Friedmann Equity Developments Inc. v. Final Note Ltd. et al., 2000 SCC 34

• Judge: Gonthier, Major, Bastarache, Binnie and Arbour, JJ.
• Court: Supreme Court (Canada)
• Case Date: July 20, 2000
• Jurisdiction: Canada (Federal)
• Citations: 2000 SCC 34;(2000), 134 O.A.C. 280 (SCC);JE 2000-1445;[2000] 1 SCR 842;255 NR 80;48 OR (3d) 800;34 RPR (3d) 159;98 ACWS (3d) 85;188 DLR (4th) 269;[2000] SCJ No 37 (QL);134 OAC 280;7 BLR (3d) 153

Friedmann Equity Dev. v. Final Note (2000), 134 O.A.C. 280 (SCC)

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[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Temp. Cite: [2000] O.A.C. TBEd. JL.056

Friedmann Equity Developments Inc. (appellant) v. Dr. Almas Adatia, also known as Almas Adatia, Mohamed Rajani, Shorim Investments, in trust, Shorim Investments Limited, in trust, Peter Bortoluzzi, Sultan Lalani, in trust, and 808413 Ontario Inc., Crown Freight Forwarders Ltd., previously known as 808548 Ontario Inc. (respondents) and Lionel C. Larry and Robins, Appleby & Taub (respondents)

(26971; 2000 SCC 34)

Indexed As: Friedmann Equity Developments Inc. v. Final Note Ltd. et al.

Supreme Court of Canada

Gonthier, Major, Bastarache, Binnie and Arbour, JJ.

July 20, 2000.

Summary:

A corporation, acting as agent for undis­closed principals, executed a mortgage by affixing its corporate seal. The plaintiff mortgagee sued the corporate agent and its beneficial owners follow­ing default under the mortgage. The benefi­cial owners (as undis­closed principals) moved under rule 21.01(1)(a) of the Rules of Civil Procedure (Ont.) to dismiss the plain­tiff's action. The owners submitted that the "sealed contract rule" precluded the plaintiff from suing anyone other than the corporate mortgagor, the agent who executed the mortgage under seal.

The Ontario Court (General Division), dismissed the motion. The defendants appealed.

The Ontario Divisional Court, in a judg­ment reported [1997] O.A.C. Uned. 103, allowed the appeal. The "sealed contract rule" applied to preclude the action against the beneficial owners as un­disclosed princi­pals. The plaintiff appealed.

The Ontario Court of Appeal, in a judg­ment reported (1998), 112 O.A.C. 253, dismissed the appeal. The plaintiff appealed, submitting, inter alia, that the court should abolish the common law rule.

The Supreme Court of Canada dismissed the appeal. The common law rule continued to apply and there was no justification for abolishing or varying the rule.

Agency - Topic 4103

Relations between principal and third parties - Principal's liability for contracts by agent - Undisclosed principal - A cor­poration, acting as agent for undisclosed principals, executed a mortgage by affixing its corporate seal - The mortgagee sued the beneficial owners of the corporate agent following default on the mortgage - The Supreme Court of Canada affirmed that the "sealed document rule" precluded the mortgagee from suing the beneficial owners, who were not parties to the mort­gage - Section 13(1) of the Land Regis­tration Reform Act made the covenant to pay in the mortgage a covenant under seal for all purposes - Whether the corporate agent intended the mortgage to be under seal was irrelevant - The mortgage was a specialty contract and the "sealed contract rule" applied - The court declined to abol­ish the "sealed contract rule".

Agency - Topic 4103

Relations between principal and third parties - Principal's liability for contracts by agent - Undisclosed principal - The Supreme Court of Canada stated that the "sealed contract rule" provided that only parties to a sealed contract could sue on it - Accordingly, an undisclosed principal could neither sue nor be sued on a contract executed under seal by an agent - Since corporations had all of the capacities and powers of a natural person, especially in contract law, there was no principled basis to treat corporate agents for undisclosed principals differently than non-corporate or personal agents - The court stated that "the sealed contract rule clearly applies to corporate agents, although the intention of the corporation to create a sealed instru­ment must be evident from the construc­tion of the instrument itself and the cir­cumstances surrounding its creation before the rule will be applied. The intention to create or not to create a sealed instrument will not be relevant if a statutory provision has the effect of deeming the instrument to have all of the effects of an instrument under seal." - See paragraphs 1 to 39.

Common Law - Topic 3221

Variation - Judicial variation - General - The Supreme Court of Canada set out the principles governing judicial reform of the common law - A common law rule (such as the "sealed contract rule") should gen­erally be abolished or varied only where a change in the common law was necessary to remain in step with societal evolution, to clarify a legal principle or to resolve an inconsistency - Additionally, any change should be incremental and its conse­quences must be capable of assessment - The court stated that "courts will not inter­vene where the proposed change will have complex and far-reaching effects, setting the law on an unknown course whose ramifications cannot be accurately measured" - See paragraphs 42 to 43.

