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New guidance on an “extricable question of law” under Sattva

6 minute read

A recent Ontario Court of Appeal decision is a useful example of the kind of “extricable question of law” that will allow an appellate court, under the principles set out by the Supreme Court of Canada in Creston Moly Corp. v Sattva Capital Corp., 2014 SCC 53, to interfere with a lower court’s interpretation of a contract, which would otherwise be accorded deference. Here, the Ontario Court of Appeal held that the motions judge erred in failing to interpret a release as a whole and give effect to all of its terms, which is a fundamental principle of contract interpretation.

Basis facts

The Plaintiff, 311176 Canada Inc. (previously known as Valle Inc.), was a manufacturer and distributor of polyurethane foam products. The Defendant, Cozy Corner Bedding Inc. (Cozy) was a long-time customer. Between August, 2011 to January, 2012, Valle supplied product to Cozy totalling approximately $190,000. On January 5, 2012, Valle pleaded guilty to price fixing during the period 1999 to 2010, contrary to the Competition Act, and paid a penalty of $6.5 million. Cozy learned of this guilty plea and refused to pay for the product shipped to it by Valle because it concluded that it had been overcharged over $400,000 during the period of time when Valle was engaging in price fixing.

As of January 11, 2012, Valle was one of numerous defendants in several class actions brought by purchasers of polyurethane products, which included Cozy. On January 11, 2012, the parties reached an agreement to settle the class actions and, the day after, on January 12, 2012, Valle was granted creditor protection under the Companies’ Creditors Arrangement Act (“CCAA”). As is typical, the court ordered a stay of all actions against Valle. On May 1, 2013, Valle brought an action against Cozy; Cozy advanced a counterclaim for the amount it claimed to have been overcharged. On February 11, 2014, the court approved the class action settlement agreement. Cozy was a member of the plaintiff class and did not opt out of the settlement.

Valle moved to have the counterclaim dismissed on the basis, inter alia, that it had been released as part of the settlement of the class actions. The Ontario Court of Appeal summarized the issue between the parties as follows: “[i]nsolvency legislation preserves the right of a person, who has been sued by the insolvent, to raise set-off as a defence. The main issue in this appeal is whether that right was given up by the release that the insolvent obtained in a class action.”

Motions judge – the release bars the counterclaim

The motions judge (2019 ONSC 2249) considered the language of the release in the class action settlement agreement to determine whether it barred Cozy’s counterclaim:

Released claims mean any and all manner of claim, demands, actions…., damages whenever incurred, damages of any kind including compensatory, punitive or other damages, liabilities of any nature whatsoever,… relating in any way to any conduct occurring anywhere, from January 1, 1999, to… [January 12, 2012] in respect of the purchase, sale, pricing, discounting, marketing, distributing of or compensation for Foam Products, or relating to any conduct alleged (or which could have been alleged) in the Proceedings…

Upon the Effective Date, all other Actions which were commenced by any Settlement Class Member who does not opt out shall be discontinued….

The motions judge concluded that Cozy’s counterclaim was released and deemed discontinued. However, in the alternative, the motions judge considered whether the counterclaim was stayed by the CCAA stay order and concluded that it was not; the counterclaim was in the nature of a claim for equitable set-off, which can be continued in response to a claim brought by a party under CCAA protection, despite a stay order. In this latter respect the motions judge and the Court of Appeal were in agreement.

Ontario Court of Appeal – the release does not bar the counterclaim

The Ontario Court of Appeal (2020 ONCA 235) overturned this decision on the basis that, in interpreting the class action settlement release, the motions judge had not read the release as a whole. In particular, the motions judge’s reasons did not advert to an “exception” in the release language that allowed the counterclaim to continue.

The Court of Appeal agreed with the motions judge that the definition of “claim” barred by the release was broad enough to cover Cozy’s counterclaim for equitable set off as against Valle. However, the court referred to an “exception” in the release language that had not been relied upon by the motions judge:

…Notwithstanding anything in this Settlement Agreement to the contrary, including but not limited to this Settlement Agreement’s provisions relating to the release of the Released Claims granted by the Releasors in favour of the Releasees and the discontinuance of proceedings against the...Defendants, nothing in this Settlement Agreement shall preclude the Plaintiffs or any member of the Settlement Class, individually or collectively, from filing against the…. Defendants a claim in any creditor protection, restructuring, insolvency, or other bankruptcy proceeding in Canada and/or the U.S. to the extent that such claim is based upon, arising out of or relating to facts, occurrences, transactions or other matters alleged in the Proceedings. To the extent permitted by law the…. Defendants shall not object to the filing by the Plaintiffs, or any member of the Settlement Class, of any such claim against any of the….Defendants in any creditor protection, restructuring, insolvency or other bankruptcy proceeding in Canada or the U.S., and further agree that nothing in this Settlement Agreement shall in any way impair or limit such claim against the… Defendants or the ability of such claimant(s) to seek recovery in any such creditor protection, restructuring, insolvency or other bankruptcy proceeding in Canada or the U.S. for any such claim(s) against the…Defendants.

This exception allowed class members like Cozy to make claims arising in the class actions (relating to the price fixing activities) in the insolvency proceedings involving a beneficiary of the class action release, like Valle. Therefore, Cozy’s claim for equitable set-off fell within this exception under the terms of the release and was also consistent with the CCAA regime, which preserves the right of a creditor to claim set-off when sued by a company under CCAA protection. In essence, the class action settlement agreement provided for no payment by the defendants and a discontinuance of claims against them, but allowed class members to advance their claims in any defendant’s subsequent insolvency.

The failure of the motions judge to consider this “exception” in the release was an extricable error of law within the meaning of Sattva and the motions judge’s interpretation of the release was not entitled to deference. Cozy’s counterclaim was permitted to continue.

Significance of this case

The Sattva case was very important in providing guidance on the interpretation of contracts (and equally on the standard of review of arbitral awards by courts). It provided much needed clarification that contract interpretation is a matter of mixed fact and law. However, it has led parties in subsequent cases to contortions to try to identify an “extricable error of law” that would justify an appellate court interfering with a lower courts’ decision. This decision of Ontario Court of Appeal is a clear, common sense application of the Sattva principles.

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Lisa C. Munro, FCIArb, Q.Arb

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