SUPREME COURT OF NOVA SCOTIA Citation: O Regan Properties Limited v. Business Development Bank of Canada, 2018 NSSC 193. O Regan Properties Limited

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1 SUPREME COURT OF NOVA SCOTIA Citation: O Regan Properties Limited v. Business Development Bank of Canada, 2018 NSSC 193 Between: O Regan Properties Limited Date: Docket: Hfx No Registry: Halifax v. Applicant Business Development Bank of Canada Respondent Decision: Objections to Affidavit Judge: Heard: Counsel: The Honourable Justice Joshua M. Arnold July 4, 2018, in Halifax, Nova Scotia Maurice Chiasson, Q.C. and Sara Scott, for the Applicant John T. Rafferty, Q.C., for the Respondent

2 Page 2 By the Court: Overview [1] O Regan Properties Limited has made an application for a determination of funds held (or that had been held) by PricewaterhouseCoopers Inc. as Receiver for Tour Tech East Limited and Nova Scotia Limited. [2] As part of the receivership, O Regan made a proposal to purchase the security held by Business Development Bank of Canada over the assets of the companies. An agreement was entered into between O Regan and PricewaterhouseCoopers. An Assignment of Debt and Security was entered into between O Regan and BDC, conveying BDC s debt and security to O Regan. [3] A dispute arose between the parties regarding certain funds paid by PricewaterhouseCoopers to BDC. O Regan alleges that this payment was contrary to the terms of the Agreement, and seeks payment of those funds. [4] In support of their position, O Regan filed the affidavit of Jon Legatto, Chief Financial Officer at O Regan. BDC makes the following objections to Mr. Legatto s affidavit, pursuant to Civil Procedure Rule 39.04: Issue 1: whether the following portions of the Legatto Affidavit offend the parole [sic] evidence rule, such that they are inadmissible and should be struck by this Court: (i) The second, fourth, and fifth sentences of paragraph 17; (ii) The first, second, and fourth sentences of paragraph 22; and (iii) Paragraph 50; Issue 2: whether paragraph 51 of the Legatto Affidavit contains argument, not fact, such that it is inadmissible and should be struck by this Court; and Issue 3: whether the following portions of the Legatto Affidavit refer to without prejudice communications covered by settlement privilege, such that they are inadmissible and should be struck by this Court: (i) (ii) Paragraphs 42, 43, and 44; and Exhibits Q, R, and S. [5] The objection to paragraph 51 was conceded by O Regan and that paragraph will be struck from Mr. Legatto s affidavit.

3 Page 3 Parol Evidence [6] In Sattva Capital Corp v. Creston Moly Corp, 2014 SCC 53, Rothstein J. speaking for the unanimous court, reviewed the parol evidence rule as it now exists. He said: 59 It is necessary to say a word about consideration of the surrounding circumstances and the parol evidence rule. The parol evidence rule precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing (King, at para. 35; and Hall, at p. 53). To this end, the rule precludes, among other things, evidence of the subjective intentions of the parties (Hall, at pp ; and Eli Lilly & Co. v. Novopharm Ltd., 1998 CanLII 791 (SCC), [1998] 2 S.C.R. 129, at paras , per Iacobucci J.). The purpose of the parol evidence rule is primarily to achieve finality and certainty in contractual obligations, and secondarily to hamper a party s ability to use fabricated or unreliable evidence to attack a written contract (United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., 1993 CanLII 88 (SCC), [1993] 2 S.C.R. 316, at pp , per Sopinka J.). [7] Justice Rothstein explained the reasoning for a shift away from the traditional approach to contract interpretation, under which interpretation of the written document was always a question of law: 46 The shift away from the historical approach in Canada appears to be based on two developments. The first is the adoption of an approach to contractual interpretation which directs courts to have regard for the surrounding circumstances of the contract -- often referred to as the factual matrix -- when interpreting a written contract (Hall, at pp. 13, and 127; and J. D. McCamus, The Law of Contracts (2nd ed. 2012), at pp ). The second is the explanation of the difference between questions of law and questions of mixed fact and law provided in Canada (Director of Investigation and Research) v. Southam Inc., [1997] 1 S.C.R. 748, at para. 35, and Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paras. 26 and Regarding the first development, the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine "the intent of the parties and the scope of their understanding" (Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at para. 27 per LeBel J.; see also Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at paras per Cromwell J.). To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding

4 circumstances known to the parties at the time of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning: No contracts are made in a vacuum: there is always a setting in which they have to be placed.... In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. (Reardon Smith Line, at p. 574, per Lord Wilberforce) Page 4 [8] In explaining that the words of the contract must be interpreted with consideration of the factual matrix, Rothstein J. stated: 49 As to the second development, the historical approach to contractual interpretation does not fit well with the definition of a pure question of law identified in Housen and Southam. Questions of law "are questions about what the correct legal test is" (Southam, at para. 35). Yet in contractual interpretation, the goal of the exercise is to ascertain the objective intent of the parties -- a fact-specific goal -- through the application of legal principles of interpretation. This appears closer to a question of mixed fact and law, defined in Housen as "applying a legal standard to a set of facts" (para. 26; see also Southam, at para. 35). However, some courts have questioned whether this definition, which was developed in the context of a negligence action, can be readily applied to questions of contractual interpretation, and suggest that contractual interpretation is primarily a legal affair (see for example Bell Canada, at para. 25). 50 With respect for the contrary view, I am of the opinion that the historical approach should be abandoned. Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix. [9] Justice Rothstein emphasized the importance of determining the parties objective intent in interpreting a contract: 55 Although that caution was expressed in the context of a negligence case, it applies, in my opinion, to contractual interpretation as well. As mentioned above, the goal of contractual interpretation, to ascertain the objective intentions of the parties, is inherently fact specific. The close relationship between the selection and application of principles of contractual interpretation and the construction ultimately given to the instrument means that the circumstances in which a question of law can be extricated from the interpretation process will be rare. In the absence

5 of a legal error of the type described above, no appeal lies under the AA from an arbitrator's interpretation of a contract. Page 5 [10] While the parties objective intent must be determined, and therefore the surrounding circumstances considered, Rothstein J. explained that the surrounding circumstances cannot be allowed to overwhelm the words of the agreement. He also explained that the surrounding circumstances must consist only of objective evidence of the background facts at the time the contract was executed: 57 While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement... The goal of examining such evidence is to deepen a decision-maker's understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract... While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement The nature of the evidence that can be relied upon under the rubric of "surrounding circumstances" will necessarily vary from case to case. It does, however, have its limits. It should consist only of objective evidence of the background facts at the time of the execution of the contract, that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting. Subject to these requirements and the parol evidence rule discussed below, this includes, in the words of Lord Hoffmann, "absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man" (Investors Compensation Scheme, at p. 114). Whether something was or reasonably ought to have been within the common knowledge of the parties at the time of execution of the contract is a question of fact. [Emphasis added.] [11] Justice Rothstein determined that the parol evidence rule does not preclude the admission of evidence of surrounding circumstances: 60 The parol evidence rule does not apply to preclude evidence of the surrounding circumstances. Such evidence is consistent with the objectives of finality and certainty because it is used as an interpretive aid for determining the meaning of the written words chosen by the parties, not to change or overrule the meaning of those words. The surrounding circumstances are facts known or facts that reasonably ought to have been known to both parties at or before the date of contracting; therefore, the concern of unreliability does not arise. 61 Some authorities and commentators suggest that the parol evidence rule is an anachronism, or, at the very least, of limited application in view of the myriad of