Common Law - Topic 3224

Variation - Judicial variation - To meet changing circumstances - [See Common Law - Topic 3221 ].

Company Law - Topic 5110

Contracts by companies - Formalities - Seal - [See Contracts - Topic 245 ].

Contracts - Topic 245

Classification of contracts - Specialties - Presumption of affixing of seal - The Supreme Court of Canada stated that "to create a sealed instrument, the application of the seal must be a conscious and delib­erate act. ... Corporate seals have a differ­ent legal effect than the seal of an individ­ual natural person ... Therefore, the affix­ing of a corporate seal may not in all cases be evidence of an intention to create a sealed instrument, within the meaning of the sealed contract rule. ... a corporation is certainly capable of creating a sealed in­strument and availing itself of the differ­ent incidents which flow from such an agree­ment. However, the attachment of the corporate seal, on its own, may not be sufficient to do so. Courts must examine the instrument itself and the circumstances surrounding its creation to determine whether the corporation intended to create a sealed instrument by affixing its corpor­ate seal. While ... evidence of an intention to create a sealed instrument is necessary when a corporate seal is affixed to a con­tract, I emphasize that this is a principle which operates at common law. Statutory provisions may have the effect of render­ing a corporation's intention to create a sealed contract irrel­evant." - See para­graphs 36 to 38.

Contracts - Topic 9004

Rights and liabilities of strangers to con­tract - General - Contracts under seal - [See both Agency - Topic 4103 ].

Mortgages - Topic 1341

The mortgage - Form - General - Seal - [See first Agency - Topic 4103 ].

Mortgages - Topic 1521

The mortgage - Covenants - General - [See first Agency - Topic 4103 ].

Cases Noticed:

Kootenay Savings Credit Union v. Toudy (1987), 22 B.C.L.R.(2d) 201 (S.C.), overturned [para. 9].

Harmer v. Armstrong, [1934] 1 Ch. 65 (Eng. C.A.), dist. [para. 10].

Keighley Maxsted & Co. v. Durant, [1901] A.C. 240 (H.L.), refd to. [para. 17].

Nalbandian v. Hanson Restaurant & Lounge Inc. (1975), 338 N.E.2d 335 (Mass.), refd to. [para. 19].

Porter v. Pelton (1903), 33 S.C.R. 449, refd to. [para. 21].

Margolius v. Diesbourg, [1937] S.C.R. 183, refd to. [para. 22].

Whisper Holdings Ltd. v. Zamikoff, [1971] S.C.R. 933, refd to. [para. 23].

Zamikoff v. Lundy (1970), 9 D.L.R.(3d) 637 (Ont. C.A.), refd to. [para. 24].

Canada Deposit Insurance Corp. v. Cana­dian Commercial Bank (1987), 83 A.R. 341; 46 D.L.R.(4th) 37 (Q.B.), refd to. [para. 24].

Napev Construction Ltd. v. Lebedinsky (1984), 7 C.L.R. 57 (Ont. H.C.), refd to. [para. 24].

Tri-S Investments Ltd. v. Vong, [1991] O.J. No. 2292 (Gen. Div.), refd to. [para. 24].

Edelstein Construction Ltd. v. Fire Pit Inc. et al. (1996), 93 O.A.C. 49; 30 O.R.(3d) 383 (C.A.), refd to. [para. 24].

Marbar Holdings Ltd. v. 221401 B.C. Ltd. (1984), 54 B.C.L.R. 169 (S.C.), refd to. [para. 35].

872899 Ontario Inc. v. Iacovoni (1998), 112 O.A.C. 280; 163 D.L.R.(4th) 263 (C.A.), refd to. [para. 36].

Lawton, Re, [1944] 3 D.L.R. 51 (Man. K.B.), affd. [1945] 4 D.L.R. 8 (C.A.), refd to. [para. 37].

Suburban Construction Ltd. v. Newfound­land & Labrador Housing Corp. (1987), 66 Nfld. & P.E.I.R. 347; 204 A.P.R. 347; 38 D.L.R.(4th) 150 (Nfld. C.A.), refd to. [para. 37].

Alton Renaissance I v. Talamanca Man­agement Ltd. (1996), 27 B.L.R.(2d) 307 (Ont. Gen. Div.), refd to. [para. 37].

Chesterfield and Midland Silkstone Col­liery Co. v. Hawkins (1865), 3 H. & C. 678; 159 E.R. 698, refd to. [para. 41].

R. v. Vetrovec; R. v. Gaja, [1982] 1 S.C.R. 811; 41 N.R. 606, refd to. [para. 42].

Watkins v. Olafson et al., [1989] 2 S.C.R. 750; 100 N.R. 161; 61 Man.R.(2d) 81, refd to. [para. 42].

