Docket: CACV2481 Directcash Management Inc. (Defendant) Appellant - v. -, 2014 SKCA 106

THE COURT OF APPEAL FOR SASKATCHEWAN Citation: 2014 SKCA 106 Date: 2014-10-09 Between: Docket: CACV2481 Directcash Management Inc. (Defendant) Appellant - and - Seven Oaks Inn Partnership (carrying on business as Best Western Seven Oaks) (Plaintiff) Respondent Coram: Ottenbreit, Herauf and Whitmore JJ.A. Counsel: Lindsay A. Wacholtz for the appellant Matthew A. Park for the respondent Appeal: From: 2013 SKQB 342 Heard: September 19, 2014 Disposition: Appeal dismissed Written Reasons: October 9, 2014

By: The Honourable Mr. Justice Whitmore In Concurrence: The Honourable Mr. Justice Ottenbreit The Honourable Mr. Justice Herauf Whitmore J.A. I. Introduction and Background [ 1 ] The respondent, Seven Oaks Inn Partnership (Seven Oaks), entered into a Processing Agreement (the Agreement) with Teal Financial Corp (Teal), the predecessor to the appellant, Directcash Management Inc. (Directcash), to acquire an automated teller machine (ATM) and perform related services in Seven Oaks’s Regina hotel.

An ATM was installed in the hotel on April 15, 2003 and the Agreement was executed by Directcash’s predecessor on May 21, 2003. Directcash is the successor to Teal. [ 2 ] The Agreement provided, inter alia , for a right of first refusal such that Directcash could meet any other offer which Seven Oaks received for the provision of services similar to those which Directcash provided. The Agreement also contained a clause fixing the term of the Agreement, an exclusivity clause, a liquidated damages clause, and an automatic renewal clause.

These clauses are relevant to the issues before the Court, and are as follows: 2.1 The initial term of this Agreement shall commence on the date the ATM is installed and shall expire five years from the date of installation (the “Initial Term”) unless sooner terminated as provided under this Agreement. [Appeal Book p. 28] 2.2 After the Initial Term, this Agreement shall automatically renew for one further five year period under the same terms and conditions provided for herein unless Teal notifies Customer or Customer notifies Teal in writing three (3) months before the end of the Initial Term or any renewal hereunder of Customer’s or Teal’s intent to terminate this Agreement. [Appeal Book p. 29] 2.3 The Customer agrees that after the completion of the Initial Term or any renewal term and within twelve months thereafter, Customer receives a bona fide offer from another company (the “Offer”) to provide similar services in the Store, the Customer shall give prompt written notice to Directcash of the Offer including a copy of such Offer.

Directcash shall have the right of first refusal to enter into an agreement with Customer upon the same terms and conditions as the Offer. Directcash shall exercise the right of first refusal by giving Customer notice no more than 30 days after receipt by Directcash of the Offer from the Customer. [Appeal Book p. 31] 3.l Teal agrees to perform for Customer and customer exclusively engages Teal to perform data processing and other services in order to provide to Customer the System for each automated teller machine owned, rented or leased by Customer.

Customer agrees that it will not purchase, lease, rent or place any third parties ATM in the Premises described on the front of this Agreement throughout the Initial Term and any renewal terms. [Appeal Book p. 29] [ 3 ] Seven Oaks purported to terminate the Agreement by letter dated January 11, 2008, with a termination to be effective in April of 2008.

Shortly after receiving the termination letter, Directcash withheld $51,784 from Seven Oaks. [ 4 ] The parties then corresponded regarding a renewal of the Agreement, but Seven Oaks claimed Directcash did not meet the offer made by another proposed supplier, Canex, and entered into an agreement with Canex. [ 5 ] Directcash returned half of the money it had withheld but retained approximately $26,434 from Seven Oaks. [ 6 ] Seven Oaks commenced an action for the amount withheld.

Directcash counterclaimed alleging that the Agreement had been renewed for a further five year term, and that Seven Oaks had breached the exclusivity term of the Agreement. Directcash claimed to be entitled to retain the $26,434 as liquidated damages. II. The Decision Below [ 7 ] The trial judge found that the Agreement had been validly terminated, and found Directcash was in breach of the Agreement by withholding funds. The trial judge also found that Seven Oaks had breached the exclusivity clause of the Agreement.

