Crown Trust Co. v. Higher et al., [1977] 1 SCR 418

Supreme Court of Canada

Crown Trust Co. v. Higher et al., [1977] 1 S.C.R. 418

Date: 1975-06-26

Crown Trust Company (Defendant) Appellant;

and

Oscar S. Higher et al. (Plaintiffs) Respondents.

1975: February 25; 1975: June 26.

Present: Laskin C.J. and Spence, Pigeon, Dickson and de Grandpré JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR QUEBEC

Trust—Trust Deed having as object the purchase of a shopping centre—Articles of the Civil Code on trusts not applicable—Innominate contract—Contractual liability of the trustee—Civil Code, arts. 981a, 981i, 1065.

On September 5, 1962, a Trust Deed was made, the principal object of which was the purchase of a shopping centre for the sum of $1,675,000, payable by $775,000 in cash and $900,000 by the assumption of a hypothec “with an amortization term of twenty years”. Following the issuing of a Prospectus, to which appellant was a party, the sixty respondents signed offers of subscription and in fact paid to appellant, as trustee, a total sum of $772,500. The latter issued participation certificates to respondents who were, inter alia, to receive monthly dividends which were to total, annually, “a minimum of Nine Percentum on the face of the certificate”.

Appellant acquired the shopping centre, and respondents received the interest provided until the end of January 1968 and then learned that the mortgage creditor had requested reimbursement of the balance of the mortgage, the term thereof in the mortgage deed being five years, while the Trust Deed, the Prospectus and the share certificates stated a period of twenty years. The mortgage creditor’s action, in fact, resulted in the collapse of the project. Respondents, having ceased to receive interest, requested that the Superior Court cancel the participation certificates purchased from appellant. The Superior Court pronounced judgment only in favour of the respondents which had established that they would not have contracted if they had known the true facts. The Court of Appeal maintained all the actions in their entirety, and condemned appellant to pay to all the respondents the amounts of the share certificates and interest from January 1, 1968. The appeals to this Court are from this judgment.

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Held: The appeals must be dismissed.

The Court of Appeal was not correct in accepting only the argument based on lack of consent. The plaintiffs remedy is based on the violation of the contractual obligation by defendant, which did not use the money entrusted to it in accordance with the terms of its promise. This default renders the trustee responsible, and it is liable for the damages provided in art. 1065 of the Civil Code.

The submission that art. 981i of the Civil Code relieves appellant of all personal liability to third parties cannot be accepted. This article appears in the chapter “Of Trusts” which, in the Civil Code, only applies to testamentary and inter vivos gifts (art. 981a). It is therefore impossible in Quebec to create a trust relating to commerce, business and investment such as is found in the common law provinces. The part of the Trust Deed relating to the purchase of a shopping centre is not a trust as it exists in Quebec law, and respondents are not third parties vis-à-vis the trustee appellant. This is an innominate contract, which must be governed by the general rules regarding obligations.

Nesbitt, Thomson & Company Limited v. Pigott et al., [1941] S.C.R. 520, distinguished; The United Shoe Machinery Company of Canada v. Brunet et al. (1909), 18 Que. K.B. 511 referred to.

APPEALS from decisions of the Court of Appeal of Quebec[1] condemning defendant to pay the damages claimed by plaintiffs. Appeals dismissed.

A.J. Campbell Q.C., and J.A. Robb, Q.C., for the appellant.

T.H. Montgomery, Q.C., M. Hesler and Bernard Reis, for the respondents.

The judgment of the Court was delivered by

DE GRANDPRÉ J.—The facts of these six appeals are relatively simple once cleared of the underbrush.

Appellant is the Trustee designated in a Trust Deed creating the Pointe Claire Shopping Centre Trust, signed on September 5, 1962. The Trust Property is made up of:

(1) the original corpus constituted by the sum of $2,500 donated by one Seymour Berish (the

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Donor) for the account and benefit of the Cerebral Palsy Association of Quebec Inc. (the Beneficiary); Berish is the power behind Realty Equities Co. of Canada Ltd., an intervenant in the Trust Deed in which it is described as the Sponsor, of which more later;

(2) participation payments from Subscribers for Participation Certificates of not less than one‑half unit, each unit having a value of $5,000, for a total aggregate principal amount of $772,500.

