[10] Clause 2(e) provides that any debt or obligation arising from a default by the builder is a charge against all the builder's property. This secur

Transcription

1 Alberta Court of Queen's Bench Crystal Rose Home Ltd. v. Alberta New Home Warranty Program Date: D. Bieganek, for plaintiff. G.J. Alexander, for defendant. (Edmonton ) November 23, [1] Master FUNDUK: This is an application by the Defendant for an order staying the action: s. 7(1) Arbitration Act. BASIC FACTS [2] The house builders' industry, like most industries, is concerned about the public image of house builders and the integrity of the industry. [3] The industry decided to give a measure of protection to buyers of new homes. That is done through the Defendant, a company. [4] House builders can apply to become members of the Defendant. If a builder becomes a member it enters into a standard printed form contract with the Defendant. [5] A buyer of a newly constructed home from a builder who is a member of the Defendant gets a written warranty. That warranty imposes various liabilities on both the builder and the Defendant. It is not necessary to deal with the specific terms of the warranty. [6] The general thrust of the total relationship is that if the builder defaults in its obligations to the purchaser the Defendant is a backstop to pick up the pieces if it is necessary. [7] It is a matter of court record that the most drastic default is when a builder goes bankrupt, leaving purchasers with partially completed homes, usually subject to builders' liens. In the last decade this has happened a number of times. The Defendant then steps in to complete the homes. [8] The relationship between the builder and the Defendant is governed by the contract between them. [9] Clause 9 identifies eight different things that are to be default by the builder under the contract. They range from not paying money it owes to the Defendant to going out of business. Included in that range is default by the builder under any contracts it has with its purchasers.

2 [10] Clause 2(e) provides that any debt or obligation arising from a default by the builder is a charge against all the builder's property. This secures the Defendant, for what it is worth, for any costs it incurs in stepping in and doing what the builder should have done. [11] Clause 2(1) provides that if there is a default by the builder the Defendant can take possession of and manage the property and business of the builder and its cost in doing so is a debt owing to it by the builder. This latter part ties to subcl.(e). [12] Clause 18 provides for arbitration between the parties. It says: If any dispute arises between the Builder and the Program with respect to any matter in relation to this Agreement the dispute shall be settled through an arbitration in accordance with rules of arbitration adopted by the New Home Warranty Program of Alberta. It is expressly agreed that the arbitration shall be final and binding on both parties. [13] The contract does not say anything about the Defendant having to give notice to or make demand on the builder to remedy any defaults, and following from that it obviously does not provide for a grace period for the builder to remedy any defaults. [14] The Plaintiff is a member of the Defendant. [15] This lawsuit was started in June [16] The Plaintiff alleges that on August 3, 1993 the Defendant terminated the Plaintiff's membership in the Defendant, took possession of all the Plaintiff's property and filed caveats against all the land owned by the Plaintiff on which the Plaintiff was building homes. [17] The Plaintiff's complaints break down into four main categories: 1. It was not in default; 2. If it was in default the Defendant completed the homes at too high a cost; 3. If it was in default the Defendant did not act in good faith and in a commercially reasonable manner (s. 66 Personal Property Security Act); 4. If it was in default it was entitled to (a) a notice of the default and a reasonable time to correct the defaults, or, in any event (b) a s. 244 Bankruptcy Act notice. ISSUES [18] As a preliminary caution, I must point out that it is not my function on this application to pass on the merits of the Plaintiff's complaints. Anything I say is against that background caution.

3 [19] Counsel cited a few decisions. Some of them are cases on the application of the International Commercial Arbitration Act. One of the cases cited is BWV Investments Ltd. v. Saskferco Products Inc., [1993] 4 W.W.R. 553 (Sask. Q.B.). That case has not faired well in Alberta. It has recently been twice rejected by this Court: Porta-Test Inc. v. Roxon Oy (Q.B , June 28, 1994 (Master)), Kvaerner Enviropower Inc. v. Tanar Industries Ltd. (Q.B , July 13, 1994 [reported 21 Alta. L.R. (3d) 182, [1994] 9 W.W.R. 228]), affirmed (C.A AC, Oct. 4, 1994 [reported 24 Alta. L.R. (3d) 365, [1995] 2 W.W.R. 433]). [20] Mr. Bieganek says that the cases based on the International Commercial Arbitration Act are not applicable because s. 2 of that Act says that its scope covers "differences arising out of commercial legal relationships, whether contractual or not". See Kaverit Steel & Crane Ltd. v. Kone Corp. (1992), 85 Alta. L.R. (2d) 287 [[1992] 3 W.W.R. 716] (C.A.), for a discussion on the scope of that section. As I understand this submission, it is that the Arbitration Act does not cover arbitration for tort claims. It is correct that there must be an agreement between the parties which provides for arbitration. The simple answer to this position is that the issue on this application is to be determined by the scope of cl. 18 of the contract. I do not understand Mr. Bieganek to say that cl. 18 is invalid or too wide. In my view, the Arbitration Act allows the parties to determine what is arbitrable. They decide what forum shall be used to settle any disputes. One [21] Mr. Bieganek does not suggest that the first complaint is not arbitrable. Whether the Plaintiff did or did not do something which constitutes a default under cl. 9 is an issue of fact which is clearly a "matter in relation to this Agreement", that is, it is clearly within the scope of cl. 18. Any argument to the contrary would be futile. [22] I find that the issue whether the Plaintiff was in default is caught by cl. 18. Two [23] Mr. Bieganek does not suggest that the issue whether the Defendant completed the homes at too high a cost is not arbitrable. The right of the Defendant to complete any homes in progress is a contract right (cl. 2(1)) as is its right to charge the costs of completion to the Defendant and to have a charge against the Plaintiff's property for those costs (cl. 2(e)). Any argument to the contrary would be futile. [24] I find that the second issue is also within the scope of cl. 18. Three

