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Contracts - Irrevocable Direction. Kemeny v. Callidus Capital Corporation
In Kemeny v. Callidus Capital Corporation (Ont CA, 2023) the Court of Appeal considered the difference between a contractual 'irrevocable direction' and a guarantee:[18] These arguments raise issues of the interpretation of the Irrevocable Direction. To succeed, the appellant must establish either a palpable and overriding error of fact or an extricable error of law: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 50-55.
[19] I do not agree that the trial judge treated the Irrevocable Direction as a guarantee by the appellant that it would pay the respondent’s fee. The trial judge interpreted the Irrevocable Direction, and found that it placed a contractual obligation on the appellant to pay the respondent’s fee out of the first advance of loan funds to Esco. She did not find it to be a guarantee by the appellant of the respondent’s fee.
[20] The appellant relies on the decision of Bridgepoint Financial Services Limited Partnership I v. Galamini, 2021 ONSC 6979, in support of its argument that the trial judge treated the Irrevocable Direction as a guarantee by the appellant of the respondent’s fee. Bridgepoint involved a covenant by a lawyer to abide by an irrevocable direction to pay proceeds of any settlement received by the lawyer on behalf of a particular client to the plaintiff in order to repay a loan by the plaintiff to the lawyer’s client.
[21] The appellant relies on paragraph 15 of Bridgepoint, which draws a distinction between a direction and a guarantee:It is true that there are circumstances in which Mr. Grillone might have been unable to comply with the direction. He might, for example, have seen his retainer terminated. The direction did not bind Mr. Grillone to pay the claimed sum from his own pocket. It was no guarantee. It merely obliged him to cause the settlement funds to be so directed. If he ceased to represent the Borrower, then the direction would have no further object. That prospect does not make the direction given void or unenforceable – it merely recognizes the potential for future events to occur which might, were they to occur, have rendered it without object. As a matter of fact, the Plaintiff Loan Agreement specifically provided for the sequence of events that would unfold in the event of an abandonment of the claim or a change of counsel. [22] This paragraph of Bridgepoint is simply an acknowledgment that, in some cases, the event which would trigger a party’s obligation under an irrevocable direction may not come to pass. In Bridgepoint, the lawyer’s obligation was to direct any settlement funds received by him to the plaintiff. If the lawyer were discharged before receiving any settlement funds, the obligation would not be triggered because the lawyer would not receive settlement funds.
[23] However, the appellant’s reliance on Bridgepoint founders on the very next paragraph of the decision, where the motion judge held that the lawyer was bound to follow the direction he had accepted, and liable for not directing settlement funds he received as he had agreed:There can be no question that Mr. Grillone was bound by the covenant he gave to honour the irrevocable direction of his client. There can be no question that he received the referenced Settlement Funds on November 13, 2012 and failed to honour that covenant in fact. That such failure was the result of oversight or carelessness on his part is of no moment. Mr. Grillone is liable to the plaintiff for breach of his covenant. [24] Similarly, in this case, the appellant agreed in the Irrevocable Direction to follow the direction from Esco and pay the amount of the respondent’s fee to him from the first advance of its loan to Esco. The trial judge found that the Irrevocable Direction was an agreement that the appellant would pay the respondent’s fee to him from the first advance of loan funds to Esco. As the trial judge found, the appellant’s obligation under the Irrevocable Direction was that if loan proceeds were advanced, it was obliged to pay the respondent’s fee directly to him out of the first advance of funds. The Irrevocable Direction was not a guarantee by the appellant of the respondent’s fee. The appellant was not required to pay the respondent’s fee out of its own pocket. The funds were part of the loan to Esco. Had loan funds not been advanced, the appellant would not have had any obligation. But as loan funds were advanced, the appellant was obliged to comply with its agreement in the Irrevocable Direction to pay the respondent his fee directly from the first advance of the loan funds.
[25] Nor am I persuaded that the trial judge failed to consider the factual matrix surrounding the Irrevocable Direction. At the outset of her analysis, the trial judge correctly instructed herself that in addition to considering the text, a contract should be interpreted in accordance with sound commercial principles and in the context of the factual matrix at the time the contract is executed.
[26] Further, the trial judge’s reasons show that she considered the factual matrix in interpreting the Irrevocable Direction, including the loan agreement between Esco and the appellant. Her reasons consider in some detail the negotiations leading up to the signing of the Irrevocable Direction, as well as subsequent negotiations in relation to the respondent offering to accept a reduced fee (the latter issue is discussed further in relation to the appellant’s ground of appeal based on the respondent being estopped from enforcing the Irrevocable Direction).
[27] The appellant argues that the trial judge did not consider the terms of the later-finalized loan agreement between itself and Esco in interpreting the Irrevocable Direction. But the trial judge’s reasons show that the appellant is incorrect in this assertion. The trial judge considered the appellant’s argument that the full amount of the loan funds advanced had been designated to pay off all of Esco’s secured creditors in order to place the appellant in sole first-priority secured position. However, she rejected the appellant’s argument that the subsequently negotiated terms of the loan agreement between Esco and the appellant relieved the appellant of its obligation to direct the payment of the respondent’s fee to him out of the first loan funds advanced to Esco. I am not persuaded by the appellant’s argument that the trial judge failed to consider the factual matrix in her interpretation of the Irrevocable Direction.
[28] The substance of the appellant’s argument is that the loan agreement between Esco and itself, executed after the Irrevocable Direction and to which the respondent was not a party, effectively altered the agreement contained in the Irrevocable Direction. The trial judge rejected that proposition. I see no error in that conclusion.
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