R. v. Jobidon, [1991] 2 S.C.R. 714; 128 N.R. 321; 49 O.A.C. 83, refd to. [para. 42].

R. v. Salituro, [1991] 3 S.C.R. 654; 131 N.R. 161; 50 O.A.C. 125, refd to. [para. 42].

R. v. K.G.B., [1993] 1 S.C.R. 740; 148 N.R. 241; 61 O.A.C. 1, refd to. [para. 42].

R. v. Robinson (D.), [1996] 1 S.C.R. 683; 194 N.R. 181; 72 B.C.A.C. 161; 119 W.A.C. 161, refd to. [para. 42].

Bow Valley Husky (Bermuda) Ltd. et al. v. Saint John Shipbuilding Ltd. et al., [1997] 3 S.C.R. 1210; 221 N.R. 1; 158 Nfld. & P.E.I.R. 269; 490 A.P.R. 269, refd to. [para. 42].

MacAskill v. R., [1931] S.C.R. 330, refd to. [para. 43].

Crowley v. Lewis (1925), 146 N.E. 374 (N.Y.C.A.), refd to. [para. 51].

McMullen v. McMullen (1962), 145 S.O.2d 568 (Fl. Dist. Ct. of A.), refd to. [para. 51].

Toll v. Pioneer Sample Book Co. (1953), 94 A.2d 764 (Penn. S.C.), refd to. [para. 51].

Statutes Noticed:

Land Registration Reform Act, R.S.O. 1990, c. L-4, sect. 13 [para. 13].

Authors and Works Noticed:

Ames, J.B., Undisclosed Principal - His Rights and Liabilities (1909), 18 Yale L.J. 443, generally [para. 16].

Anger and Honsberger, Law of Real Prop­erty (2nd Ed. 1984), vol. 2, p. 1263 [para. 50].

Bowstead and Reynolds on Agency (16th Ed. 1996), p. 426 [para. 44].

British Columbia, Law Reform Commis­sion, Report on Deeds and Seals (1988), p. 8 [para. 19].

Cardozo, B.N., The Paradoxes of Legal Science (1928), p. 68 [para. 47].

Cheshire, Fifoot and Furmston, Law of Contract (13th Ed. 1996), p. 495 [para. 25].

Fridman, G.H.L., The Law of Contract in Canada (4th Ed. 1999), p. 197 [para. 41].

Fuller, L., Consideration and Form (1941), 41 Colum. L. Rev. 799, p. 802 [para. 19].

Halsbury's Laws of England (4th Ed. 1998), vol. 9(1), para. 617 [para. 20].

Herschorn, A., Documents under Seal: Consequences and Complications (1989), 10 Adv. Q. 129, p. 130 [para. 20].

McGuinness, K., The Law and Practice of Canadian Business Corporations (1999), p. 204 [para. 34].

Ontario, Law Reform Commission, Report on Amendment of the Law of Contract (1987), p. 35 [para. 19].

Pollock on Contracts (10th Ed. 1936), pp. 97, 98 [para. 22].

Schiff, M., The Undisclosed Principal: An Anomaly in the Laws of Agency and Contract (1983), 88 Com. L.J. 229, gen­erally [para. 16].

Seavy, W.A., The Rationale of Agency (1920), 29 Yale L.J. 859, p. 880 [para. 41].

Waddams, S.M., The Law of Contracts (4th Ed. 1999), para. 268, note 4 [para. 41].

Weinrib, E.J., The Undisclosed Principle of Undisclosed Principals (1975), 21 McGill L.J. 298, generally [para. 17].

Counsel:

Benjamin Zarnett, Carolyn Silver and Julie Rosenthal, for the appellant;

Robert D. Malen, for the respondents, Dr. Almas Adatia, also known as Alma Adatia, Peter Bortoluzzi, Sultan Lalani, in trust, 808413 Ontario Inc. and Crown Freight Forwarders Ltd., previously known as 808548 Ontario Inc.;

Carl Orbach, Q.C., for the respondents, Mohamed Rajani, Shorim Investments, in trust, and Shorim Investments Ltd., in trust;

Valerie A. Edwards, for the respondents, Lionel C. Larry and Robins, Appleby & Taub.

Solicitors of Record:

Goodman, Phillips & Vineberg, Toronto, Ontario, for the appellant;

Goldman, Sloan, Nash & Haber, Toronto, Ontario, for the respondents, Dr. Almas Adatia, also known as Alma Adatia, Peter Bortoluzzi, Sultan Lalani, in trust, 808413 Ontario Inc. and Crown Freight Forwarders Ltd., previously known as 808548 Ontario Inc.;

Orbach, Katzman & Herschorn, Toronto, Ontario, for the respondents, Mohamed Rajani, Shorim Investments, in trust, and Shorim Investments Ltd., in trust;

Torkin, Manes, Cohen & Arbus, Toronto, Ontario, for the respondents, Lionel C. Larry and Robins, Appleby & Taub.

This appeal was heard on January 27, 2000, before Gonthier, Major, Bastarache, Binnie and Arbour, JJ., of the Supreme Court of Canada.

On July 20, 2000, Bastarache, J., delivered the following judgment in both official languages for the Supreme Court of Canada.