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Contracts - Unconscionability (2). Mouralian v. Groleau
In Mouralian v. Groleau (Ont CA, 2024) the Ontario Court of Appeal comments on mental incompetence and contract formation:[16] The motion judge concluded, at para. 26:In any event, it is clear that the defendant had no knowledge of any alleged incapacity of the plaintiff at the time the APS was signed. “Even in cases of mental incompetence, a party seeking to escape the terms of a contract must show not only that he or she was mentally incompetent, but also that the other party knew it” or at least was aware of facts that should have put them on notice that the state of mind of the mentally incompetent person was in question: Lougheed v. Ponomareva, 2013 ONSC 4347, at paras. 43-44; Grant v. Imperial Trust Co., 1935 CanLII 335 (SCC), [1934] O.W.N. 370 (C.A.); aff’d 1935 CanLII 327 (SCC), [1935] 3 D.L.R. 660 (S.C.C.). . Sunningdale GP Inc. v. First Source Mortgage Corporation
In Sunningdale GP Inc. v. First Source Mortgage Corporation (Ont CA, 2024) the Ontario Court of Appeal allowed an appeal from a summary judgment order, which excused the borrower respondent from paying part of a 'lender's fee' after they "decided not to proceed with the loan".
Here the court considered the law of relief from forfeiture, contrasted it with the doctrine of unconscionability:[25] Despite her inability to find that the termination of the commitment letter was First Source’s fault, which would have permitted 660 Sunningdale to avoid the Lender Fee under the terms of the contract, the motion judge concluded that the balance of the Lender Fee is unenforceable as a penalty clause, and that relief from forfeiture should be granted under s. 98 of the Courts of Justice Act.
[26] She arrived at these conclusions on the premise that the Lender Fee is a “stipulated remedy clause”, giving rise to the application of the law described by Sharpe J.A. in Peachtree II Associates - Dallas L.P. v. 857486 Ontario Ltd. (2005), 2005 CanLII 23216 (ON CA), 76 O.R. (3d) 362 (C.A.), leave to appeal refused, [2005] S.C.C.A. No. 420. According to this body of law, a stipulated remedies clause can be found to be: (1) an unenforceable penalty clause if it is “extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach”, or (2) a forfeiture, that is eligible for relief of forfeiture because it would be unconscionable for the party seeking the forfeiture to retain the right, property or money forfeited: Peachtree, at paras. 24-25, quoting from Dunlop Pneumatic Tyre Co. Ltd. v. New Garage & Motor Co. Ltd., [1915] A.C. 79 (H.L.), at p. 87.
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(2) The Motion Judge Erred in Applying the Law of Relief of Forfeiture
[43] I am also persuaded that the motion judge erred in excusing 660 Sunningdale from paying the balance of the Lender Fee based on the law of relief against forfeiture. Relief against forfeiture may be available to relieve a party of the consequences of its non-observance or breach of the terms of a contract or covenant. The balance of the Lender Fee was payable under the terms of the Loan Agreement regardless of any breach or non-observance of its terms. By granting relief against forfeiture to 660 Sunningdale from a contractual payment obligation that did not arise from any non-observance of the Loan Agreement on its part, the motion judge, in effect, applied the independent doctrine of unconscionability incorrectly in circumstances where there was no finding of inequality of bargaining power.
[44] In a helpful article, Eric Andrews commented that “[t]he penalty doctrine and relief against forfeiture are limited to a relatively narrow set of circumstances” while the distinct and independent unconscionability doctrine has a wider ambit: Eric Andrews, “The Penalty Doctrine, Relief against Forfeiture, and Unconscionability in Anglo-Canadian Law”, (2023) 86 Sask. L. Rev. 197, at p. 200. This proposition is supported by expositions of the law provided in Uber Technologies Inc. v. Heller, 2020 SCC 16, [2020] 2 S.C.R. 118, where Abella J. and Rowe J. explained for the majority that although “other doctrines can provide relief from specific types of oppressive contractual terms, unconscionability allows courts to fill in gaps between the existing ‘islands of intervention’ so that the ‘clause that is not quite a penalty clause or not quite an exemption clause or just outside the provisions of a statutory power to relieve will fall under the general power, and anomalous distinctions… will disappear”: at para. 60, citing S.M. Waddams, The Law of Contracts, 7th ed. (Toronto: Thomson Reuters, 2017), at p. 378. In his concurring judgment Brown J., at paras. 150-52, helpfully added that although there are doctrines that address conduct that can be described as unconscionable, no doubt including the doctrines invalidating penalty clauses or permitting relief against forfeiture, their policy rationales differ from the “independent doctrine” of unconscionability that “has developed a special meaning in relation to inequality of bargaining power”, and which alone should be referred to by the term “unconscionability”.