6 exceptions to it... For the purposes of this appeal, it is sufficient to say that the parol evidence rule does not apply to preclude evidence of surrounding circumstances when interpreting the words of a written contract. Analysis Page 6 [12] The parties agree that for the purpose of this motion to strike I should consider the contract ambiguous. The Applicant reserves the right to argue at the hearing proper that the written contract is not ambiguous. Therefore, the question on this motion to strike on the issue of the parol evidence rule is: Do the sentences in the affidavit challenged by the Respondent assist in determining the surrounding circumstances of the written contract? [13] The impugned paragraphs of the Legatto affidavit are the following: 17. After receiving this proposal, further discussions were held with between [sic] myself, Mr. O Regan and Patrick O Regan. Despite our position that our initial offers were fair and reasonable, we agreed that we would again increase our offer, this time to the full amount as per BDC s proof of claim, being $4,730,995.43, but no more. I was authorized by Mr. O Regan to commit to a payment equal to the amount as per BDC s proof of claim, but no more. It was never our intent or expectation that we would pay any of BDC s interest or costs, or to provide for BDC s interest or costs in any way. We concluded that if this offer was not accepted by BDC, we would not proceed with the transaction. I then called Mr. Clarke and indicated to him that OPL would purchase the BDC security at the full amount of BDC s Proof of Claim, $4,730,995.43, but that was the maximum that we were willing to pay. I confirmed to him that this was our last and best offer and if this was refused by BDC, we would terminate the negotiations. 22. As a result of the discussions between Mr. Clarke and me, and the confirming the terms of the agreement reached, OPL was under the clear belief that once the purchase agreement was finalized, all of the security held by BDC over the assets and property of the Companies would belong to OPL. This was in exchange for OPL paying the full amount owing to BDC, being the amount provided by BDC as the full payout owing to it by the Companies. At no point was there any discussion regarding payment of BDC s interest and costs, or BDC recovering their interest and costs through any other means. Had this matter been raised, we would have terminated the agreement and negotiations immediately and not proceeded with the deal.

7 50. Once OPL paid the purchase price to BDC, OPL expected that any additional funds, including all cash and accounts receivable, would belong to the Companies. Accordingly, BDC would have no entitlement to the cash and accounts receivable of the Companies. [Emphasis added] Page 7 [14] The Respondent urges the court to allow these paragraphs to remain in their entirety, waiting until the remainder of the evidence and arguments are presented to the court before ascribing the appropriate weight to the evidence in question. Although these sentences appear to focus on the subjective belief of the affiant, depending on the rest of the evidence and argument at the hearing, the Respondent says, it is possible that the information could be part of the factual matrix, and could be objective evidence of the background facts at the time of the execution of the contract, and part of the rubric of the surrounding circumstances. More specifically, the Respondent says the evidence may show that these positions were known to the other parties. [15] I will allow the paragraphs in question to remain intact until the conclusion of the hearing. At that time, if the impugned evidence is not established to be objective evidence of the background facts at the time of the execution of the contract, I will either exclude those paragraphs or give them no weight. Settlement Privilege [16] The Applicant argues that paragraphs 42, 43 and 44 of the Legatto affidavit, along with their related exhibits, are without prejudice communications covered by settlement privilege and should be struck out. [17] In Sable Offshore Energy v. Ameron International Group Corp., 2013 SCC 37, Abella J., for the court, stated that while settlement discussions are privileged, labelling something without prejudice does not determine admissibility. What matters instead is the intent of the parties to settle the action: 13 Settlement negotiations have long been protected by the common law rule that "without prejudice" communications made in the course of such negotiations are inadmissible... The settlement privilege created by the "without prejudice" rule was based on the understanding that parties will be more likely to settle if they have confidence from the outset that their negotiations will not be disclosed. As Oliver L.J. of the English Court of Appeal explained in Cutts v. Head, [1984] 1 All E.R. 597, at p. 605:

