SUPREME
COURT OF CANADA
Between:
Sharbern
Holding Inc.
Appellant
and
Vancouver
Airport Centre Ltd., Larco Hospitality Management Inc.,
MM&R
Valuation Services Inc. doing business as HVS International — Canada
and
HVS International — Canada
Respondents
Coram: McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Charron,
Rothstein and Cromwell JJ.
|
Reasons
for Judgment:
(paras. 1 to 178)
|
Rothstein J. (McLachlin C.J. and Binnie,
LeBel, Deschamps, Fish, Abella, Charron and Cromwell JJ. concurring)
|
Sharbern Holding Inc. v. Vancouver
Airport Centre Ltd., 2011 SCC 23, [2011] 2 S.C.R. 175
Sharbern Holding Inc. Appellant
v.
Vancouver Airport Centre Ltd., Larco Hospitality Management Inc.,
MM&R Valuation Services Inc. doing business as
HVS International — Canada and HVS
International — Canada Respondents
Indexed as: Sharbern
Holding Inc. v. Vancouver
Airport Centre Ltd.
2011 SCC 23
File No.: 33280.
2010: October 6; 2011: May 11.
Present: McLachlin C.J. and Binnie, LeBel, Deschamps, Fish,
Abella, Charron, Rothstein and Cromwell JJ.
on appeal from the court of appeal for british columbia
Commercial law — Property
— Disclosure statements — Company developing and marketing two hotels on same
property — Purchasers of strata units in each hotel entering into differing
agreements with developer — Purchasers of Hilton units not informed of
different financial arrangements offered to purchasers of Marriott units — Hilton
not performing as expected and owners of Hilton units incurring losses — Whether
developer liable for misrepresentation under B.C. Real Estate Act for material
false statements — Whether developer able to avail itself of statutory defence —
Whether deemed reliance under Real Estate Act was rebuttable — Real Estate Act,
R.S.B.C. 1996, c. 397, s. 75.
Torts — Negligent
misrepresentation — Disclosure statements — Company developing and marketing
two hotels on same property — Purchasers of strata units in each hotel entering
into differing agreements with developer — Purchasers of Hilton units not
informed of different financial arrangements offered to purchasers of Marriott
units — Hilton not performing as expected and owners of Hilton units incurring
losses — Whether developer liable for negligent misrepresentation under common
law.
Fiduciary duty — Agent — Company developing and
marketing two hotels on same property — Purchasers of strata units in each
hotel entering into differing agreements with developer — Purchasers of Hilton
units not informed of different financial arrangements offered to purchasers of
Marriott units — Developer entering into non‑competition agreements with
owners of Marriott units on behalf of owners of Hilton units without prior
consent — Hilton not performing as expected and owners of Hilton units incurring
losses — Whether developer owed a fiduciary duty to owners of Hilton units — If
so, whether developer was in breach of its fiduciary duty.
The
respondent developer Vancouver Airport Centre Ltd. (“VAC”)
was incorporated for the purpose of developing and marketing two hotels on the
same property: a Marriott hotel and a Hilton hotel. The two hotels were
essentially identical and were joined by a concourse of shops and other
amenities. Purchasers of strata lots in each hotel entered into separate Hotel
Asset Management Agreements with VAC. The two hotels were marketed and
developed at different times, resulting in differences in the financial
arrangements offered to the purchasers of each hotel. VAC offered purchasers
in the Marriott hotel a guarantee and VAC was entitled to a monthly management fee
of a percentage of the gross rental revenue as well as an incentive management
fee. VAC did not offer purchasers in the Hilton hotel a guarantee, and VAC’s
monthly management fee for the Hilton was lower than for the Marriott. The
Hilton Disclosure Statement did not disclose the differences in financial
arrangements as between the Hilton Owners and the Marriott Owners. The Hilton
Owners incurred losses.
S
represents a class of investors who purchased strata
lots in the Hilton hotel from VAC. S claimed that VAC was liable for failing
to disclose details about differences in the financial arrangements given to
the Hilton Owners and those given to the Marriott Owners. S alleged that the
differences resulted in an undisclosed conflict of interest in that they
created an incentive for VAC to favour the Marriott over the Hilton in its
operation and management of the two hotels.
The
trial judge concluded that the undisclosed differences
in financial arrangements gave rise to at least a potential conflict of
interest, particularly in view of the potential for common management of the
two hotels. She then concluded that VAC negligently misrepresented both the
absence of an actual or potential conflict of interest and the nature of the
agreements between VAC and the Marriott Owners and found both
misrepresentations material. While her reasons were not entirely clear,
it appears she found VAC liable both under common law and under the Real
Estate Act. The trial judge concluded that under the Real Estate Act
the investors were deemed to rely on material misrepresentations by VAC and
that such deemed reliance was a non-rebuttable presumption. The trial judge
also found that in its capacity as manager, VAC was a fiduciary of the Hilton Owners,
that a conflict existed with respect to VAC’s interests as between the Hilton
and the Marriott, and that VAC was liable for breach of fiduciary duty because
it did not disclose that conflict. She also found that VAC was liable for
breach of fiduciary duty as manager.
The
Court of Appeal allowed VAC’s appeal. The
appellate court found that the details of the financial arrangements between
the two hotels were not material. As to breach of fiduciary duty, the
Court of Appeal determined that there was no breach by VAC.
Held: The appeal should be dismissed.
Both
the Securities Act and
the Real Estate Act governed VAC’s disclosure obligations. VAC’s
disclosure obligations were limited to disclosing specific prescribed matters. VAC
issued one document that combined the two Acts’ requirements: the Hilton
Disclosure Statement.