Directcash was ordered to pay to Seven Oaks the sum it had withheld and retained, namely $26,433.62, less damages to Directcash for Seven Oaks’s breach of the exclusivity clause in the amount of $1,982.25. Seven Oaks was awarded costs plus $750 as extra costs. III. Issues [ 8 ] The issues raised by the appellant, Directcash, are as follows: (

a) Did the trial judge err in determining the Initial Term of the Agreement commenced on May 21, 2003? (

b) Did the trial judge err in finding the Agreement did not automatically renew at the end of the Initial Term?

(

c) Did the trial judge err in his assessment of damages for Seven Oaks’s breach of the exclusivity provisions of the Agreement? (

d) Alternatively, did the trial judge err in finding the right of first refusal provision contained in the Agreement did not apply, and ifso, did Seven Oaks breach the provision? (

e) If the right of first refusal provision was breached by Seven Oaks, did the trial judge err in the assessment of damages? IV. Standard of Review [9] In Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53, 373 DLR (4th) 393 [Sattva], the Supreme Court of Canadaabandoned the historical approach to contractual

interpretation in favour of a new approach, which has an impact on the standard ofreview. [10] In Sattva, the Supreme Court stated the following: [50] With respect for the contrary view, I am of the opinion that the historical approach should be abandoned. Contractualinterpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual

interpretation are applied tothe words of the written contract, considered in light of the factual matrix. [51] The purpose of the distinction between questions of law and those of mixed fact and law further supports this conclusion. Onecentral purpose of drawing a distinction between questions of law and those of mixed fact and law is to limit the intervention of appellatecourts to cases where the results can be expected to have an impact beyond the parties to the particular dispute.

It reflects the role ofcourts of appeal in ensuring the consistency of the law, rather than in providing a new forum for parties to continue their privatelitigation. For this reason, Southam [Canada (Director of Investigation and Research) v Southam Inc., (SCC), [1997] 1SCR 748] identified the degree of generality (or “precedential value”) as the key difference between a question of law and a question ofmixed fact and law.

The more narrow the rule, the less useful will be the intervention of the court of appeal: If a court were to decide that driving at a certain speed on a certain road under certain conditions was negligent, its decision would nothave any great value as a precedent. In short, as the level of generality of the challenged proposition approaches utter particularity, thematter approaches pure application, and hence draws nigh to being an unqualified question of mixed law and fact. See R. P. Kerans,Standards of Review Employed by Appellate Courts (1994), at pp. 103–108.

Of course, it is not easy to say precisely where the lineshould be drawn; though in most cases it should be sufficiently clear whether the dispute is over a general proposition that might qualifyas a principle of law or over a very particular set of circumstances that is not apt to be of much interest to judges and lawyers in thefuture. [para. 37] [52] Similarly, this Court in Housen [Housen v.

Nikolaisen, 2002 SCC 33] found that deference to fact-finders promoted the goalsof limiting the number, length, and cost of appeals, and of promoting the autonomy and integrity of trial proceedings (paras. 16–17).These principles also weigh in favour of deference to first instance decision-makers on points of contractual

interpretation. The legalobligations arising from a contract are, in most cases, limited to the interest of the particular parties. Given that our legal system leavesbroad scope to tribunals of first instance to resolve issues of limited application, this supports treating contractual

interpretation as aquestion of mixed fact and law. [Emphasis added] [11] This approach was followed in Martenfeld v Collins Barrow Toronto LLP, 2014 ONCA 625 wherein the Ontario Court ofAppeal stated the following: [41] The Sattva court also held, at para. 50, that: “Contractual

interpretation involves issues of mixed fact and law as it is anexercise in which the principles of contractual

interpretation are applied to the words of the written contract, considered in light of thefactual matrix.” Thus, questions of contractual

interpretation generally attract a deferential standard of review: Sattva at para. 52. Further,although it may be possible “to identify an extricable question of law from within what was initially characterized as a question of mixedfact and law,” “courts should be cautious in identifying extricable questions of law in disputes over contractual

interpretation” since,among other considerations, “the goal of contractual

interpretation, to ascertain the objective intentions of the parties, is inherently factspecific”: Sattva at paras. 53–55. [42] On this appeal, the CBT Group challenges the trial judge’s findings regarding the meaning of “Permanent Capital” and herquantification of the amount of liquidated damages owed by Martenfeld under s. 11.2.2. The CBT Group also attacks her findingsconcerning the relevance of the Capital Equalization Schedules, the Group Statements, and the parties’ discussions leading up to theformation of the Partnership Agreement.

