Gilby made application to this program on July 9, 2001 pursuant to which he covenanted, if employed, to abide by the Collective Agreement and Policies of the International Union of Elevator Constructors - Local 125. He was accepted into the program in September of 2001 at which time he signed the subject Agreement. In that document, Mr. Gilby agreed, in consideration of CEIEP paying for his training program, to the following contractual conditions: CONDITION OF ACCEPTANCE BY THE PROGRAM 1.

The Student agrees, as a condition of being accepted by the Program and in consideration of the cost to the Program for training provided, that both during the course of the training and upon completion of the training or the completion of any subsequent upgrading courses, and for a period of five (5) years thereafter, the Student will neither seek nor accept employment from an employer engaged in the elevator industry, unless such employment is performed under the terms of a collective bargaining agreement that provides for the payment of contributions by such employer to the Canadian Elevator Industry Educational Program and the International Union of Elevator Constructors (I.U.E.C.).

COST OF TRAINING 2. The Student agrees that the cost to the Program for training to be provided by the Program to the Student including materials, necessary equipment, instructor ’ s salaries and related expenses and material is Ten Thousand Dollars ($10,000) (hereby called the “ Cost of Training ” ) .

TERM 3. The term of this Agreement shall commence on the date hereof and shall terminate five (5) years from the later of: a. the completion of the training provided to the Student pursuant to this Agreement; or b. the completion of any upgrading training provided to the Student by the Program. BREACH OF AGREEMENT 4. It will constitute an immediate breach of this Agreement if during the term of this Agreement the Student accepts employment in the elevator industry from an employer who is not party to a collective bargaining agreement with the I.U.E.C. DAMAGES RECOVERABLE BY THE PROGRAM FROM STUDENT IN EVENT OF BREACH OF THIS AGREEMENT 5. (

a) In the event of breach by the Student of the provisions of paragraph 4 hereof, the Student acknowledges and agrees the Program shall be entitled to recover from the Student the full Cost of Training . (

b) If legal action is required to collect any moneys payable by the Student to the Program, the Student shall pay to the Program legal fees and disbursements incurred by the Program on a solicitor and his own client bases (sic) together with interest at the prime rate prevailing as determined by the Royal Bank of Canada from the date of date (sic) of this Agreement. (Emphasis mine). [ 6 ] After successfully completing the training program in 2005, including a four year apprenticeship working in the industry with a unionized employer, Mr. Gilby passed the CEIEP Mechanics examination on March 2 of that year.

Shortly thereafter, on June 10, 2005 Mr. Gilby ’ s status under the Collective Agreement of the day changed from one of Helper to one of Mechanic. [ 7 ] As recited by the adjudicator in his decision, Mr. Gilby went on to have a very successful career in the elevator maintenance business, moving up the ranks within the union shops and ultimately becoming a supervisor with a unionized employer.

However, in November of 2009, he left his place of employment to take up new employment with another employer engaged in the elevator industry. [8] That new employer was not unionized and hence provided no payment or contributions to the CEIEP program. [9] Mr. Gilby made this change of employment openly, which precipitated charges being filed by the union against him pursuant to the Union ’ s Constitution and By-laws. The complaint filed January 4, 2010 was that he took new employment with an elevator company that was not a signatory to the union ’ s Collective Agreement, i.e., a non-union company.

Having done so before the expiration of the full five year term prescribed by the Agreement, Mr. Gilby was then sued by CEIEP for breach of contract. THE ADJUDICATOR ’ S DECISION [10] In his review of the evidence, the adjudicator noted that there is essentially no dispute relating to the basic facts of the case. The central issue, as he framed it, is the effectiveness and enforceability of the Agreement.

To use more precise legal terms, the central issue is whether or not the stipulated remedy clause is enforceable depending on its characterization as being in the nature of a penalty or as a genuine pre-estimate of damages in the event of a breach . [11] Before getting to the adjudicator ’ s analysis of that issue, it should first be noted that he unassailably found that the Agreement was validly formed and properly executed. The adjudicator was also satisfied that Mr.

Gilby truly understood the nature of the contract when he signed it and that its purpose was to ensure that the unionized side of the industry would be able to benefit from the investment they were sponsoring in the trainees ’ education. Even though the adjudicator accepted that Mr. Gilby did not appreciate or specifically remember exactly how long he had to work with a unionized employer until after his departure, he found Mr.

