2007 BCCA 88 Doman Forest Products Ltd． v． GMAC Commercial Credit Corp． － Canada

Citation:
 Doman Forest Products Ltd. v.
GMAC Commercial Credit Corp. – Canada ,
 
 
 2007 BCCA 88
 

Date: （略）

 

Docket: CA033073

Between:

Doman Forest Products Limited,
Western Pulp Limited Partnership,
Western Pulp Inc., Doman Log Supply Ltd.,
and Eacom Timber Sales Ltd.

Appellants

(Plaintiffs)

And

GMAC Commercial Credit Corporation - Canada

Respondent

(Defendant)

 

 

Before:
 The Honourable Madam Justice Southin
 
The Honourable Madam Justice Prowse
 
The Honourable Mr. Justice Lowry
 

 

D. B. Kirkham, Q.C. and K. J. Fischer
 Counsel for the Appellants
 
I. G. Nathanson, Q.C. and K. D. Loo
 Counsel for the Respondent
 
Place and Date of Hearing:
 Vancouver, British Columbia
 
20th and 21st September, 2006
 
Place and Date of Judgment:
 Vancouver, British Columbia
 
12th February, 2007
 

 

Dissenting Reasons by:
 
The Honourable Madam Justice Southin
 
Written Reasons by:
 
The Honourable Mr. Justice Lowry  (P. 40, para. 70)
 
Reasons concurring in the result by:
 
The Honourable Madam Justice Prowse  (P. 72, para. 130)
 

Reasons for Judgment of the Honourable Madam Justice Southin:

[1]                The appellants (whom the learned trial judge referred to collectively as "Doman") appeal from the judgment of the Honourable Madam Justice Kirkpatrick pronounced 25th May, 2005, dismissing, after an 11 day trial in April 2005, their action brought the 23rd April, 2002, against the respondent for damages for breach of a contract to lend.  Her reasons for judgment are cited as 2005 BCSC 774.

[2]                The matter arose in this way.  On 5th June, 2001, the appellants, as borrowers, entered into a revolving credit agreement for a three year term (subject to both early termination and renewal) with the respondent, as lender.  The maximum possible amount of credit was the lesser of US $50 million or CDN $65 million.  Under the agreement, the respondent's security was Doman's accounts receivable.  It is not suggested that at any time these accounts receivable were not sufficient security for the contemplated amount of credit. 

[3]                In order to obtain the agreement, which came after a lengthy "due diligence" investigation on the part of the respondent, the appellants paid to the respondent a commitment fee of US $190,000.  By the agreement, the appellants paid a closing fee of US $385,000 (section 5(b)(i)), were obliged to pay an "unused line fee" (section 5(b)(ii)), and a monitoring fee for the first year of the agreement of US $100,000 (section 5(b) (iii)), and, if the agreement was terminated in the first year, whether by itself or by the respondent exercising its right to terminate upon an Event of Default, an Early Termination Fee of US $1 million.  [The draftsman of this instrument, rather like Queen Victoria, was partial to capitals.  Where it is appropriate, I have followed his [or her] usage.] 

[4]                While on its face the agreement is harsh, Doman Industries Limited [of which the appellants are subsidiaries] was in such serious financial straits in the spring of 2001, in part because of adverse market conditions in the forest industry and in part because of the Government of the United States imposing countervailing duties on softwood lumber, that its bankers had declined credit to it.  It had outstanding bonds, called in the agreement "Senior Notes", of US $710 million, as the respondent well knew before the agreement was made.  Of these, US $425 million were due in March 2004.  As, in the circumstances, they might fairly be called "junk bonds", they were trading at 50% of face value.  Doman wanted substantial credit, not only for working purposes, but also to take advantage of the opportunity to repurchase some of those bonds at their discounted price. 

[5]                On 24th September, 2001, the loan committee of the respondent, all of whose members were in New York, consequent upon a memorandum from Mr. Wayne Dyer concerning the respondent's financial condition (Mr. Dyer was first employed by the respondent at the beginning of September), came to a conclusion described by the learned judge thus:

[50]  The loan committee minutes disclose that the committee downgraded the Doman account from a '5' risk rating to a '6' "based on losses."  The minutes state "maintain investment cap of $15" million.  The minutes confirmed that Mr. Waxlax was to visit Doman and that any advances were to be authorized by Mr. Grimaldi and Mr. Brady.  The loan committee added a "miscellaneous reserve" of an additional $7 million to bring the reserves to $20 million.  The audit cycle was "maintained" at 30 days, although Mr. Dyer testified that the audit cycle was usually every six months.  The loan committee ordered a review in 30 days, as opposed to the typical two?month review.

[Emphasis mine.]

[6]                Any rational possibility of Doman Industries Limited repurchasing some of its bonds thereupon disappeared like the snows of summer. 

[7]                As to that loan committee meeting, John Waxlax, then the Managing Director of the respondent, a subsidiary of an American corporation with its headquarters in New York, who had participated in it by telephone or teleconference, testified: 

A          I don't recall the specifics of the conversation.  I do recall there was great concern as to the financial performance of Doman.  It was, it was felt that there was a -- could be a huge problem here.  The concern led to the chairman of the committee, Joe Grimaldi, advising that any further advances from Doman would require his personal signature and he would only sign after Peter Brady, who was the chief credit officer of the company, had signed off first.  He directed me to go to Vancouver to meet with the management of the company to determine what was going on and then report back.

Q         All right.  Now, can I ask you, for your experience prior to this meeting with the credit committee, was it normal that any credit advances under a facility would have to be signed first by the chief credit officer and then signed by the president or CEO?

A          Very unusual.  I don't recall of any other instance. 

[8]                Various discussions took place between representatives of both parties.

[9]                Of particular importance to the learned trial judge were discussions on 2nd October, 2001.  The learned judge held that the appellants volunteered to "live with" the cap (paras. 74 and 75). 

[10]            On 10th October, the loan committee met again (Exhibit 1 (57)).  Those minutes say simply:

Doman Industries Ltd.

W. Dyer

Committee was updated on a meeting with president to discuss revised plan.  The miscellaneous reserve was reduced to $7.5MM as a block in the availability.  We will not lend more than $15MM.

[11]            The appellants did not thereafter request advances in excess of $15 million.

[12]            From comparing Exhibit 1 (20), an inter-office memorandum of 7th May, 2001, to Exhibit 1 (32A), the minutes of the loan committee meeting of 24th September, 2001, one can infer that the composition of the loan committee at the time of the "cap" on credit was little different from that of the committee when it approved the loan, and yet no one who participated in both decisions testified at the trial.  The learned trial judge rejected the submission of the appellants that an adverse inference should be drawn from that lack of testimony.  I shall comment on this point hereafter.

[13]            The respondent charged the appellants to the end of their relationship "unused line fees", calculated not on $15 million but on the Maximum Loan Amount, as defined in the agreement.  Those fees amount to some US $95,000.00, although it is not clear to me how much of that accrued after the 24th September, 2001.

[14]            Commencing in early November 2001, the appellants negotiated with another lender for alternate financing.  Those negotiations having culminated in an agreement, the appellants, on 5th March, 2002, so informed the respondent:

Dear Sirs:

Re:      GMAC Commercial Credit Corporation – Canada ("GMACC") –

Credit Agreement (the "Credit Agreement") between GMACC and

            Doman Forest Products Limited et al. ("Doman" or the "Company")

I am writing to you in connection with Doman's Credit Agreement with GMACC.  Under the terms of the Credit Agreement, Doman was entitled to draw up to $65 million and to use the credit facility for, among other things, general working capital. 

On September 13, 2001 Doman drew Cdn. $15 million under the credit facility and on September 15, 2001, Doman made an interest payment in respect of its outstanding Indenture indebtedness in the sum of U.S. $16,975,000.  Later in September GMACC advised Doman that it was concerned with Doman paying interest out of funds advanced under the credit facility and, contrary to the specific terms of the Credit Agreement, unilaterally capped the facility at Cdn. $15 million (notwithstanding that Doman pays fees in respect of the U.S. $50 million face amount of the facility).  GMACC also refused to fund a $3.5 million draw request and took other unilateral steps that were not contemplated by or allowed under the Credit Agreement.

GMACC's actions and the ongoing unilateral limits imposed by GMACC in respect of the credit facility are contrary to GMACC's obligations to Doman under the Credit Agreement and have resulted in Doman being unable to satisfactorily finance or operate its business.  As a result, Doman has and continues to suffer significant losses and expenses.

In light of your actions to date, Doman has no choice but to seek alternative financing arrangements and end our arrangement with you.

Doman has made arrangements for CIT Business Credit Canada Inc. ("CIT") to provide a replacement credit facility and has substantially settled upon the terms thereof.  In order to complete Doman's facility with CIT, Doman requires that GMACC cooperate with CIT in connec­tion with the discharge of its security.  Doman wishes to deal with the transition on a cooperative basis and shall pay all amounts properly due to GMACC under the Credit Agreement.  However, in light of the circumstances described above Doman does not believe that any early termination fee should be payable.

We enclose a form of discharge and release agreement proposed by CIT, requiring execution by GMACC, and ask that you provide your comments with respect to such document as soon as possible.  In addition, please provide the particulars of the people within GMACC and of legal counsel that shall be dealing with this matter.  Please address your response to Kim Moller of Sangra, Moller, who shall be dealing with the mechanics of the transition on behalf of Doman.

As Doman has an interest payment due on March 15, 2002, time is of the essence in completing the new facility.  We trust that GMACC will provide its full cooperation in this regard.

Thus, the contemplated three year relationship ended in less than one.  [At paragraph 122, the learned judge referred to the termination date as 5th June, 2002.  I assume, although I am not certain, that this was simply a case of Homer nodding.]

[15]            For the alternate financing, the appellants paid the new lender fees of approximately $1 million. 

[16]            The respondent asserted that the Early Termination Fee was due and obtained that sum by refusing to release its security over the appellants' accounts receivable unless that fee was paid.

[17]            By way of relief, the appellants claimed in their statement of claim, among other losses, return of the closing fee, the Early Termination Fee, the unused line fees, the monitoring fee, and the fees incurred in obtaining a new lender.  As I understand it, the appellants do not now assert any right to repayment of the closing fee or the monitoring fee. 

[18]            Before I come to the learned judge's reasons for judgment and the case each side put before us, I pose what I see as the broad issue this appeal raises.  When a revolving credit agreement, under which the borrower pledges its accounts receivable as security, contains what I will call lender's escape hatch terms, is the lender entitled to rely upon those terms, one of which contains a termination fee, when on the evidence the lender either repented of its bargain or, to use a phrase from the old conditional sales cases, "deemed himself insecure" (see A. H. O'Brien, Cyclopaedia of Conveyancing, 8th ed. (Toronto: Canada Law Book, 1942) at p. 1342)?

[19]            Escape hatch clauses are common in mortgages of land.  See, e.g. Schwartzman v. Great-West Life Assurance Co. (1956), 18 W.W.R. (N.S.) 45 (B.C.C.A.). 

[20]            In those rare cases in which a mortgage lender does not have an escape hatch, the borrower cannot compel specific performance of the contract.  See Larios v. Bonany y Gurety (1873), L.R. 5 P.C. 346.  I have always understood the underlying reason for equity's refusal to decree specific performance of a contract to lend is that the borrower must repay what is advanced.  At law, the remedy of the borrower for a breach of such a contract to lend will generally be limited to the difference between the agreed interest rate and what he must pay another lender.  Normally, upon payment of the amount which has been advanced and the interest owing, the borrower, unless there is some lawful limitation in the mortgage upon his right to redeem, is entitled to a decree for redemption.  Thus, he would be able to pledge his land to another lender. 

[21]            But the contract here, as I have already noted, provided that if the contract were terminated in its first year, the borrower would pay the lender not only the principal and interest, but also the other charges to which I have referred, including the Early Termination Fee, which is said by the contract to be a genuine pre-estimate of damage.  I have never seen such a fee in a mortgage of land.  But of course a mortgagee who has observed his obligations under a contract to lend is not obliged to permit early redemption unless the mortgage so provides or a statute permits it.  See Knightsbridge Estates Trust, Ltd. v. Byrne, [1940] 2 All E.R. 401 (H.L.). 

[22]            The essential findings of the learned judge were, first, that although the respondent had, in 2001, repudiated its obligations under the agreement, that is to say refused to perform them further, the appellants, by continuing in their relationship with the respondent, had affirmed the contract, and, secondly, that no relief should be given from the Early Termination Fee.

[23]            On the first point, the appellants submit that the learned judge erred in finding an affirmation.  They say that the repudiation, i.e. refusal to perform, was continuing, and that they were entitled to accept it by the letter of 5th March, 2002.  In answer, the respondent says that the learned judge erred in finding that the impugned conduct of the respondent was repudiatory; to put it another way, it says that upon the true construction of the agreement, the respondent's actions were within the permissions given by it.  On the second point, the appellants submit that the learned judge erred; the respondent, of course, argues to the contrary.

[24]            At this point, it is worth noting that this case, to my mind, raises an important question which this Court has not heretofore addressed and which was not directly addressed by the learned trial judge:  What is the effect, if any, in this jurisdiction of s. 68(2) of the Personal Property Security Act, R.S.B.C. 1996, c. 359?