These findings are either findings of fact or, on the authority of Sattva, findings of mixed factand law. In either case, they attract significant deference from this court. Absent palpable and overriding error, appellate interventionwith these findings is precluded. [Emphasis added] [12] The issues raised herein, namely the

interpretation of the commencement date of the Agreement and the amount of damages areeither findings of fact or findings of mixed fact and law. Thus, following the principles enunciated in Sattva, significant deference is to begiven to the findings of the trial judge. In the absence of palpable and overriding error, the Court should not intervene. V. Analysis A.

Did the trial judge err in determining the Initial Term of the Agreement commenced on May 21, 2003? [13] Prior to the Supreme Court’s decision in Sattva, it was not clear that the surrounding circumstances or the “factual matrix” ofthe contract had to be taken into account when interpreting a contract. The Supreme Court had earlier suggested in Eli Lilly & Co. v

Novopharm Ltd., (SCC), [1998] 2 SCR 129 at para 55–56 that the surrounding circumstances only had to be consideredwhen the contract was ambiguous. Sattva has made it clear that the surrounding circumstances are relevant, whether or not there is anambiguity in the contract. [14] The Agreement contained the following proviso where Teal Financial Corp. (the predecessor to Directcash) was required to signand date the Agreement: “This agreement shall not become binding upon Teal until accepted as follows” (“as follows” means thesignature of a representative of Teal Financial Corp. and the date upon which the representative signed the Agreement). [15] The Agreement also contained the following at

Article 2.1: “The initial term of this Agreement shall commence on the date theATM is installed and shall expire five years from the date of installation (the “Initial Term”) unless sooner terminated as provided underthis Agreement” (Appeal Book p. 28). [16] There is thus an ambiguity or inconsistency in the terms of the Agreement as one term provides for rights and obligations tocommence upon installation of the ATM and another term provides that Directcash has no obligations until the Agreement is executed byDirectcash.

The surrounding circumstances thus become all the more relevant in interpreting the Agreement. [17] Directcash submits the trial judge failed to consider the surrounding circumstances and that this failure is an error. [18] In Sattva, the Supreme Court relied upon Lord Hoffmann’s decision in Investors Compensation Scheme Ltd. v West BromwichBuilding Society, [1998] 1 All ER 98 (HL) wherein Lord Hoffmann held that surrounding circumstances include “absolutely anythingwhich would have affected the way in which the language of the document would have been understood by a reasonable man” (para. j, p.114). [19] The trial judge was clearly alive to the surrounding circumstances and those circumstances were taken into account in hisinterpretation of the Agreement.

At para. 34 of the judgment he expressly commented upon the surrounding circumstances as follows: [34] This

interpretation – that is, that

Article 2.1 is intended to take account of the fact that installation would normally occur afterexecution – is accordingly consistent with the purpose of this standard form contract and the commercial context. In my view, thatcontext is not changed by the fact that Teal had supplied services to the plaintiff since August 2002, and had done so on the samefinancial terms as the ATM contract since April 15, 2003.

The parties intended that the defendant would have a new five year term, inaccordance with its standard form contract. (Seven Oaks Inn Partnership v Directcash Management Inc., 2013 SKQB 342) [20] Having taken the surrounding circumstances into account, the trial judge did not commit an error of law. Thus, his analysis issubject to the standard of review of palpable and overriding error in relation to that issue. The question then becomes, did the trialjudge’s

interpretation of the contract, particularly in light of the minimal weight he appeared to ascribe to the surrounding circumstances,disclose a palpable and overriding error. [21] The Supreme Court in Sattva described the role of the surrounding circumstances in the

interpretation of a contract: [57] While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed tooverwhelm the words of that agreement (Hayes Forest Services [Ltd. v Weyerhaeuser Co., 2008 BCCA 31], at para. 14; and Hall, at p. 30[Geoff Hall, Canadian Contractual