Gilby to have been very aware of the fact that there was some such specific period of time and that that was sufficient to bind him to the contract. [12] The adjudicator also noted that Mr. Gilby confirmed the value and quality of the training program over its four year span.

[13] The adjudicator went on from there to consider the essential nature of the contract.

He found that this was principally “ a contract for education with a condition to remain in the unionized labour force for a particular period of time to allow the claimant to recover their investment. ” He added that “ It appears to be perfectly acceptable to have an individual acknowledge and accept a specific temporal obligation into the future as it relates to additional costs being paid by one ’ s employer ” . [14] The adjudicator properly distinguished the Agreement in issue from an employment contract containing a restrictive covenant in the nature of a non-competition clause.

In so doing, he accepted the evidence before him that there were a multitude of firms in the unionized side of the industry in Nova Scotia at the time (indeed the majority) although there was at least one other non-unionized shop at the time. He accordingly made no finding that the impugned provision in the contract before him was in the nature of a restraint of trade clause. [15] Having characterized the true nature of the contract as aforesaid, the adjudicator stated that he found no unconscionability in its terms whatsoever.

On the contrary, he found this to be a situation where an organization was attempting to both better regulate an industry that had been unregulated to date and to provide the opportunity and jobs for those that had none. [16] In coming to this conclusion, the adjudicator took into account that although there was some lack of balance in the bargaining power between the parties, it was not sufficient to affect the viability of the contract. He stated that no one was being exploited by reason of this contract.

Rather, the contract was one that provided students with an opening into a well paid area of employment and gave them a high quality of education. With one exception (to be addressed next in this decision), he found the contract to be reasonably reflective of the investment made by CEIEP and the importance of ensuring that it got return value from the individuals who took the program. He added that “ This is purely a matter of contract between two parties ” . [17] With all of those observations, the adjudicator found that this contract was not patently unfair on its face. However, there is one

section of it which the adjudicator considered to be unreasonable.

He framed the issue as follows: Finally, the only issue remaining in my mind insofar as the issues of unreasonability and whether in fact the amount sought was punishment, is the issue of the $10,000 amount not being connected at all to the length of time the student had invested in the requisite unionized industry. [18] Although the adjudicator said he was never satisfied on the evidence with the total amounts of money that had been paid towards this training program (i.e., the actual cost of training), he stated that he was satisfied that the amount of $10,000 appeared to be reasonable under the circumstances.

Nor did he consider the temporal restriction of five years employment with a unionized employer to be unacceptable. However, he then made the key finding that without the payback of the $10,000 amount being prorated, “ it takes on the character and quality of a penalty and colours the entire contract ” . He then added that he did not believe that any court, given the obligation to enforce this contract, would find that Mr.

Gilby should have to pay the entire $10,000 amount when he was only five and half months short of the expiration of the term of the Agreement. [19] Stating that this contract is legally binding in all other ways, the adjudicator ’ s remedial solution was to sever “ the non pro-rated portion of the $10,000" and effectively replace it with an obligation to pay for only the pro-rated period of time that Mr. Gilby did not contribute to the unionized industry and its educational program as contracted for. Using a rounded up factor of six months for his premature departure, the adjudicator found that Mr.

Gilby left his unionized employment 10% earlier than he otherwise should have and was therefore obligated to pay $1,000 to CEIEP. [20] There were two further ancillary issues addressed by the adjudicator. First, he ruled that he did not have jurisdiction to make an award of the solicitor-client costs claimed by CEIEP under paragraph 5(

b) of the Agreement. Lastly, he interpreted that same clause to mean that interest was to be associated only with legal fees payable, in respect of which he declined jurisdiction. He did, however, provide for prejudgment interest to be paid from November of 2009 (the date of the breach) to the present which he fixed at $100. In the

final result, Mr. Gilby was ordered to pay CEIEP the sum of $1,100. GROUNDS OF APPEAL [21] The errors attributed to the adjudicator which form the grounds of appeal are framed by counsel for the appellant as follows: 1. The Adjudicator found that there was a legally binding contract entered into between the Appellant and the Respondent in Septemberof 2001 but he erred in law by deciding to sever part of the contract by ordering the Respondent to pay only 10% of the Appellant’s claimfor damages. 2.