The respondents, 60 in number, are such subscribers who are claiming the reimbursement of their capital payments plus the interest at 9% promised in the certificates and other relevant documents. The grounds alleged by respondents will be mentioned later.

The parties to this litigation were brought in contact by an advertising campaign organized by the sponsor, following the approval by the supervising body of a Prospectus dated September 19, 1962 to which appellant was a party. As a result of this campaign, most of the respondents, if not all, signed an offer of subscription of which two paragraphs are relevant:

6. I hereby acknowledge and represent that:

a) …

b) In executing this offer, I am relying solely on the aforesaid Prospectus and upon no other statement whatever, written or oral.

c) …

7. In submitting this offer I agree to abide by all of the terms, conditions and provisions of the Trust Deed, referred to in the Prospectus, a copy of which is available at the Crown Trust Company, Montreal.

This offer, having been accepted by appellant, as well as by the sponsor which in the Trust Deed had stipulated that no certificate would be issued without its prior written approval, participation certificates in various amounts were issued to respondents. These certificates signed by appellant as Trustee and Registrar entitle the holders (the subscribers) to the benefits and rights of the Deed of Trust, the provisions of which are incorporated therein, and stipulate in addition:

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Under the said Trust Deed, the holder of this Participation Certificate is entitled to receive, on a monthly basis, distributions of income equal to a minimum of Nine Percentum (9%) per annum on the face amount of this Certificate.

The scheme of the Trust Deed appears from the following:

(1) the trust is for the account and benefit of the beneficiary “subject to the beneficial rights of the holders of the Participation Certificates”;

(2) each unit represented by a participation certificate entitles the holder to “a vested proportionate beneficial interest in the property of the Trust”;

(3) the net income is to be distributed monthly to the beneficiary and to the subscribers “according to their respective interests in the Trust”;

(4) the trust is constituted for the sole purpose of purchasing from the sponsor the Pointe Claire Shopping Centre for the sum of $1,675,000 payable as follows:

a) $775,000 in cash from the property of the trust;

b) $900,000 by the assumption of a hypothec in favour of the Royal Trust Company “with an amortization term of twenty (20) years”;

it is to be noted that in the process the sponsor will receive a benefit of $40,000;

(5) another company of the sponsoring group, namely Realty Equities (1962) Ltd., the second intervenant in the Trust Deed, is to become the Lessee of the Shopping Centre under a net lease stipulating its obligation to remit to the trustee an amount equal to the 9% promised to the beneficiary and to the subscribers, the surplus income earned by the lessee, if any, to be divided in accordance with stipulations with which we are not concerned here.

The Prospectus relied upon by the subscribers contains four particularly relevant paragraphs:

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PURCHASE OF THE PROPERTY:

The Trustee of the Trust is empowered under the Trust Deed to purchase the Property from the Sponsor for $1,675,000 payable as to $775,000. in cash and as to the balance by its assumption of a mortgage-loan from The Royal Trust Company in the principal amount of $900,000., bearing interest at the rate of 7.2% per annum, to be entirely liquidated by means of equal and consecutive monthly payments of capital and interest, over a twenty (20) year period…

STATUTORY INFORMATION

7. The Trustee at its head office in the City of Montreal at 393 St. James Street West, is the Registrar and Transfer Agent of the Participation Certificates in the Trust.

8. The Trust has no authorized share capital. The Trustee is authorized under the provisions of the Trust Deed to issue Participation Certificates representing an aggregate beneficial interest in the Trust not exceeding an aggregate oustanding principal amount of Seven Hundred and Seventy-Two Thousand, Five Hundred Dollars ($772,500.00), such Participation Certificates to be issued in and for units of Five Thousand Dollars ($5,000.00) each and/or half-units of Two Thousand, Five Hundred Dollars ($2,500.00) each. No Participation Certificates have been issued by the Trust prior to the date of this Prospectus.

11. The Trustee of the Trust is the Crown Trust Company, 393 St. James Street West, Montreal, Province of Quebec. Under the terms of the Trust Deed, all assets of the Trust are held by the Trustees for the benefit of the beneficiary and the holders of the Participation Certificates.