8 [P]arties should be encouraged so far as possible to settle their disputes without resort to litigation and should not be discouraged by the knowledge that anything that is said in the course of such negotiations... may be used to their prejudice in the course of the proceedings. They should, as it was expressed by Clauson J in Scott Paper Co v. Drayton Paper Works Ltd (1927) 44 RPC 151 at 157, be encouraged freely and frankly to put their cards on the table. What is said during negotiations, in other words, will be more open, and therefore more fruitful, if the parties know that it cannot be subsequently disclosed. 14 Rush & Tompkins confirmed that settlement privilege extends beyond documents and communications expressly designated to be "without prejudice". In that case, a contractor settled its action against one defendant, the Greater London Council (the GLC), while maintaining it against the other defendant, the Carey contractors. The House of Lords considered whether communications made in the process of negotiating the settlement with the GLC should be admissible in the ongoing litigation with the Carey contractors. Lord Griffiths reached two conclusions of significance for this case. First, although the privilege is often referred to as the rule about "without prejudice" communications, those precise words are not required to invoke the privilege. What matters instead is the intent of the parties to settle the action (p. 739). Any negotiations undertaken with this purpose are inadmissible. Page 8 [18] In Brown v. Cape Breton (Regional Municipality), 2011 NSCA 32, Bryson J.A. outlined the three conditions that must be met to attract settlement privilege: 30 It is generally accepted that there are three conditions that must be met to attract settlement privilege: (1) A litigious dispute must be in existence or in contemplation; (2) The communication must be made with the express or implied intention that it would not be disclosed to the court in the event that negotiations failed; (3) The purpose of communication must be to attempt to effect a settlement. (per Sopinka, at para ) [19] As the Respondent points out, to be covered by settlement privilege, a communication must contain at least a hint of potential compromise or negotiation. If a communication is an unconditional assertion of rights without any connection to the possibility of settlement or negotiation, it will not be covered by settlement privilege. This proposition was noted in Bellatrix Exploration Ltd. v. Penn West Petroleum Ltd., 2013 ABCA 10, where the unanimous court stated:

9 24 Courts appear to have accepted that the types of communications covered by the settlement privilege require at least a hint of potential compromise or negotiation: see, for example, Hansraj at para 20. However, an unconditional assertion of rights without any connection to the possibility of settlement or negotiation do not fall within the scope of the rule: Buckinghamshire County Council v. Moran, [1990] 1 Ch 623, [1989] 3 All ER 225 (CA), cited in Hansraj at para 19. Communications of this type do not offer any potential for compromise, which is the interest the privilege is intended to protect. 25 The notation "without prejudice" is not conclusive in establishing privilege. If the contents of a communication are truly in furtherance of settlement, and therefore privileged, it makes no difference whether the communication is marked "without prejudice" or not. A communication that is not in substance privileged does not become so just because one party places "without prejudice" on it. Likewise, the absence of the words "without prejudice" means nothing if the communication is truly privileged Analysis Page 9 [20] In conducting the analysis set out in Brown regarding the communications discussed in paragraphs 42, 43 and 44 of the affidavit, I reach the following conclusions: 1. A litigious dispute was in existence or contemplation; 2. The exhibit referenced in paragraph 43 is marked without prejudice written by the Respondent, however, the exhibits referenced in paragraphs 42 and 44 are not marked either with or without prejudice. Such a label is not determinative in any event; 3. Each piece of correspondence found at Exhibits Q, R and S is merely an unconditional assertion of each parties position and rights. None of that correspondence refers to the possibility of settlement or negotiation in any way. Of course, as the Applicant points out, [s]ettlements do not simply materialize. There is always the advancing of positions, negotiations and often, the sharing of information in pursuit of the deal. Such information would be protected against subsequent disclosure by settlement privilege. (Sable Offshore Energy v. Ameron International Corporation, 2015 NSCA 8, at para. 78). However, the impugned paragraphs and exhibits do not fall into this category of evidence. [21] I conclude that paragraphs should not be struck, as they do not meet the requirements of settlement privilege.

10 Page 10 Conclusion [22] Paragraphs 17, 22 and 50 will remain intact. Once argument is heard, the Applicant s argument to strike can be revisited or, as with all of the evidence, I will ascribe the appropriate weight, if any, to be given to the passages in question. [23] Paragraphs 42, 43 and 44, along with their related exhibits, will not be struck as they do not fall under the umbrella of settlement privilege. Arnold, J.