Jul 13, 2020

COURT OF APPEAL SUMMARIES (July 6 to 10, 2020)

Tran v. Bloorston Farms Ltd., 2020 ONCA 440 (CanLII)

Tran v. Bloorston Farms Ltd., 2020 ONCA 440

[Benotto, Zarnett and Thorburn JJ.A.]

Counsel:

Mark A. Ross and Eric Brousseau, for the appellant

Evan L. Tingley, for the respondents

Keywords: Corporations, Separate Legal Personality, Rule in Foss v. Harbottle (1843), 67 E.R. 189 (U.K.H.L.), Contract, Interpretation, Real Property, Commercial Leases, Breach, Damages, Reasonable Foreseeability, Civil Procedure, Summary Judgment, Sufficiency of Reasons, Standard of Review, Ontario Business Corporations Act, RSO 1990, c. B16, ss. 28(1) and 41, Meditrust Healthcare Inc. v. Shoppers Drug Mart (2002), 220 D.L.R. (4th) 611 (Ont. C.A.), Johnson v. Gore Wood & Co. (No. 1) (2000), [2001] B.C.C. 820 (U.K.H.L), Quadrangle Group LLC et al. v. Attorney General of Canada, 2015 ONSC 1521, leave to appeal to Div. Ct. refused, 2015 ONSC 7346, Hercules Management Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, SFC Litigation Trust v. Chan, 2019 ONCA 525, George Fischer (Great Britain) Ltd v. Multi Construction Ltd. (1994), [1995] B.C.C. 310 (C.A.), Robak Industries Ltd. v. Gardner, 2007 BCCA 61, BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, Chevron Corp. v. Yaiguaje, 2015 SCC 42, Saramia Crescent General Partner Inc. v. Delco Wire and Cable Limited, 2018 ONCA 519, Hryniak v. Mauldin, 2014 SCC 7, Hersey v. Hersey, 2016 ONCA 494, Sattva Capital v. Creston Moly, 2014 SCC 53

Facts:

The respondent, STT, was the named tenant who leased premises pursuant to a written lease.

STT operated a restaurant at the premises through her corporation, 1835068 Ontario Ltd. (“183”), of which she was the 100% shareholder.

The appellant landlord, Bloorston Farms Ltd. (“Bloorston”) purchased the leased premises and inherited the existing lease. It measured the leased premises and determined that they were larger than as specified in the written lease. The allocation of property taxes to the leased premises was therefore increased from 26.77% to 43.59%. Bloorston demanded increased minimum and additional rent to reflect the actual size of the leased premises. STT paid the rent in accordance with past practice, but refused to pay the increased rent demanded. Bloorston took the position that STT was in default under the lease and changed the locks. 183 was therefore put out of business.

STT sued Bloorston for wrongful termination of the lease, claiming the return of her deposit and damages for breach of the lease. 183 was later added as plaintiff. Bloorston counterclaimed for lost rent and other losses.

On a motion for summary judgment by Bloorston, the motion judge determined that there was nothing in the lease that permitted Bloorston to adjust the minimum rent payable based on a recalculation of the square footage of the leased premises. Bloorston’s demand for minimum rent was therefore improper. Regarding additional rent, the motion judge found that while the lease permitted the landlord to re-estimate additional rent “acting reasonably”, Bloorston had not acted reasonably, and the lease did not permit the landlord to change the method of allocation of property taxes from that used by its predecessor. He found that the demand for additional rent was also unjustified. Finally, the motion judge determined that there had been no breach of the lease by assigning it to 183 or letting 183 use the premises. He found that there had been no assignment, and that the prior landlord and Bloorston had known about 183’s involvement and had not objected.

The motion judge therefore found that the lease had been wrongfully terminated by Bloorston. He determined that STT was entitled to damages for the diminution in value of her shares in 183. He awarded damages for the diminution in value of the shares in the amount of about $140,000, plus the return of a $5,000 deposit. The motion judge refused to deduct from the damage award an advance to 183 in the amount of $137,000 made by STT’s sister, finding that it was not a loan, and therefore that this amount represented part of the capital of 183.

Issues:

1. Whether the Rule in Foss v Harbottle should have been applied to deny STT’s claim against Bloorston for the diminution in value of her shares.

2. Whether the motion judge erred in failing to deduct the sister’s advance from the damage award.

3. Whether the motion judge erred in finding that Bloorston breached the lease and was not entitled to succeed on its counterclaim.

