In the brief decision Union Building Corporation of Canada v. Markham Woodmills Development Inc., the Court of Appeal for Ontario allowed an appeal from an application judge who had awarded the applicant $407,582 based on a new theory that was “not part of the dispute between the parties.”
The decision is the latest in a long line of Ontario appellate authority, holding that first-instance judges cannot decide cases based on new theories “not anchored in the pleadings, evidence, positions or submissions of any of the parties.” Otherwise, the parties are deprived of the opportunity to answer with evidence and submissions, contravening procedural fairness and natural justice.
As a result of the procedural fairness and natural justice concerns, the new theory is also inherently unreliable. As explained by the Court of Appeal in an earlier case, it cannot be assumed that the new theory would have prevailed had it been advanced by one of the parties:
In addition to fairness concerns which standing alone would warrant appellate intervention, the introduction of a new theory of liability in the reasons for judgment also raises concerns about the reliability of that theory. We rely on the adversarial process to get at the truth. That process assumes that the truth best emerges after a full and vigorous competition amongst the various opposing parties. A theory of liability that emerges for the first time in the reasons for judgment is never tested in the crucible of the adversarial process. We simply do not know how [the first-instance judge's] theory would have held up had it been subject to the rigours of the adversarial process.
Perhaps surprisingly, this issue appears to arise fairly regularly. When it does, each of these grounds – procedural fairness, natural justice, and inherent unreliability – justifies appellate intervention.
Background to the Dispute
The dispute arose from an agreement of purchase and sale for a 3.6 acre parcel of land originally owned by the appellant, Woodmills. Union Building entered into the agreement to purchase that land in order to develop.
The agreement was made conditional upon the City of Markham consenting to a severance of that land from a larger parcel owned by Woodmills. Under clause 17 of the agreement, Woodmills was required to seek the severance and satisfy any condition imposed by the City unless it was “onerous or unreasonable”. In the event the City imposed an “onerous or unreasonable” condition, Woodmills could give Union Building the option to satisfy the condition. If Union Building chose not to satisfy it, then the agreement would be null and void.
The City granted the severance, but only on the condition that Woodmills enter into a separate cost-sharing agreement with the surrounding landowners who were developing their lands. The cost-sharing agreement required payment of $407,582. Woodmills had no intention to develop its lands and refused to enter into the cost-sharing agreement, but gave Union Building the opportunity to satisfy the condition. To prevent the agreement from falling through, Union Building agreed to pay the $407,582, but later sued Woodmills to recover the payment.
The Decision Below
On the application, the parties had agreed that the only question before the court was the meaning of clause 17 and the notice of application was restricted to that issue. However, the application judge allowed the application based upon his interpretation of a separate provision of the agreement, stating in his reasons that “[t]he issue in this case is not determined by an understanding of the application of clause 17…Rather it is the requirement found in clause 19 that the zoning for the intended development of the purchaser be in place and be “in full force and effect”…at the time the property was sold.” The amended zoning, based on the severance, had a hold in place, which would not be lifted until the $407,582 payment had been made. The hold had not been lifted by the time of closing. Therefore, the application judge allowed the application and ordered Woodmills to pay $407,582 to Union Building.
The Appeal Decision
The Court of Appeal allowed the appeal, set aside the decision below, and dismissed the application.
Although the application judge’s interpretation of the agreement, a non-standard form contract, would normally be reviewable only for palpable and overriding error, the natural justice and procedural fairness concerns were overriding. The judge had proceeded on a theory not “anchored in the pleadings, evidence, positions or submissions of any of the parties”, which was an error of law warranting appellate intervention. Accordingly, the appeal was allowed, and the application decision was set aside.
However, the Court of Appeal went further. Rather than remit the case back to the application judge, the Court of Appeal dismissed the application because the condition imposed by the City was ‘unreasonable’ within the meaning of clause 17. Woodmills had no intention to develop its lands and there was no precedent at the City for imposing this kind of condition on a non-developing vendor. As a result, Union Building had merely exercised its option to prevent the agreement from collapsing, rendering the $407,582 unrecoverable.
In February 2018, the Supreme Court of Canada heard an appeal from a 2017 decision of the Court of Appeal for Ontario, Moore v. Sweet, which had allowed an appeal under similar circumstances. The Supreme Court’s decision is presently under reserve, but will surely affect appellate treatment of these issues.
Date of Decision: April 27, 2018