The Adjudicator erred in law in concluding that the requirement in the contract between the Appellant and the Respondent to repay$10,000 to the Appellant had the character of a penalty which colored the entire contract unless all but 10% of the repayment wassevered. 3. The Adjudicator erred in law, committed jurisdictional error and denied natural justice to the Appellant in finding that he did not havejurisdiction as a Small Claims Court Adjudicator to enforce the contractual obligations of the Respondent to pay the legal costs of theAppellant.

This claim was started in the Nova Scotia Supreme Court and transferred to the Small Claims Court with agreement betweenthe parties that the Appellant could recover legal expenses as provided for in the contract as a monetary award in respect of a matter orthing arising under the contract. This agreement between the parties was communicated to the Adjudicator but he ignored this agreementin his decision. 4.

The Adjudicator erred in law and committed jurisdictional error by refusing to enforce the provision in the contract between theAppellant and Respondent providing for interest at a specified rate and substituting an order that the Respondent pay the Appellant $100instead of the interest claimed as a monetary award in respect of a matter or thing arising under the contract. 5. In the alternative, the Adjudicator erred in law in denying costs to the Appellant. STANDARD OF REVIEW [22] The Small Claims Court of Nova Scotia is a statutory court created by the Small Claims Court Act, R.S.N.S. 1989 c.430.

By virtueof s.32 of that Act, appeals to this court are limited to grounds of jurisdictional error, error of law, or failure to follow the requirements ofnatural justice. [23] The main issue on this appeal is advanced on the grounds of error of law as above recited. The scope of this court’s jurisdiction inthat regard is explained in the well-known case of Brett Motors Leasing Ltd. v.

Welsford (NS SC), [1999] NSJ.No. 466 where Justice Saunders stated (at para. 14): One should bear in mind that the jurisdiction of this Court is confined to questions of law which must rest upon findings of fact as foundby the adjudicator. I do not have the authority to go outside the facts as found by the adjudicator and determine from the evidence myown findings of fact. "Error of law" is not defined but precedent offers useful guidance as to where a superior court will intervene toredress reversible error.

Examples would include where a statute has been misinterpreted; or when a party has been denied the benefit ofstatutory provisions under legislation pertaining to the case; or where there has been a clear error on the part of the adjudicator in theinterpretation of documents or other evidence; or where the adjudicator has failed to appreciate a valid legal defence; or where there is noevidence to support the conclusions reached; or where the adjudicator has clearly misapplied the evidence in material respects therebyproducing an unjust result; or where the adjudicator has failed to apply the appropriate legal principles to the proven facts.

In suchinstances this Court has intervened either to overturn the decision or to impose some other remedy, such as remitting the case for furtherconsideration. [24] It is contended by the appellant in the present case that the adjudicator erred in law in his

interpretation and treatment of thestipulated remedy clause (para. 5 of the Agreement) and that he failed to apply the appropriate legal principles to the proven facts.

FIRST ISSUE -

Interpretation and Enforceability of Stipulated Remedy Clause [25] As summarized earlier in this decision, the adjudicator found the Agreement between the parties to be valid and legally binding in all respects except one. In his view, taken from a position of hindsight, the clause providing for recovery of the full cost of training from the student upon default, without a pro-rated abatement, was unfair and unreasonable. He therefore considered it appropriate to sever “ the non pro-rated portion of the $10,000" and replace it with an obligation to reimburse CEIEP only for the pro-rated period of time that Mr.

Gilby did not contribute to the industry and its educational program as contracted for. Having found that Mr. Gilby departed from his unionized employment 10% earlier than he otherwise should have (i.e., with approximately six months left to go on the five year term), the adjudicator ruled that Mr.

Gilby was therefore obligated to pay the sum of $1,000 to CEIEP. [26] In taking this approach, the adjudicator failed to adequately identify and consider the threshold question of whether the stipulated payment remedy clause was in the true nature of a penalty that could not be enforced, or a genuine pre-estimate of liquidated damages that could be enforced.

He merely stated in his decision that “ Without it being pro-rated, it takes on the character and quality of a penalty and colours the entire contract ” . [27] This branch of the law was expounded upon in the venerable decision of the House of Lords in Dunlop Pneumatic Tyre Co. Ltd. v. New Garage & Motor Co. Ltd. [1915] A.C. 79 where the following authoritative propositions were summarized: (

i) Though the parties to a contract who use the words penalty or liquidated damages may prima facie be supposed to mean what they say, yet the expression used is not conclusive.