S
claims that VAC is liable for misrepresentations found in the Hilton Disclosure
Statement which resulted in the non‑disclosure of a material conflict of
interest leading to two potential causes of action: one under s. 75 of
the Real Estate Act, and the other at common law under the tort of
negligent misrepresentation.
Under
the Real Estate Act, a material false statement in a disclosure
statement will result in the developer being liable to investors for any
resulting loss they may have sustained. However, s. 75 also contains a
defence which provides that if the developer had reasonable grounds to believe
and did believe that the material false statement was true, it would not be
liable.
A
materiality standard is a legislated and regulatory balancing between too much
and too little disclosure. The jurisprudence has recognized that it is not in
the interests of investors to be buried in trivial information that will impair
decision making. The Real Estate Act does not define what is meant by
the term “material” when it is used in the context of the “material false
statement” required for liability under s. 75. Information is material if
there is a substantial likelihood that it would have been considered important
by a reasonable investor in making his or her decision to invest. In other words,
information is material if there is a substantial likelihood that its
disclosure would have been viewed by the reasonable investor as having
significantly altered the total mix of information made available. Materiality
is a question of mixed law and fact, and except in those cases where common
sense inferences are sufficient, the party alleging materiality must provide
evidence in support of that contention. In carrying out a materiality
assessment, a court must first look at the information disclosed to investors
at the time they made their investment decision. The next step is to consider
the omitted information against the backdrop of what was disclosed. As part of
this second step, a court may consider contextual evidence which helps to
explain, interpret, or place the omitted information in a broader factual
setting, provided it is viewed in the context of the disclosed information. Investors’
behaviour evidence is relevant to the materiality assessment. Evidence of
common knowledge or, depending upon the circumstances, knowledge specific to
particular investors would also be admissible. Nonetheless, in considering the
question of materiality, the predominant focus is on the disclosed and omitted
information.
The
trial judge erred in law with respect to assessing the materiality of the
alleged false statements in three ways. First, once she had determined that
the differences in financial arrangements created a potential or actual
conflict of interest, she found that there was an obligation to disclose them
as if they were inherently material. This approach misinterprets the statutory
requirement as well as the test for materiality. While it is true that in
certain situations, common sense inferences will be sufficient to establish
materiality, in this case, there was evidence to support the opposite inference
that the omitted information was not material in the context of what had
already been disclosed. Therefore, a more detailed analysis of the evidence
constituting the total mix of information was required in order to make a
determination about what a reasonable investor would have considered
significant.
Second,
the trial judge erred by reversing the burden of proof of materiality from the
plaintiff to the defendant. Once the trial judge was satisfied that S had
proven the existence of a conflict of interest, she turned to VAC to show why
it was not material. The result was that she made the determination that the
conflict of interest was material without requiring S to satisfy its burden, as
plaintiff, of proving materiality.
Third,
the trial judge erred when she failed to consider all of the evidence relevant
to the determination of materiality. Relevant evidence was available concerning
the general economic climate at the time the strata lots were sold, the
financial arrangements offered to Hilton Owners, the disclosure made by VAC of
common management and risk factors, and the limited extent of VAC’s ability to
act upon the differences in financial arrangements in its own interests. There
was also evidence of the conduct of fully informed investors, either prior to
making their investment decisions or subsequent to their investment, when they
had learned of the guarantee given to the Marriott Owners. This evidence was
relevant to the trial judge’s materiality assessment.
While
S was not required to prove that investors would not have purchased the Hilton
strata lots had they known about the differences in financial arrangements, it
did have the burden of proving materiality, on a balance of probabilities. S
failed to adduce evidence to prove the materiality of the differences in
financial arrangements.
Even
if VAC were shown to have made a material false statement, the statutory defence
contained in s. 75(2)(b)(viii) of the Real Estate Act would
preclude VAC from being found liable under s. 75(2). To rely on the
defence, VAC had to show that it subjectively believed the representations it
made were true and that it objectively had reasonable grounds for such a
belief. The statutory defence does not appear to have been considered by the
trial judge. Evidence of common industry practices and of VAC’s limited
practical means and incentives to prefer the Marriott hotel over the Hilton
hotel indicates that VAC subjectively believed, and objectively had reasonable
grounds to believe, that it was making true statements when it did not disclose
the details of the differences in financial arrangements and represented in the
Hilton Disclosure Statement that it had entered into agreements with the
Marriott that were similar in form and substance to those governing the Hilton
and that it was not aware of any existing or potential conflicts of interest.
The
presumption of deemed reliance under the Real Estate Act was rebuttable
when it could be proven, on a balance of probabilities, that the investor had
knowledge of the misrepresented or omitted facts or information at the time the
investor made the purchase. While the Real Estate Act did not expressly
provide for a rebuttable presumption, the use of the word “deemed” does not
always result in a conclusive, non‑rebuttable presumption. It is the
purpose of the statute that must be examined in order to determine if the
presumption is rebuttable.
VAC
is also not liable for the tort of negligent misrepresentation. The trial
judge did not consider whether VAC breached the standard of care. S’s failure
to demonstrate how VAC breached the standard of care is fatal to its common law
claim.
Although
VAC, as manager of the Hilton, had fiduciary obligations to S, S did not
discharge its onus of proving a breach of fiduciary duty. The nature and scope
of the fiduciary duty owed by VAC must be assessed in the context of the
contract giving rise to those duties. When VAC was acting as an issuer, its
relationship with S was not fiduciary in nature. However, when VAC began
acting as S’s agent under the Hotel Asset Management Agreement, a fiduciary
relationship arose. VAC’s position of conflict in managing both the Hilton and
the Marriott hotels had already been disclosed to S.