Interpretation Law, 2d ed (Markham: LexisNexis, 2012)]). The goal of examining such evidence isto deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of thecontract. The

interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract(Hall, at pp. 15 and 30-32). While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them todeviate from the text such that the court effectively creates a new agreement (Glaswegian Enterprises Inc. v. B.C. Tel Mobility CellularInc. (1997), (BC CA), 101 B.C.A.C. 62). [Emphasis added] [22] The trial judge’s

interpretation of the Agreement was consistent with this approach to the surrounding circumstances of thecontract. His analysis clearly focussed on the text of the Agreement. He noted the following at para. 32: [32] …

Article 2.1 contemplates the possibility that the effective date of the contract and the commencement of the five year termduring which services are provided can be different dates. … If the parties had intended that the five year term to commence onexecution, regardless of the date of installation, it would have been a simple matter to say so. He then concluded by focusing on the plain language of the provisions: [35] I would finally note that this

interpretation is also consistent with the plain language of

Article 2.1.

Article 2.1 speaks in thefuture tense. That is, it says the term “shall” commence on the day the ATM “is” installed. The plain meaning of that provision is that theterm will commence on or after execution. If the parties intended to make the contract effective on an installation date that preceded theeffective date of the contract, it would have been a simple matter to so provide. [23] In addition to emphasising the terms of the Agreement, the trial judge took into account the purpose of the standard formAgreement as evidence of the relevant surrounding circumstances, including the operation of the ATM on April 15, 2003: [33] It does not follow, however, that

Article 2.1 must be read as referring to installation of the ATM prior to the effective date of thecontract. This is a standard form contract. It is designed to enable the defendant to sign up a new customer, and at that time or thereafter,“install” the automatic teller machine by providing the necessary services to connect it to the Interac network. The defendant earns itsmoney primarily from interchange fees. Those fees are not generated as a result of the execution of the contract, but only when the ATMis connected to the network.

The contract is intended to ensure that it will earn those fees for least five years. The provisions for anautomatic five year renewal and the right of first refusal also reflect the defendant’s concern with ensuring that it would be entitled todeliver services and earn fees for a lengthy term. [34] This

interpretation – that is, that

Article 2.1 is intended to take account of the fact that installation would normally occur after

execution – is accordingly consistent with the purpose of this standard form contract and the commercial context. In my view, that context is not changed by the fact that Teal had supplied services to the plaintiff since August 2002, and had done so on the same financial terms as the ATM contract since April 15, 2003.

The parties intended that the defendant would have a new five year term, in accordance with its standard form contract. [ 24 ] Directcash further submits that the trial judge erred in failing to consider that the ATM had been operational and that the parties had not performed their obligations since April 15, 2003. This is not correct. The trial judge did take into account the operation of the ATM since April 15, but essentially found that the surrounding circumstances could not override the text of the Agreement. As stated, this Court is to review the trial judge’s decision for palpable and overriding error.

No such error is apparent. The trial judge’s finding that the Agreement commenced on May 21, 2003 is reasonable and his finding should not be disturbed. I would therefore dismiss this ground of appeal. B. Did the trial judge err in finding the Agreement did not automatically renew at the end of the Initial Term? [ 25 ]

Article 2.2 of the Agreement requires notice of termination to be given at least three months before the expiration of the Initial Term in order to avoid the operation of the automatic renewal provision of the Agreement. As I have found that the trial judge did not err in finding the commencement date of the Initial Term to be May 21, 2003, Seven Oaks’s notice of termination, received by Directcash on January 16, 2008, was received more than three months prior to the termination date of the Initial Term, namely May 21, 2008.

Thus the termination was valid and the automatic renewal provision was not triggered. [ 26 ] There was no error in the trial judge’s conclusion that the Agreement terminated on May 21, 2008, and that the Agreement did not renew at the end of the Initial Term. I would therefore dismiss this ground of appeal. C. Did the trial judge err in his assessment of damages for Seven Oaks’s breach of the exclusivity provision of the Agreement? [ 27 ] The trial judge found that the plaintiff breached the exclusivity provision “by placing other automated teller machines in its premises no later than January 2008” (para. 46).