68 (1)   ...

(2)        All rights, duties or obligations arising under a security agreement, this Act or any other law applicable to security agreements or security interests must be exercised or discharged in good faith and in a commercially reasonable manner.

The Relevant Terms of the Contract

[25]            As the pleadings of the parties cannot be understood without the contract between the parties, I now set out what I perceive to be the relevant terms.  Instead of following the order of the agreement, I set out the covenants addressed in argument and then the definitions material to them:

From Section 2 -

2.         LOANS...

(h)        The aggregate outstanding balance of Loans hereunder shall not at any time exceed the Maximum Revolving Amount, and, the aggregate outstanding balance of Revolving Credit Advances shall not at any time exceed the Formula Amount.  For greater certainty and without prejudice to the foregoing, the Lender shall not have any obligation to make any Revolving Credit Advances to any Borrower at any time that an Overadvance exists.

(i)         Borrowers may apply the proceeds of Revolving Credit Advances for the following purposes only:  (i) to provide for their working capital, (ii) to pay fees and expenses relating to this transaction, and (iii) to purchase, or to loan or otherwise advance funds, directly or indirectly, to DIL for the purposes of enabling DIL to purchase, a portion of the outstanding senior notes of DIL guaranteed by the Borrowers, namely those issued in connection with any one or more of the Indentures.

(j)         Letters of Credit.  Subject to the terms and conditions hereof, Lender shall, in its sole discretion, issue or cause the issuance of standby letters of credit ("Letters of Credit") on behalf of any Borrower; provided, however, that Lender will not be required to issue or cause to be issued any Letters of Credit to the extent that a Default or Event of Default shall have occurred and be continuing or to the extent that the face amount of such Letters of Credit would then cause the sum of (i) the outstanding Revolving Credit Advances plus (ii) the outstanding Letters of Credit (with the requested Letter of Credit being deemed to be outstanding for purposes of this calculation) to exceed the lesser of (x) the Maximum Revolving Amount or (y) the Formula Amount.  Notwithstanding anything to the contrary contained herein, the maximum amount of outstanding Letters of Credit shall not exceed five million Dollars ($5,000,000) or the Equivalent Amount in Canadian dollars in the aggregate at any time.  All disbursements or payments related to Letters of Credit shall be deemed to be Revolving Credit Advances and shall bear interest at the Revolving Interest Rate; Letters of Credit that have not been drawn upon shall not bear interest.  Letters of Credit shall be subject to the terms and conditions set forth in the Letter of Credit Agreement attached hereto as Schedule 2(j).

From Section 1 -

"Receivables Availability" means the amount of Revolving Credit Advances against Eligible Receivables which Lender may, from time to time during the Term, make available to any Borrower equal to eighty-five percent (85%) ("Receivables Advance Rate") of the aggregate Net Face Amount of Borrowers' Eligible Receivables. 

"Availability Block" means an amount equal to seven million five hundred thousand Dollars ($7,500,000) or the Equivalent Amount in Canadian dollars.  

"Maximum Revolving Amount" means the amount equal to the lesser of:

(A)  the Maximum Loan Amount or the Equivalent Amount in Canadian dollars, or any combination thereof, or

(B)  the maximum amount of Indebtedness at all times permitted to be incurred by the Borrower in connection herewith (such permission to be in form and substance satisfactory to Lender, in its sole discretion) without violating any one or more of the Indentures.  Without limiting the generality of the foregoing, such maximum amount shall be limited to sixty-five million Canadian dollars (CDN$65,000,000) or the Equivalent Amount in Dollar[s] until such time as the Lender determines in its sole discretion that the Indenture dated November 13, 1997 permits the Borrower to incur Indebtedness in connection herewith in an amount greater than sixty-five million Canadian dollars (CDN$65,000,000).

From Section 5(b)(ii)

(b)        Fees.

* * *

(ii)        Unused Line Fee.  In the event the average closing daily unpaid balances of all Revolving Credit Advances is less than the Maximum Loan Amount, Borrowers shall pay to Lender a fee at a rate per annum equal to three-eighths of one percent (0.375%) on the amount by which the Maximum Loan Amount exceeds such average daily unpaid balances.  Such fee shall be calculated on the basis of a year of 360 days and actual days elapsed, and shall be charged to the loan account referred to in Section 2(f) on the first day of each month with respect to the prior month.  For purposes of calculating such fee, the Revolving Credit Advances outstanding in Canadian dollars on each day will be deemed to be outstanding in the Equivalent Amount thereof in Dollars as computed using Lender's spot buying rate in Toronto as at approximately 12:00 noon (local time) as in effect on the last day of the relevant month.

From Section 12(q) – 

12.       ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS.  Each Obligor represents and warrants (each of which such representations and warranties shall be deemed repeated upon the making of a request for a Revolving Credit Advance and made as of the time of each Revolving Credit Advance made hereunder), and covenants that: 

* * *

(q)        all statements made in DIL's "Annual Statutory Report for 2000", as updated by DIL's March 31, 2001 Quarterly Report, which has been delivered to Lender are and continue to be true in all material respects as at the date thereof and there has been no material adverse change in any Obligor's financial condition as reflected in such Quarterly Report since the date thereof and such Annual Statutory Report as updated by such Quarterly Report does not fail to disclose any fact or facts which might have a Material Adverse Effect;

From Section 17 -

17.       TERM OF AGREEMENT.

(a)        Lender may terminate this Agreement at any time without notice upon an Event of Default.  If Lender so terminates this Agreement, Borrowers shall pay to Lender forthwith, in full, all Obligations, including, without limitation, the Early Termination Fee, unpaid monitoring fees then owing, unpaid unused line fees then owing and any other fees then owing.

(b)        Borrowers may terminate this Agreement at any time upon sixty (60) days prior written notice and payment in full of the Obligations including, without limitation, the Early Termination Fee, unpaid monitoring fees then owing, unpaid unused line fees then owing and any other fees then owing.

* * *

(d)        In view of the impracticality and extreme difficulty of ascertaining actual damages, and by mutual agreement of the parties as to the reasonable calculation of Lender's lost profits, the early termination fee ("Early Termination Fee"), which shall be an obligation of and payable by Borrowers, shall be equal to:

(i)         one million Dollars ($1,000,000) if such termination occurs after the date hereof, but on or prior to the first anniversary of the Closing Date;

(ii)        five hundred thousand Dollars ($500,000) if such termination occurs after the first anniversary of the Closing Date, but on or prior to the second anniversary of the Closing Date; or

(iii)       if such termination occurs after the second anniversary of the Closing Date, but prior to the third anniversary of the Closing Date or prior to the end of any renewal Term, as the case may be, an amount equal to the quotient derived from dividing (A) the product of two hundred and fifty thousand Dollars ($250,000) multiplied by the number of calendar months included in the period commencing on the first day of the calendar month in which the termination occurs and ending on the last day of the calendar month in which such third anniversary or end of renewal Term would otherwise occur, by (B) twelve (12).

No Early Termination Fee will be payable if the Obligations are repaid in full from the proceeds of debt or equity raised in the recognized North American public financial markets.

From Section 1 -

"Event of Default" means the occurrence of any of the events set forth in Section 18.

From Section 18 -

18.       EVENTS OF DEFAULT.  The occurrence of any of the following shall constitute an Event of Default: 

* * *

(h)        any change in any Obligor's condition or affairs (financial or otherwise) which has a Material Adverse Effect;

From Section 1 -

"Material Adverse Effect" means a material adverse effect, as determined by Lender in its sole discretion, on, as the case may be, (a) the condition (financial or otherwise), operations, assets, property, business or prospects of DIL on a consolidated basis, (b) Borrower's ability to pay the Obligations in accordance with the terms thereof, (c) the Collateral, the Liens on the Collateral or the priority of any such Liens, or (d) the practical realization of the benefits of Lender's rights and remedies under this Agreement and/or the Ancillary Agreements.

From Sections 19, 20 and 21 –

19.       REMEDIES.  Upon the occurrence of an Event of Default pursuant to Section 18 (j), (k) or (l) herein, all Obligations shall be immediately due and payable and this Agreement shall be deemed terminated; upon the occurrence and continuation of any other of the Events of Default, Lender shall have the right to demand repayment in full of all Obligations, whether or not otherwise due and/or to terminate this Agreement without advance notice.  Notwithstanding any such termination, until all Obligations have been fully satisfied, Lender shall retain its Lien in all Collateral as well as all other rights and recourses provided for hereunder and/or under any Ancillary Agreement.  Lender shall have, in addition to all other rights provided herein and/or any Ancillary Agreement, the rights and remedies of a secured party under the Personal Property Security Act of British Columbia, and under other applicable law, all other legal and equitable rights to which Lender may be entitled. 

[Emphasis mine.]

20.       CONDITIONS PRECEDENT

* * *

(b)        CONDITIONS TO EACH REVOLVING CREDIT ADVANCE.  The agreement of Lender to make any Revolving Credit Advance requested to be made on any date (including, without limitation, the initial Revolving Credit Advance), is subject to the satisfaction of the following conditions precedent as of the date such Revolving Credit Advance is made:

(i)         Representations and Warranties.  Each of the representations and warranties made by any Obligor in or pursuant to this Agreement, any Ancillary Agreements and any related agreements to which it is a party, and each of the representations and warranties contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement any Ancillary Agreements or any related agreement shall be true and correct in all material respects on and as of such date as if made on and as of such date;

(ii)        No Default.  No Event of Default or Default shall have occurred and be continuing on such date, or would exist after giving effect to the Revolving Credit Advances requested to be made, on such date; provided, however that Lender, in its sole discretion, may continue to make Revolving Credit Advances notwithstanding the existence of an Event of Default or Default and that any Revolving Credit Advances so made shall not be deemed a waiver of any such Event of Default or Default; and

(iii)       Maximum Revolving Credit Advances.  In the case of any Revolving Credit Advances requested to be made, after giving effect thereto, the aggregate Revolving Credit Advances shall not exceed the maximum amount of Revolving Credit Advances permitted under Section 2 hereof.

Each request for a Revolving Credit Advance by Borrowing Agent hereunder shall constitute a representation and warranty by each Obligor as of the date of such Revolving Credit Advance that the conditions contained in this subsection shall have been satisfied.

21.       WAIVER; CUMULATIVE REMEDIES.  Failure by Lender to exercise any right, remedy or option under this Agreement, any Ancillary Agreements or any supplement hereto or thereto or any other agreement between any Obligor and Lender or delay by Lender in exercising the same, will not operate as a waiver; no waiver by Lender will be effective unless it is in writing and then only to the extent specifically stated.  Lender's rights and remedies under this Agreement or any Ancillary Agreements will be cumulative and not exclusive of any other right or remedy which Lender may have.

From Section 25 - 

25.       DISCRETION OF LENDER.  For greater certainty, all discretionary rights and powers of Lender under this Agreement and the Ancillary Agreements shall at all times be exercised in good faith and, where required by applicable law, such rights and powers shall also be exercised in a commercially reasonable manner.

The Pleadings

[26]            By their amended statement of claim, the appellants pleaded, in part:

7.         By an agreement in writing between Doman and the Defendant made as of June 5, 2001 (the "Credit Agreement") the parties agreed, inter alia, as follows:

a)         pursuant to section 2 of the Credit Agreement that the Defendant would make available to Doman a line of revolving credit in a maximum amount calculated according to a formula but not to exceed $65,000,000 (the "Maximum Loan Amount"), provided that, in certain circumstances, such amount could be increased to US$50,000,000;

b)         pursuant to section 25 of the Credit Agreement that the Defendant would exercise all its discretionary rights and powers under the Credit Agreement in good faith and in a commercially reasonable manner;

c)         that in consideration of the Defendant making the line of revolving credit available to Doman, Doman would pay the Defendant, inter alia, the following amounts:

i)          interest on credit advanced at specified rates;

ii)         a commitment fee of US$190,000 (the "Commitment Fee");

iii)         a closing fee of US$385,000 on the closing date of the Credit Agreement (the "Closing Fee");

iv)        an unused line fee at a rate per annum of 0.375% on the unused portion of the Maximum Loan Amount charged monthly (the "Unused Line Fee");

v)         a monitoring fee of US$100,000 payable on the closing date of the Credit Agreement and on every anniversary thereof (the "Monitoring Fee");

vi)        all of the Defendant's out-of-pocket costs and expenses in connection with the preparation, execution and delivery of the Credit Agreement, including legal costs; and

vii)        all of the Defendant's out-of-pocket costs and expenses in connection with the inspection of Doman's collateral, books and records, including audit fees; and

d)         pursuant to section 17(d) of the Credit Agreement that if Doman terminated the Credit Agreement within the first year of the term thereof, then Doman would pay the Defendant an early termination fee of US$1,000,000 (the "Early Termination Fee"). 