The
disclosure obligations with respect to VAC’s fiduciary duty are different from
the disclosure obligations under the Real Estate Act. As a fiduciary,
VAC was obligated to disclose any material facts or information, such as if
there was a substantial risk that VAC’s fiduciary relationship with the Hilton
Owners would be materially and adversely affected by VAC’s own interests or by
VAC’s duties to another. VAC’s statutory duty was simply to disclose to
investors certain prescribed information, without making material false
statements. It is also necessary to inquire whether circumstances changed
during the course of the fiduciary relationship such as to require VAC to make
additional disclosure and obtain renewed consent.
S
did not adduce evidence to establish that the different financial arrangements
constituted material facts or information beyond what had already been
disclosed by VAC. S also failed to establish the materiality of the non‑competition
agreement implemented by VAC to prevent the Hilton and Marriott hotels from
undercutting each other’s room rates. The evidence before the trial court
could not support a finding that VAC was liable for a breach of fiduciary duty
either for failing to disclose the differences in financial arrangements or in
implementing the non‑competition policy.
Cases Cited
Discussed:
Kerr v. Danier Leather Inc., 2007 SCC 44, [2007] 3 S.C.R. 331; TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), rev’g 512 F.2d 324 (1975); Queen v. Cognos
Inc., [1993] 1 S.C.R. 87; referred to: Sparling v. Royal
Trustco Ltd. (1984), 6 D.L.R. (4th) 682, aff’d [1986] 2 S.C.R. 537; Harris
v. Universal Explorations Ltd. (1982), 17 B.L.R. 135; Inmet Mining Corp. v.
Homestake Canada Inc., 2003 BCCA 610, 189 B.C.A.C. 251; Gerstle v.
Gamble‑Skogmo, Inc., 478 F.2d 1281 (1973); Mills v. Electric Auto‑Lite
Co., 396 U.S. 375 (1970); Basic Inc. v. Levinson, 485 U.S. 224 (1988);
Maple Leaf Foods Inc. v. Schneider Corp. (1998), 42 O.R. (3d) 177; Van
de Perre v. Edwards, 2001 SCC 60, [2001] 2 S.C.R. 1014; Housen v.
Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235; Hollis v. Dow Corning
Corp., [1995] 4 S.C.R. 634; St. Peter’s Evangelical Lutheran Church v.
Ottawa, [1982] 2 S.C.R. 616; R. v. Loxdale (1758), 1 Burr. 445, 97
E.R. 394; Nova, an Alberta Corp. v. Amoco Canada Petroleum Co.,
[1981] 2 S.C.R. 437; Frame v. Smith, [1987] 2 S.C.R. 99; Galambos v.
Perez, 2009 SCC 48, [2009] 3 S.C.R. 247; McGuire v. Graham (1908),
11 O.W.R. 999; R. v. Neil, 2002 SCC 70, [2002] 3 S.C.R. 631.
Statutes and Regulations Cited
Class Proceedings Act, R.S.B.C. 1996, c. 50,
s. 37.
Real Estate Act, R.S.B.C. 1996, c. 397
[rep. 2004, c. 42, s. 146], ss. 66, 75.
Real Estate Development Marketing Act,
S.B.C. 2004, c. 41, ss. 22(3), (5).
Securities Act, R.S.B.C. 1996, c. 418,
ss. 45(2)(5), 74(2)(4), 131.
Authors Cited
British Columbia. Securities Commission. Notice and Interpretation
Note No. 96/36. “Real Estate Securities”, October 10, 1996 (online:
www.bcsc.bc.ca/print.asp?id=3727).
Canadian Securities Administrators. National Policy 51‑201
Disclosure Standards, July 12, 2002.
Ng, Michael. Fiduciary Duties: Obligations of Loyalty and
Faithfulness. Aurora, Ont.: Canada Law Book, 2003 (loose-leaf updated
May 2007).
Reynolds, F. M. B. Bowstead and Reynolds on Agency,
17th ed. London: Sweet & Maxwell, 2001.
United States. Securities and Exchange Commission. SEC Staff
Accounting Bulletin: No. 99 — “Materiality”, August 12, 1999 (online:
www.sec.gov/interps/account/sab99.htm).
Waters’ Law of Trusts in Canada, 3rd
ed. by Donovan W. M. Waters, Mark R. Gillen and Lionel D.
Smith. Toronto: Thomson Carswell, 2005.
APPEAL
from a judgment of the British Columbia Court of Appeal (Ryan, Chiasson and D. Smith
JJ.A.), 2009 BCCA 224, 57 B.L.R. (4th) 1, 93 B.C.L.R. (4th) 256, 271 B.C.A.C.
116, 458 W.A.C. 116, [2009] B.C.J. No. 1007 (QL), 2009 CarswellBC 1337, reversing
a decision of Wedge J., 2007 BCSC 1262, 38 B.L.R. (4th) 171, [2007] B.C.J.
No. 1845 (QL), 2007 CarswellBC 1948, with supplementary reasons, 2008 BCSC
245 (CanLII). Appeal dismissed.
Stephen R. Schachter, Q.C., and Geoffrey B.
Gomery, for
the appellant.
Peter A. Gall, Q.C., Donald R.
Munroe, Q.C., M. Ali
Lakhani and Edward Iacobucci, for the respondents.
