In a recent Ontario Court of Appeal decision, a corporation’s claim of economic duress when signing Minutes of Settlement in a construction dispute was rejected.
Parties Agree to Minutes of Settlement in Construction Dispute
The corporation retained a construction company in 2015 to perform construction work on a property in Port Hope.
By August 2016, disputes had arisen.
Outstanding invoices dated April 29 and May 31, 2016, issued by the construction company, were unpaid. The construction company had been provided with cheques by the corporation, post-dated to August 15, 2016, to cover those invoices but, on that date, the corporation told the construction company that the cheques could not be honoured.
As a result, the construction company registered a construction lien on August 18, 2016. The corporation took the position that the construction company’s delays in completing the work had caused it losses, which the construction company disputed. The corporation attempted to refinance by placing a new mortgage on the property, but the construction lien prevented that from occurring.
Subsequently, negotiations took place to resolve the disputes, which resulted in Minutes of Settlement (the “Minutes”), executed on September 19, 2016.
Under the Minutes, and the guarantee and release they provided for, the corporation agreed to pay the construction company an initial payment of $400,000 by September 23, 2016, and a second payment of $162,832 by March 12, 2017. A guarantor personally guaranteed payment of the second payment. In turn, the construction company agreed to discharge the construction lien upon specified arrangements being in place for the $400,000 initial payment and receipt by the construction company’s counsel of the executed documents. The parties were also to cooperate with respect to finishing the construction work. Finally, the parties released each other from any claim “by reason of any matter or thing existing as of the date hereof, whether known or unknown, with respect to the construction services and materials provided by [the construction company] as of the date hereof”. The only exception to the release was for the construction company’s “ordinary warranty obligations with respect to the quality of its workmanship and materials”.
The parties subsequently agreed to amendments, extending the date for the initial payment to September 29, 2016, and increasing the amount of the second payment to $185,999.
The initial payment due under the Minutes was made on September 29, and the construction lien was discharged the same day. However, the second payment was never made.
As a result, on October 16, 2017, the construction company commenced an action to recover the second payment.
Lower Court Finds Corporation and Guarantor Liable
The corporation and the guarantor alleged that economic duress made the Minutes, and the guarantee and release they provided for, unenforceable. They also alleged that they had been damaged by the construction company’s delays in performing the construction work, and claimed an equitable set-off for those damages. They also counterclaimed for those damages.
By summary judgment, the motion judge rejected the corporation’s claim of economic duress and found it liable because the sum claimed from it was an amount it had agreed to pay under the Minutes. Additionally, the guarantor was held liable as she had guaranteed the payment that the corporation had been obligated to make by a written guarantee provided for by the Minutes. The counterclaim was dismissed because its subject matter was released in a mutual release provided for by the Minutes.
The corporation and the guarantor appealed the decision.
Court of Appeal Finds No Grounds for Economic Duress Claim
The Court of Appeal began by explaining that for a party to establish economic duress, it must show two things: first, that it was subjected to pressure applied to such an extent that there was no choice but to submit, and second, that the pressure applied was illegitimate. On the first prong of the test, the court will consider four factors:
(a) Did the party protest at the time the contract was entered into?
(b) Was there an effective alternative course open to the party alleging coercion?
(c) Did the party receive independent legal advice?
(d) After entering into the contract, did the party take steps to avoid it?
If the party alleging duress satisfies those four factors, it must go on to satisfy the second prong, by showing that the pressure exerted was illegitimate.
The court found that the motion judge’s ruling that the corporation and the guarantor had not satisfied any of the four factors relevant to the first prong of the test had a substantial factual component and was entitled to deference on appeal.
First, the court agreed with the motion judge’s finding that there had been no protest of any kind by the corporation when they signed the Minutes.
Second, the court found that the motion judge was correct in finding that there had been an effective alternative course open to the corporation and the guarantor.
Third, the court agreed with the motion judge’s findings regarding independent legal advice as both parties had been represented by counsel in the negotiations.
Finally, the court found that the motion judge was correct in finding that the corporation and the guarantor did not take any timely steps to avoid the Minutes after they were signed. Not only did they make the initial payment under the Minutes, and receive the benefit of the discharge of the construction lien, but even after they defaulted on making the second payment when it came due in March 2017, they requested more time to pay.
Thus, the corporation and the guarantor had raised no genuine issue requiring a trial regarding the enforceability of the Minutes or the guarantee and release they provided for. The court stated:
“A person invoking economic duress must satisfy both prongs of the test. Having failed to show a genuine issue requiring a trial on the first prong, a specific ruling on the second prong could not change the outcome.”
As a result, the appeal was dismissed.
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