4 [25] Section 66(1) P.P.S.A. says that any rights, duties or obligations arising under a security agreement shall be exercised or discharged in good faith and in a commercially reasonable manner. [26] Assuming, without deciding, that the contract here falls within the scope of s. 66(1), this complaint also falls fairly within the scope of cl. 18. Whether the Defendant acted in good faith in exercising its rights under the contract is an issue of fact. Whether the Defendant acted in a commercially reasonable manner in doing whatever it is that it did is also a fact issue. Both these fact issues are "matters in relation to" the contract and so are caught by cl. 18. [27] The P.P.S.A. does not prohibit parties to a security agreement from agreeing to arbitrate disputes arising from the security agreement. There is nothing to prevent parties to a security agreement from arbitrating s. 66(1) issues. The Act merely prohibits a waiver or variation of the rights and duties given by s. 66(1): s. 56(2). The forum for the resolution of disputes can be left to the parties to decide if they so wish. [28] I find that this third issue is within the scope of cl. 18. Four [29] The fourth issue, notice, is the real dispute on this application. Mr. Bieganek stakes the Plaintiff's position on this issue not being arbitrable. [30] If the Defendant was required to give a notice of some kind, for whatever reason, the Plaintiff could not frame its complaint as a breach of contract. If it did that it would shoot itself in the foot if one of the objects of the exercise is to avoid arbitration. A claim that the Defendant had breached the contract would be caught by cl. 18. [31] Litigants can sometimes get around hurdles in suing in contract, for whatever reason, by suing in tort instead. That can be done where there is concurrent liability in tort and in contract. In recent years we have seen a proliferation in these kinds of cases. [32] The current final word on this situation is found in Central & Eastern Trust Co. v. Rafuse, [1986] 2 S.C.R. 147; BG Checo International Ltd. v. British Columbia Hydro & Power Authority (1993), 147 N.R. 81 [[1993] 2 W.W.R. 321] (S.C.C.), and Queen v. Cognos Inc. (1993), 147 N.R. 169(S.C.C.). [33] The claim in tort is usually based on the common law duty of care. It is the "neighbor" concept discussed in Donoghue [M'Alister (Donoghue) v. Stevenson, [1932] A.C. 562 (H.C.)], cited in Central Trust. The fact that there is a contract between parties does not of itself preclude the common law duty of care.

5 [34] In Central Trust Le Dain J. says, pp : 1. The common law duty of care that is created by a relationship of sufficient proximity, in accordance with the general principle affirmed by Lord Wilberforce in Anns v. Merton London Borough Council, is not confined to relationships that arise apart from contract. Although the relationships in Donoghue v. Stevenson, Hedley Byrne and Anns were all of a non-contractual nature and there was necessarily reference in the judgments to a duty of care that exists apart from or independently of contract, I find nothing in the statements of general principle in those cases to suggest that the principle was intended to be confined to relationships that arise apart from contract. Indeed, the dictum of Lord Macmillan in Donoghue v. Stevenson concerning concurrent liability, which I have quoted earlier, would clearly suggest the contrary. I also find this conclusion to be persuasively demonstrated, with particular reference to Hedley Byrne, by the judgment of Oliver J. in Midland Bank Trust. As he suggests, the question is whether there is a relationship of sufficient proximity, not how it arose. The principle of tortious liability is for reasons of public policy a general one. See Arenson v. Casson Beckman Rutley & Co., [1977] A.C. 405, per Lord Simon of Glaisdale at p Junior Books Ltd. v. Veitchi Co., [1983] 1 A.C. 521, in which an owner sued flooring subcontractors directly in tort, is authority for the proposition that a common law duty of care may be created by a relationship of proximity that would not have arisen but for a contract. 2. What is undertaken by the contract will indicate the nature of the relationship that gives rise to the common law duty of care, but the nature and scope of the duty of care that is asserted as the foundation of the tortious liability must not depend on specific obligations or duties created by the express terms of the contract. It is in that sense that the common law duty of care must be independent of the contract. The distinction, in so far as the terms of the contract are concerned, is, broadly speaking, between what is to be done and how it is to be done. A claim cannot be said to be in tort if it depends for the nature and scope of the asserted duty of care on the manner in which an obligation or duty has been expressly and specifically defined by a contract. Where the common law duty of care is co-extensive with that which arises as an implied term of the contract it obviously does not depend on the terms of the contract, and there is nothing flowing from contractual intention which should preclude reliance on a concurrent or alternative liability in tort. The same is also true of reliance on a common law duty of care that falls short of a specific obligation or duty imposed by the express terms of a contract. [35] Mr. Bieganek says that there was a common law duty by the Defendant to give notice to the Plaintiff. The complaint is framed this way in the pleading: 10. The Plaintiff was entitled to receive reasonable notice of the Defendant's intention to terminate the Plaintiff's membership in the Program and take possession of all or substantially all of the Plaintiff's assets but the Plaintiff received no such notice from the Defendant. 11. If the Plaintiff was in default of the Agreement, which is not admitted, the Plaintiff was entitled to receive notice of such default and to be given a reasonable opportunity to correct the default in the circumstances. 12. If the Plaintiff was insolvent, which is not admitted, the Defendant, as a party holding a security interest in all or substantially all of the Plaintiff's assets, was required pursuant to Section 244 of the Bankruptcy and Insolvency Act (Canada) to provide the Plaintiff with ten days written notice of its intention to enforce its security on all or substantially all of the Plaintiff's assets and failed to do so.

