In 625805 Ontario Ltd. v. Silverwood Flooring Inc., the Ontario Court of Appeal has recently held that the discovery of facts following a mediation had the effect of extending the limitation period. This decision has an important impact on the limitation period for all claims, and particularly claims arising from building projects, in which the facts relating to the claim may be gradually disclosed to the claimant.

Facts:

Henry Smith and his son Carl Smith were home builders who carried on business through the applicant 625805 Ontario Ltd (625). Tamar Royt carried on her business through Silverwood Flooring Inc. (“Silverwood”). Silverwood supplied hardwood flooring to building projects. In 2009, the parties entered into a Joint Venture Agreement (“JVA”) in order to sell and install hardwood flooring to building projects. The JVA provided that Silverwood would continue to engage in its hardwood flooring supply business with customers who were not referred to it by the Smiths. Ms. Royt was responsible for managing the JV and would receive a two percent management fee.

In March 2010, the Smiths secured a customer for the joint venture, being M5V Condominiums Project (the “M5V Project”). Ms. Royt confirmed that all open orders in the system up to and including April 30th 2010 would be shared “as per the agreement as well as M5V of course.” After that, the former partners to the JVA disagreed about their obligations and benefits from the M5V Project.

In December 2010, the Smiths commenced an application against Ms. Royt, 2219970 Ontario Inc., and another company. The application sought an accounting of the amounts owing by Ms. Royt and 2219970 Ontario Inc. to the Applicants under the JVA. Silverwood was not named as a defendant in the application because it was not a party to the JVA and the Smiths claimed they had no knowledge that Silverwood supplied hardwood flooring to the M5V Project.

Ms. Royt swore an affidavit in the application. During a cross-examination on her affidavit in January 2012, Ms. Royt testified that Silverwood, not the joint venture, had supplied the flooring for the M5V Project.  She also testified that the project made a profit, that she or Silverwood had received some of the proceeds from that project, but that it was less than 2 percent. While the Smiths then knew that Silverwood had supplied the flooring for the M5V Project, they did not join Silverwood as a respondent in the application.

In September 2015, the Smiths’ numbered company, 625, issued a statement of claim against Silverwood, Ms. Royt and John Doe seeking a declaration that the defendants have been unjustly enriched at the plaintiff’s expense and an accounting from the defendants as to the amount by which they have been unjustly enriched. After pleadings were delivered, in January 2016 Silverwood and Ms. Royt moved for summary judgment dismissing the action on the basis that the limitation period had expired before the action was commenced.

The motion judge dismissed the action on the basis that by 2012 the plaintiffs knew that Silverwood had made a profit on the M5V Project and had the means to explore the revenues from the M5V project and whether the JV would have made a profit on the project, so that by September 2015 the two year limitation period had expired.

Ontario Court of Appeal’s Decision

The Court of Appeal allowed the appeal. It held that the facts upon which the plaintiffs brought their 2015 action were not known to them until March 2015. The Court of Appeal said, in their pleadings and affidavits, the Smiths allege that:

  1. “in the cross-examination on her affidavit in January 2012, Ms. Royt lied about the profits made on the M5V Project”;
  1. “In or about March of 2015, following an unsuccessful mediationin the Commercial Court action, Royt disclosed to Henry Smith that contrary to her earlier evidence, Silverwood had in fact made at least $200,000 in profit in respect of the sale of flooring to M5V. She also told him that the representation she had made to him in 2009 regarding Silverwood’s overhead expenses was untrue in that it was significantly less than $40,000.00 per month. Royt made these admissions during the course of a meeting, following further unsuccessful settlement discussions, where Henry Smith again requested that the financial records relating to the sale of flooring to M5V be disclosed after Royt’s admissions that she lied during her 2011 testimony.”

 

The Court of Appeal held that in these circumstances the Smiths had not discovered their loss until March 2015:

  1. Since Ms. Royt had testified that the amount earned on the project was less than her management fee (in 2012), it was reasonable for the Smiths to understand that the JV had suffered no financial loss or damage. As the court said:

“In light of the two percent management fee to which Ms. Royt was entitled before profits could be distributed to the joint venture and Ms. Royt’s express statement that profit from the M5V Project was less than her management fee, the possibility that the Smiths had suffered damage from the M5V Project and that the damage was caused by the respondents was removed from the Smiths’ minds. Accordingly, this is not a case where a party knows that it has suffered a loss but does not know the extent of the loss….”

  1. This was not a case in which the Smiths knew or ought to have known that they or the JV had suffered damage in 2012. The court said:

“It is true that the Smiths could have disbelieved or doubted Ms. Royt’s answers and brought a motion to compel production of financial documentation and/or to add Silverwood as a party to the original application. I do not think this was necessary. Parties are entitled to accept that information testified to under oath is truthful and accurate….In these circumstances, the appellant “discovered” the potential “damage” that grounds its unjust enrichment claim when Ms. Royt told Henry Smith in 2015 that Silverwood made a profit of at least $200,000 on the M5V Project.”

Discussion

There are two interesting aspects of this decision.

First, the decision demonstrates how the evolving disclosure in civil litigation may extend the limitation period. Clearly, the Ontario Court of Appeal was not inclined to be generous to the defendants in the application of the limitation period, particularly when the plaintiffs alleged that the defendants had lied under oath about important matters relating to the limitation period. Nor, in these circumstances, was the court inclined to be technical about the discovery of damage, or the duty to take steps to explore that issue.

As a result, in building contract disputes, the parties will have to be vigilant about telling the truth in order not to allow the other party to assert that its non-disclosure caused the limitation period to be extended. Equally, parties should always consider whether new information disclosed after the project occurred has caused the extension of the limitation period.

Second, the other interesting aspect of this decision is the court’s reference to information disclosed after a mediation. If the information was disclosed as part of the mediation process, was that information admissible in evidence?

Section 9(1) of the Ontario Commercial Mediation Act, 2010 says that, subject to subsections (2) and (3), the following information is not “discoverable or admissible in evidence in arbitral, judicial or administrative proceedings.” That information includes “2. A document prepared solely for the purposes of the mediation; 3. Views expressed or suggestions made by a party during the mediation concerning a possible settlement of the dispute: 4. Statements or admissions made by a party during the mediation.

None of the exceptions in subsections (2) or (3) appear to apply in the present case. However, one exception which is potentially applicable is section 9(2)(a) which reads: “information referred to in subsection (1) may be admitted in evidence to the extent required, (a) by law.”

In this circumstance, the following questions appear to arise.

First, was the information in this case part of the mediation? How does one determine that issue? Following a mediation, should parties be careful in designating whether or not information is being provided as part of the mediation?

Second, if this information was disclosed during the mediation, could it still be admissible? Does the discoverability principal contained in the Limitations Act, 2002 trump the Commercial Mediation Act, or vice versa? If the plaintiff is entitled to rely on the discoverability principal in the Limitations Act, 2002, is the information obtained during mediation admissible “as required by law”?

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. Chapter 9, part 3.

625805 Ontario Ltd. v. Silverwood Flooring Inc., 2017 CarswellOnt 1734, 2017 ONCA 125

Building contracts – limitation periods – mediation – discoverability

Thomas G. Heintzman O.C., Q.C., L.L.D. (Hon.), FCIArb                         March 12, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.