* * *

8C.      At some point prior to September 26, 2001, the date of which is known only to the Defendant, the Defendant unilaterally and arbitrarily increased the Availability Block from US$7,500,000 (which at the prevailing exchange rate of approximately 1.55 was roughly CDN$11,600,000), to CDN$13,534,000.  This had the effect of reducing the Advances which the Plaintiffs would be entitled to draw under the Credit Agreement by approximately $2,000,000.  At no time did the Defendant advise the Plaintiffs of its rationale for the $2,000,000 increase in the Availability Block.  In any event, the Defendant was not permitted to increase the Availability Block.

9.         On or about September 26 and 27, 2001, the Defendant, in fundamental breach of the Credit Agreement:

a)         unilaterally and arbitrarily increased the "Availability Block" to $20,000,000, which alteration had the effect of reducing the credit available under the Credit Agreement by an additional amount, over and above that stated in paragraph 8C, of approximately $8,000,000;

b)         arbitrarily capped the Maximum Loan Amount at $15,000,000;

c)         advised the Plaintiffs that no Advances would be permitted under the Loan Agreement until, at the earliest, representatives from the Defendant's Toronto office attended in Vancouver to meet with the Plaintiffs, which meeting was scheduled for October 2, 2001; and

d)         refused to advance $3,500,000 requested by Doman pursuant to the Credit Agreement.

* * *

9C.      On October 10, 2001, the Defendant informed the Plaintiffs that if the Plaintiffs required Advances of more than $15,000,000 the prior approval of the Defendant's Credit Committee in New York would first have to be obtained.  This constituted a unilateral cap on the loans facility at $15,000,000.

9D.      The Defendant's unilateral and arbitrary imposition of a $15,000,000 cap on the Advances constituted a fundamental breach of contract.  The Defendant never resiled from that breach of contract.  This fundamental breach of contract continued at all material times up until the termination of the Credit Agreement.

10.       Despite unilaterally capping the credit facility at CDN$15,000,000, the Defendant at all times charged the Unused Line Fee as if the Plaintiffs were entitled to Advances up to US$50,000,000.

* * *

12.       The Defendant's fundamental breaches of contract amounted to an ongoing repudiation of the Credit Agreement in that they demonstrated that the Defendant no longer treated itself as, or intended to be, bound by the terms thereof and deprived Doman of a substantial part of the benefit to which it was entitled under the Credit Agreement, namely a revolving line of credit with a potential Maximum Loan Amount of $65,000,000.

* * *

13.       Throughout the fall of 2001 and January and February, 2002, Doman's financial position was such that loss of its entire line of credit under the Credit Agreement would have been catastrophic unless there was alternative financing in place.  Accordingly, as the Defendant well knew, Doman had no choice but to postpone accepting the Defendant's repudiation of the Credit Agreement, such as to put an immediate end to the Credit Agreement, pending arranging alternate financing.

14.       As soon as it was able to confirm alternate financing, Doman, by letter dated March 5, 2002, gave notice to the Defendant that it had arranged for alternate financing (the "Alternate Financing") and that it was accepting the Defendant's repudiation of the Credit Agreement.

* * *

17D.    In the further alternative, the Early Termination Fee is a penalty.  Doman requests relief from such penalty pursuant to Section 24 of the Law and Equity Act, RSBC 1996, c. 253.

18.       As anticipated and intended by the Defendant, Doman was coerced and compelled to pay the Early Termination Fee to the Defendant as Doman's business would be seriously compromised without an adequate operating line of credit, which could not be obtained while the Defendant withheld its consent to be discharged as Doman's secured creditor.

19.       Doman paid the Defendant the Early Termination Fee under protest to attempt to mitigate its damages caused by the Defendant's breach of contract and as a result of the Defendant's wrongful assertion of its entitlement.

20.       By taking advantage of Doman's vulnerable position to compel Doman to pay the Early Termination Fee when it was not entitled to such fee, the Defendant has unjustly enriched itself at Doman's expense.

* * *

23.       As Doman's banker and primary source of operating capital, the Defendant owed Doman the duties of a fiduciary.

24.       Further, section 68(2) of the Personal Property Security Act, RS[B]C imposed a duty on the Defendant to exercise its rights under the Credit Agreement in good faith and in a commercially reasonable manner.

25.       By wrongfully refusing to provide credit as required by the Credit Agreement when it knew that Doman relied on that credit for operating capital and by wrongfully demanding that Doman pay the Early Termination Fee before it would agree to be discharged as Doman's secured creditor, the Defendant has acted in an unjust, inequitable and unreasonable manner and has shown callous disregard for Doman's interests and legitimate expectations under the Credit Agreement.

26.       The Defendant's conduct towards Doman was harsh and high handed and constituted a breach of the Defendant's fiduciary duties and duty to act in good faith and in a commercially reasonable manner which, in all of the circumstances, justifies an award of punitive damages.

[27]            The respondent, in its amended statement of defence delivered 30th March, 2004, pleaded essentially the terms of the agreement which I have already set out, and then this:

7.         In September, 2001, the defendant made an assessment of the financial condition of the Company (on a consolidated basis), based on information provided by the plaintiffs.  It noted that lumber and pulp prices were weak; the Company had taken extensive down time on its sawmills and reduced inventories; the Company's pulp mills were currently closed; gross margins had fallen dramatically; and the Company's earnings had fallen well short of debt servicing requirements.  The Company had suffered a CDN $87 million decline in its working capital since its fiscal year end, and a CDN $44 million decline in its cash holdings.  The Company's cash flow was well under budget, and the trends were negative.  The defendant determined that the risk associated with its loans had increased.

* * *

8.         The deterioration in the financial condition of the Company and the Obligors constituted a change in the Obligors' financial condition or affairs which had a Material Adverse Effect pursuant to section 18(h) of the Agreement.  This deterioration constituted both a Default and an Event of Default under the Agreement.

8A.       This deterioration in the financial condition of the Company and the Obligors continued from the summer of 2001 to the termination of the Agreement in the spring of 2002.  Accordingly, the plaintiffs were not entitled to require, and the defendant was not obliged to provide, a Revolving Credit Advance under the Agreement during this period of time.

8B.       The plaintiffs delivered to the defendant financial statements for June and July, 2001; for the quarter ended September 30, 2001; for October, November and December, 2001; for January, 2002 and draft financial statements for the fiscal year 2001.  These financial statements were accompanied by certificates of the plaintiffs' Chief Financial Officer stating that, based on an examination sufficient to enable him to make an informed statement, no Event of Default or Default existed.  The defendants say that, contrary to the representations of the Obligors pursuant to section 12(i), there had been, and continued to be, during the period referred to in para. 8A, material adverse changes in the financial condition of Doman Industries Limited on a consolidated basis as reflected in these financial statements.  The existence of such material adverse changes constituted Events of Default under section 18(e) of the Agreement.

8C.      The defendant says that, contrary to the representations of the Obligors pursuant to section 12(q), there had been, and continued to be, during the period referred to in para. 8A, material adverse changes in the financial condition of Doman Industries Limited on a consolidated basis when compared with the statements made, and the financial information contained, in the Annual Statutory Report for 2000 of Doman Industries Limited, as updated by the March 31, 2001 Quarterly Report of Doman Industries Limited.  The existence of such material adverse changes constituted Events of Default under section 18(e) of the Agreement.

8D.      The defendant says that the certificates referred to in paragraph 8B herein, in each case signed by Phillip G. Hosier, were false or misleading in a material respect by certifying that no Event of Default or Default existed when in fact an Event of Default or Default was then existing, at the time of each such certificate, and that Phillip G. Hosier knew, or ought to have known, that an Event of Default or Default did exist at the time of each certification by him.  This constituted further Events of Default under section 18(e) of the Agreement.

* * *

The defendant performed its obligations under the Agreement

12.       At all material times, the defendant performed its obligations under the Agreement in good faith and in a commercially reasonable manner.

13.       The deterioration in the financial condition of the Company in the second half of 2001 and the first two months of 2002 constituted a Default, an Event of Default or breach of the condition precedent in section 20(b)(i) under the Agreement, relieving the defendant of any obligation to advance further funds to the Borrowers.  The Agreement was not brought to an end.  The defendant continued, in its discretion, to advance funds subject to such limits as it considered were proper and necessary to protect its position.

* * *

The plaintiffs' conduct

21.       In the alternative, by their conduct the plaintiffs affirmed the Agreement with full knowledge of the defendant's conduct which they now say constituted a repudiation of the Agreement.  Particulars of the plaintiffs' conduct affirming the Agreement are as follows:

(a)        From September, 2001 to April, 2002, the Borrowers drew upon the revolving credit facility contemplated under the Agreement, receiving significant sums from the defendant.

(b)        On or about October 23, 2001, the Borrowers requested and obtained from the defendant a letter of credit having a value of CDN $7,815,325.

(c)        On January 23, 2002, while the balance outstanding under the letter of credit issued by the defendant was CDN $6,371,132, the Borrowers requested and obtained from the defendant a further letter of credit in the amount of US $4 million.

(d)        While taking full advantage of the funds advanced, and letters of credit provided by the defendant, the plaintiffs failed to advise the defendant prior to March 5, 2002 that they considered that the defendant had repudiated the Agreement or that they considered themselves entitled to resile from the Agreement by reason of the defendant's conduct.

[28]            To this, the appellants, in their amended reply delivered 17th February 2005, pleaded, in part:

3.         The Plaintiffs admit the facts stated in paragraph 7 of the Statement of Defence except for the final sentence thereof.  In respect to the final sentence of paragraph 7 of the Statement of Defence the Plaintiffs deny that the Defendant determined that the risk associated with its loans had increased.  In fact the Defendant was at all times amply and fully secured for all Advances that were made or could have been requested under the Credit Agreement because of the Defendant's first charge on the Plaintiffs' accounts receivables.  At all material times the eligible receivables, being receivables with respect to which there was no doubt as to collectability, vastly exceeded any Advances which had been made or could have been requested under the Credit Agreement.  Further, all payments made by the Plaintiffs' customers were paid into bank accounts controlled by the Defendant.  Over 90% of the Plaintiffs' accounts receivable were regularly paid within 30 days.  Thus, any Advances which were made or could have been requested under the Credit Agreement would automatically be liquidated within 30 days, regardless of what financial difficulties the Plaintiffs encountered.  Therefore, at no time had the risks associated with the Defendant's loans ever increased.  The Defendant was never at risk of not being repaid 100% of any and all Advances which had been made or which could have been requested under the Credit Agreement.

3A.       In further response to paragraph 7 of the Statement of Defence, the Plaintiff says:

(a)        the assessment made by the Defendant of the Plaintiff's financial condition in September 2001 was based on a comparison between the Plaintiff's financial statements as of December 31, 2000 and as of July 30, 2001;

(b)        The Plaintiff entered into the loan agreement after having received the Plaintiff's financial statements for the period ending March 31, 2001 and after the April 2001 financial statements were available;

(c)        a substantial part of the $87 million dollar decline in working capital and $44 million decline in cash holdings which occurred in the period January 1, 2000 to July 31, 2001 had in fact occurred and were noted in the Plaintiff's financial statements of March 31, 2001, and in the April 2001 financial statements; as had many of the other conditions referred to in paragraph 7 of the Statement of Defence.

(d)        It was not open to the Defendant to determine that the risk associated with its loans had "increased" in respect of changes in the Plaintiff's financial condition which had been reported in the March 31, 2001 and April 2001 financial statements and which the Plaintiff was fully aware of prior to prior to [sic] the entering into the Agreement.

3B.       The Plaintiffs deny the allegations in paragraphs 8, 8A, 8B, 8C, 8D, 8E, 8F and 8G of the Statement of Defence.

* * *

11.       At no time did the Defendant make a determination that a Material Adverse Effect had occurred. In the absence of any such determination no Event of Default occurred.

12.       Further, if the Defendant made a valid determination that the Plaintiffs' deteriorating financial condition constituted a Material Adverse Effect, thereby purporting to cause an Event of Default to occur, it is an express or implied term of the Credit Agreement that the Defendant would promptly notify the Plaintiffs of such determination.

13.       Further, clause 25 of the Credit Agreement provides that all the discretionary rights and powers of the Defendants shall be exercised in good faith and in a commercially reasonable manner.  Both good faith and commercial reasonableness required the Defendant to advise the Plaintiff if the Defendant determined that a Material Adverse Effect had occurred.

14.       Having failed to give the Plaintiffs notice, at any time, of any determination that a Material Adverse Effect occurred, the Defendant cannot now claim that such determination was ever made by it.

15.       The decision by the Defendant not to determine that a Material Adverse Effect had occurred was a deliberate and conscious decision motivated by the Defendant's desire to keep the Credit Agreement in good standing so as to claim fees under the Credit Agreement, including the standby fees payable on US$50,000,000.

The Reasons for Judgment

[29]            As the learned judge's reasons are some 79 pages long, I can do no more than attempt a précis.

[30]            From pages 3-41 (paras. 3-115), the learned judge gave an account of the dealings between the parties up to the letter of 5th March, 2002. 

[31]            She then, under the heading "Issues", said, "The central issue in this case is GMAC's alleged fundamental breach of the agreement."  Having set out paragraphs 9, 27, 28 and 29 of the amended statement of claim, she went on:

[117]    Other issues to be decided are:

(a)        did Doman agree to the $15 million cap?