6 13. In taking possession of all or substantially all of the Plaintiff's assets without notice and without commercially reasonable grounds for so doing, the Defendant wrongfully seized the Plaintiff's assets and the Plaintiff has suffered loss and damage by those actions. [36] The rule that a reasonable demand or a reasonable notice must be given is well known in the law in a particular kind of situation. The leading Canadian case on this rule is of course Ronald Elwin Lister Ltd. v. Dunlop Canada Ltd., [1982] 1 S.C.R [37] Ronald Elwin Lister is a creditor-debtor case. The debt was due on demand and the creditor had security for it. The creditor demanded payment and concurrently appointed a receiver who immediately took possession of the debtor's assets. The debtor did not have a reasonable opportunity to pay the debt after demand was made. [38] Ronald Elwin Lister traces this rule back to Toms v. Wilson (1863), 122 E.R In Toms the contract said that the debtor had to pay the debt "immediately on demand". The creditor was secured. The issue was whether the debtor was entitled to a reasonable time to pay the debt after demand was made notwithstanding the literal meaning of the contract. The court said that he was. [39] Cockburn C.J. says, p. 529: We are all of opinion that the rule should be made absolute. By the terms of the bill of sale, the plaintiff was under an obligation to pay this money immediately upon demand in writing, and if he did not then the defendants were entitled to take possession of and sell the goods. Here such a demand was made. The deed must receive a reasonable construction, and it could not have meant that the plaintiff was bound to pay the money in the very next instant of time after the demand, but he must have a reasonable time to get it from some convenient place. For instance, he might require time to get it from his desk, or to go across the street, or to his bankers for it. (emphasis mine) [40] Blackburn J. says the same thing, same page: I am of the same opinion. In general, where money is payable on demand, the law holds that the creditor is bound to find out the debtor. But, when, by the express terms of the instrument creating the debt, payment is to be made "immediately upon demand in writing," it must be construed to mean within a reasonable time. This agrees with what is said in Com. Dig. tit. Condition (G.5): "Where a condition is to be performed immediately, he shall have a reasonable time to perform it, according to the nature of the thing to be done. So, if it be to be performed upon demand." And by a "reasonable time" must be understood time enough to ascertain the will of the creditor, or of a person authorized by him to receive the money. (emphasis mine) [41] What the court said was this is how this contract should be interpreted. [42] This analysis was followed in Massey v. Sladen (1868), L.R. 4 Exch. 13. There the contract, a common law chattel mortgage, provided that the debt was to be paid "instantly on demand and without any delay or any pretence whatever".

7 [43] Kelly C.B. says, pp : The question is whether, by this deed, the defendants were, under the circumstances, entitled to enter and seize the plaintiff's goods? That depends on the language of the instrument, which is framed so as to give the defendants every advantage which they could possibly have, in taking with expedition those steps which they were bound to take. But these words, though stringent, nevertheless make it necessary that there should be a personal demand and a default That it was intended some reasonable time should be allowed for the plaintiff to receive information of the demand is certain from the use of the word notice, which clearly points to something adapted to the purpose of giving knowledge. Therefore it is clear that a notice must be left on the premises under such circumstances that it must be presumed the plaintiff would give an answer to it within a reasonable time. And were it otherwise, the absurd and inequitable consequence might follow, that the plaintiff might have at his bankers moneys far exceeding the amount demanded, and yet might on his return from a five minutes' absence from his place of business find that his opportunity of complying with the demand was lost, and that his goods were already in the hands of the defendants. There can be no doubt the parties contemplated that such an opportunity should be afforded him; and even the word "instantly" allows of a perfect compliance with the deed by his offering to the defendants his cheque for the amount, and if it were refused, taking the time necessary to enable him to obtain the money by cashing it. But if on these words the matter were doubtful, all doubt would be removed by the proviso, that in case the plaintiff should make default the defendants might enter and sell, but that until default the property should remain in the possession and enjoyment of the plaintiff. From this it is clear, that what was contemplated was a demand with a reasonable time for complying with it; for it is only if he had an opportunity of knowing the demand that he could have an opportunity of either complying with it, or declaring himself unable to do so; and in the latter case only could there be said to be a default. (emphasis in original) [44] Pigott B. adopts the same approach, p. 19: I am of the same opinion. It is not necessary to define what time ought to elapse between the notice and the seizure. It must be a question of the circumstances and relations of the parties, and it would be difficult, perhaps impossible, to lay down any rule of law on the subject, except that the interval must be a reasonable one. But it is quite clear that the plaintiff did not intend to stipulate for a merely illusory notice, but for some notice on which he might reasonably expect to be able to act. On the contention of the defendants, however, we might as well strike out the stipulation, for it would rather be calculated to deceive the plaintiff than to afford him any protection. [45] Again, what the court said was this is how the contract should be interpreted notwithstanding what it literally says because a literal interpretation is not reasonable in the surrounding circumstances. [46] What technically started out as a matter of interpretation of a contract has now probably evolved into a rule of law. Where a debt is payable on demand the creditor must make a reasonable demand for payment. Until (a) a reasonable demand is made, and (b) the reasonable time has gone by without the debtor paying the debt, the debtor is not in default so the creditor is not justified in exercising his security. If the creditor exercises his