The trial judge observed that while “it is arguable that the liquidated damages provision constitutes a penalty clause, and is accordingly unenforceable, the plaintiff did not take that position. Rather, both parties took the position that damages should be fixed in accordance with

Article 6.15.” [ 28 ] The evidence is clear that Seven Oaks had another ATM installed in the hotel during the term of the Agreement, thus breaching the exclusivity provision of the Agreement. This is not disputed by Seven Oaks and is a reasonable conclusion of the trial judge. [ 29 ] The trial judge had determined that the Initial Term expired in May of 2008 and, therefore, calculated that four months of damages at $440.50 per month were owed to Directcash for breach of the exclusivity provision in accordance with

Article 6.15.

Damages of $1,982.25, which included interest, were awarded to Directcash. [ 30 ] Again, this issue is dependent upon the finding of the trial judge regarding the commencement date of the Agreement, and as a consequence of that finding, the resulting termination date of the Agreement. [ 31 ] Directcash maintains that the Agreement automatically renewed and thus damages are to be calculated for a period of five years and four months. [ 32 ] As I have found no error in the trial judge’s conclusion as to the commencement date of the Initial Term of the Agreement, and as I have found no error in the trial judge’s conclusion that the Agreement terminated on May 21, 2008, and did not automatically renew, the trial judge’s determination of damages for the period January to May 2008 should not be disturbed.

D. Alternatively, did the trial judge err in finding the right of first refusal provision contained in the Agreement did not apply and if so, did Seven Oaks breach the provision? [ 33 ]

Article 2.3 of the Agreement is as follows: The Customer agrees that after the completion of the Initial Term or any renewal term and within twelve months thereafter, Customer receives a bona fide offer from another company (the “Offer”) to provide similar services in the Store, the Customer shall give prompt written notice to Directcash of the Offer including a copy of such Offer. Directcash shall have the right of first refusal to enter into an agreement with Customer upon the same terms and conditions as the Offer.

Directcash shall exercise the right of first refusal by giving Customer notice no more than 30 days after receipt by Directcash of the Offer from the Customer. (Appeal Book p. 7–8) [ 34 ] Seven Oaks argues that the right of first refusal contained in

Article 2.3 does not apply to the offer received, as the plain meaning of that

Article is that it applies only to offers received after the expiration of the Initial Term. The Initial Term expired May 21, 2008 and the offer was received in April of 2008. The right of first refusal, therefore, according to Seven Oaks does not apply to that offer as it was received prior to the expiration of the Agreement. [ 35 ] Directcash submits that the trial judge erred in determining the letter of April 8, 2008, from the proposed supplier was an offer rather than a mere introductory letter. Thus, Canex did not enter into an agreement or make an offer until later, after the Agreement terminated. [ 36 ] The trial judge found that on a fair reading the plain meaning of

Article 2.3 is clear and is the

interpretation proposed by Seven Oaks.

[ 37 ] I am of the view that a plain reading of

Article 2.3 supports the trial judge’s

interpretation. Thus, the right of first refusal did not operate with respect to the offer by Canex, which was received in April of 2008, during the term of the Agreement. The right of first refusal provision, by its plain meaning, only applies to offers received after the completion of the Initial Term and within twelve months thereafter. [ 38 ] The April 2008 letter from Canex was the only written document concerning the relationship between Seven Oaks and Canex. The trial judge did not err in finding that letter to be an offer. I would dismiss this ground of appeal. E.

If the right of first refusal provision was breached by the respondent, Seven Oaks, did the trial judge err in the assessment of damages? [ 39 ] As I have found that the right of first refusal provision was not breached by Seven Oaks, it is not necessary to pursue this issue. VI. Conclusion [ 40 ] I would dismiss the appeal with costs to Seven Oaks. DATED at the City of Regina, in the Province of Saskatchewan, this 9th day of October, 2014. “ Whitmore J.A. ” Whitmore J.A. I concur “ Ottenbreit J.A. ” Ottenbreit J.A. I concur “ Herauf J.A. ” Herauf J.A.