(b)        did Doman delay in accepting GMAC's alleged repudiation of the agreement?; and

(c)        was Doman's deteriorating financial condition material to GMAC?

[32]            She then addressed, in paragraphs 120-179, repudiation.

[33]            Before coming to her findings under that head, I think it should be noted that upon the pleas of paragraphs 8 and 8A of the respondent's amended statement of defence, the learned judge made these findings:

1.         "GMAC was entitled under the agreement to consider the cumulative effect of Doman's financial condition, including information it received prior to June 5, 2001." [para. 140]

2.         "Doman's financial condition was in steep decline by September 24, 2001."  [para. 148]  "There can be no doubt that these financial results were material and adverse to Doman." [para. 150]  It may be that the learned judge here misspoke and meant, instead, to say that they were adverse to GMAC.

3.         That, on those facts, it was within the discretion of the respondent to determine that there was a Material Adverse Effect. [para. 151]

4.         On a proper construction of the agreement, no formal "determination" or notice is required to establish the existence of any change in Doman's condition. [paras. 155, 160]

5.         The appellants did not deliberately mislead the respondent.  In other words, the learned judge rejected the plea in paragraph 8D of the amended statement of defence. [paras. 165-167]

6.         There having been an Event of Default, the respondent had the remedies set out in article 19, but those remedies did not include "capping" the loan amount. [paras. 177-179]

[34]            Next, the judge turned to the question of "Did Doman Affirm the Repudiation?"

[35]            I take the learned judge, by this question, to have asked whether Doman, by continuing to perform, affirmed the contract, i.e. did not accept the repudiation.  The learned judge answered that question "yes", citing Morrison-Knudsen Co., Inc. v. British Columbia Hydro and Power Authority (1978), 85 D.L.R. (3d) 186 (B.C.C.A.) at 227, and The Kanchenjunga, [1990] 1 Lloyd's Rep. 391 (H.L.) at 398?99.  The learned judge said:

[193]  Doman voluntarily agreed to limit its draw downs to $15 million.  The loan committee acted on Doman's agreement by providing advances when it was not contractually obliged to do so, given Doman's continuing deteriorating financial condition. 

* * *

[195]  It is, of course, significant that Doman never requested (either before or after the repudiation) advances in excess of the unlawful cap.  The evidence is overwhelming that it did not need to draw down amounts in excess of the cap.  Although Doman asserted that it "lived within the cap" and expressed fear that GMAC would terminate the facility if it requested advances in excess of the cap, the evidence does not support such a conclusion.  The October 2, 2001 meeting was by all accounts cordial and productive.  At the very least, the parties agreed that any advances over $15 million would first be discussed with GMAC and time given to it to consider its position.  That never occurred, and it would be mere speculation for me to assume that such requests would have been denied. 

[196]  In these circumstances, Doman must be found to have affirmed the contract by taking benefits under it while in the full knowledge of the repudiation.  Accordingly, Doman has failed to prove a breach of the contract entitling it to an award of damages. 

The Issues as Framed by the Parties

[36]            The appellants, in their factum, allege these errors:

I.          The judge erred in failing to appreciate that GMAC's insistence on the $15,000,000 cap was a continuing repudiation of the contract, such that Doman was entitled to accept that repudiation and terminate the contract so long as the repudiation continued.  But for this error, Doman's claim would have succeeded.

II.          Should it be necessary to this appeal, Doman submits the judge also erred in finding Doman in default.  There were three independent errors which culminated in the finding of default.  The judge erred:

1)         In failing to apply the objective test of commercial reasonableness for determining materiality;

2)         In finding GMAC could put Doman in default without considering whether there had been a material adverse change subsequent to the Credit Agreement.

3)         In finding no "determination" of MAE was required, even though the Credit Agreement clearly defined an MAE to exist only when such was "determined in the sole discretion of the lender."

III.         The judge also erred in failing to find that GMAC's increase in the AB from US$7,500,000 to CDN$20,000,000 was a fundamental breach of the contract.

IV.        The judge erred in failing to find the US$1,000,000 termination fee was a penalty.

[37]            For its part, the respondent states the issues on the appeal thus:

IA.        After October 2, 2001, the "$15M cap" was not imposed by GMAC and did not constitute a repudiation of the Credit Agreement;

IB.        Alternatively, even if the "$15M cap" was a repudiation by GMAC, it was not a continuing repudiation;

IC.        In any event, there was a continuing affirmation of the Credit Agreement by Doman up to, and including, the purported acceptance of the repudiation on March 5, 2002.

II.          Doman was in default under the Credit Agreement as at September 24, 2001 and thereafter.  Specifically:

(a)        There was no failure of the trial judge to apply the proper test of "materiality";

(b)        Default is determined objectively pursuant to the terms of the Credit Agreement.  There was no exercise of discretion by GMAC nor did GMAC "put Doman into default";

(c)        GMAC was not required to make a "determination" of a material adverse effect ("MAE");

(d)        Doman was in default as at September 24, 2001 and continued to be in default on March 5, 2002. 

III.         The alleged increase in the Availability Block from $7.5M US to $20M Canadian did not constitute a fundamental breach of the contract.

IV.        The $1M US termination fee was not a penalty.

[38]            In its opening statement, the respondent summed up its position in these terms:

1.         Doman’s claim is fundamentally misconceived.  Doman alleged that GMAC fundamentally breached the terms of the Credit Agreement and denied Doman substantially the whole of the benefit of that contract.

2.         Central to Doman’s position in this litigation is the assertion that because GMAC’s advances were always fully secured by high quality accounts receivable, the deterioration of Doman’s financial position could not be material and adverse.  As Doman stated in its opening at trial: “Neither bankruptcy nor CCAA would effect the defendant’s security.”  This position is in the teeth of the terms of the Credit Agreement.

3.         Apart from the denial of credit for a few days during a standstill period in late September 2001, pending a meeting between senior executives of the two companies scheduled for October 2, 2001, there was no denial of any request by Doman to draw down credit under the contract. 

4.         Doman’s financial affairs had deteriorated substantially in the summer of 2001.  Its operations were generating only a fraction of the funds required to meet its interest obligations of approximately $100M annually.  The GMAC Credit Committee was alarmed when it learned of Doman’s financial condition on September 24, 2001 and dispatched senior executives to meet with Doman executives.  At the meeting of October 2, 2001, Rick Doman, the CEO of Doman, volunteered to limit Doman’s requests for credit under the credit facility to $15M per year and to give advance notice of any requests in excess of that amount which would be subject to approved [sic] by GMAC.  Between the date of that meeting and March 5, 2002 when Doman terminated the Credit Agreement, there was not one single request by Doman for credit in excess of $15M.  Every request made by it for credit was granted.  Nor did Doman assert, prior to March 5, 2002, that GMAC had repudiated the Credit Agreement.

5.         Doman’s operations were not restricted in any fashion by reason of the voluntary agreement.

6.         Notwithstanding these facts, Doman asserts that GMAC imposed a $15M cap restricting Doman’s ability to draw down credit and thereby repudiated the Credit Agreement.  Doman places considerable reliance on its financial condition as at June 5, 2001, when the contract was entered into and as of September 24, 2001, the date of the GMAC loan committee meeting.  Much emphasis is also placed by it on what GMAC allegedly knew or decided on those dates.  Although GMAC contends that Doman’s submissions are without merit, their significance must be assessed in light of Doman’s acceptance of the alleged repudiation on March 5, 2002, approximately eight months before it slid inexorably into CCAA status.  As Doman states at para. 146 of its factum:

The imposition of the $15,000,000 cap was a repudiation of the contract, and the repudiation continued until March 5.  Thus Doman was entitled to elect to terminate the contract on March 5.

7.         GMAC submits that Doman’s financial condition as at September 24, 2001 was such that it was in default under the terms of the Credit Agreement.  This default continued through to March 5, 2002.  Doman does not address in its factum the deterioration of its financial condition through to March 5, 2002. 

8.         In its factum at para. 87, Doman states:

Because Doman did utilize the facility in January, it was open to the court to find that Doman at that point elected to affirm the agreement.  … But GMAC never resiled from the cap.  GMAC’s repudiation continued every day the agreement existed.  Each day gave Doman a fresh right of election, a right Doman exercised on March 5. This is the point the judge wholly misses. 

9.         Doman utilized the credit facility not only in January 2002 but every day through to, and including, March 5, 2002 when it purported to accept the alleged repudiation of GMAC. Letters of credit issued by GMAC at Doman’s request (approximately $13M) remained outstand­ing on each and every day in March 2002 through to March 16, 2002. 

10.       Although GMAC disputes that it repudiated the Credit Agreement, on each and every day of the alleged repudiation there was an affirmation of the contract by Doman by taking the benefit of the contract. 

11.       It is submitted that the dismal financial condition of Doman in September 2001 through to Doman’s termination of the Credit Agreement on March 5, 2002 would have supported a decision by GMAC to refuse all credit requests because the pre-conditions under the agreement for Doman to obtain credit were not met. However, GMAC did not act on its strict legal rights but reached a practical accommodation with Doman to meet its credit needs. GMAC acted in a commercially responsible manner in circumstances where Doman was staggering under the twin burdens of a $1 billion debt and the imposition of the softwood lumber duties imposed by the U.S. Government. In the end, it was Doman that terminated the Credit Agreement, not because GMAC allegedly capped the facility, but due to Doman’s requirement for a credit facility which contained a formula supporting credit advances on the basis of the value of its inventory, in addition to accounts receivable.

Discussion

[39]            I see this case differently from the parties, from the learned trial judge, and from my colleagues. 

[40]            I remarked earlier that the learned trial judge did not directly address s. 68(2) of the Personal Property Security Act.  It may well be that having chosen to stand their ground on repudiation, the appellants did not make much of it.

[41]            "Good faith" is a phrase to which different meanings may be ascribed according to the context in which the phrase is used.  It is a concept rooted in equity.

[42]            Thus, in Central Estates (Belgravia) Ltd. v. Woolgar, [1971] 3 All E.R. 647 (C.A.), where what was in issue was a statutory provision giving a tenant a claim to buy the freehold from his landlord if the claim was "made in good faith", we find this, at 649:

            How then are we to decide whether the tenant's claim to buy the freehold is made in good faith, or not?  The words 'in good faith' are often used in statutes but rarely defined.  A good instance is the Larceny Act 1916, which speaks of 'a claim of right made in good faith', but does not tell us what 'good faith' means.  Other instances come readily to mind.  The Limitation Act 1939 speaks of cases when a right of action is concealed by 'fraud', but does not define what is meant by 'fraud' in this context.  It is left to the courts to work it out from case to case:  see Archer v. Moss, Applegate v. Moss [[1971] 1 All E.R. 747, [1971] 1 Q.B. 406].  In all such cases, when a word or phrase goes undefined, the judges have to work out for themselves the meaning of it, doing the best they can to interpret the will of the legislature in regard to it.  That is the principle I stated in Seaford Court Estates Ltd. v. Asher [[1949] 2 All E.R. 155 at 164, [1949] 2 K.B. 481 at 499].  To my mind under this Act a claim is made 'in good faith' when it is made honestly and with no ulterior motive.  It must be made by the tenant honestly in the belief that he has a lawful right to acquire the freehold or an extended lease, and it must be made without any ulterior motive, such as to avoid the just consequences of his own misdeeds or failures.  If the landlord asserts that the tenant's claim is not made in good faith, the burden is on the landlord to satisfy the court that the tenant, in making the claim, was acting dishonestly or with an ulterior motive.

See also Sanagan's Encyclopaedia of Words and Phrases, Legal Maxims, 5th ed., looseleaf (Toronto: Thomson Carswell, 2005-), G-28, et seq.

[43]            Whatever meaning one ascribes to the phrase in the particular context, at issue is a state of mind.  The "good faith" of a corporation can only be the "good faith" of those who act on its behalf, for an artificial person has no mind.  Thus, the events of this case require a consideration of the state of mind of the members of the Credit Committee who, having first decided to make the loan, approximately three and one-half months later decided to cap the loan at an amount somewhat less than one-third of the original agreed loan amount. 

[44]            If one accepts the accuracy of the evidence given on behalf of the respondent, the moving force in the decision to "cap" was Mr. Joe Grimaldi, who did not testify as to what caused him to give the instruction.

[45]            As I understand it, at the time of this litigation, Mr. Grimaldi was no longer employed by the respondent but that in itself is no reason for the absence of his evidence. 

[46]            In my opinion, the inference which the learned judge ought to have drawn is that Mr. Grimaldi, and therefore the respondent, on the advice of Mr. Dyer, who was not employed by the respondent at the time of the bargain, repented of the bargain.

[47]            Thus, the respondent wanted the benefit of the bargain – the standby fee and the Early Termination Fee – but not the burden of risk that advancing the full amount would entail.  In and of itself, repenting of one's bargain does not at law disentitle a party from taking advantage of an escape hatch given him by his contract.  But if, in Mr. Grimaldi's mind, there was a Material Adverse Effect entitling the respondent to invoke its contractual remedies, it ought to have communicated that fact to the appellants.  The learned judge found no obligation in the contract to do so, but it does seem to me that there can be no good faith in remaining silent in such circumstances.

