B.C. – alleged breach of unclear settlement agreement requires lengthy trial to discern rights/obligations

Following 18 days of proof and hearing, Mr. Justice J. Christopher Grauer in Great Corner Stone Ltd. v. Vancouver Cabinets Inc., 2020 BCSC 107 puzzled through a “bewildering” set of initial contracts and a “poorly drafted” settlement agreement purporting to “reset” the relationship. Grauer J. struggled to identify what the mediate resolved, concluding that the settlement agreement “does not offer much guidance”.  Overall, Grauer J. held that discerning what rights and obligations were placed on the parties “was not a problem of ambiguity, but rather one of inexpert drafting and lack of clarity”.

The parties’ business relationship between Great Corner Stone Ltd. (“GCS”) and Vancouver Cabinets Inc. (“VCI”) involved the manufacture, supply and installation of kitchen and bathroom cabinets and countertops.  

Introducing his reasons, Grauer J. observed that their relationship was “governed by a series of agreements, originally in Chinese with English translations, that the parties prepared themselves, without the benefit of professional legal advice”.  The initial set of agreements, entered into on April 16, 2013, comprised “a somewhat bewildering series of agreements, some in Chinese, some in English, some in both, although the versions were not quite the same”.  Listed at para. 11, that initial set included a commercial lease, a contract of countertop manufacturing and installation, sale and workshop subletting agreement and a “business agreement”.

He described the “principal undertaking of these reasons” as “[d]iscerning just what rights and obligations these documents placed upon the parties”.

For the purpose of the trial, the parties submitted an Agreed Statement of Facts which included the following: “the Agreements are consistent with and/or complementary to one another, and that the agreements should be interpreted in relation to one another since they were entered in or around the same time”.

In response to that statement, Grauer J. disagreed with qualifying that alleged consistency as a fact.

[13] This is more of a submission than a fact.  That the agreements are consistent is, frankly, a bit of a stretch.  There are a number of apparent inconsistencies, but in resolving those inconsistencies, there is no doubt that the agreements must be interpreted as a whole”.

Disputes arose and, in the summer of 2015, the parties engaged in mediation with the assistance of lawyers. 

Note: The reasons nowhere identify or attribute any involvement whatsoever of either party’s trial litigation counsel to any assistance, advice or drafting of any agreements at any stage of the facts.

On November 19, 2015, the parties entered into a Settlement

A November 19, 2015 settlement agreement (“Settlement Agreement”).  “The intention, it would appear, was to reset the relationship”.

Despite the attempt to “reset” the relationship, the parties did not resolve their differences and eventually went to trial. The merits hearing took place over 18 days (August 7-10, 13-17 and 20-23, 2018; November 7-9, 2018; June 14, 2019; and, July 16, 2019), followed by  further written submissions provided November 30, 2019 and January 13, 2020, resulting in a detailed 45 page decision.

Grauer J. early on in his reasons noted the inherent problem in the Settlement Agreement which did little than ‘reaffirm’ the initial set of agreements. “The settlement did not specify how the issues arising under those agreements were resolved, nor did it specify precisely what conflicts were being settled”.

Grauer J. analysed the text and ostensible purpose of each contract, as well as the parties’ respective interpretation of what they thought each contract purported to create as rights and obligations.  Taking each in turn, he introduced the Settlement Agreement at paras 32-33.  The full text of the Settlement Agreement appears at para. 32. Grauer J. introduced it and then commented on it:

This agreement, apparently negotiated with the assistance of lawyers and a mediator, is remarkably short of details”.

Apart from the question of duration, this agreement did not specifically address the disputes between the parties, other than to reaffirm the original agreements.  But of course the parties disagreed as to the interpretation of those agreements, and nothing in this document addressed those disagreements”.

Regarding the ensemble of contracts, Grauer J. then prefaced the balance of his lengthy analysis with the observation that contracts were essentially doomed upon drafting.

[34] I have no doubt that if the parties had been advised by competent solicitors when they negotiated this transaction, it would have been structured very differently.  As it is, it is questionable just what sort of transaction it was.  Was it truly the sale of a business?  Was it a sale of equipment and transfer of rights with obligations limited to a three year period?  Was it a subcontracting agreement with the sale of equipment and the right to use premises for three years?  It is not surprising that the parties ran into difficulty”.