8 security before there is default he has committed a breach of contract and has concurrently committed a tort (trespass or conversion or both). [47] In Massey Kelly C.B. expressly ties the issue of the creditor's right to exercise his security to there being default by the debtor. He says that there must be a reasonable demand and only after the reasonable time has passed without the debtor paying the debt "could there be said to be default": p. 18. [48] Toms and Massey were referred to and followed in Moore v. Shelley (1883), 8 App. Cas. 285 (P.C.). That was also a case of a debt due on demand. [49] The case law that developed this rule all involved debts due on demand. The language in the contracts might vary but all required the debtor to pay the debt the moment that the creditor demanded payment. Canada Trustco Mortgage Co. v Holdings Ltd. (1986), 72 A.R. 357 (C.A.), discusses the peculiar nature of a debt payable on demand. [50] Some Canadian cases suggest that the rule (I call it that because it is called that in Ronald Elwin Lister) applies in every case where there is default by the debtor regardless what the default is. See, for example, Jim Landry Pontiac Buick Ltd. v. Canadian Imperial Bank of Commerce (1987), 40 D.L.R. (4th) 343 (N.S.T.D.). These cases say that if there is a default by the debtor (which is not a default in paying the debt) the creditor must still make a reasonable demand on the debtor to pay the debt before he can realize on his security. [51] I do not read Toms and Massey that way. In my view, these cases stand for the simple proposition that a secured creditor cannot exercise his security rights unless there is default by the debtor. That is so elementary it hardly need be said. What Toms and Massey also say is that if the default relied on is the failure to pay a debt which is payable on demand there is not that default until: (a) a reasonable notice to pay is given to the debtor, and (b) the reasonable time has lapsed without the debtor paying the debt. [52] These Canadian cases conclude that Toms and Massey establish a general rule that in all cases where there is a default the creditor must still give the debtor a reasonable notice to pay the debt (or presumably to cure the default if it is a non-monetary default). These cases arrive at that conclusion by (a) looking at the language of the contracts in Toms and Massey, (b) looking at the end result in each case, (c) saying that the end result cannot be justified based on the language in the contracts, and so the rule must be a general rule that the creditor must first give a reasonable notice in any case where there is

9 default of any kind. The argument is that the language used in the contracts and the result reached are only sensible if the rule is the general rule advocated. [53] I think that that approach trivializes Toms and Massey. Both cases say that it is a matter of construction (interpretation) of the contract. Second, both cases say that the "demand" language used in the contract should not be read in isolation and in their context should not be read literally. There is nothing startling in that. Words in a contract are not to be read in isolation. A contract must be read as a single entity: Côté, An Introduction to the Law of Contract, p In addition, there is what Côté calls the "absurdity rule". If there are two reasonable interpretations of a contract and one produces an unreasonable result the other interpretation is to be preferred. That applies to the interpretation of any document. [54] I think that it can fairly be said that the construction (interpretation) found in Toms and Massey has now probably become engrained as a rule of law where it is a debt payable on demand situation. As Côté points out, pp : What is the proper construction of a contract (as with any other document) is a question of law to be decided by the judge (subject to appeal) and not by the jury. It is therefore not a subject for evidence, but simply one for argument. The only exceptions to this are special customs or trade usages, and latent ambiguity. 4. Precedent It being on question of law, previous decisions on the same subject will be followed, especially where they represent a well-settled practice upon which people may have come to rely. On the other hand, a case is no precedent if the facts are merely similar but distinguishable, and the courts will not consider a case to be a true precedent unless the words construed in the two cases really are the same, in the same context. [Footnotes omitted.] [55] Moore was a secured creditor and debt payable on demand case. There the Judicial Committee identifies the issue as being whether there was default by the debtor which entitled the creditor to exercise its security rights when it did. Sir Barnes Peacock says, p. 291: Such a stipulation is not at all consistent with the fact that the plaintiffs were all along and before the defendant's entry considered as holding possession and managing the property as the agents or bailiffs of the mortgagee. Their Lordships are of opinion that it was part of the terms of the deed that the Plaintiffs were to remain in possession on their own account, and manage the property until they should make default in payment of the 9000 upon demand or some other default. It is not proved that they made any other default, and the only question now is whether they did make default in payment of the 9000 upon demand (emphasis mine) [56] Great-West Life Assurance Co. v. Royal Pacific Hotels Inc. (1988), 29 B.C.L.R. (2d) 63 (C.A.), rejects the argument that the rule applies for other defaults by the debtor.