[48]            Whether the learned judge was invited to consider, in this context, Reliance Car Facilities, Ltd. v. Roding Motors, [1952] 1 All E.R. 1355 (Eng. C.A.), I do not know.

[49]            I need not decide whether that authority should be applied to a loan agreement such as this, but it at least does indicate that silence about one's state of mind is not always the right course.  Whatever else may be the meaning of "good faith" in the statute, surely candour is an essential aspect of it. 

[50]            When the respondent took, in late September, the stance it did, it was, in substance, saying to itself, "We have the right in the events which have happened to declare a Material Adverse Effect, but we are not going to do so.  But although we are not going to do so, we are instead going to simply say to the Borrower, all we will advance is $15 million and if the Borrower accepts that, then that will be fine, and if it does not, then perhaps we will do something else.", and thereupon said to the borrower, "$15 million, take it or leave it."

[51]            For their part, the appellants, who had nothing other than their accounts receivable to offer as security, were placed in a position where they could do nothing but submit.  Accepting, as I must, the learning judge's finding that the appellants said they could "live with" the "cap" does not change the fact that the appellants were placed in an invidious position.

[52]            To fit this reality into the classic common law doctrine of, on the one side, refusal, whether by words or conduct, to perform future obligations, and, on the other side, non-acceptance (a repudiation not accepted is a thing "writ in water") by continuing to perform – what some of the cases call affirmation of the contract – is, to my mind, artificial in the extreme.

[53]            There is a profound difference between, say, contracts for the purchase and sale of powdered egg (Canada Egg Products, Ltd. v. Canadian Doughnut Co., [1955] S.C.R. 398) or a contract for building a structure (Morrison-Knudsen Co., Inc. v. British Columbia Hydro and Power Authority, supra), and a contract of the sort at issue here.  In the former, unless the goods are delivered or the work is done, the seller, or the contractor as the case may be, does not obtain the purchase or contract price and indeed may have to pay damages.

[54]            If this were an action only at law, in my opinion it would fail simply because with all the escape hatch rights which the respondent had under the contract, it could not, by its conduct, be said to have repudiated the contract. 

[55]            But this is a court not only of law but of equity.

[56]            In Kreglinger v . New Patagonia Meat and Cold Storage Company, Limited, [1914] A.C. 25 (H.L.), Lord Parker of Waddington remarked that he had always admired the way in which the Court of Chancery succeeded in supplementing the common law system in accordance with the exigencies of a growing civilization.

[57]            I would put it that equity has not been totally somnolent since Lord Eldon died.

[58]            In 1946 (Central London Property Trust, Ltd. v. High Trees House, Ltd. (1946), [1956] 1 All E.R. 256 (K.B.)), there came upon the scene the doctrine of promissory estoppel.

[59]            In this country, we have seen the development and extension of the concept of unjust enrichment.  See Pettkus v. Becker, [1980] 2 S.C.R. 834, which, in my opinion, would have astonished a 19th century common law lawyer with the common law's emphasis on rights of property and contractual obligations as contained in the written instruments of the parties.

[60]            So what is there in the contract between these parties which then attracts the jurisdiction of a court of equity?  In my opinion, it is the Early Termination Fee.

[61]            By the Law and Equity Act, R.S.B.C. 1996, c. 253, s. 24:

24.       The court may relieve against all penalties and forfeitures, and in granting the relief may impose any terms as to costs, expenses, damages, compensations and all other matters that the court thinks fit. 

[62]            It is trite to say that no matter how the parties characterize an obligation, it is for the court ultimately to say whether it is a penalty.  See H.F. Clarke Limited v. Thermidaire Corp. Ltd., [1976] 1 S.C.R. 319 per Laskin C.J., particularly at 331.  The respondent asserts, citing Dunlop Pneumatic Tyre Co., Ltd. v. New Garage and Motor Co., Ltd., [1915] A.C. 79, [1914-15] All E.R. Rep. 739 (H.L.), that the issue of penalty or genuine pre-estimate of damages stands or falls on the facts as they were at the time of entry into the contract. 

[63]            The critical question is whether that proposition, which is a judge made rule, admits of no exception.

[64]            I do not see why the courts, in applying s. 24, should be so constrained, when by its breach of its obligation of good faith the person claiming the "penalty" has brought about the event upon which the sum at issue becomes due.

[65]            If, instead of what happened here, the appellants had exercised their right of termination because they had found a lender who would give credit on better terms, it would be quite right that the Early Termination Fee should be paid. 

[66]            Upon the learned judge's findings, it was the appellants who terminated the contract.  But even accepting that characterization of events, how can $1 million be a genuine pre-estimate of damages on a loan reduced to $15 million?

[67]            In my opinion, the general proposition of the Dunlop case should not be a barrier today to holding that that which at the time of the bargain was not necessarily a penalty has become one in consequence of the conduct of the party claiming the benefit of it, and thus the opposite party may be relieved under s. 24 of the Law and Equity Act if it is otherwise just to do so.  It is just to do so here.

[68]            In so concluding, I have taken into account that the raising of money on the security of personal property is as essential an aspect of contemporary commercial life as was the raising of money on the security of land generations ago, and I see no reason why equity should abandon this aspect of commercial life.  In 1705, Lord Cowper, in Lord Dudley v. Lady Dudley (1705), Prec. Ch. 241 at p. 244 (quoted in Nat. Prov. Bank v. Ainsworth, [1965] 2 All E.R. 472 at 480) remarked:

            Now equity is no part of the law, but a moral virtue, which qualifies, moderates, and reforms the rigour, hardness, and edge of the law, and is an universal truth; it does also assist the law where it is defective and weak in the constitution (which is the life of the law) and defends the law from crafty evasions, delusions, and new subtilties, invented and contrived to evade and delude the common law, whereby such as have undoubted right are made remediless; and this is the office of equity, to support and protect the common law from shifts and crafty contrivances against the justice of the law.  Equity therefore does not destroy the law, nor create it, but assist it.

[69]            I would therefore allow the appeal and award to the appellants the sum of $1,000,000.00, together with interest from the date the respondent received that sum, at the Registrar's rates.  Costs should follow the event.

“The Honourable Madam Justice Southin”

Reasons for Judgment of the Honourable Mr. Justice Lowry: 

[70]            I have been afforded the opportunity to read Madam Justice Southin's judgment in draft.  While she would to some extent allow the appeal, in my respectful view, it should be dismissed. 

[71]            On the way the appeal has been argued, to me there appear to be two determinative issues.  First, did the respondent fundamentally breach the three-year revolving credit agreement it entered into with the appellants in June 2001 to permit them to borrow against their receivables and obtain letters of credit?  Second, if so, was the breach a continuing breach – one that commenced in late September 2001 and extended to March 2002 – entitling the appellants to benefit from the agreement for the intervening five months before accepting the respondent's repudiation, as the appellants maintain they did when they terminated the agreement?  The further ancillary issue, upon which Madam Justice Southin focuses, is whether, upon terminating the agreement within the first year of its operation, the appellants were, in the circumstances, required to pay the agreed Early Termination Fee of US $1 million.

[72]            The appellants' contention is that the respondent breached the agreement fundamentally in two ways:  1) by imposing a "cap" of $15 million in respect of a line of credit that was agreed to be the lesser of CDN $65 million and US $50 million; and 2) by increasing what is referred to as the Availability Block of receivables from US $7.5 million, for which the agreement provided, to CDN $20 million.  The increase in the Availability Block reduced the receivables against which the appellants could borrow.  Madam Justice Kirkpatrick found a fundamental breach in respect of the first but not the second.  She then found that, while the respondent's breach constituted a repudiation of the agreement, the appellants had elected to affirm the agreement rather than accept the repudiation and terminate it.  She found the appellants were required to pay the Early Termination Fee which the respondent had taken, and dismissed their action.

[73]            I begin by outlining what is said to have been the arrangement imposed by the respondent that constituted its fundamental breach of the agreement. 

The Arrangement

[74]            The appellants, being a large West Coast based conglomerate of lumber companies, had been driven to seek a revolving line of credit from the respondent, a New York based commercial credit corporation, because, due to their poor financial performance, their bankers had urged them to take their business elsewhere.  As the judge noted, earnings in 2001 were only one-tenth of the $100 million cost of servicing the appellants' debt, which was in the order of $1 billion.  The August statements provided a dismal forecast, particularly with respect to long term cash flow, aggravated by an announcement of the imposition of American duties on softwood lumber.  On September 27, the respondent informed the appellants that it was capping the line of credit at $15 million (the facility having then been utilized to cover temporary cash requirements of $13.6 million) and that the Availability Block was being increased to $20 million.  The respondent denied the appellants' request to draw down $3.5 million that day and told them there would be no further advances until the parties could meet in Vancouver.

[75]            They met on October 2.  The appellants provided the respondent with a revised business plan and a positive cash flow projection based in part on the sale of some of its mills.  After what is described as cordial discussion about the situation, the judge found the appellants' CEO "volunteered to 'live with' the $15 million cap" (para. 75) and an arrangement was made.  While the parties differ over the details, the expression of the terms that appear to be most favourable to the appellants' position now, is contained in the respondent's letter of October 10, confirming:

1.         The availability block on your account was reduced from $20.0 million CAD to $7.5 million USD as per the Credit Agreement.

2.         It was agreed that borrowings under the facility for amounts up to $15.0 million CAD would be allowed.

3.         You agreed that notice would be given of your intent to borrow in excess of $15.0 million CAD under the facility and our loan committee's prior approval sought. 

[76]            On October 17, the appellants wrote in response:

Further to your letter of October 10, 2001, we advise that our understanding resulting from our meeting with Mr. Waxlax and Mr. Mann is that the terms of our revolving Credit Agreement with you remain in full force and effect unamended and that the availability block is U.S. $7.5 million.  As discussed at our meeting, we will contact you if we are going to increase our loan balance in excess of $15 million so that you are kept abreast of matters.

[77]            I attach importance to what, in the circumstances, was the position the respondent actually took in its dealings with the appellants at the material time.  Much emphasis is placed on the respondent's internal communications suggesting the cap was firm, but only what the respondent stated to the appellants, or gave them to understand, is indicative of any breach of their agreement.  What one party to an agreement may at some point decide to do with respect to its performance cannot itself constitute a breach.  It is only when its decision is manifest that considerations of breach can arise.

[78]            From October 2 onward, the appellants used the facility continuously until they terminated the agreement in March 2002.  The respondent performed its obligations under the agreement throughout to the extent the appellants actually required.  Until early January 2002, the appellants obtained ongoing credit advances of millions of dollars and secured the benefits of letters of credit, which by the end of that month totalled $12.6 million, and remained in place to the termination of the agreement as part of the credit facility.  They never did have any need to borrow more than $15 million before they terminated the agreement, and they conceded in evidence that not one operational decision was adversely affected by reason of the arrangement that was made.

[79]            The judge's conclusions in this regard are found in the part of her judgment that deals with her view of the appellants' affirmation of the agreement upon the arrangement being made:

[195]  ... The evidence is overwhelming that it did not need to draw down amounts in excess of the cap.  Although Doman asserted that it "lived within the cap" and expressed fear that GMAC would terminate the facility if it requested advances in excess of the cap, the evidence does not support such a conclusion.  The October 2, 2001 meeting was by all accounts cordial and productive.  At the very least, the parties agreed that any advances over $15 million would first be discussed with GMAC and time given to it to consider its position.  That never occurred, and it would be mere speculation for me to assume that such requests would have been denied.

[80]            It is of some significance that throughout their dealings with each other and with others, both parties proceeded on the assumption that the $65 million line of credit was available to the appellants subject to loan committee approval.  For their part, the appellants confirmed that in their letter of October 17, quoted above, and continued to represent to third parties that they had a $65 million line of credit.  The respondent continued to charge the unused line fee for which the agreement provided, on the basis of the credit facility being $65 million, apparently without any objection being raised by the appellants. 

[81]            The security for all of the appellants' borrowing under the agreement was their accounts receivable which were entirely solid, so there is no suggestion the respondent was at any time at risk of not ultimately being repaid.  The agreement provided that the appellants could draw on the line of credit in accordance with a formula that limited borrowings to the value of their receivables less the amount of the Availability Block, the outstanding amount of any letters of credit issued by the respondent under the facility, and such reserves as the respondent deemed necessary from time to time.  The extent to which the appellants could borrow under the facility, quite apart from the arrangement made on October 2, was then entirely a function of their sales of lumber and the receivables generated. 

[82]            It is evident that in the latter part of 2001 the appellants' markets were shrinking.  Production was being seriously curtailed and some mills were being closed.  Revenue and the appellants' consequent ability to borrow on their receivables were declining.  As the judge recognized, it is apparent they required a credit facility that would permit them to borrow against their inventory as well as their receivables.  In November, they entered into a confidentiality agreement with CIT Business Credit Canada Inc. ("CIT") and received a proposal for a $65 million line of credit secured by receivables and inventory. 

[83]            The appellants did not disclose to the respondent the fact they were seeking alternate financing but, during November, they told the respondent they wanted access to the $65 million line of credit without the loan committee's approval and offered to include inventory in the security base.  The offer was declined.