The court must find out whether the payment stipulated is in truth a penalty or liquidated damages. . . (ii) The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage. . . (iii) The question whether a sum stipulated is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged as at the time of the making of the contract, not as at the time of the breach . . . (iv) To assist this task of construction, various tests have been suggested which, if applicable to the case under consideration, may prove helpful or even conclusive.

Such are: (

a) It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss which could conceivably be proved to have followed from the breach . . . (

b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid. . . (

c) There is a presumption (but no more) that it is a penalty when "a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damages": On the other hand: (

d) It is no obstacle to the sum stipulated being a genuine pre- estimate of damage that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties. [28] These legal propositions have been accepted and applied by Canadian courts in many cases, one of the most recent of which is Nguyen v. Tran, 2012 ONSC 2418 . The approach to be taken by the court in its

interpretation of a stipulated remedy clause was set out as follows (at para. 60): In every case, the court is still required to determine whether the stipulated payment is, in truth, an unenforceable penalty or an enforceable estimate of liquidated damages. To make this determination, the court will interpret the terms of the contract and its inherent circumstances, judged at the time of the making of the contract.

The stipulated payment is properly viewed as an unenforceable penalty if it is an extravagant, extortionate, unconscionable or unreasonable amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach of contract. The essence of an unenforceable penalty is required payment of a stipulated sum that is oppressive to the party breaching the contract. The essence of enforceable liquidated damages, on the other hand, is a genuine advance estimate of the damage that would flow from a breach of the contract.

In this assessment, it is important to recall that the jurisdiction to strike down penalty clauses is an exception to the general principle that parties have the freedom to contract as they wish . . . (citations omitted). [29] Similar reasoning was followed by the Ontario Superior Court of Justice, Divisional Court (and the court below) in Renaud v.

Graham [2009] O.J. No 597. In that case, the court found that the purpose of a stipulated remedy clause in the employment contract ofa realtor was to recover costs of his training provided by his employer in the event of his departure to a competitor before the end of athree year term. The court concluded that the stipulated remedy clause was a genuine pre-estimate of damages and not a penalty. [30] Another helpful case to which I was referred is the decision of the Ontario Court of Appeal in Peachtree II Associates - - DallasL.P. v. 857486 Ontario Ltd. (ON CA), [2005] O.J. No. 2749.

Although that case principally dealt with a relieffrom forfeiture remedy in equity in the context of a commercial contract, it is nonetheless instructive on the issue of stipulated remedyclauses generally. [31] After reviewing the historical treatment of such clauses by the courts of common law (which dealt with attempts to enforce thepayment of penalties) and the courts of equity (which dealt with pleas for relief from penal forfeitures), Justice Sharpe summed up asfollows (at paras. 24-25): 24.

While both doctrines have the effect of relieving the breaching party of the penal consequences of stipulated remedy clauses, in theirtraditional formulations they bear significant differences. The common law penalty rule involves an assessment of the stipulated remedyclause only at the time the contract is formed. If the stipulated remedy represents a genuine attempt to estimate the damages the innocentparty would suffer in the event of a breach, it will be enforced.

On the other hand, again to quote Lord Dunedin from Dunlop, supra, "[i]twill be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest lossthat could be conceivably be proved to have followed from the breach." . . . Although the common law defined penalties in terms ofunconscionability, that assessment is to be made at the time the contract was formed. The common law doctrine did not include anydiscretion to be exercised in the light of circumstances that may exist at the time of breach. 25.

Equity, on the other hand, considers the enforceability of forfeitures at the time of breach rather than at the time the contract wasentered.

Equity also looks beyond the question of whether or not the stipulated remedy has penal consequences to consider whether it isunconscionable for the innocent party to retain the right, property, or money forfeited. . . . [32] In his reasons for judgment, Justice Sharpe also underscored the policy of upholding freedom of contract, stating at para. 34: Judicial enthusiasm for the refusal to enforce penalty clauses has waned in the face of a rising recognition of the advantages of allowingparties to define for themselves the consequences of breach.

As I have already noted, in Elsley, supra, Dickson J. labeled the penaltyclause doctrine as "a blatant interference with freedom of contract," [33] We are, of course, not dealing here with a relief from penal forfeiture situation as in Peachtree, but rather with the thresholdquestion of whether the stipulated remedy clause is in the nature of a penalty or a genuine pre-estimate of damages.

