Risks and Rewards by Notice of Application

by | May 15, 2024 | Litigation, Partition Act, Property Disputes, Real Estate Disputes

Everybody loves a good shortcut, but sometimes you have to take the long way around. The same is true in court.

Rule 14.05(3) of Ontario’s Rules of Civil Procedure sets out the circumstances when a matter can proceed by way of application, allowing the judge to decide a discrete issue or potentially even the entire case based entirely on a paper record and oral arguments, without hearing from any live witnesses.

In the appropriate case, this allows the parties to circumvent some of the worst aspects of litigation: the costs and scheduling delays associated with discoveries and a full trial.

However, the process is not without risks. Judges retain the ability to convert an application into an action, which means that you could end up right back where you started if the court concludes that further evidence is required.

That’s exactly what happened in the case of Waterloo v. MXM, where Ontario Superior Court Justice Shin Doi decided that a trial on a fulsome record was needed to decide the $4-millon dispute between two alcoholic drinks companies.

The facts
B.C.-based MXM Beverages first got together with Waterloo Brewing in 2018 to discuss the possibility of having a line of MXM drinks manufactured and packaged at the Ontario company’s facilities in Kitchener.

In January 2020, shortly before the onset of the COVID-19 pandemic, the parties ultimately signed an agreement that set the annual minimum order at 75,000 hectolitres, with MXM to pay for any shortfall at a rate of $20 per hectolitre.

Less than two years into the three-year deal, MXM made its final order from Waterloo, bringing the cumulative volume of its purchased product to around 21,000 hectoliters.

Waterloo then demanded payment of just over $4 million plus interest, based on the 200,000-hectolitre minimum order shortfall across the three-year span of its agreement with MXM. The Ontario brewer also alleged that MXM had breached the contract because it wanted to pay less by placing orders with another brewery.

For its part, MXM refused to pay the bill and attempted to terminate the agreement, arguing that Waterloo was unable to fulfill orders within the timeframes set out in their agreement during the early months of the pandemic after warning that it may have to reduce capacity due to labour and material shortages.

In an application filed with the court, Waterloo sought a declaration that MXM was required to pay $4 million in fees, relying on Rule 14.05(3)(d), which provides that an application may be brought when the relief claimed is a determination of rights that depend on the interpretation of a contract. MXM resisted the application, arguing for its conversion to an action.

The results
Although the parties were in agreement about the meaning of the contract and its minimum order provisions, MXM argued that Waterloo was actually seeking enforcement, rather than interpretation of its terms.

Characterizing the minimum-order provisions as a penalty clause, MXM argued that Waterloo should have to prove its damages, which would also be subject to mitigation. In any case, MXM contended that the penalty clause was not enforceable.

In addition, MXM argued for estoppel and frustration of the contract as a result of the COVID-19 pandemic — issues that Justice Shin Doi found were “deeply factual and require discoveries.”

In her decision, Justice Shin Doi concluded that it was not appropriate to determine the dispute by way of an application and ordered that it be converted to an action.

“The issue of whether the Respondent is required to pay the Applicant involves several distinct issues,” the decision reads. “The issue of whether the contract clause is valid is a separate legal issue from whether the contract clause is enforceable against a party and whether there are any defences.

“The relief sought by this Application blends those distinct issues against the backdrop of the COVID-19 pandemic and the issues should be determined at trial on a fulsome record. There are also material facts in dispute and discoveries are required,” the judge wrote.

The lessons
This decision is a reminder that proceeding by way of application does not work well for every case.

The potential cost and time savings are enough to tempt many litigants to take a chance on an application, but if the parties can’t agree on the key facts in dispute, the gamble will probably not pay off.

In these cases, it may be better to accept defeat and start an action, rather than going to all the bother of scheduling and preparing for a hearing on an application, only to end up in the same place.

Matters that are best suited to proceeding by way of an application include some estate administration cases, partitions and sales of property under Ontario’s Partition Act and others where the underlying facts tend not to be in dispute.