The
judgment of the Court was delivered by
Rothstein J. —
[1]
I. Introduction
[1]
When securities are offered to the general
public, the rule of caveat emptor no longer applies. Securities
legislation imposes on issuers a statutory duty of disclosure. That duty may
vary in detail from one Act to another or from one jurisdiction to another.
However, the common theme is that issuers must disclose to potential investors
information affecting their investment decision. Even so, issuers are not
subject to an indeterminate obligation, such that an unhappy investor may seize
on any trivial or unimportant fact that was not disclosed to render an issuer
liable for the investor’s losses. Rather than issuers being required to
provide unlimited disclosure, disclosure obligations have been enacted to
provide a balance between too much and too little disclosure.
[2]
The appeal arises from a class action lawsuit in
which the appellant, Sharbern Holding Inc. (“Sharbern”), represents a class of
investors who purchased strata lots in a Hilton hotel (the “Hilton Owners”) from
the respondent developer, Vancouver Airport Centre Ltd. (“VAC”). Sharbern
claimed that VAC was liable for failing to disclose details about differences
in the financial arrangements given to the Hilton Owners, and those given to
purchasers of strata lots in the adjacent Marriott hotel (the “Marriott
Owners”) that VAC was developing on the same property. Sharbern alleged that
the differences resulted in an undisclosed conflict of interest in that they
created an incentive for VAC to favour the Marriott over the Hilton in its
operation and management of the two hotels.
[3]
Two main questions are raised on appeal. The first
is whether VAC is liable for alleged misrepresentations contained in the
offering memorandum and disclosure statement (the “Hilton Disclosure Statement”)
that VAC used to sell the Hilton strata lots. The second is whether VAC is
liable for breach of fiduciary duty when it acted as manager of the Hilton
under an agreement (the “Hotel Asset Management Agreement”) entered into
between VAC and the Hilton Owners, including Sharbern. In the reasons that
follow, I conclude that Sharbern’s claims fail on both grounds, and I would
dismiss the appeal.
[4]
As to the first question, I am of the opinion
that the trial judge erred in law in concluding that VAC
is liable for misrepresentation, either under the statutory cause of
action found in the Real Estate Act, R.S.B.C. 1996, c. 397, or under the
common law of negligent misrepresentation.
[5]
Under s. 75 of the Real Estate Act, VAC could
only be liable if it is found to have made material false statements to
Sharbern, and cannot rely on the defence contained in the section. I am of the
respectful view that the trial judge erred in law with respect to the
materiality of the alleged false statements. The legal errors were: treating
the conflict of interest as inherently material; reversing the burden of proof
of materiality from the plaintiff to the defendant; and failing to consider all
of the evidence relevant to the determination of materiality. She further erred
in not considering the statutory defence which would avail to the benefit of
VAC.
[6]
Although this Court has previously dealt with
the issues of materiality and disclosure obligations in the context of
securities law, this case represents the first time that the Court has
considered the common law test for materiality. Even though the test is not
new in Canadian law, this case represents an opportunity to clarify important
aspects of the test.
[7]
Under the common law of negligent
misrepresentation, the trial judge erred by not considering whether VAC
breached the standard of care. As there is no evidence capable of supporting a
finding of breach of standard of care, her finding under the common law of
negligent misrepresentation cannot stand.
[8]
As to the second question, although VAC, as
manager of the Hilton, had fiduciary obligations to Sharbern, Sharbern did not
discharge its onus of proving a breach of fiduciary duty. A fiduciary is
required to disclose material facts and information, and conflicts of interest.
VAC’s position of conflict in managing both the Hilton and the Marriott hotels
had already been disclosed to Sharbern. The trial judge again failed to
consider all the relevant evidence on the issue of materiality that was before
her, and Sharbern did not adduce evidence to support a finding that the
different financial arrangements constituted material facts or information
beyond what had already been disclosed by VAC.
II. Facts
A. The
Hilton and Marriott Hotels
[9]
VAC is owned by Larco Investments Ltd. (“Larco
Investments”), a company involved in real estate and hotel development. By the
mid 1990s, there was an extraordinary boom in the Richmond hotel market. Larco
Investments already owned the Best Western Richmond Inn in that market, and decided
to develop and market two additional hotels on the same property. It
incorporated VAC for that purpose. The Marriott hotel, a strata-titled hotel
tower marketed through an offering memorandum and disclosure statement issued
September 11, 1996, opened for business in June 1998. A second, identical
strata-titled hotel tower was built and marketed through the Hilton Disclosure
Statement issued February 3, 1998. It opened as a Hilton hotel in June 1999.
The two hotels were essentially identical and were joined by a concourse of
shops and other amenities.
[10]
Purchasers of strata lots in each hotel entered
into separate Hotel Asset Management Agreements with VAC, whereby VAC was given
exclusive management of the hotel for 20 years, with an option to renew. In
return, VAC contracted to, among other things, use commercially reasonable
efforts to rent out the strata units, maximize each owner’s proportionate share
of monies available for distribution, and faithfully perform its duties and
responsibilities and supervise and direct hotel operations.
[11]
The two strata unit hotels were marketed and
developed at different times, resulting in differences in the financial
arrangements offered to the purchasers of each hotel. Since the popularity of
marketing a strata unit hotel in an urban area solely for the income stream was
unknown, VAC offered purchasers in the Marriott hotel a gross operating
guarantee. For the first five years of the hotel’s operation, VAC guaranteed a
gross return of 12% of the purchase price of the owner’s unit, so that each
strata lot owner’s annual proportionate share of funds available for
distribution after projected operating expenses and other deductions was a projected
net return of 8.29%.