Holding:

Appeal dismissed.

Reasoning:

1. No. The wrong in this case was not done to the corporation, but to the shareholder personally. Only STT was a tenant under the lease and only she had a cause of action for its wrongful termination. In these circumstances, neither the rule in Foss v. Harbottle nor its rationale applied. The motion judge therefore did not err in allowing Sang’s claim for diminution in share value. Nor did the motion judge err in the quantification of that diminution or in finding that Bloorston had breached the lease.

The Court discussed rule in Foss v. Harbottle, which is part of the law of Ontario, and related case law in detail. The rule stipulates the following: a shareholder of a corporation—even a controlling or sole shareholder—does not have a personal cause of action for a wrong done to the corporation. There are two reasons for the rule. First, the corporation is a separate legal entity. The corporation, and not its shareholders, is liable for the corporation’s acts and defaults, and the corporation, not its shareholders, acquires causes of action when wrongs are committed against it. Second, the rule avoids a multiplicity of actions; without the rule, a shareholder would always be able to sue on the basis that a wrong done to the corporation, which caused harm to the corporation, indirectly harmed the shareholder:

While the rule in Foss v. Harbottle prevents a shareholder from suing for any type of damage resulting from a wrong done to the corporation, it is frequently invoked when a shareholder attempts to recover for the diminution in value of his or her shares. Such claims offend the rule because a wrong done to the corporation that results in diminished share value does not ground a personal cause of action for the shareholder. The party with the cause of action for the wrong is the corporation. The loss in share value is simply reflective of the loss incurred by the corporation as a result of the wrong done to it, and would be remedied if the corporation took action to recover its loss from the wrongdoer.

But the rule has a limit. It only provides that shareholders cannot raise individual claims in respect of a wrong done to the corporation. The rule in Foss v. Harbottle does not preclude an individual shareholder from pursuing a claim for harm done directly to her, assuming the shareholder can make out all the elements of her own cause of action.

The limited reach of the rule in Foss v. Harbottle is important in two different circumstances. The first is where both the corporation and shareholder have the same or overlapping causes of action. The second is where only the shareholder has a cause of action. This case involved the second circumstance. Only STT, as the tenant, had a cause of action for wrongful termination of the lease. 183 had no cause of action against the landlord.

The Court cited with approval the House of Lords decision in Johnson v. Gore Wood & Co. (No. 1) (2000), [2001] B.C.C. 820 (U.K.H.L), which sets out the three circumstances in which a shareholder can sue for diminution in value of his or her shares. The Court rejected Bloorston’s argument that Johnson had been rejected by Canadian courts. The three propositions set out in Johnson for when a claim to diminution in value of shares can be made are as follows:

1. Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss.

2. Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding.

3. Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other.

The damages for diminution in value of STT’s shares awarded by the motion judge were reasonably foreseeable in this case, and the judge’s failure to explicitly make a finding using the words “reasonably foreseeable” did not constitute reversible error on the basis of insufficiency of reasons. Damages for breach of a lease are reasonably foreseeable if:

(i) in the ‘usual course of things’, they arise fairly, reasonably, and naturally as a result of the breach of contract; or

(ii) they were within the reasonable contemplation of the parties at the time of contract.

The lease in this case specified that the premises were for use as a restaurant. The original tenant under the lease was STT’s sister, who, like STT, also operated a restaurant on the premises through a corporation. Additionally, the motion judge found that Bloorston and its predecessor were aware of and did not object to 183’s occupation of the premises. Bloorston’s demands for additional payments show that it was aware of the operation of a restaurant on the premises. That a restaurant operating on leased premises would cease to operate if the lease were wrongly terminated was reasonably foreseeable. If the tenant benefitted from the continuation of the lease and the operation of the restaurant, loss from the inability to continue in operation would arise “in the usual course of things” from a breach of the lease. Bloorston would not be able to complain if STT claimed losses for the discontinuance of the restaurant business if she had operated it herself as a sole proprietorship. That her interest was as a shareholder does not take the loss out of the type that would have been in the reasonable contemplation of the parties at the time of contracting.

2. No. The motions judge’s factual findings were entitled to deference and had support in the evidence. The motion judge was not required to refer to all of the evidence in expressing his conclusion.

3. No. The motion judge’s interpretation of the lease involved findings of mixed fact and law, and therefore attracted the deferential standard of review. There was no palpable and overriding error that justified appellate interference.