10 [57] In that case the unexceptional debenture said that it would become immediately enforceable upon the occurrence of any of a number of specified events. The debtor was "in default under the debenture in many respects, being unable to meet its liabilities and failing to pay its trade creditors". [58] The creditor appointed a receiver manager, identifying a number of defaults which entitled it to do so. The court said, pp : The trial judge referred to Ronald Elwyn Lister Ltd. v. Dunlop Can. Ltd., [1982] 1 S.C.R. 726, 41 C.B.R. (N.S.) 272, 18 B.L.R. 1, 135 D.L.R. (3d) 1, 65 C.P.R. (2d) 1, 42 N.R. 181 [Ont.], and the leading case in this court, Whonnock Indust. Ltd. v. Nat. Bank of Can., No. CA , 27th August 1987 [now reported 67 C.B.R. (N.S.) 179, [1987] 6 W.W.R. 316, 16 B.C.L.R. (2d) 320, 37 B.L.R. 162, 42 D.L.R. (4th) 1], which were cases of loans payable on demand in which the question was the time for giving reasonable notice. Here the trial judge said: "However, it remains for determination in my view not on a summary application but by a full trial of the issue on whether reasonable notice for seizure is also implicit in the case of a non-demand venture where default by the debtor, i.e., the grantor of the debenture, gives rise to the debenture-holder's right, not only to demand that the default be cured, but also to elect to accelerate full payment. And, if this hurdle is cleared, what would then constitute reasonable notice under the prevailing circumstances of this case before putting in a receiver-manager to seize the security " I am of the opinion that a trial of the issue should not have been ordered in this action. It is no defence to the claim for a declaration that the floating charge has crystallized to say that reasonable notice of the appointment of the receiver was not given. Many leading authorities establish that a floating charge remains dormant until the person in whose favour the charge is created intervenes: Govt. Stock & Other Securities Invt. Co. v. Manila Ry. Co., [1897] A.C. 81 (H.L.); Illingworth v. Houldsworth, [1904] A.C. 355 (H.L.); and Indust. Dev. Bank v. Valley Dairy Ltd., [1953] C.T.C. 132, 53 D.T.C (H.C.). The appointment of a receiver is an unequivocal act which crystallizes the floating charge. It is the default provisions of the debenture which give rise to the power to appoint a receiver, not a demand followed by reasonable notice. There were specified events of default and according to the instrument the security became immediately enforceable, which enabled the appointment of a receiver under cl. 9. [59] Some time later two members of the same court appear to have forgotten its previous decision: Waldron v. Royal Bank (1991), 53 B.C.L.R. (2d) 294 [[1991] 4 W.W.R. 289]. Lambert J.A. says, p. 299: The Lister principle is not a principle about the law of negotiable instruments or about whether presentment or demand must precede an action on a bill or note; nor is it a principle about the steps that must be taken to make a debt become due or become payable. There is no need for any requirement of reasonable notice in those areas of the law. It is the realization of security, collateral or otherwise, which raises the call for fairness to which the law has responded. I do not regard the decision of this court

11 in Barclay Const. Corp. v. Bank of Montreal, 28 B.C.L.R. (2d) 376, [1988] 6 W.W.R. 707, 40 B.L.R. 150, affirmed supra, as being to the contrary. In that case this court decided that reasonable notice had been given. The call for fairness in the enforcement of security instruments responds to the same fundamental demands as those which have resulted in the constitutional protection against unreasonable seizure conferred and confirmed by s. 8 of the Canadian Charter of Rights and Freedoms. [60] Hollinrake J.A. also says that the rule applies to any default by the debtor, p. 321: I would like to emphasize in these concurring reasons one aspect of the notice requirement in cases such as this. In my opinion, the principle in Ronald Elwyn Lister Ltd. v. Dunlop Can. Ltd., [1982] 1 S.C.R. 726, 41 C.B.R. (N.S.) 272, 18 B.L.R. 1, 65 C.P.R. (2d) 1, 135 D.L.R. (3d) 1, 42 N.R. 181, is that the law requires a lender to give to its borrower a reasonable time in which to correct any default usually payment - before enforcing its security. [61] Some cases suggest that the rule applies whenever there is a "debt-evidencing or creating document" regardless what the default is, based on this from Ronald Elwin Lister, p. 746: The rule has long been that enunciated in Massey v. Sladen (1868), L.R. 4 Ex. 13, at p. 19: the debtor must be given "some notice on which he might reasonably expect to be able to act". The application of this simple proposition will depend upon all the facts and circumstances in each case. Failure to give such reasonable notice places the debtor under economic, but nonetheless real duress, often as real as physical duress to the person, and no doubt explains the eagerness of the courts to construe debt-evidencing or creating documents as including in all cases the requirement of reasonable notice for payment. (emphasis mine) [62] In Canada Trust Mortgage Co. v Ontario Ltd. (1987), 46 D.L.R. (4th) 150 (Ont. H.C.), the debtor gave a chattel mortgage which required it to make monthly payments. The court interpreted Massey and Ronald Elwin Lister to mean, p. 159: From these cases there emerges that there is an obligation to give reasonable notice of intention to act and that the reasonableness of notice given will depend upon the facts or circumstances existing in a given case at the material time. [63] If there is default by the debtor which entitles the creditor to exercise his security rights the creditor must first give the debtor a reasonable notice that it intends to exercise its security rights before it does so, according to that case. Toms and Massey have come a long way if they now mean that. [64] If the rule applies to a default it would mean, for example, that if a debt is payable at a fixed date and the debtor does not pay the debt on the due date the creditor must still make a "reasonable demand" on the debtor to pay before it is entitled to exercise its security rights.