[12]
Under the Hotel Asset Management Agreement
entered into between the Marriott Owners and VAC, VAC was entitled to a monthly
management fee of 5% of the gross rental revenue, and an incentive management
fee equal to 25% of the amount by which the owners’ net annual return on
investment exceeded 8%.
[13]
VAC’s evidence was that it intended to market
the Hilton with a guaranteed rate of return, but was advised by Larco
Investments’ securities solicitor that changes to securities regulations
precluded making reference to a guarantee in the Hilton Disclosure Statement.
Instead, VAC marketed the Hilton on the basis of projections. In an effort to
increase the projected return for potential investors of the Hilton strata units,
VAC increased the revenue available to them by including food and beverage
revenues (which were retained by VAC for the Marriott hotel), decreasing the
management fee charged by VAC under the Hotel Asset Management Agreement to 3%,
and removing the hotel lobby lease expense.
[14]
The guaranteed gross return offered to Marriott
Owners, and the 5% gross rental revenue and added incentive provided to VAC as
its fee for managing the Marriott versus the 3% management fee provided to VAC
for managing the Hilton (collectively the “Compensation Differences”), are the
differences in the financial arrangements made with purchasers of the two
hotels that are the essential focus of Sharbern’s claims on appeal.
[15]
While the Hilton Disclosure Statement disclosed
that VAC owned the Best Western Richmond Inn and that VAC was currently
developing the adjacent Marriott hotel, it did not disclose the Compensation
Differences as between the Hilton and Marriott Owners.
[16]
The marketing of the Hilton strata units was not
as successful as that of the Marriott, in which all of the units were sold
within a few hours. At some point, VAC decided to retain the last 24 Hilton units
rather than continue to incur significant marketing costs. Ultimately, neither
hotel achieved their anticipated financial performances. By 2001, the Richmond
hotel market was one of the weakest hotel markets in Canada. The hotel market
was further weakened by the events of September 11, 2001. The Marriott did not
achieve a 12% gross return on investment for any of the years covered by the 5-year
guarantee. As a result, VAC sustained liability of over $13 million under the
guarantee, which was ultimately paid by Larco Investments. The Hilton Owners incurred
losses instead of obtaining the projected 16.6% returns. The Hilton did not
perform as well as the Marriott.
B. Procedural
Background
[17]
On June 16, 2003, Sharbern brought an action against
VAC, HVS International — Canada (“HVS”) and Larco Hospitality Management Inc.
(formerly known as HMS Hospitality Management Services Ltd. (“HMS”)). HVS was
the company that prepared the financial projections for the Hilton hotel that
were included in the Hilton Disclosure Statement. HMS was an affiliate of VAC
that carried out the day-to-day management of the Hilton hotel, the Marriott
hotel and the Best Western Richmond Inn.
[18]
Sharbern obtained certification of the action as
a class proceeding under the Class Proceedings Act, R.S.B.C. 1996, c.
50, on behalf of approximately 200 unit owners (Sharbern Holding Inc. v.
Vancouver Airport Centre Ltd., 2005 BCSC 232 (CanLII), aff’d 2006 BCCA 96,
223 B.C.A.C. 80). Twenty-four common issues on liability were certified. The
trial judge summarized what she called the “central contentious” common
liability issues (2007 BCSC 1262, 38 B.L.R. (4th) 171, at para. 10 and Appendix
A), which I paraphrase as:
1. Whether the financial projections made by HVS were negligent
misrepresentations, and whether the investment returns projected by VAC in the
Hilton Disclosure Statement constituted fraudulent or negligent
misrepresentations.
2. Whether VAC’s representations about conflicts of interest
and the nature of the financial arrangements as between the Hilton and Marriott
hotels were fraudulent or negligent.
3. Whether the members of the Hilton class could be deemed to
have relied on any of the impugned representations pursuant to s. 75(2) of the Real
Estate Act and the effect of the repeal of the Real Estate Act.
4. Whether VAC and HMS owed fiduciary and/or trust duties to
the members of the Hilton class, and if so, whether they breached those duties.
III. Lower
Court Decisions
A. British
Columbia Supreme Court, 2007 BCSC 1262, 38 B.L.R. (4th) 171
[19]
Madam Justice Wedge made a number of findings
that are not at issue in this appeal. She determined that neither VAC nor HVS
were liable for negligent misrepresentation concerning the financial
projections. She observed that the allegation of fraud against VAC with
respect to the projected investment returns had been withdrawn by Sharbern.
She found that HMS did not owe fiduciary duties to Sharbern. In supplemental
reasons, she also clarified that VAC was not liable for fraudulent
misrepresentation with respect to its conflict of interest representations
because Sharbern did not “prove that VAC did not have an honest belief in the
representation and either intended to deceive investors or was reckless as to
whether it did so” (2008 BCSC 245 (CanLII), at para. 12).
[20]
With respect to her findings that are at issue
in this appeal, Wedge J. concluded that the undisclosed Compensation
Differences gave rise to at least a potential conflict of interest,
particularly in view of the potential for common management of the two hotels.
She then concluded that VAC negligently misrepresented both the absence of an
actual or potential conflict of interest and the nature of the agreements
between VAC and the Marriott Owners. She found both misrepresentations
material. It is not entirely clear from Wedge J.’s reasons whether she found
VAC liable under the common law or under the Real Estate Act, although I
proceed on the basis that she found VAC liable under both.
[21]
Wedge J. concluded that under the Real Estate
Act, the investors were deemed to rely on material misrepresentations by
VAC. She determined that such deemed reliance was not a rebuttable presumption,
irrespective of the actual knowledge of the investors.
