Quebec Court of Appeal Refines the Principles Applicable to the Characterization of Contracts
February 26, 2018
On February 15, 2018, the Supreme Court of Canada (SCC) dismissed leave to appeal in Station Mont Tremblant v. Banville-Joncas. In its decision, the Quebec Court of Appeal (Court) reaffirmed and elaborated on the principles applicable to the characterization of contracts as expressed in Montréal, Maine & Atlantique Canada Cie/Montreal, Maine & Atlantic Canada Co. (M.M.A.) (Arrangement relatif à).
The dispute involved Station Mont Tremblant (SMT) and the owners of condominium units in the Ermitage du Lac development (respondents), situated in Tremblant. The respondents made a long-term investment in a resort hotel. According to the documents provided to the respondents, the units were placed in a rental program to be part of a resort hotel. Furthermore, the sale contract included a perpetual real servitude stipulating that the property could not be used for any purpose other than as a resort hotel unit participating in the rental program operated by SMT. In order to place the units in the rental pool, each buyer signed a 20-year lease with SMT (Lease) simultaneously with the signature of the sale contract. By virtue of the Lease, SMT enjoyed all the attributes of the right of ownership, with the goal of ensuring the units be sublet in a resort hotel project, a project developed and partly owned by SMT. In consideration of the rental of their unit, the respondents receive a percentage of the global revenue generated by the rental of the units in the Ermitage du Lac development, constituting the rent under the Lease.
At first instance, the respondents sought to obtain a declaratory judgment to the effect that the Lease constitutes a contract of service under the Civil Code of Québec (CCQ). The trial judge granted the application, ruling that the essential prestation of the agreement was not the Lease itself, but SMT’s designation as manager of the resort hotel.
The characterization of the Lease as a contract of service was essential for the parties, given that contracts of service are subject to the right of unilateral resiliation under article 2125 of the CCQ.
COURT OF APPEAL
The Court referred to M.M.A. for the appropriate analytical approach in the characterization of an agreement involving leasing and a contract of service. Quoting Justice J. Dutil:
The judge (at first instance) is of the opinion that the characterization of a contract is a question of law. In certain cases, he is correct. But it can also be a question of mixed fact and law when testimonial evidence must be examined in order to determine the purpose of the contract. Generally, this characterization presents few difficulties. The analysis is however, more complex when many obligations coexist in the contract, as in this case.
When many obligations are found in the same contract, it is very important for its characterization to determine which is the essential prestation and which prestations are accessory. This can be done by looking at the contract, but also by looking for the purpose that may be evident from the intention of the parties during the negotiation process. (translation)
Based on the principles expressed in M.M.A, the Court refused to limit itself to examining only the Lease itself. In this case, the Court chose to deepen its examination into the characterization of the contract in order to identify both the cause of the Lease and the object of its obligation, in light of the entirety of the testimonial evidence and the documentary evidence of all the agreements that led to the conclusion of the Lease, in order to ultimately identify the Lease’s goal and the commercial relationship of the parties.
With respect to the cause, the Court was of the opinion that the testimonial evidence made explicit the fact that SMT and the respondents were pursuing the same goal, that is, investing in the operation of a resort hotel. With respect to the object, the Court believed that the written evidence clearly demonstrated that the legal mechanism envisioned by the parties was to include their unit in a rental pool.
In attempting to identify the essential prestation of the Lease without having considered essential elements of proof, the trial judge committed a palpable and overriding error, thereby allowing the decision to be challenged despite the fact that a more stringent standard of review was required by the analysis of a question of mixed law and fact.
The Court thus concluded:
The essential prestation at the heart of the agreement, the contract, is therefore the leasing by the respondents of their condominium units to the appellant SMT for the purpose of including the units in a rental pool, the lease.
The Convention regulating the rental pool that results from the lease is therefore accessory to the lease. (translation)
The Court therefore allowed the appeal and overturned the declaratory judgment rendered at first instance.
The principles applicable to the characterization of contracts as expressed in M.M.A. have once again been applied by the Court. In this case, however, the Court pushed the reasoning behind these principles further. According to the Court, characterization is equally applicable to the determination of the essential elements of the contract, namely its cause and its object.
Where a contract contains a number of obligations, legal characterization can become complex. A simple reading of the contract itself is insufficient. The exercise of characterization requires a more exhaustive assessment of the evidence, including testimonial evidence and the other documents linked to the agreement, in order to determine the essential prestation of the contract.
Blakes acted for Station Mont Tremblant in this matter.
For further information, please contact:
Francis Rouleau 514-982-4016
or any other member of our Litigation & Dispute Resolution group.
Posted in: Litigation & Dispute Resolution
Blakes and Blakes Business Class communications are intended for informational purposes only and do not constitute legal advice or an opinion on any issue.
We would be pleased to provide additional details or advice about specific situations if desired.
For permission to reprint articles, please contact the Blakes Client Relations & Marketing Department at firstname.lastname@example.org. © 2019 Blake, Cassels & Graydon LLP