12 [65] I should have thought that if a debt is payable at a fixed date and the debtor does not pay the debt when it becomes due that that is default. Perhaps at Masters level we view things too simply. [66] There is case law which says that if a creditor must make a reasonable demand for payment and instead makes a demand for payment but does not take steps to enforce his security for a reasonable time the debtor does not have a cause of action: Federal Business Development Bank v. Dunn, [1984] 6 W.W.R. 46 (Sask. Q.B.). In that case the creditor made a demand for payment "forthwith" but waited three weeks before appointing a receiver. [67] There are cases which say that the debtor can waive the requirement that he be given a reasonable time to pay the debt: Iampen v. Royal Bank, (1987), 79 A.R. 305 (Master); Royal Bank v. Lane (1992), (sub nom. A.B.C. Color & Sound Ltd. v. Royal Bank) 117 A.R. 271 [81 Alta. L.R. (2d) 289, [1991] 6 W.W.R. 344] (C.A.); Banque nationale du Canada v. Atomic Slipper Co. (1991), 125 N.R. 161 (S.C.C.), cited in A.B.C. Color & Sound. [68] There are also suggestions that a debtor's right to a reasonable notice to pay the debt cannot be whittled down by the contract: Banque nationale du Canada, p. 176; Lambert J.A. in Waldron. The first case is based on the civil law of Quebec. [69] It is not my function on this application to decide what the scope of the rule is or whether it applies to the contract in question. [70] I may have engaged in too lengthy a survey of judicial opinion on the rule, especially when I do not have to decide exactly what it is or whether it applies in this case, but there is a point to the survey. [71] The point is that for there to be a possible concurrent liability in tort and in contract there must be a "tort duty", to use a description used by La Forest and McLachlin JJ. in BG Checo International. [72] In all cases where there is liability in tort (where there is a contract between the parties) there is a recognized common law duty which exists on its own, that is, without regard to whether there is a contract between the parties. The contract is irrelevant to the existence of that duty. The most obvious example of that is the common law duty of care found in Donoghue, Hedley Byrne [& Co. v. Heller & Partners Ltd., [1964] A.C. 465 (H.L.)] and Anns [v. Merton London Borough Council, [1978] A.C. 728 (H.L.)], referred to in Central Trust Co. That duty exists regardless whether there is a contract between the

13 parties. It is, as Central Trust Co. points out, a "relationship of sufficient proximity test". That is the Donoghue "neighbor" test. [73] Mr. Bieganek argues that there was a common law duty on the Defendant to give a reasonable notice to the Plaintiff. But the problem with that position is that this duty would have to exist as a general "tort duty" even when there is not a contract between the parties. That is where the analysis falls down. Mr. Bieganek tries to create a common law duty to give a reasonable notice comparable to a common law duty of care. [74] Is there a common law duty by citizen A to give a reasonable notice to citizen B without more? Even the obtuse person would scratch his head and ask reasonable notice of what? Is there a common law duty by me to give a reasonable notice to my next door neighbor just because he is in close proximity to me (Donoghue's "neighbor" test)? I would obviously ask notice of what? My equally puzzled neighbor would also ask notice of what? [75] The problem that Mr. Bieganek faces can be best highlighted by three decisions: Wabasso Ltd. v. National Drying Machinery Co., [1981] 1 S.C.R. 578; Air Canada c. McDonnell Douglas Corp., [1989] 1 S.C.R. 1554; Banque nationale du Canada c. Houle, [1990] 3 S.C.R [76] The three cases discuss the issue of "coexistence of contractual and delictual liability", which the common law jurisdictions refer to as concurrent liability in contract and in tort. [77] In the last case the court puts the issue this way, pp : That the two sources of liability can coexist is not in question. However, some comments about the extent to which they can coexist are appropriate both for contracting parties and with respect to third parties. Gonthier J. recently reaffirmed the principle of coexistence between contracting parties in Air Canada v. McDonnell Douglas Corp., [1989] 1 S.C.R. 1554, where he states, at pp : "The fact that McDonnell Douglas is party to a contract does not make their failure to warn Air Canada of that danger any less of a fault which, independent of the genesis of the danger, grounds an action in quasi-delict." In order to find delictual liability between the contracting parties themselves however, there must exist, independently of the contract, a legal obligation deriving from art C.C.L.C., which would apply generally, not only to the contracting parties. In Air Canada, the action was not based on the contract but on art C.C.L.C., alleging the extra-contractual fault of the failure to warn the purchaser of a hidden danger in the goods sold. Similarly, in Wabasso Ltd. v. National Drying Machinery Co., [1981] 1 S.C.R. 578, it was decided that the facts gave rise to extra-contractual liability between contracting