[22]
She also found that in its capacity as manager, VAC
was a fiduciary of the Hilton Owners, that a conflict existed with respect to
VAC’s interests as between the Hilton and the Marriott, and that VAC was liable
for breach of fiduciary duty because it did not disclose that conflict. Finally,
she found that VAC was also liable for breach of fiduciary duty as manager, because
of a non-competition arrangement that it put in place between the Marriott and
the Hilton, preventing each hotel from competing for certain customers with the
other or with the Richmond Inn.
B. British
Columbia Court of Appeal, 2009 BCCA 224, 57 B.L.R. (4th) 1
[23]
VAC appealed and Sharbern cross-appealed aspects
of the trial decision. The Court of Appeal allowed VAC’s appeal, overturning
Wedge J.’s findings with respect to misrepresentation, deemed reliance and
breach of fiduciary duty. Sharbern’s cross-appeal was dismissed.
[24]
On the issue of misrepresentation, Chiasson J.A.
found that the details of the financial arrangements between the two hotels
were not material. He observed that at trial “VAC relied on the extensive
factual and expert evidence it adduced concerning actual and industry practice
in the management of multiple hotels by a single entity” and that “[t]here was
no evidence to the contrary and no evidence objectively to support the
conclusion a reasonable investor would be concerned about the details of the
financial arrangements” (para. 76). He found that
[h]aving
made the disclosure [VAC] did, recognizing industry and actual practice and
considering the subjective belie[f] of [VAC’s officers and employees], VAC did
not misrepresent that it was unaware of any conflict that reasonably could
affect materially the investment decisions of the Hilton Hotel investors.
[para. 84]
He therefore ruled that
the trial judge had erred in concluding VAC materially misrepresented its
conflict of interest and its agreements with the Marriott Owners.
[25]
As to breach of fiduciary duty, Chiasson J.A. determined
that there was no breach by VAC. He observed that the answer to whether VAC
was “obliged to tell the Hilton Hotel unit owners the details of its financial
arrangements with the Marriott Hotel unit owners . . .
depends on whether that information was material” (para. 98). He went on to
conclude that “in the circumstances of this case, the information objectively
was not material” (para. 99). In his view, “the consent given to VAC to act
for competing hotels is an answer to any contention the implementation of the
price competition policy was per se a breach of fiduciary duty” (para.
104). The issue was again reduced to the question of whether VAC was required
to disclose the details of its financial arrangements with the Marriott. Chiasson
J.A. concluded it was not.
IV. Issues
[26]
This appeal raises five issues, which I will
address in turn:
1. Did the trial judge err in finding that VAC was liable under
s. 75 of the Real Estate Act for material false statements?
2. Did the trial judge err in not considering the statutory
defence available to a developer under s. 75(2)(b)(viii) of the Real Estate
Act, and whether VAC could avail itself of that defence?
3. Did the trial judge err in finding that the deemed reliance
under s. 75(2)(a) of the Real Estate Act was non-rebuttable?
4. Did the trial judge err in finding that VAC was liable for
negligent misrepresentation under the common law?
5. Did the trial judge err in finding VAC liable for breach of
fiduciary duty?
V. Analysis
A. Misrepresentation
Under the Real Estate Act
(1) VAC’s
Statutory Disclosure Obligations
[27]
I commence with a summary of the statutory
disclosure requirements that were applicable in the context of this case.
[28]
The Hilton hotel strata lots were a
combination of an interest in real estate and an interest in a rental pool,
governed by the Securities Act, R.S.B.C. 1996, c. 418, and the Real
Estate Act. Both statutes governed VAC’s disclosure obligations. Pursuant
to those obligations, VAC marketed the strata lots using a document that was a
combination of both a Securities Act “offering memorandum” and a Real
Estate Act “disclosure statement”.
[29]
As to VAC’s disclosure obligations under the Securities
Act, the strata lots were marketed on the basis of exemptions then found in
ss. 45(2)(5) and 74(2)(4) of that Act. Section 45(2)(5)
provided that VAC did not have to register with the British Columbia Securities
Commission to trade in the strata lots. Section 74(2)(4) provided that
VAC did not have to provide a Securities Act prospectus for the strata
lots. Both exemptions applied to trades — such as those involving the strata
lots — in which a person purchased the security as a principal and the security
had an aggregate acquisition cost of not less than a prescribed amount, in this
case $97,000.
[30]
The minimum acquisition cost and the requirement
that the purchaser be acting as principal imply that these
conditions serve as a proxy for a degree of sophistication on the part of the
investor, justifying a more defined disclosure obligation than that found under
the prospectus requirements. Because the strata lots fell under these Securities
Act exemptions, VAC was only required to submit an offering
memorandum (British Columbia Securities Commission, Notice and Interpretation
Note No. 96/36, “Real Estate Securities” (online)). VAC’s disclosure
obligations under an offering memorandum were limited to disclosing specific
matters that were prescribed by the B.C. Securities Commission in a document referred
to as Form 43B.
[31]
As to VAC’s disclosure obligations under the Real
Estate Act, s. 66(1) of that Act provided that the Superintendent of Real
Estate could permit VAC to issue a disclosure statement as opposed to a
prospectus. The Superintendent of Real Estate appears to have exercised that
discretion in this case. VAC’s disclosure obligations in a disclosure
statement were limited to specific matters that were prescribed by the Superintendent
of Real Estate (pursuant to Real Estate Act, ss. 66(3)(a) and (c)).