[84]            In January 2002, CIT issued a letter of commitment which was extended in February.  In March, the appellants executed a credit agreement with CIT and then terminated their agreement with the respondent.  Significantly, in discussing the appellants' liability for the Early Termination Fee, the judge found:

[205]  ... The evidence supports a finding that Doman terminated the agreement when it concluded in early November that it would not be able to persuade GMAC to include inventory in the asset base.  Doman could foresee that its continuing declining sales would impact on its ability to make draw downs based on the formula provided in the agreement.  Furthermore, Doman knew that the sale of its pulp mills was critical.  Failure to sell them (which it had not done by March 5, 2002) meant that it would be in the "cash crunch" that Mr. Dyer foresaw in the months following September 24, 2001. 

[206]  In addition, Doman's deteriorating financial condition permitted GMAC to increase the reserves under the formula, thereby further limiting Doman's access to the facility. 

[207]  In these circumstances, I conclude that Doman terminated the agreement, which it had affirmed, not because GMAC capped the facility, but because Doman needed a facility that would include inventory in the asset base. 

Fundamental Breach

[85]            At trial, as justification for the actions it took, the respondent contended, and the judge found, that, on the appellants' required financial reporting to the respondent, what is defined in the agreement as a Material Adverse Effect creating an Event of Default that would have entitled the respondent to terminate the agreement, existed when the arrangement was made.  The appellants insisted then, as they do now, the respondent never in fact determined there was a Material Adverse Effect and no notice of such was given to them.  The judge concluded that, under the agreement, neither the determination nor notice was required to establish the Event of Default.  She considered, as do I, that the question is essentially irrelevant if, as she concluded, the event did not entitle the respondent to impose the $15 million cap.  In finding that the respondent had fundamentally breached the agreement, the judge said:

[177]  As Doman submits, GMAC was not entitled under the agreement to re-write the contract by imposing the $15 million cap on advances. 

* * *

[179]  ... GMAC did not terminate the agreement when the Material Adverse Effect occurred, and thus it must be considered to have been in full force and effect.  There is no provision in the agreement that permits GMAC to cap advances at $15 million.  The central benefit of the facility, from Doman's perspective, was the availability of $65 million of credit advances.  GMAC, in capping the availability at $15 million, repudiated the agreement. 

[86]            The respondent contends that the judge erred in reaching this conclusion.  It maintains the cap was the result of a mutual understanding the parties reached as to how the agreement would operate and that there is no basis upon which it can be said there was a fundamental breach of the agreement as recognized in law. 

[87]            As I have indicated, the judge rejected the appellants' contention that the respondent's increase of the Availability Block to $20 million was also a fundamental breach of the agreement.  The appellants maintain that the judge was in error in this regard but, on my understanding of the point, it is not one which the appellants could ultimately succeed on alone, given that, according to them, the effect of the increase while it was in place was simply to reduce the amount the appellants could borrow under the agreement by about $10 million.  It had no actual effect on what the appellants did borrow and, in my view, it need not be further considered.

[88]            The judge did not find it necessary to review the authorities on what constitutes a fundamental breach of an agreement, but I consider it desirable to do so now.  To be clear, a party who breaches an agreement in a manner that is fundamental is said to repudiate – refuse to perform – the agreement.  The other party who continues to have obligations to perform is then entitled to accept the repudiation and treat the agreement as at an end, thereby releasing both parties from further performance.  If the repudiation is not accepted, both parties remain obligated to perform. 

[89]            In Poole v. Tomenson Saunders Whitehead Ltd. (1987), 16 B.C.L.R. (2d) 349 at 357-358, this Court considered authorities on fundamental breach in the context of an action for the wrongful dismissal of an employee:

            The Supreme Court of Canada has set out the requirements for termination of a contract by fundamental breach in Thompson & Alix Ltd. v. Smith, [1933] S.C.R. 172 at 182, [1933] 2 D.L.R. 214 [N.B.], where Cannon J. cited with approval the House of Lords' statement in Mersey Steel & Iron Co. v. Naylor, Benzon & Co. (1884), 9 App. Cas. 434 (H.L.):

            "All their Lordships as well as the Lords Justices accepted the principle stated by Lord Coleridge in Freeth v. Burr (2) as the true test; or, as it was expressed in the words of Lord Selborne:  'You must look at the actual circumstances of the case in order to see whether the one party to the contract is relieved from its future performance by the conduct of the other.  You must examine what that conduct is, so as to see whether it amounts to a renunciation, to an absolute refusal to perform the contract, such as would amount to a rescission if he had the power to rescind, and whether the other party may accept it as a reason for not performing his part.' "

And in Bettini v. Gye (1876), 1 Q.B.D. 183 at 188, it was said:

            [One must] see whether the particular stipulation goes to the root of the matter, so that a failure to perform it would render the performance of the rest of the contract by the plaintiff a thing different in substance from what the defendant has stipulated for.  [[Wallace J.A.'s] emphasis]

The same principle was expressed by Upjohn L.J. in Hongkong Fir Shipping Co. v. Kawasaki Kisen Kaisha Ltd., [[1962] 2 Q.B. 26], at p. 64, in these words:

... the question to be answered is, does the breach of the stipulation go so much to the root of the contract that it makes further commercial performance of the contract impossible, or in other words is the whole contract frustrated?  If yea, the innocent party may treat the contract as at an end.  If nay, his claim sounds in damages only.

            Other authorities have described the indicia of a fundamental breach in a variety of ways, including:  "An intimation of an intention to abandon and altogether to refuse performance of the contract":  Freeth v. Burr (1874), L.R. 9 C.P. 208 at 213; Do the acts and conduct of the party evince an intention no longer to be bound by the contract?:  Gen. Billposting Co. v. Atkinson, [1909] A.C. 118 at 120; "If the conduct of the employer amounts to a basic refusal to continue the servant on the agreed terms of the employment, then there is at once a wrongful dismissal and a repudiation of the contract": Re Rubel Bronze & Metal Co. and Vos, [1918] 1 K.B. 315 at 323.

            The common theme, emphasized by every court, when determining whether a breach of contract justifies the innocent party terminating the contract rather than confining his remedy to the damages caused by the breach, is that the breach must be tantamount to the frustration of the contract either as a result of the unequivocal refusal of one party to perform his contractual obligation or as a result of conduct which has destroyed the commercial purpose of the contract, thereby entitling the innocent party to be relieved from future performance.

[90]            Perhaps most recently, the following consideration is found in the dissenting judgment of Levine J.A. in Smith v. Lau (2004), 31 B.C.L.R. (4th) 240, 2004 BCCA 443, in the context of the enforceability of a separation agreement in a family law dispute:

[41]  The legal test for repudiation of a contract arising out of a fundamental breach was considered in this Court in Ballantyne v. Grone (1989), 22 R.F.L. (3d) 217 (B.C.C.A.) at 219-20, where Hinkson J.A. for the Court adopted the summary of the law stated by Cameron J. (as he then was) in Borg-Warner Acceptance Canada Ltd. v. Wyonzek (1981), [1981] 4 W.W.R. 193, 122 D.L.R. (3d) 737 (Sask. Q.B.) at pp. 744-45: 

Whatever its limitations or the subtle shades of its essence the doctrine with all its imperfections is embedded in Canadian law and at least for the purposes at hand may be sufficiently if not exhaustively nor perfectly stated thus:  a fundamental breach is one going to the very root of the contract; where one party fails to perform the very purpose for which the contract is designed so as to deprive the other of the whole or substantially the whole of the benefit which the parties intended should be conferred and obtained, such breach goes to the very root of the contract, and the party not in default is absolved from performing his end of the contract.

[Underlining added [by Levine J.A.].]

[42]  In The Law of Contract in Canada, 3d ed. (Toronto: Carswell, 1994), G.H.L. Fridman describes the application of the legal test (at p. 570):

…The basic test comes down to the simple, if not obvious one of deciding what is the real purpose of the contract, the true benefit intended to be obtained by the injured party, the extent to which the misperformance by the defendant goes beyond falling short of what was desired by the victim of the breach and involves the complete denial to him of any benefit from the performance that was provided.

[91]            To like effect, the respondent relies on what Lord Diplock said in his concurring judgment in Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd., [1962] 2 Q.B. 26 at 65-66, in which it was held that an inordinate delay in the chartering of a ship attributable to the owners' failure to make her seaworthy did not amount to a fundamental breach of the charterparty:

            The test whether an event has this effect [i.e. entitling the other party to terminate] or not has been stated in a number of metaphors all of which I think amount to the same thing: does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings.  [at 66]

[92]            Thus, what must be considered is whether the steps taken by the respondent on September 27, as modified in the arrangement put in place a few days later on October 2, so deprived the appellants of what they contracted to obtain when they entered into the revolving credit agreement that they can be said to have been deprived of substantially the whole benefit it was mutually intended they were to receive.  Was the imposition of the need for loan committee approval for borrowing beyond $15 million tantamount to the frustration of the agreement as a result of the respondent's unequivocal refusal to perform its contractual obligations or did its imposition destroy the commercial purpose of the agreement?

[93]            I have difficulty in seeing why, as a matter of law, the respondent can be said to have committed a fundamental breach of the agreement. 

[94]            It is, of course, to be accepted that the arrangement was imposed on the appellants and that their CEO was not suggesting that he could live with the $15 million limit indefinitely.  His volunteering not to borrow more must have been based on the positive cash flow projections that were discussed at the October 2 meeting.  But that said, I do not see how the arrangement can be said to have substantially deprived the appellants of the whole benefit of the agreement.  The respondent did perform to the full extent what the appellants required for five months until they terminated the agreement in favour of an alternative facility. 

[95]            There was no unequivocal refusal by the respondent to perform its obligations.  In the end, the respondent deprived the appellants of an unconditional credit facility of $65 million by imposing the need for the appellants to obtain the approval of the respondent's loan committee if they required to borrow more than $15 million.  That is not an unequivocal refusal to perform; it is, at worst, the introduction of an uncertainty as to whether, depending on the circumstances at the time, the respondent would perform.  As the judge said, to assume that it would not perform amounts to mere speculation.  If a request had been made, the committee may have given its approval.  The uncertainty may well have been unsatisfactory to the appellants in the longer term, but one does not breach an agreement by asserting he might not perform some or all of his obligations at some future time.  Nor can it be said that the imposition of the cap destroyed the commercial purpose of the agreement.  The agreement served its purpose until it was terminated.  It funded the appellants' operations to the extent they said, on October 2, would be required.  They obtained all that they requested and no operational decision was adversely affected by the imposition of the arrangement requiring loan committee approval for borrowing beyond $15 million.

[96]            I would not be able to conclude that the respondent fundamentally breached the agreement such as to amount to its repudiation but, on the assumption that it did, I turn to considering the appellants' contention that it remained open to them to accept what they say was a continuing repudiation, as they maintain they did when they terminated the agreement. 

Continuing Repudiation

[97]            Having concluded that the respondent had committed a fundamental breach of the agreement when the $15 million cap was imposed, the judge considered whether the appellants had accepted the repudiation or, as the respondent contended, affirmed the agreement.  With reference to the authority cited, she said that, faced with the respondent's repudiation, the appellants could not delay in their acceptance beyond a reasonable period of time.  Their affirmation of the agreement could be derived from their conduct and, if they affirmed, they were to be taken to have made an election between inconsistent rights that was irrevocable:  Morrison-Knudsen Co. Inc. v. British Columbia Hydro and Power Authority (1978), 85 D.L.R. (3d) 186 (B.C.C.A.) at 227; Ginter v. Chapman (1967), 60 W.W.R. 385 (B.C.C.A.); and The Kanchenjunga, [1990] 1 Lloyd's Rep. 391 (H.L.) at 398-399. 

[98]            The judge said that the appellants believed the agreement did not permit the imposition of the cap but they continued to treat the agreement as subsisting.  She then considered and rejected the reasons advanced by the appellants as to why it could be said they accepted the respondent's repudiation in a reasonable time.  The first was what the judge characterized as the appellants being prevented from exercising their contractual rights and obligations because of economic duress.  The second was the appellants' contention that the respondent's repudiation of the agreement was ongoing.  In rejecting the appellants' second contention, the judge said:

[194]  Furthermore, once Doman, in the face of the repudiation, affirmed the contract by its conduct, it made its irrevocable election between inconsistent rights.  In these circumstances, Doman could not thereafter assert an ongoing repudiation.  In support of its argument, GMAC cited Verschures Creameries Ltd. v. Hull & Netherlands Steamship Co., [1921] 2 K.B. 608 (C.A.):

… but the principle is well established, that a plaintiff is not permitted to "approbate and reprobate."  The phrase is apparently borrowed from the Scottish law, where it is used to express the principle embodied in our doctrine of election – namely, that no party can accept and reject the same instrument: (Ker v. Wauchope (2); Douglas-Menzies v. Umphelby (3)).  The doctrine of election is not, however, limited to instruments.  A person cannot say at one time that a transaction is valid and thereby obtain some advantage, to which he could only be entitled on the footing that it is valid, and then turn round and say it is void for the purpose of securing some other advantage.  That is to approbate and reprobate the transaction. 