14 parties, based on the manufacturer's failure to warn the purchaser of the dangers of the machine. (The question of the choice between or the "cumul" or joinder of recourses, which was at issue in Wabasso, is not at issue here.) As in Air Canada, the action was not based on the contractual obligations undertaken by the parties, but rather on the delictual liability of the manufacturer. Viewed in this factual context, these cases support the proposition that even between contracting parties, extra-contractual liability can exist, so long as the fault alleged is independent of the contract and would have existed even in the absence of a contract. (emphasis mine) [78] On p. 167 the court says: In summary, although contractual and delictual liability may coexist even in the context of a contract, delictual liability must arise independently of contractual obligations and all the elements required to give rise to such liability must be found. In the context of an abuse of contractual rights, it is the rights arising out of the contract itself which are exercised, and only the contracting parties possess these rights and the correlative obligation to exercise them reasonably. This obligation is derived exclusively from the contract. Consequently, when the fault alleged arises strictly from the abuse of a contractual right, then the liability must have its source in the contract. (emphasis mine) [79] Although those cases are from Quebec and so involve Quebec civil law the basic principle is also found in the common law. In Central Trust the court also says the same thing in saying that the alleged common law duty must be independent of the contract. The duty must exist even if there is not a contract between the parties. If the duty can exist only if there is a contract between the parties it is not a duty independent of any contract obligations. [80] If there was not a contract between the Plaintiff and the Defendant would there still be a common law duty on the defendant to give a reasonable notice of some kind to the Defendant? Would there be a common law duty on the Defendant to make a reasonable demand for something on the Plaintiff? [81] This is where Mr. Bieganek's analysis collapses. He looks at the consequence of the Defendant not giving a notice or making a demand, if it is required to do so, and then creating an independent duty (altogether outside the contract setting) based on the consequence. (The consequence is that the Defendant has committed a tort of trespass or conversion.) [82] If the Plaintiff is to have a cause of action independent of the contract, within the context of Houle, there must be a common law duty, a breach of that duty and damages flowing from the breach. As I have already indicated, there is not a general common law duty to make a reasonable demand or give a reasonable notice. There is no sense to that outside a contract setting.

15 [83] As Schmidt v. Toronto Dominion Bank (1993), 23 C.B.R. (3d) 122 (Ont. Gen. Div.), points out, a claim for trespass or conversion can succeed only if the creditor does not allow a reasonable time after demand for payment of the debt before exercising its security rights. [84] Royal Bank v. W. Got & Associates Electric Ltd. (1994), 17 Alta. L.R. (3d) 23 [[1994] 5 W.W.R. 337] (Q.B.), adds nothing to the discussion. That was also a secured creditor-debtor relationship where the court found that the creditor had acted precipitously in exercising its security. It is a Ronald Elwin Lister scenario. Nobody argues that if a secured creditor is required to give a reasonable notice of some kind before exercising his security rights and does not do so that he has not committed the torts of trespass and conversion. [85] To look at the consequence of the Defendant exercising its security rights without a reasonable notice mistakes the consequence from whether there is a common law duty. That is what Mr. Bieganek does. [86] All of the cases I have referred to are in a contract setting. They are all secured creditor-debtor cases, which is a contract relationship. The obligation of the creditor to give a reasonable notice flows from the contract relationship. It is not necessary that this obligation be expressly addressed in the contract for it to be arbitrable. I do not interpret cl. 18 to encompass only matters expressly addressed in the contract. [87] Whether the Defendant was required to give some kind of notice or make some kind of demand on the Plaintiff is a "matter in relation to this agreement". If there is such a requirement the kind of notice or demand that should have been given is also a "matter in relation to this Agreement". If there is such a requirement the time that the Plaintiff should have been given is also a "matter in relation to this Agreement". [88] It must also be pointed out that in this lawsuit the relationship between the parties is not the straightforward one of secured creditor and debtor, as in all the other cases. This is not a case where the Defendant gave a loan to the Plaintiff and took security for payment of the loan. The contract here has a totally different objective, to provide some security for purchasers of new homes from builders who are members of the Defendant. [89] Mr. Bieganek says that this lawsuit is indistinguishable from McCulloch v. Peat Marwick Thorne-T (1991), 1 Alta. L.R. (3d) 53 (Q.B.). In that case the contract required the parties to arbitrate [p. 55]:

16 " any dispute relating to the construction, meaning or effect of anything in this agreement or the rights or liabilities of any party pursuant to this agreement shall be referred to and settled by arbitration " [90] The plaintiff sued and advanced a number of claims. Two of them were for the torts of conspiracy and injury to reputation. The chambers judge held that those claims were not encompassed in the arbitration clause. These two kinds of claims are "delictual liability" claims. They do not need the contract as a relevant fact. The contract is not a relevant fact in that case. [91] In my view, Kaverit Steel & Crane is of assistance in its discussion of the arbitration clause present in that case because it is not unlike cl. 18. In that case the court says, p. 294: The submission before us limits itself to disputes "arising out of or in connection with" the contract. I agree with the comments of Evans J. in Overseas Union Insurance Ltd. v. AA Mutual International Insurance Co., [1988] 2 Lloyd's Rep. 63 (Q.B.), at p. 67. He first described a narrower form of submission, typically using only the words "under the contract," where only rights and obligations created by the contract can be referred. He contrasted that to the form of submission before us when he said, at p. 67: "Conversely, if the parties agree to refer disputes arising in relation to or in connection with their contract, a fortiori if the clause covers disputes arising during the execution of this contract (The Damianos, [1971] 1 Lloyd's Rep. 502; [1971] 2 Q.B. 588) or in relation to the work to be carried out hereunder, a common form in construction contracts, then both as a matter of language and of authority some wider category may be intended." In my view, this submission extends beyond rights and duties created by the contract. A dispute meets the test set by the submission if either claimant or defendant relies on the existence of a contractual obligation as a necessary element to create the claim, or to defeat it. Thus, the pleading here that relies upon a claim of a conspiracy by unlawful means to harm the distributor meets the test. This is because a breach of the contract is relied upon as the source of the "unlawfulness." That dispute should be referred to arbitration. [92] And at p. 296: I cannot say that a dispute arises out of or in connection with a contract unless the existence of the contract is germane either to the claim or the defence. It is not enough to say that the events that give rise to the claim also give rise to a claim for breach of contract. One must be able to say that the other claim relies on the existence of the contractual obligation. [93] I do not see any difference in substance between "in connection with" a contract and "in relation to" a contract. Both are the wider test suggested in the above quotes. [94] I do not interpret the quotes as meaning that the plaintiff's complaint must be based on a specific term of the contract before the complaint can be said to be "in