[45] As I will explain, even though it is wider in ambit, the independent doctrine of unconscionability is limited to unfair agreements that have resulted from inequality of bargaining power, a circumstance that has no application in the instant case. In my view, the motion judge employed the law of relief against forfeiture in circumstances that are not supported by precedent and that are contrary to principle, effectively misapplying the unconscionability doctrine without finding the requisite inequality of bargaining power.
[46] I do not purport in the following comments to exhaustively define the set of circumstances in which relief against forfeiture is available, but it is helpful to canvass its better-known applications to demonstrate that the application of relief against forfeiture in this case does not appear to be supported by precedent.
[47] Perhaps the paradigm circumstance in which relief against forfeiture is available is where the enforcement of a clause inserted to secure some aspect of the bargain would result in overcompensation for a breach of contract by the party seeking relief. Indeed, although Canadian authority may be more generous than English law, the application of relief against forfeiture that I have just outlined has been described in England as one of only two situations where courts my relieve against breaches of covenants and conditions, the other involving relief where there has been “fraud, accident, mistake or surprise”: Shiloh Spinners Ltd. v. Harding, [1973] AC 691, at pp. 722-724.
[48] In Canada, the application of the law of relief against forfeiture arising from breaches of contractual clauses inserted to secure performance can be observed, for example, in cases recognizing that relief against forfeiture can be granted to prevent the forfeiture of non-refundable deposits (see Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282, 137 O.R. (3d) 374, at paras. 18-20; Rahbar v. Parvizi, 2023 ONCA 522, at paras. 49-51); the forfeiture of insurance coverage for imperfect compliance with policy terms (Kozel v. The Personal Insurance Company, 2014 ONCA 130, 119 O.R. (3d) 55, at para. 40); the forfeiture upon repudiation by the purchaser of installments or part or full payment of purchase monies that have been advanced (216927 Alberta Ltd. v. Fox Creek (Town), 1990 ABCA 29, 104 A.R. 321, at paras. 23-27; Conner v. Bulla, 2010 BCCA 457, 297 B.C.A.C. 20, at para. 12); and forfeitures provided for in stipulated remedy clauses (Peachtree). This line of authority does not avail 660 Sunningdale relating to the balance of the Lender Fee. As I have explained, the balance of the Lender Fee was not paid or payable, in form or in substance, as a deposit, or a part payment or installment, and it is not a stipulated remedy clause, precisely because it was not agreed to in order to secure performance of the bargain.
[49] Nor does this case involve any suggestion of “fraud, accident, mistake or surprise” so it cannot shelter under the alternative situation derived from English authority.
[50] Relief against forfeiture is also available to prevent the loss of proprietary or possessory rights. In Shiloh Spinners Ltd., at p. 722, for example, the court identified mortgages giving rise to equity of redemption and re-entry clauses under leases as the “commonest instances” of relief against forfeiture of property: see also Liscumb v. Provenzano et al. (1985), 1985 CanLII 2051 (ON SC), 51 O.R. (2d) 129, at p. 137 (Ont. H.C.), aff’d (1986) 1986 CanLII 2595 (ON CA), 55 O.R. (2d) 404 (C.A.), as well as Andrews, “The Penalty Doctrine, Relief against Forfeiture, and Unconscionability in Anglo-Canadian Law”, at p. 216. This case, of course, does not involve the forfeiture of proprietary or possessory rights.
[51] Narrow jurisdiction to grant relief against forfeiture has also been recognized by authorities of this court where a party faces the loss of an option to renew a lease or extend a contractual right: Ross v. T. Eaton Co. (1992), 1992 CanLII 7470 (ON CA), 11 O.R. (3d) 115, at pp. 124-25 (C.A.). See also 120 Adelaide Leaseholds Inc. v. Oxford Properties Canada Ltd., [1993] O.J. No. 2801 (C.A.); 1383421 Ontario Inc. v. Ole Miss Place Inc. (2003), 2003 CanLII 57436 (ON CA), 67 O.R. (3d) 161 (C.A.), at para. 80; PDM Entertainment Inc. v. Three Pines Creations Inc., 2015 ONCA 488, 388 D.L.R. (4th) 478, at para. 63.[1] Where a lease is involved, this line of authority is arguably no more than an application of the relief against forfeiture of property, since leases carry both contractual and property law characteristics: Highway Properties Ltd. v. Kelly, Douglas and Co. Ltd., 1971 CanLII 123 (SCC), [1971] S.C.R. 562. In any event, this line of authority does not avail 660 Sunningdale, as this case does not involve either property rights or a failed attempt to exercise an option to renew.
[52] The application of this body of law in the circumstances of this case is also contrary to principle. I say this for two reasons.