[99]            The appellants maintain that the judge misunderstood the concept of a continuing repudiation.  They contend that the nature of the respondent's obligations under the agreement to provide an ongoing line of credit of $65 million was such that the repudiation was not a single act requiring acceptance in a reasonable time but a continuing repudiation giving the appellants a fresh right of election every day the repudiation continued.  The appellants cite one decision of this Court in support:  Fletton Ltd. v. Peat Marwick Ltd. (1988), 27 B.C.L.R. (2d) 209, leave refused [1988] 2 S.C.R. (vi), and in particular the recognition of the concept of a continuing repudiation, at p. 218:  "... each day the refusal continues there is a new repudiation of the contract."

[100]        The appellants say that the judge's analysis would be sound if this were a case of a single act of repudiation whereby they would have been put to their election as to whether to accept the repudiation and terminate the agreement or affirm it.  But they say her analysis is inapplicable where, as here, the ongoing nature of a revolving credit agreement renders the repudiation continuous.  The judge, they say, failed to appreciate the difference.  The appellants contend further that when, for example, they utilized the facility in January 2002, they could be said to have elected to affirm the agreement such that, if the respondent had at that time resiled from its position and evidenced an intention to make $65 million available without loan committee approval, they would not have been able to terminate the agreement on the basis of the respondent's earlier repudiation.  But, they say, the respondent never resiled from the cap and so its repudiation continued every day the agreement existed, giving the appellants a continued right of election which they ultimately exercised in March.  This, they say, is the point the judge completely missed.

[101]        It is then necessary to consider the extent to which it can be said the concept of continuing repudiation raised in Fletton is applicable to the circumstances of the case.  It appears the concept is not one that is particularly well developed in law.

[102]        Fletton arose out of a contract for the sale of washer-dryer units.  The seller repudiated the contract but the repudiation was not accepted.  The buyer commenced an action for specific performance (held to have been what ultimately affirmed the contract rendering the repudiation of no legal effect) and, alternatively, damages.  The action failed because the buyer was not able to perform all of its obligations under the agreement.  At page 220, it was said that the case was not one of a "continued repudiation" of a contract.  However, at page 218, a distinction was recognized between a single act of repudiation and a continuing refusal to perform a contract: 

            Dealing with that issue, a distinction must be made between the single act of repudiation of the contract and a continuing refusal to perform the contract.  Where there is a continuing refusal to perform the contract, the plaintiff who is ready and able to perform may recover damages for breach of the contract, notwithstanding that it sought initially to obtain specific performance.  In that circumstance, each day the refusal continues there is a new repudiation of the contract.  Where there is a single act of repudiation of the contract and the plaintiff elects to ignore that repudiation, then the contract does not come to an end, but the obligations on both sides under the contract remain in full force.  The repudiation in those circumstances is of no legal effect.  If, ultimately, the plaintiff is unable to fulfil its obligations under the contract, it will not be able to recover common law damages for breach based on the single act of repudiation by the other party. 

[103]        That statement was considered by this Court in Bridgesoft Systems Corp. v. British Columbia, 74 B.C.L.R. (3d) 212, 2000 BCCA 313.  That case arose out of what was alleged to be the repudiation of a contract requiring the Ministry of Transportation and Highways to test bridge-building software it was to acquire from a developer.  The Ministry ceased testing when the developer informed it of delays and increased costs.  Without citing any authority that defined continuing repudiation, the developer sought to rely on Fletton to support its contention of a continuing repudiation of the contract by the Ministry.  After citing the passage I have quoted immediately above, the developer's contention was rejected:

[85]  In the result of that case, the Court held that it was not a case of continuing repudiation and that, because the plaintiff was ultimately unable to perform its obligations under the contract, it was unable to obtain damages.  Strictly speaking, the [second and third sentences] above are obiter dicta.  For the purposes of this discussion, I will assume, without deciding, that those comments accurately summarise the law.

[86]  Counsel for Bridgesoft, relying on Fletton Ltd., argued that because the Ministry continued to fail to test the substructure software, there was a continuing refusal to perform the contract, and in that way, a continuing repudiation.  Neither party referred the Court to any cases that define what constitutes a continuing breach.

[87]  In my opinion, it cannot be said that the Ministry's breach, if there was one, was a continuing repudiation.  Before it can be said that a breach is a continuing one, in my view, the facts must show that the innocent party continued to perform its obligations, or at the very least was in a position to do so, while the repudiating party repeatedly refused to perform its own.  I reach this conclusion from a review of cases in which continuing breaches have been found.  For example, a tenant's violation of a clause in a lease which prohibits a certain use has been held to constitute a continuing breach:  Sim v. Large (1980), 22 B.C.L.R. 278 (B.C.S.C.) and Griffin v. Tomkins (1880), 42 L.T. 359 (Eng. Q.B.).  In each of those cases, the innocent party, the landlord, continued to perform its obligations by not terminating the lease while the tenant continuously acted in violation of that lease by continuing the prohibited use.  … In the absence of continuing performance by Bridgesoft, I do not think that the principle in Fletton Ltd. as to continuing breach applies. …

[104]        Fletton was also considered in Elderfield v. Aetna Life Insurance Co. of Canada (1996), 27 B.C.L.R. (3d) 1 (C.A.).  While the case arose out of a dispute over a contract of employment, in her concurring judgment, Huddart J.A. stated that, as a general proposition:

[15]  … Failure to unequivocally accept the repudiation means that the repudiation has no effect unless there is a continued refusal to perform. The contract continues to exist for the benefit of both parties and an action cannot be brought until one of the parties fails to perform: see Fletton Ltd. v. Peat Marwick Ltd. …

[16]  This means that the repudiating party has the opportunity to reconsider his or her position and complete the contract, as Lord Simon suggested in Heyman v. Darwins Ltd., [1942] 1 All E.R. 337 at 340-1, [1942] A.C. 365 (H.L.): ...

[17]  To similar effect is this passage from Frost v. Knight (1872), L.R. 7 Ex. 111 at 112 (per Cockburn C.J.), about the situation of an anticipatory breach that the innocent party refuses to accept:

... [i]n that case he keeps the contract alive for the benefit of the other party as well as his own; he remains subject to all his own obligations and liabilities under it, and enables the other party not only to complete the contract, if so advised, notwithstanding his previous repudiation of it, but also to take advantage of any supervening circumstances which would justify him in declining to complete it. [emphasis [of Huddart J.A.]]

[105]        A consideration of decisions of the trial court does not advance the inquiry very far, although it would appear to suggest that the notion of continuing repudiation has been applied in factual circumstances where it might be said the repudiation is unquestionably ongoing such as "the failure to keep in repair" (mentioned as an example in Toronto General Trusts Corp. v. Roman (1962), 37 D.L.R. (2d) 16 (Ont. C.A.) at 25, cited in Lovas v. Lovas (1990), 43 C.P.C. (2d) 31 ? 13 (B.C.S.C.)); continued exclusion of a party from possession of premises in breach of an agreement between the parties (Lovas); or failure of a landlord to remedy leaks that continually prevent its tenant from successfully operating a business (Shun Cheong Holdings B.C. Ltd. v. Gold Ocean City Supermarket Ltd., 2000 BCSC 574, aff'd on unrelated grounds 2002 BCCA 451). 

[106]        In Bailey v. Koop, [1995] B.C.J. No. 1562 (S.C.), it was held that continued refusal to permit performance of an agreement constituted continuing repudiation.  One party, the landowner, had agreed to permit the other party to remove trees on his land.  The landowner then provided written notice refusing further removal of the trees.  This repudiation was found not to have been accepted.  Subsequently the landowner provided another written notice reiterating cancellation of the agreement.  Such conduct was held to be a continuing repudiation. 

[107]        The recent decision of the English Court of Appeal in Stocznia Gdanska SA v. Latvian Shipping Co. (No. 2), [2002] E.W.J. No. 2917 (QL), [2002] EWCA Civ 889, contains a useful consideration of continuing repudiation.  Questions arose as to whether certain contracts with a shipbuilding yard had been repudiated by the buyers, whether the repudiation had been affirmed, and whether there had been continuing repudiation.  The trial judge found the contracts had been repudiated by the buyers and had not been affirmed by the yard.  However, assuming there had been affirmation, he proceeded to consider whether there was continuing repudiation.  The Court of Appeal, which ultimately dismissed the appeal, summarized the trial judge's discussion in material respects as follows:

40        The judge went on, however, to consider the position on the hypothesis that the yard had affirmed.  On that basis, he adopted the following analysis (at paras 169/176).  He agreed with the reasoning of Mr Sumption QC (sitting as a deputy high court judge) in Safehaven v. Springbok [1996] 71 P&CR 59 at 66 as follows:

"It does not follow from this analysis that the innocent party may in all cases change his mind after affirming the contract.  If, after he had affirmed it, the repudiating party's conduct suggested that he proposed to perform after all, then the previous party's repudiation is spent. It has no further legal significance.  If on the other hand, the repudiating party persists in his refusal to perform, the innocent party may later treat the contract as being at an end.  The correct analysis in this case is not that the innocent party is terminating on account of the original repudiation and going back on his election to affirm.  It is that he is treating the contract as being at an end on account of the continuing repudiation reflected in the other party's behaviour after the affirmation." 

41        The judge himself then reasoned (at para 172) as follows:

"Once the innocent party has affirmed, he must go on performing.  He must then be able to point to behaviour that amounts to a repudiation after the affirmation either by way of some fresh conduct amounting to repudiation or by way of the continuing refusal to perform amounting to repudiation.  I cannot see any reason why the innocent party must wait until there is an actual repudiatory breach; in this respect I regret I have reached a different conclusion to that reached by Colman J (see p 236 of [1997] 2 Lloyd's Rep)." 

42        He then recorded the yard's acceptance that, "if the breach in this case was not a continuing repudiatory breach, then the election made by the Yard was final ..." (at para 174).  His conclusion on the facts is put (at para 175/6) as follows:

"The question therefore is whether the breach was a continuing one and amounted to repudiatory conduct.  In my view it was.  As I have set out, the Yard pressed for performance on 19 April 1994 and 4 May 1994; there was no response.  It does not seem to me that the failure to respond can make a difference; if, for example, Latreefers had replied and said that they were not going to perform, then there would clearly have been a new repudiatory act.  Can it make a difference that they were silent in the face of a demand for performance, if the inference from silence was their continuing refusal to perform?  As that is the inference I draw, I do not think it can make a difference, as by not responding in the circumstances of this case they were making clear that they were not going to perform.  The matter can be tested by asking whether in such circumstances, the Yard were meant to proceed to start to build the vessels and wait until such time as there was some act of Latreefers that amounted to a fresh actual breach.  Had they done so, I am sure that it would be said rightly that they had failed to mitigate in circumstances where it was obvious that Latreefers were not going to take the vessels. 

I have reached my decision on the basis that there can be inferred in this case a continued refusal to perform which amounted to continuing repudiatory conduct and that there is no distinction in this respect between a continuing actual breach and a continuing anticipatory breach."  [emphasis in original]

[108]        The Court of Appeal agreed that there was a continuing repudiation.  The repudiating party's silence was (at para. 95) "a pregnant silence, a silence that speaks of maintained recalcitrance."

[109]        Where a party to an agreement commits a fundamental breach of its terms, the agreement is repudiated.  There has been what amounts to a refusal to perform.  If the repudiation is not accepted, the agreement is affirmed.  Where the breach is ongoing, as distinct from one instance of fundamental non-performance, there is a continuing repudiation which may, in the absence of subsequent affirmation, be accepted as long as the repudiation continues.  What in my view is important is that, in order to establish the existence of a continuing repudiation, particularly when an extended period of time has elapsed following the affirmation of an agreement, it must be clear beyond question that there is a continued (Elderfield) or repeated (Bridgesoft) refusal to perform.  The refusal may be manifest in different ways, which may include silence in response to a request for performance at the time the request is made, but the refusal must be clear for it is that refusal which is the repudiation to be accepted. 

[110]        There can be no doubt that the appellants' affirmation of the agreement in October was unequivocal.  On October 17 they wrote stating the terms of the agreement remained in "full force and effect unamended" and thereafter they used the credit facility to the full extent they required.  Depending on what might be made of the exchange in November when the appellants offered inventory as security and sought to avoid having to obtain loan committee approval, four or five months elapsed before they terminated the agreement.  There was then an extended period of time that elapsed between the appellants' affirmation of the agreement and their purported acceptance of what they say was the respondent's continuing refusal to perform.  Certainly after the exchange in November, there was no request for performance that was refused – no draw down of the line of credit that the respondent did not permit.  Throughout that period, the respondent never did anything which could be said to constitute a continuing or repeated refusal to permit the appellants to borrow beyond $15 million without loan committee approval.  Whether the respondent would have been prepared to forgo the cap in March 2002 cannot with any certainty be said.  There is only speculation.  The circumstances were such that the question was never raised.