[32]
Rather than issuing a separate offering
memorandum and a separate disclosure statement, the Superintendent of Real
Estate and the Securities Commission appear to have allowed developers to issue
one document that combined the two. The Hilton Disclosure Statement was such a
document. In that document, as I have just explained, VAC was only required to
disclose certain prescribed matters. Of those prescribed matters, the only two
of relevance to this appeal are Items 9 and 13 of Form 43B.
[33]
Item 9 of Form 43B required VAC to include a
statement drawing attention to the speculative nature and inherent risks of a
real estate investment and to disclose specific factors that “make the offering
a risk or speculation”:
ITEM 9 Risk Factors
(1) State:
A real estate investment is, by its nature,
speculative. If a purchaser is purchasing the real estate as an investment, the
purchaser should be aware that this investment has not only the usual risks
when purchasing real estate, but also those risks that are inherent to the
nature of real estate securities.
(2) Disclose the risk factors that make the
offering a risk or speculation.
Instructions:
Risk factors may include but are not limited to such matters as risks
associated with real estate investments generally, reliance on the
developer/managers efforts, ability and experience, inexperience of management,
lack of financial expertise, reliance on the financial strength of the person
offering the guarantee or financial commitment, cash flow and liquidity risks,
financing risk, potential liability to make additional contributions beyond
initial investments, restricted rights of a holder in the management and
control of the strata corporation or business, inability to change the manager,
restrictions on resale of the real estate securities, developer/manager
conflicts of interests, and where the offering provides holders with a means to
participate financially in a business such as a hotel, motel, resort or
apartment hotel or other commercial enterprise, the general risks of the
business, absence of an operating history of the business, and competition.
(3) If the real estate securities include a
rental pool, state:
The success or failure of the rental pool will
depend in part on the abilities of the manager of the rental pool.
(4) If the owner will be responsible for
paying a portion of the costs of the operation of the rental pool, state:
If the revenue generated from the rental pool is
less than the costs of operating the rental pool, then the purchaser must make
additional contributions over and above the purchasers initial investment and
financing costs.
(5) If the real estate securities include a
guarantee or other financial commitment, state:
The
ability of [the person providing the guarantee] to perform under the [guarantee
or other financial commitment] will depend on the financial strength of [the
person]. See [the persons] financial statements on page [*]. There is no
assurance that [the person] will have the financial ability to be able to
satisfy its obligations under the [guarantee or other financial commitment] and
therefore you may not receive any return from your investment. [Text in brackets in original.]
[34]
Item 13 of Form 43B required VAC to include a
statement describing conflicts of interest and provided:
ITEM 13 Conflicts of Interest
Describe
any existing or potential conflicts of interest among the developer, manager,
promoter . . . in connection with the real estate securities which could
reasonably be expected to affect the purchaser’s investment decision.
[35]
Article 4.9(i) of the Hilton Disclosure
Statement is related to the Item 9 obligation to disclose risk factors:
4.9 Risk Factors
. . .
(i) Liabilities
and Obligations of the Developer. The Developer is currently developing
the Vancouver Airport Marriott, a 237 room full service hotel, on the Parent
Property. The Vancouver Airport Marriott is scheduled for completion in or about
June of 1998. In this regard, the Developer has entered into purchase
agreements, ancillary documents similar in form and substance to the
Agreements, and certain additional agreements with purchasers of strata lots
comprising the Vancouver Airport Marriott, all of which give rise to certain
liabilities and obligations of the Developer which could impact upon its
ability to perform its obligations under the Agreements.
(A.R.,
vol. II, at p. 164)
Article 4.1 of the Hilton
Disclosure Statement provided that “Agreements” meant “the Bylaws, the Hotel
Asset Management Agreement, the Hotel Use Covenant, the Joinder in Covenant
Agreement and the Purchase Agreement”.
[36]
Article 4.11 is related to the Item 13
obligation to disclose conflicts of interest:
4.11 Conflicts of Interest
The
Developer is not aware of any existing or potential conflicts of interest . . .
that could reasonably be expected to materially affect the purchaser’s
investment decision. . . .
(2) Liability
Under the Real Estate Act
[37]
Sharbern claims that VAC is liable for
misrepresentations contained in arts. 4.9(i) and 4.11 of the Hilton Disclosure
Statement in that they resulted in the “non-disclosure of a material conflict
of interest” (A.F., at para. 1). There are two potential causes of action
here: one under s. 75 of the Real Estate Act, and the other at common
law under the tort of negligent misrepresentation. I will first deal with the
cause of action under the Real Estate Act.
[38]
Section 75 of the Real Estate Act
provides the statutory mechanism pursuant to which an investor can hold a
developer liable with respect to the representations found in a disclosure statement.
Under the Real Estate Act, if a “material false statement” is contained
in a disclosure statement, the developer will be liable to investors for any
resulting loss they may have sustained, and investors are deemed to have relied
upon the representations made in the disclosure statement. However, s. 75 also
contains a defence which provides that if the developer had reasonable grounds
to believe and did believe that the material false statement was true, it would
not be liable. (Although s. 75 uses the term “prospectus”, a disclosure
statement is deemed under s. 66(2) of the Real Estate Act to be a
prospectus for the purposes of the section.) The relevant parts of s. 75 of the
Real Estate Act provide:
75 (1) In
this section, “prospectus” includes every statement and report and
summary of report required to be filed with the prospectus under this Part.