In fairness to theadjudicator, counsel have acknowledged that they were more focussed in the court below on the issues of the validity of the contract inits formation and execution, and whether it was unconscionable and/or ambiguous. However, the adjudicator’s failure to properlyidentify and apply the foregoing legal principles constitutes, in my view, an error of law. [34] The first error committed was the characterization of Clause 5(

a) of the Agreement as a penalty clause from the standpoint ofwhen the breach occurred, rather than at the time the contract was made. Significantly, the adjudicator made the following findings offact which were evident at the time of the making of the contract: (

a) He was satisfied that the amount of $10,000 as the cost of training was reasonable under the circumstances, even though the actualcosts of the program could not be proven with precision. The adjudicator noted the evidence from the appellant of what the associatedcosts were as they related to instructors, simulation labs, manuals and facilities; (

b) Indeed, the defendant agreed at the outset (in Clause 2 of the Agreement) that the cost to CEIEP for training, including materials,necessary equipment, instructors’ salaries and related expenses and materials was $10,000; (

c) The adjudicator stated in his decision that he “found the contract to be reasonably reflective of the investment made by the claimantand the importance of ensuring that they got return value from the individuals that took the program”; (

d) The adjudicator also found it to be “perfectly acceptable to have an individual acknowledge and accept a specific temporal obligationinto the future as it relates to additional costs being paid by one’s employer”. [35] In keeping with those findings, the adjudicator, in considering the nature of the Agreement, concluded that it was “a contractfor education with a condition to remain in the unionized labour force for a particular period time to allow the claimant to recover their

investment ” . In other words, Mr. Gilby ’ s contractual obligations were regarded as a recovery of investment on the part of CEIEP in his training. The adjudicator also expressly found that Mr. Gilby was not being exploited by this contract (there being a number of unionized employers in the industry), that the contract was not patently unfair on its face, and that it was not unconscionable. [36] When all these factors are judged as of the time of the making of the contract under the test articulated in Dunlop , I conclude that Clause 5(

a) of the Agreement is in essence a provision for liquidated damages, being a genuine pre-estimate of damages in the event of a breach. It is not in essence a penalty clause. The stipulated sum of $10,000 cannot be said to be an extravagant and unconscionable amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. Furthermore, to track the language in Dunlop , “ It is no obstacle to the sum stipulated being a genuine pre-estimate of damage that the consequences of the breach are such as to make precise pre-estimation almost an impossibility.

On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties ” . [37] The adjudicator, by wrongly judging the terms of the contract and its inherent circumstances at the time of the breach (more than eight years after the contract was made), erred in his

interpretation of the impugned provision as taking on the character and quality of a penalty (without it being pro-rated) and thereby colouring the entire contract. [38] Because the stipulated remedy clause represents, in my opinion, a genuine attempt to pre-estimate the damages the aggrieved party would sustain in the event of a breach (i.e., recovery by CEIEP of its investment in the cost of training), it should be enforced. Even if the stipulated remedy could be said to be in the nature of a penalty, it is not one that crosses the line of unconscionability (see Peachtree, supra ).

Overall, this is not a situation where this court should interfere with the general principle of freedom of contract. [39] The adjudicator then compounded his error in the

interpretation of the stipulated remedy clause by then misusing the doctrine of severance to achieve the desired result. In purporting to sever “ the non pro-rated portion of the $10,000", he went well beyond the mere excision of the impugned provision by incorporating a new provision that pro-rated damages to the unexpired term of the contract. [40] An authoritative review on the doctrine of severance can be found in the recent decision of the Supreme Court of Canada in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6 .

The question posed in that case was whether a restrictive covenant in an employment contract that was unreasonably wide in its geographic scope could be severed in some manner so as to leave in place what the court regarded as reasonable. [41] The Court observed that there appears to be two types of permissible severance, namely, “ blue-pencil severance ” and “ notional severance ” . The Court noted that both types of severance have been applied in limited circumstances to remove illegal features of a contract so as to render the contract in conformity with the law.

It also noted that where severance applied, whether blue-pencil or notional, the purpose is to give effect to the intention of the parties when they entered into the contract, with the added comment that courts will be restrained in their application of severance because of the right of the parties to freely contract and to choose the words that determine their obligations and rights. [42] In applying those principles in Shafron , the Supreme Court of Canada ruled that it was inappropriate for the Court of Appeal to have rewritten the geographic scope of an ambiguous restrictive covenant to what it thought was reasonable.