[111]        I do not accept the appellants' contention that there was a continuing repudiation because the respondent did not resile from the position it took in October 2001.  The contention finds no support in the authorities considered.  The absence of any communicated change in position does not establish that five months later the respondent was, in fact, refusing to perform the agreement.  In the circumstances, it was for the appellants to approach the respondent in March 2002 if they required to borrow more than $15 million.  That is what they said they would do, and the basis on which they affirmed the agreement, when they confirmed their understanding of the arrangement in October 2001.  By March they had not borrowed on the line of credit at all for two months.  Had the respondent been asked to lend more than $15 million in March, it may have reconsidered its position and decided it had to abandon loan committee approval or, if an Event of Default existed at that time, the respondent may have terminated the agreement, as it would have been entitled to do.  But the appellants did not approach the respondent because they were not then seeking to borrow on the line of credit or to change the arrangement.  They had decided to obtain what they wanted from another lender.

[112]        The election to which a party is put when faced with another's repudiation of an agreement is a long-established principle of contract law.  The repudiation must be accepted and the agreement put to an end promptly so that both parties are released from further performance, or it will be said to be affirmed such that both parties are required to perform.  That is because the law will not permit a party to an agreement to elect between inconsistent rights – to rely upon a repudiation to avoid performing his, her, or its obligations while taking the benefit of the repudiating party's continued performance.  A continuing repudiation, which permits the innocent party to make an election at any time while the repudiation continues, effectively permits the innocent party to continue to take the benefit of the agreement to the extent that the repudiating party is prepared to perform until such time as the innocent party sees fit to put the agreement to an end. 

[113]        If, having affirmed an agreement in the face of it having been repudiated, and then having taken the benefit of the repudiating party's performance, the innocent party is to be heard to say at some later time there has been a continuing breach entitling that party to accept the repudiation, it can only be where there is no question that the repudiating party has in fact refused at the time of acceptance to perform.  There must, at the very least, be a clear manifest refusal to perform, subsequent to an affirmation of the agreement, which is accepted with reasonable promptness.  The party purporting to have accepted the repudiation bears the burden of establishing the continued or repeated refusal to perform that constitutes the repudiation.  The burden will become more onerous with the passage of time between affirmation and subsequent purported acceptance.  The burden is not one the appellants can meet in this case.

[114]        I consider there to have been no continuing repudiation the appellants could have accepted in March 2002 when they terminated the agreement.  If the respondent breached the agreement fundamentally in the fall of 2001, the appellants affirmed it by November, if not by October, and it cannot be said that the respondent manifested a continued or repeated refusal to perform the agreement in the four or five months that then elapsed before it was terminated by the appellants in March 2002.

[115]        I turn then to the ancillary issue of whether, having terminated the agreement in the absence of any repudiation, the appellants were required to pay the Early Termination Fee for which the agreement provides.

The Early Termination Fee

[116]        Clause 17 of the agreement provided in material respects as follows:

17.       TERM OF AGREEMENT.

(a)        Lender may terminate this Agreement at any time without notice upon an Event of Default.  If Lender so terminates this Agreement, Borrowers shall pay to Lender forthwith, in full, all Obligations, including, without limitation, the Early Termination Fee....

(b)        Borrowers may terminate this Agreement at any time upon sixty (60) days prior written notice and payment in full of the Obligations including, without limitation, the Early Termination Fee....

* * *

(d)        In view of the impracticality and extreme difficulty of ascertaining actual damages, and by mutual agreement of the parties as to the reasonable calculation of Lender's lost profits, the early termination fee ("Early Termination Fee"), which shall be an obligation of and payable by Borrowers, shall be equal to:

(i)         one million Dollars ($1,000,000) if such termination occurs after the date hereof, but on or prior to the first anniversary of the Closing Date;

(ii)        five hundred thousand Dollars ($500,000) if such termination occurs after the first anniversary of the Closing Date, but on or prior to the second anniversary of the Closing Date; or

(iii)       ...

No Early Termination Fee will be payable if the Obligations are repaid in full from the proceeds of debt or equity raised in the recognized North American public financial markets.

[117]        The appellants maintain now, as they did at trial, that the fee is a penalty in that it was not a genuine pre-estimate of the losses that the respondent might suffer if the agreement was terminated, particularly in its first year.  The appellants contend that relief against forfeiting the fee ought to be granted under the Law and Equity Act, R.S.B.C. 1996, c. 253, s. 24 (quoted by Southin J.A. at para. 61).

[118]        The appellants argue that, because they were not required to draw on the line of credit at all, the most that could properly be said the respondent might have lost in the event of early termination would be the total amount of the unused line fee, a fee to which the respondent was entitled on the amount of the line of credit that was at any time not drawn down.  That was in the range of $400,000 over the three years of the agreement, assuming the respondent charged the unused fee on $65 million and there was no borrowing.  The appellants then say that the fee of $1 million was not a fair estimate of "damages" such that it would be unconscionable to permit the respondent to retain it.

[119]        After noting the potential for the respondent to earn $2 million in the first year if the line of credit had been fully drawn down, the judge applied the principles stated in Dunlop Pneumatic Tyre Co. v. New Garage & Motor Co., [1915] A.C. 79 (H.L.) as adopted by this Court in Prudential Insurance Co. of America v. Cedar Hills Properties Ltd. (1994), 100 B.C.L.R. (2d) 312 (C.A.).  She concluded:

[214]  In my view, Doman's argument overlooks the third proposition from Dunlop Tyre, namely that the question of whether the fee is a penalty is a question of construction to be decided upon the terms and inherent circumstances of the contract, judged as at the time of the making of the contract, not as at the time of the breach. 

[215]  At the time of the making of the contract it was, as Mr. Fiorillo noted, impossible to determine the extent of Doman's potential utilization of the facility.  Doman's argument rests on the parties having the collective prescient knowledge that Doman would not utilize the facility.  I reject that assumption and find that, at the time of the making of the contract, the $1 million fee was, as the parties mutually agreed, a reasonable estimation of GMAC's lost profits in the event of termination by either party within the first year of the agreement. 

[216]  As was the case in Prudential, I am unable to conclude that I should on equitable principles interfere with freedom of contract:  see B.L.T. Holdings Ltd. v. Excelsior Life Insurance Co., [1986] 6 W.W.R. 534 (Alta. C.A.). 

[120]        Thus, she found as a fact that, at the time the agreement was made, $1 million was a reasonable estimate of what the respondent might have lost if the agreement was terminated in its first year.  The appellants do not appear to offer any sound basis on which this Court could now interfere with that factual finding.  They simply reargue the point, contending first that the respondent cannot be taken to have been entitled to more than the unused line fee, and second that its potential earnings on borrowings must in any event be limited to what it could earn on only $15 million, being the cap that it imposed, albeit three months after the agreement was made.

[121]        That said, I do not consider the fee can, in any event, be said to be a "penalty" within the meaning of s. 24 of the Act because it became payable on the occurrence of an event other than a breach of the agreement.  The law is clear, as stated in Gunning v. Thorne Riddell, [1990] B.C.J. No. 36 (C.A.) (QL):

            With respect, the judge was right in saying, upon the authority of the Export Credits Guarantee Department case [Export Credits Guarantee Department v. Universal Oil Products Co, and Others, [1983] 1 W.L.R. 399 (H.L.)] that in order for the question of penalty to arise there must first be a breach of contract.  In that case the issue whether a certain contract provision operated as a penalty was carried to the House of Lords.  All Law Lords agreed with the reasons of Lord Roskill in dismissing the appeal.  At 223 he stated:

            My Lords, the reason why the defendants' submissions failed in the Courts below can be simply stated. The clause was not a penalty clause because it provided for a payment of money on the happening of a specified event other than a breach of a contractual duty owed by the contemplated payer to the contemplated payee ....

Their Lordships declined to extend the law.

            In the case at bar, there being no breach of contract, the question of penalty does not arise.

[122]        G.H.L. Fridman in The Law of Contract in Canada, 5th ed. (Toronto: Carswell, 2006) at 774 explains that a penalty is a sum that is fixed in advance as being subject to forfeiture or payment in the event of non-performance or misperformance of a contract.  The author distinguishes between payment of a sum in the event of non-performance of a contractual obligation and payment of a sum on the happening of an event.  In the latter scenario, no question of a penalty arises and courts will refuse relief.  The author emphasizes that the "doctrine is not designed to relieve a party from the consequences of what might in the event prove to be an onerous or even commercially imprudent bargain" (at 774).  Accordingly, the law regarding penalties has narrow scope. 

[123]        In Busby + Associates Architects Ltd. v. Good Fortune Investments Ltd., 15 B.L.R. (3d) 93, 2001 BCSC 588, the court was concerned with the characterization of a termination fee.  The defendant hired the plaintiff to assist in building a hotel property.  The contract included a termination fee of $50,000.  The defendant terminated the contract and contended that the fee was a non-enforceable penalty.  In rejecting the contention, the following explanation was given:

[75]      …The provision calls for payment not on breach of a condition but rather on an event occurring which is not a breach of the contract.  The difference between whether such a term is to be considered as a penalty or a genuine pre-estimate of liquidated damages or simply a contractual provision freely entered into by the parties to a contract is discussed in Chitty on Contracts, Sweet & Maxwell, 26th Edition, p. 1831, c. 26.  At p. 1176, the learned authors state:

The law on penalties is not applicable to many sums of money payable under a contract. … In Campbell Discount Co. Ltd. v. Bridge [[1961] 1 Q.B. 445], a hire-purchase agreement permitted the hirer at his option to terminate the hiring during the period of the agreement, and provided that the hirer should thereupon pay a sum by way of agreed compensation for the depreciation of the chattel; the Court of Appeal held that the owner could recover the agreed sum, since being payable upon an event not constituting a breach of the agreement, it fell outside the scope of the law as to penalties. . . . 

[124]        The passage from Export Credits Guarantee above was quoted and it was concluded the termination fee was not a penalty, although the judge went on to find the amount was justified in any event: the provision represented a negotiated term reached between the parties.

[125]        The Early Termination Fee was payable by the appellants quite apart from any breach of the agreement if it was properly terminated by either party.  The payment was not agreed liquidated damages in the event of default, and the drafter of the agreement would have done better to use the word "losses" instead of "damages" in clause 17(d).  As such, it was not a "penalty" in my respectful view against which the court could grant relief under s. 24 of the Act.  It was simply a negotiated sum the parties agreed would be paid in the event of termination to compensate the respondent for the loss of its expected earnings on the line of credit it provided.

Conclusion

[126]        I conclude then that if, as the judge found, the respondent fundamentally breached the agreement in the fall of 2001, the appellants unequivocally affirmed the agreement by no later than November.  A continuing refusal to perform thereafter on the part of the respondent has not been established.  When the appellants terminated the agreement they were not accepting any repudiation by the respondent.  The appellants were required to pay the Early Termination Fee. 

[127]        I wish to add only that I would be reluctant to draw the inference with respect to the respondent's motivation that Madam Justice Southin does in paragraphs 46 and 47 of her judgment, particularly in view of the appellants' insistence at trial and on this appeal that the respondent never determined that a Material Adverse Effect existed which would have permitted it to terminate the agreement.  If, to its knowledge, the respondent was in a position to terminate the agreement after three months by reason of an Event of Default, it could have done so and been entitled to the Early Termination Fee.  It is less than clear to me that it can be said with any  certainty there would then have been a substantial advantage to the respondent in performing the agreement by extending no more than one quarter of the credit the agreement was to provide.  

[128]        I consider it may well have been as the respondent maintains.  When faced with what it saw as a seriously deteriorating financial projection in September 2001, aggravated by the announced American duties on softwood lumber, the respondent endeavoured to come to a responsible arrangement with the appellants.  The respondent's initial reaction was precipitous, but an arrangement was put in place whereby the respondent would fund the appellants' operations to the full extent that at the time they said they would require rather than consider terminating the three-month-old agreement it had entered into with them for three years, and abandon them, as the judge effectively concluded the respondent could have done. 

Disposition

[129]        It is for these reasons that I would dismiss the appeal.

“The Honourable Mr. Justice Lowry”

Reasons for Judgment of the Honourable Madam Justice Prowse:

[130]        I have had the privilege of reading, in draft form, the reasons for judgment of Madam Justice Southin and those of Mr. Justice Lowry.  In the result, I agree with Mr. Justice Lowry that the appeal must be dismissed. 

[131]        Unlike my colleagues, I accept the trial judge's finding that GMAC Commercial Credit Corporation – Canada ("GMAC") repudiated the contract between the parties by imposing a $15 million cap on the line of credit available to the appellants ("Doman").  I agree with her interpretation of the contract and her application of the law to the facts in coming to that conclusion.

[132]        The further issue raised by Doman, however, is whether the trial judge erred in failing to appreciate the significance of its pleading and argument that there was an ongoing repudiation of the contract by GMAC which Doman could either accept or reject on an ongoing basis, and which it ultimately accepted on March 5, 2002.

[133]        With respect to this issue, I agree with, and adopt, the analysis of Mr. Justice Lowry set forth at paragraphs 97-115 of his reasons for judgment. 

[134]        I also agree with Mr. Justice Lowry, for the reasons given by him, that the Early Termination Fee was not a penalty. 

[135]        As earlier stated, I would dismiss the appeal.

“The Honourable Madam Justice Prowse”

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