Respondents received their interest until the end of January 1968 and then learned that the mortgage creditor, the Royal Trust, had requested reimbursement of the balance of the mortgage, the term thereof in the mortgage deed being 5 years, and had, exercising its rights, instituted an hypothecary action, taken over the rent and assumed the entire administration of the Shopping Centre, thus disrupting the cash flow and rendering impossible the continuation of the payments to the beneficiary and the subscribers. Hence the three actions giving rise to the present appeals. There are six appeals because in the Trial Court, in each action only some of the plaintiffs were successful so that there were before the Court of Appeal (in addition to appeals by other parties in which we are not interested) three appeals by the

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Trustee and three further appeals by the unsuccessful plaintiffs. In the courts below, except in the case of three respondents, there were other defendants (and other appeals as just mentioned) but this fact has no importance before this Court where the Crown Trust is the sole appellant.

The prayer of the three respondents who have sued the appellant alone (Atillasoy, Janeway Ventures (Canada) Ltd. and Janeway Publishing and Research Corporation (Canada) Ltd.) is that the agreements between plaintiffs and defendant be cancelled and annulled for all legal purposes because “the defendant has failed and neglected to execute its essential obligations under the Trust Deed”. The prayer of all the other respondents is that the purchase by plaintiffs of the participation certificates be declared null and void for all legal purposes and this for the following reasons:

(1) the plaintiffs purchased the certificates on the faith of untrue statements in the Prospectus;

(2) appellant failed and neglected to adhere to the terms of the Trust Deed.

I do not attach any importance to the difference in the wording of the conclusion and only note that three respondents based their attack on one ground alone whereas all of the others stated two grounds.

Although respondents have alleged and, to some extent proven, other facts, the central circumstance to the cases at bar is that the mortgage, instead of having a term of 20 years, had a term of 5 years only, which circumstance brought about the collapse of the venture. The courts below have found that the mortgage should have had a 20 year term. I refer to the following extract from the reasons of Bélanger J.A.:

[TRANSLATION]… I quite agree with my colleague Dubé J., and with the trial judge, that the authorization referred to a mortgage repayable by instalments spread over a period of twenty years.

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There is no doubt in my mind that this concurrent finding has a valid foundation in the evidence and that appellant’s attack against it has no validity.

Having reached this conclusion on the term of the mortgage, the Superior Court did not pronounce judgment in favour of all the respondents but only in favour of those having established that they would not have contracted if they had known the true facts. In other words, the Superior Court accepted only the ground of attack based on the lack of consent and refused to accept the submission that, even if the agreements between appellant and respondents had been validly entered into, they had been breached in an essential clause.

The Court of Appeal went further and maintained all the actions in their entirety on the principal basis that, in the words of Bélanger J.A.:

[TRANSLATION] With all due respect, I think that the trial judge erroneously required evidence which would have been necessary if the case merely involved an action to rescind for want of consent, whereas the facts justify rescission of the participation certificates for breach of the obligations resulting therefrom.

In the circumstances, the Court of Appeal did not feel obliged to examine in depth whether or not a valid consent had been given by the respondents or by some of them although Dubé J.A., wrote:

[TRANSLATION] I am however of the same opinion as the trial judge, namely that in addition to the contractual remedy, plaintiffs also have had an action for damages against respondents, as the evidence shows that they had been misled and that they would not have entered into a contract had they known the truth.

Before us, appellant has argued vigorously that art. 981i CC. which reads:

Trustees are not personally liable to third parties with whom they contract.

is a bar to the actions. I cannot accept that submission. This article is part of a chapter entitled “Of Trusts” which deals with a situation very limited in scope outlined in the words of art. 981a:

All persons capable of disposing freely of their property may convey property, moveable or immoveable, to trus-

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tees by gift or by will, for the benefit of any persons in whose favor they can validly make gifts or legacies.

(The underlining is mine).

As outlined in Waters—Law of Trusts in Canada, 1974, at p. 947:

…the Quebec trust of articles 981a-981n is only introduced for the purposes of testamentary and inter vivos gifts. Other than where the legislature has intervened, as with trusts for debenture holders, there is no trust in Quebec law for purposes other than such gifts. That means that the multitude of uses of the trust device in the common law jurisdictions in connection with commerce, business and investment are not possible in Quebec.

(The underlining is mine).