Although the case at bar does not involve a restrictive covenant in an employment contract, the application of these same legal principles leads me to the same conclusion that the doctrine of severance was here misused by the adjudicator. [43] I fully recognize that the adjudicator, in deciding the case as he did, was trying to fashion a remedy that he thought would produce a fair and reasonable result. However, in so doing, he erred in his

interpretation of the stipulated remedy clause and in his misuse of the doctrine of severance. The appeal on the first two grounds advanced by the appellant is therefore allowed.

SECOND ISSUE - Treatment of Solicitor-client Costs [44] This ground of appeal arises from the omission of the adjudicator to consider an agreement made between the parties at the time the proceeding was transferred to the Small Claims Court in respect of the treatment of legal costs. [45] Clause 5(

b) of the Agreement stipulates that if legal action is required to collect any monies payable by the Student to CEIEP, the Student shall pay to CEIEP its legal fees and disbursements incurred on a solicitor-client basis. [46] As recited earlier, this proceeding originated by way of a Notice of Action filed in this court. It was later transferred to the Small Claims Court after the parties reached an agreement that the claim for legal fees and disbursements, and interest at the stipulated rate, would be “ a monetary award in respect of a matter or thing arising under a contract ” as referred to in s.9 (

a) of the Small Claims Court Act . Counsel have confirmed that this agreement was communicated to the adjudicator but there is no mention of it anywhere in his decision. [47] As I indicated during the hearing of this appeal, this ground of appeal cannot succeed. Firstly, s. 9(

a) above recited should not be interpreted so broadly, in my view, so as to encompass the payment of solicitor-client costs. Rather, it connotes some form of damages arising under the contract, with the subject of costs being expressly dealt with elsewhere in the legislation. [48] It is trite to say that damages and costs are two very different things. Whatever the label the parties might have agreed to put on this head of recovery for purposes of the transfer of the proceeding to the Small Claims Court, it remains in substance to be that of solicitor-client costs.

It simply cannot be transformed into something else by agreement of the parties. [49] The Small Claims Court Act further provides (in s.14 ) that an agreement is void if it in any way purports to exclude, limit or vary the jurisdiction of the court. In other words, the parties cannot contract out of the Act . The Act does not anywhere provide any jurisdiction for an adjudicator to award solicitor-client costs but rather permits only a very specifically limited regime for the recovery of party-and-party costs.

Accordingly, the agreement made by the parties for the treatment of solicitor-client costs, to be dealt with by the Small Claims Court as a “ monetary award ” , is void. [50] The adjudicator dealt with this aspect of the claim in a very perfunctory way in his decision. He simply concluded that he did not have jurisdiction as a Small Claims Court adjudicator to award costs under these circumstances. Although he did not specify the appropriate reasons, or make any reference to the agreement of the parties, he was correct in deciding that he was without jurisdiction to award such costs.

THIRD ISSUE - Interest Payable [51] Again in a perfunctory manner, the adjudicator made the finding that the reference to interest in Clause 5(

b) of the Agreement pertained only to legal fees incurred by CEIEP to collect any money payable by the Student. He therefore simply awarded prejudgment interest from the date of default (November of 2009) in a seemingly arbitrary amount of $100. [52] In my view, Clause 5(

b) of the Agreement cannot reasonably bear that

interpretation. Rather, that clause should reasonably be interpreted as providing for interest at the specified rate to be paid on the damages recoverable. The appellant here maintains that such a calculation should be made on the full cost of training since the date of default.

[53] By virtue of s.16 of the Regulations made under s.33 of the Small Claims Court Act , an adjudicator may award prejudgment interest at a rate of 4% per annum in the same circumstances in which prejudgment interest may be award by the Supreme Court. That permissive language should have resulted here in an award of interest calculated at the prevailing prime rate as determined by the Royal Bank of Canada as contracted for by the parties. [54] Accordingly, this ground of appeal is also allowed.

However, it can be left to the parties to perform the simple arithmetic calculation required to determine the appropriate amount of interest payable since the date of default, without further involvement of the court. CONCLUSION [55] In the final result, Mr. Gilby will be obligated to pay to CEIEP the sum of $10,000 with interest thereon at the specified contractual rate from the date of default. Although not a direction by the court, I would encourage CEIEP to allow Mr.

Gilby to repay this amount over a reasonable period time, if so requested. [56] Since the appellant has been largely successful on this appeal, it is also awarded a barrister ’ s fee of $50 pursuant to s.23 of the Regulations. I decline to interfere with the decision of the adjudicator to award no costs in the hearing before him. J.