[53] First, in Peachtree, at para. 22, Sharpe J.A. defined forfeiture as “the loss, by reason of some specified conduct, of a right, property, or money, often held as security or part payment of the obligation being enforced under the threat of forfeiture” (emphasis added). All of the examples I have identified bear out that, accordingly, the doctrine of relief against forfeiture applies to relieve a party from the loss of a right, or property or money as the result of conduct on their part consisting of the non-observance of, or non-compliance with, the contract or covenant. In this case, the motion judge did not relieve 660 Sunningdale from any specified conduct that it engaged in that triggered its obligation to pay the balance of the Lender Fee. She, in effect, purported to relieve 660 Sunningdale not from the consequences of its conduct relating to the contract but rather from a contractual term that she found to be excessive and unconscionable in amount. It is not the role of relief against forfeiture to relieve parties from terms of a contract they agreed to, on the grounds of the improvidence of that term. That is the function of the independent doctrine of unconscionability.
[54] This brings me to the second, related error in principle that the motion judge made in using the doctrine of relief against forfeiture to effectively address the unconscionability of contractual terms. The independent doctrine of unconscionability is meant to strike the proper balance between fairness and commercial certainty by protecting only “those who are vulnerable in the contracting process from loss or improvidence to that party in the bargain that was made” (emphasis in original): Uber Technologies, at paras. 60, 86. A two-part test is employed. To relieve a party from the contract they have agreed to there must be “(1) proof of inequality in the positions of the parties, and (2) proof of an improvident bargain”: Uber Technologies, at paras. 64-65, citing Norberg v. Wynrib, 1992 CanLII 65 (SCC), [1992] 2 S.C.R. 226, at p. 256. There was no suggestion in the motion judge’s decision that she considered whether there was an inequality of bargaining power between the parties to the Loan Agreement. Moreover, it bears notice that 660 Sunningdale appears to be a commercial developer capable of handling a largescale development, not a disadvantaged consumer. I am satisfied that the motion judge invalidated the terms of the contract relating to the balance of the Lender Fee, without complying with the limits of the doctrine of unconscionability that she was effectively applying. . Steinberg v. Adderley
In Steinberg v. Adderley (Ont CA, 2024) the Court of Appeal considered (and partially granted) an appeal (by a non-party lender) against an order that reduced 20-24% compound interest on 'litigation loans', which were loans taken out to fund MVA litigation expenses (but not contingent on success).
In the lower court, the borrower unsuccessfully argued provisions of the rarely-used Unconscionable Transactions Relief Act (UTRA):[6] According to the loan documents, as of June 5, 2023, Mr. Steinberg owed BridgePoint $312,936.18 (after credit for the $70,000 paid in May 2022), with interest continuing to accrue. Mr. Steinberg’s position before the motion judge was that BridgePoint’s interest should be capped at 1.5 times the principal borrowed and that any additional interest charges were unconscionable. He relied on the Unconscionable Transactions Relief Act, R.S.O. 1990, c. U.2 (“UTRA”). Section 2 of UTRA allows a court to set aside loan agreements, in whole or in part, if the cost of the loan is excessive and the transaction is harsh and unconscionable.
[7] The motion judge rejected the contention that the interest on the loans was unconscionable. She said:I find that the litigation loans are contractually sound. Mr. Steinberg cannot now claim that the interest rate is unconscionable in light of the legal advice he received when obtaining the loans and based upon his signed acknowledgment on two different occasions where he acknowledged the quantum of interest that would accrue with time. ....
[10] On appeal, BridgePoint challenges the reduction of interest. We agree that the reduction cannot stand.
[11] Once the motion judge found that the loan transactions were not unconscionable, there was no basis to vary the interest owing. UTRA, which was the only basis upon which Mr. Steinberg relied on the motion, does not give the court the power to vary interest charges without a finding that the transaction is “harsh and unconscionable”.
[12] Mr. Steinberg argued, on appeal, that the reduction could be justified based on the equitable doctrine of unconscionability described in Uber Technologies Inc. v. Heller, 2020 SCC 16, [2020] S.C.R. 118. Leaving aside the issue of how that doctrine applies to loan agreements, which are the subject of a specific statutory regime in UTRA, there are two problems with this argument. First, that was not the basis on which Mr. Steinberg brought his motion. Second, the doctrine requires a finding of unconscionability, which the motion judge did not make. Her finding that the transactions were not unconscionable, because Mr. Steinberg had independent legal representation and signed acknowledgments confirming his understanding of how interest would accrue, was supported by the record and is entitled to deference in this court.[4]
[13] ... Courts are not generally empowered to rewrite contracts or relieve parties against the consequences of an improvident bargain: Pacific National Investments Ltd. v. Victoria (City), 2004 SCC 75, [2004] 3 S.C.R. 575, at para. 31.
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