In the cases at bar, between appellant and respondents, such was not the situation. Thus I share the view of Dubé J.A., speaking for the Court:

[TRANSLATION] The Trust Deed created in the name of the Pointe Claire Shopping Centre Trust is, in my opinion, a contract which is partially within the provisions of art. 981a et seq of the Civil Code. Indeed, this part of the trust, that is $2,500.00, donated to the Cerebral Palsy Association of Quebec Inc, is truly a trust as provided in art. 981a of the Civil Code, since it was formed by a gift to a third party. As for the balance of the trust in question, which actually constitutes a profit-making commercial enterprise, I would think rather that this was an innominate contract, which must be governed by the general rules of the Civil Code regarding obligations and contracts.

It is apparent that respondents are not third parties vis-à-vis the trustee appellant. They are the main contributors to the assets of the trust and the principal beneficiaries (not in the technical sense of the Law of Trust) of its income. This is truly a business venture to which appellant agreed to participate under the label of “trustee”. It does not partake of the nature of the trust as known to the law of Quebec.

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It is not necessary to go any further on this aspect of the case, except to point out that the Real Estate Investment Trust under consideration here is an american concept about which some interesting comments are to be found in vol. 71 of the Michigan Law Review, at p. 808. This concept is totally foreign to our Civil Code.

It follows that, in this context, art. 981i C.C. cannot be invoked by appellant.

Appellant’s second main submission is that it has not breached any specific undertaking essential to the performance of the contracts but has simply made a representation that was true at the time of the Prospectus in September 1962, with the result that it cannot be held liable in the light of the rule laid down by this Court in Nesbitt, Thomson & Company Limited v. Pigott et al.[2] Here again appellant refuses to face up to the reality of the situation. The documents make it clear that respondents entrusted their monies to appellant in exchange for a definite promise that the monies would be used for a purpose that would be achieved by the mortgage financing of the Shopping Centre over a 20 year period. That promise has been broken, hence appellant’s liability. I have already quoted from the reasons of Bélanger J.A. on this point. It is sufficient to add that this default renders appellant personally responsible because it was its personal duty to apply the amounts received from the subscribers to a certain purpose in accordance with stipulations clearly spelled out and it failed to discharge that duty.

In the light of the foregoing, what is the remedy? The Court of Appeal has come to the conclusion that the facts clearly bring into play art. 1065 C.C.:

Every obligation renders the debtor liable in damages in case of a breach of it on his part. The creditor may, in cases which admit of it, demand also a specific performance of the obligation, and that he be authorized to execute it at the debtor’s expense, or that the contract from which the obligation arises be set aside; subject to the special provisions contained in this code, and without prejudice, in either case, to his claim for damages.

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I share this conclusion. In the cases at bar, the obligation to reimburse the capital payments admits of no doubt and the damages are clearly the interest of 9% promised by appellant and not paid because of its default. The trustee is certainly not entitled to invoke clause 11, sub‑paragraph (j) of the Trust Deed dealing with the case where the property is not purchased by the trust and stipulating that in such a case all amounts shall be returned without interest or indemnity. This clause clearly deals with the non-purchase of the property and not with the purchase under conditions that are at variance with the promise made by appellant.

Having reached this conclusion, there is no need for me to examine what effect might have had upon some or all of the respondents the representations made by appellant in the Prospectus and the applicability to those representations of the rules laid down by the Privy Council in The United Shoe Machinery Company of Canada v. Brunet et al[3].

There remains one submission which need not detain us at great length. Appellant argues that it has lived up to its obligation under the Trust Deed because in all matters it consulted its legal counsel. As pointed out by the courts below:

a) the evidence does not disclose that counsel was consulted as to the term of the mortgage;

b) even if counsel was consulted, appellant cannot hide behind his skirt to escape the consequence of its breach of a clear stipulation in the Trust Deed.

I would dismiss all the appeals with costs.

Appeals dismissed with costs.

Solicitors for the appellant: Stikeman, Elliot, Tomaki, Mercier & Robb, Montreal.

Solicitors for the respondents Higher et al: Ogilvy, Cope, Porteous, Montgomery, Renault, Clarke & Kirkpatrick, Montreal.

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Solicitors for the respondents Atillaroy et al: Chait, Salomon, Gelber, Reis, Bronstein & Litvack, Montreal.