Alberta – “oblique” dispute resolution clause overlooks dispute, provides no resolution process – #144

In Zerr v. Thermal Systems KWC Ltd, 2018 ABQB 1008, Master in Chambers A.R. Robertson found no application for a lease’s “oblique” dispute resolution clause which did not deal with contractual entitlements in the lease and provided no process to resolve the dispute. In considering the clause and disputes stemming from either “complexity” or “inconsistent wording” in the parties’ contracts, Master Robertson provided confirmation that clear drafting can both pre-empt disputes and solve them if and when they do arise.

Thermal Systems KWC Ltd. (“Thermal Systems”) purchased shares from Plaintiffs in three (3) corporations (collectively “Skyline”) and, through a related corporation, leased premises which housed Skyline’s operations. Disputes arose over the indemnities in the Share Purchase Agreement (“SPA”), the extent of Thermal Systems’ obligations to make tenant improvements under the lease and how a monthly set-off payable by Thermal Systems applied to Plaintiffs’ payment of a tenant improvement allowance.

The parties presented Master Robertson with competing applications for partial summary judgment involving the SPA and the lease. In order to decide the applications, Master Robertson first described each of the parties’ contracts

(i) SPA – Buying shares instead of only assets made Thermal Systems wary of assuming “a host of agreements and potential historical liability in respect of completed contracts as well as partially completed contracts”. Plaintiffs and Thermal Systems each attempted to limit their respective exposure by including express indemnities, varying time limits in which to exercise them and set-off provisions in both the SPA and the lease. Plaintiffs and Thermal Systems therefore negotiated what Master Robertson qualified as a “very complex” SPA.

The attempt to address liability lead to confusing complexity. Rather than eliminate anticipated disputes, the drafting efforts created disagreements and lead to the litigation.

[11] The SPA is, as mentioned, complex. Reading it is like playing a game of “Snakes and Ladders”, requiring a repeated review of provisions already covered, in order to understand what appears on subsequent pages. This is not uncommon when reading commercial agreements, but in this SPA, the extent to which references elsewhere must be reviewed to understand various passages is quite extensive.

[12] For example, there are many definitions, but not all of them appear in the “definitions” provision. As I mention below, there are 37 headings of different kinds of representations and warranties, plus many subsidiary provisions. Different expiry dates apply to different representations and warranties.

[13] That complexity in the SPA seems to be the source of the disagreements about what it means. The complexity makes it possible to read different meanings into the agreement.

(ii) Lease – Master Robertson considered the lease to be straightforward but suffering from “some unfortunate inconsistent wording” which he wrote was responsible for “setting the stage for the conflict that we see now”.

In dismissing each of the applications for summary judgment, Master Robertson devoted paras 16-54 to various issues grouped under the heading “The Complexities in the SPA” and paras 55-137 to analysis of the SPA and paras 138-166 to analysis of the lease.

The reasons should be of particular interest to those drafting dispute resolution clauses. At paras 167-175, as an alternative analysis if wrong on the terms of the lease, Master Robertson considered the role of two (2) expert reports generated at the request of the landlord. The first report assessed the costs of certain items which had not been done to the premises. The second report analysed how the rent set-off should be adjusted to reflect those costs. Master Robertson tied the source of both reports to the lease’s section 1.4 entitled “Dispute Resolution”.

[169] The explanation of why the landlord did this is that there is a kind of dispute resolution clause in the lease. However, it does not provide for the appointment of an arbitrator and a hearing, as one might expect. The provision is somewhat oblique.

[170] When a dispute over tenant improvements arose, Thermal Systems sent the landlord an email specifically referring to this clause, section 1.4 of the lease, which provides as follows:

Dispute Resolution

Where the Landlord is obliged to refer any dispute or question to an auditor, real estate appraiser or other expert experienced in assessment appeals, surveyor, engineer, architect, insurance consultant, or other professional: (i) the Landlord will select a person who is at arm’s length from the Landlord, except that the Landlord may use its external auditor and other arm’s-length persons with whom the landlord has dealings, (ii) that person’s decision or determination will be conclusive and binding on the Landlord and Tenant, and (iii) each of the Landlord and Tenant will pay 50% of that person’s fees and disbursements.

In light of earlier conclusions that the tenant improvements were not mandatory, Master Robertson determined that the dispute resolution section, which Master Robertson had described as “oblique”, did not address contract interpretation. Even if it had, the question would necessarily arise as to what then would be the result. As Master Robertson had earlier noted, there was no provision to appoint a decision-maker or hold a hearing “as one might expect”.

[175] In my view, the email from the tenant referring to section 1.4 of the lease when the tenant’s improvement dispute arose was an error. That dispute resolution section was simply not in play. Section 1.4 did not deal with contractual entitlements set out in the lease, that is, contract interpretation. It had a very limited function.

For all the reasons set out more fully in the balance of his decision, Master Robertson dismissed both applications for partial summary judgment.