17 connection with" or "in relation to" the contract. That would make the test the narrower one which the court said is not the right test for "in connection with". [95] If the existence of the contract is a relevant fact either to the claim or to the defence then the claim is "in relation to" the contract even if the claim is not advanced as a breach of contract claim. [96] Here the contract is relevant to both claim and defence. This is not a case of a stranger taking and selling the Plaintiff's assets. The Plaintiff did give the Defendant security on all its assets. Whether the Defendant had cause to exercise its security rights and whether it had to give notice before it did so are matters "in relation" to the contract. [97] In McCulloch the arbitration clause talks about any disputes "relating to" but it immediately qualifies that by what follows. [98] In any event, Kaverit Steel is after McCulloch and I prefer the approach of Kaverit Steel. It focuses on the intention of the parties based on the language used. "In relation to" and "in connection with" extends the arbitration beyond rights and duties created by the contract. Kaverit Steel agrees with Overseas Union Insurance [v. AA Mutual International Insurance, [1988] 2 Lloyd's Rep. 63 (Q.B.)] on that. [99] In Dunhill Personnel System Inc. v. Dunhill Temps Edmonton Ltd. (1993), 13 Alta. L.R. (3d) 241 (Q.B.), the chambers judge says, p. 244: Damages were awarded for trademark infringement and passing off. Harcourt contends that these matters are either such that they do not fall within the terms of submission to arbitration or are beyond the scope of arbitration. However, s. 2 of the Act provides that the arbitration applies "only in respect of differences arising out of commercial legal relationships, whether contractual or not." In Kaverit the court states that the language of each agreement determines the scope of the arbitration. The agreements between the parties here both provide that any disputes between them shall be "settled by" or "determined by" arbitration. This language is similar to that found in Kaverit. The Court of Appeal held the wording to be sufficiently broad to include tort claims. I conclude that the tribunal had power to award damages in tort. [100] I agree that it is the arbitration agreement that governs the scope of the arbitration. Whether the International Act or the local Act applies is not relevant to the interpretation of the arbitration agreement as long as the agreement does not in some way run afoul of the appropriate Act. [101] Borowski v. Henrich Fiedler Perforiertechnik GmbH (Q.B , August 12, 1994 [reported 22 Alta. L.R. (3d) 366, [1994] 10 W.W.R. 623]) does not help the Plaintiff. There the arbitration clause said [p. 369 Alta. L.R.]:

18 "Any controversy or claim arising out of or relating to this Agreement as the breach hereof shall be submitted to the parties to binding arbitration " [102] The chambers judge said [p. 378]: The Defendants take the position that the word "as" should be read as "or" and refer to a similarly worded arbitration clause in the Planned Sales Ltd. case (supra) where the word "or" was used rather than "as". I have nothing before me to indicate that the parties intended the use of the word "or". The rules of interpretation assume that the words of a contract were intended to be used and to have a meaning unless to do so would give an absurd result, or unless the term cannot be meaningfully interpreted. The term "hereof refers to the employment contract. In my opinion, the words "as the breach hereof qualify the words "any controversy or claim". Thus para. 11 only applies to a controversy or claim relating to an alleged breach of the contract. This is consistent with my view that arbitration is available only after a cause of action has accrued. [103] Clause 18 of the contract before me does not qualify "any matter in relation to this Agreement" so there is no comparison to Borowski. [104] The chambers judge in Borowski also said [p. 380]: The theory behind the 1991 Arbitration Act is that if the parties agree to submit their disputes to arbitration then one party should be able to hold the other to it. Section 6 of the Arbitration Act prohibits the Court intervening in matters governed by it with certain exceptions which are not applicable in this case. Section 7 requires this Court to stay the Plaintiff's action unless it is established that one or more of five grounds set out in s. 7(2) apply. [105] I agree with that. [106] The Chambers judge also said [pp ]: In this case, as noted earlier, the wording of para. 11 is "any controversy or claim arising out of or relating to this Agreement " In my opinion, the controversy as to whether the contract notice period is thirty days or six months and whether or not the October 14, 1992 letter constituted an amendment to para. 7 is a controversy related to the agreement. The "subject matter" of the dispute is an action for breach of contract and damages in lieu of notice. What the proper notice period is, is one of the facts which the tribunal will have to determine. Breach of contract actions frequently involve a determination of whether there has or has not been a variation in a term of the contract. I feel that it would be defeating the underlying basis upon which the new Arbitration Act is founded to refuse to stay arbitration proceedings because such a dispute is one of the issues. In my view, the proper approach is to look at the Statement of Claim and determine what the cause of action is. If it falls within the scope of the arbitration clause then that issue or matter in dispute should be referred to arbitration. I agree with the observation of Mr. Justice Hickman in the Gulf Canada Resources case (supra) where he stated at p. 397: "Where it is arguable that the dispute falls within the terms of the arbitration agreement or where it is arguable that a party to the legal proceedings is a party to the arbitration agreement then in my view, the stay should be granted and those matters left to be determined by the arbitral tribunal."