Throughout his reasons, Grauer J. puzzled at the purpose of the Settlement Agreement.  Despite determining later that, as a fact, it was intended to “reset” the relationship, he held that the final document fell short of meeting that intention.  Having outlined the lead up to the mediation, Grauer J. again noted that each participated in mediation and that counsel “were involved” but admitted that “it is not clear just what this [Settlement Agreement] purported to resolve”.

The parties’ respective positions are summarized at paras 71-77 for GCS and at paras 78-88 for VCI.  Regarding the Settlement Agreement, GCS “accepts that it was intended to reset the parties’ relationship, but maintains that it was still necessary to look at the original agreements, which were reaffirmed”.

For its part, VCI “acknowledges that the contracts are unsophisticated and contain gaps.  It submits that they are not ambiguous, but do require terms to be implied to make things workable, in a manner that is consistent with common sense inferences and the standards of the industry”.  VCI agreed with GCS that “Settlement Agreement was intended to “re-set the clock for the parties”” but added that it included “GCS being obliged to perform its contractual obligations in accordance with the explicit terms of the agreements, as originally intended”.

Despite efforts, Grauer J. found little assistance in any of the contracts in establishing a single, definitive interpretation of the rights and obligations of the parties.  The added problem stemmed from the attempt of the Settlement Agreement to resolve the disputes but, in doing so, only compounded them.

Commenting on the terms of one aspect of their parties’ relationship, Grauer J. refused to agree the problem was due to ambiguity.  “As I see it, that is not a problem of ambiguity, but rather one of inexpert drafting and lack of clarity”. 

Grauer J. acknowledged that a court could look at surrounding circumstances and subsequent conduct to determine meaning and even referred to Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII), [2014] 2 SCR 633 para. 57 for a statement of the limits of using surrounding circumstances.  See paras 103-104.

At paras 126-131, Grauer J. consolidated his take on the issues raised by the Settlement Agreement. “In this context of mutual shortcomings and impasse, the parties attended mediation and entered into the Settlement Agreement.  The agreement itself is poorly drafted … It does not offer much guidance”. 

After 18 days of hearing and supplementary written submissions of trial counsel, Grauer J. drew conclusions.  The need for lengthy hearing begs the question of what could a expertly drafted, clear settlement agreement have provided to avoid the need for a trial to decide what was “reset”.

[130] I find that it was indeed intended to be a reset, to restart the parties going forward, and was not intended to preserve any pre-existing claims for contractual breach other than what was specifically preserved in the agreement.  It is inconceivable to me that, in the absence of an express declaration, VCI would have intended to be retroactively responsible for the $250,000 threshold after having ceased doing business with GCS in the period from July through November 2015.  If GCS intended that VCI should have that retroactive liability, it should have specified it in the agreement, as was the case with back charges for deficiencies.  GCS’s claim in that regard had certainly been in the contemplation of both parties before the settlement was negotiated.

[131]  I conclude that the Settlement Agreement eliminated the right of either party to claim against the other in relation to alleged breaches occurring before the settlement, with the exception of back charges for deficiencies in workmanship, materials and supply”.

Based on the determinations made regarding the rights and obligations of the parties, Grauer J. issued conclusions awarding GCS damages from VCI’s fundamental breach of their contracts and a more modest award in favour of VCI for its counterclaim for recover of out-of-pocket expenses and rent owing

urbitral note – First, the drafting generated by the parties required 18 days of hearing before an experienced trial judge to unravel as best as possible the mix of rights and obligations created.  The fact that a mediated settlement only compounded and preserved the dispute cautions other disputing parties to exercise care and retain counsel experienced in dispute resolution.  As already noted, trial counsel for the parties were not identified has having any role in assisting advising, drafting of any of the agreements and were tasked with presenting their client’s respective positions as best they could

The reasons illustrate the breach of key concepts in dispute resolution: today’s resolution of an existing dispute should not lead to a fresh dispute tomorrow or leave the existing one unresolved.