(2) If
a prospectus has been accepted for filing by the superintendent under this
Part,
(a) every
purchaser of any part of the subdivided land, shared interests in land or
time share interests to which the prospectus relates is deemed to have
relied on the representations made in the prospectus whether the purchaser
has received the prospectus or not, and
(b) if
any material false statement is contained in the prospectus,
(i) every
person who is a director of the developer at the time of the issue of the
prospectus,
(ii) every
person who, having authorized the naming, is named in the prospectus as a
director of the developer,
(iii) every
person who is a developer, and
(iv) every
person who has authorized the issue of the prospectus
is
liable to compensate all persons who have purchased the subdivided land,
shared interests in land or time share interests for any loss or damage
those persons may have sustained, unless it is proved
. . .
(viii) that, with
respect to every untrue statement not purporting to be made on the
authority of an expert, or of a public official document or statement, the
person had reasonable grounds to believe and did, up to the time of the sale
of the subdivided land, shared interests in land or time share interests believe
that the statement was true . . . .
[39]
Under s. 75(2)(b) of the Real Estate Act,
Sharbern has the onus to demonstrate that either or both of arts. 4.9(i) and
4.11 contained a “material false statement”. As the plaintiff, Sharbern bears
this onus under the principle that the party who alleges a fact has the burden
of proving it. Nothing in the language of s. 75 suggests that a plaintiff
advancing a statutory cause of action under the Real Estate Act does not
bear this onus. In order for art. 4.9(i) to contain a material false
statement, the representation that VAC made indicating that it had entered into
agreements with the Marriott that were “similar in form and substance” to those
governing the Hilton must be shown to be a material false statement. For art.
4.11 to contain a material false statement, VAC’s representation that it was “not
aware of any existing or potential conflicts of interest . . .
that could reasonably be expected to materially affect the purchaser’s
investment decision” must be found to be a material false statement. If
Sharbern satisfies that onus, VAC must then demonstrate that it had reasonable
grounds to believe and did believe that the material false statements were
true, in order to rely on the defence.
(3) Materiality
[40]
In Kerr v. Danier Leather Inc., 2007 SCC
44, [2007] 3 S.C.R. 331, Binnie J. wrote that “disclosure lies at the heart of
an effective securities regime” and that the extent of disclosure is a matter
of legislative policy that involves “[b]alancing the needs of the investor
community against the burden imposed on issuers” (para. 5). The materiality
standard for disclosure “supplants the ‘buyer beware’ mind set of the common
law with compelled disclosure of relevant information” while “recogniz[ing] the
burden” that is placed on issuers to provide such disclosure (para. 32).
[41]
A materiality standard is a legislated and
regulatory balancing between too much and too little disclosure. As the
Supreme Court of the United States cautioned in TSC Industries, Inc. v.
Northway, Inc., 426 U.S. 438 (1976), at pp. 448-49:
. . . if the standard of materiality
is unnecessarily low, not only may the corporation and its management be
subjected to liability for insignificant omissions or misstatements, but also
management’s fear of exposing itself to substantial liability may cause it
simply to bury the shareholders in an avalanche of trivial information — a
result that is hardly conducive to informed decisionmaking.
[42]
Sharbern argues that in a prospectus context
under the Real Estate Act, “asymmetries in knowledge and vulnerability”
exist which would suggest that the materiality standard of disclosure should be
high (A.F., at para. 32). I infer that it is Sharbern’s position that when
balancing the requirement to disclose in a prospectus context, the emphasis
should be on more disclosure. Although Sharbern does not suggest that VAC, in
its capacity as developer, was acting as a fiduciary, Sharbern does say that
VAC’s disclosure obligations should be the same as that of a fiduciary.
[43]
Potential investors are indeed vulnerable to the
superior knowledge of an issuer as to what need and need not be disclosed.
That is the reason for legislated disclosure obligations in a securities context.
However, the jurisprudence has recognized that it is not in the interests of
investors to be buried “in an avalanche of trivial information” that will
impair decision making (TSC Industries, at p. 448). As I will explain,
the materiality standard calls for the disclosure of information that a
reasonable investor would consider important in making an investment decision.
(4) The
Test for Materiality
[44]
The Real Estate Act does not define what
is meant by the term “material” when it is used in the context of the “material
false statement” required for liability under s. 75. The parties submit that
in interpreting materiality under s. 75, the Court should adopt the approach
set out by the Supreme Court of the United States in TSC Industries. In
that case, the materiality of an omitted fact in a proxy solicitation context
was determined based on whether there was a substantial likelihood that the
disclosure of the omitted fact would have assumed actual significance in the
deliberations of a reasonable investor.
[45]
The materiality test was described by the U.S.
Supreme Court in TSC Industries:
.
. . An omitted fact is material if there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how to vote.
This standard is fully consistent with Mills’ general description of
materiality as a requirement that “the defect have a significant propensity
to affect the voting process.” It does not require proof of a substantial
likelihood that disclosure of the omitted fact would have caused the reasonable
investor to change his vote. What the standard does contemplate is a showing
of a substantial likelihood that, under all the circumstances, the omitted fact
would have assumed actual significance in the deliberations of the reasonable
shareholder. Put another way, there must be a substantial likelihood that the
disclosure of the omitted fact would have been viewed by the reasonable
investor as having significantly altered the “total mix” of information made available.
[Emphasis in original; p. 449.]
The U.S. Supreme Court
characterized materiality “as a mixed question of law and fact, involving as it
does the application of a legal standard to a particular set of facts” (p.
450).
[46]
The TSC Industries test is not a new
concept in Canadian securities law. The test has been adopted by a number of
Canadian appellate courts: see Sparling v. Royal Trustco Ltd. (1984), 6
D.L.R. (4th) 682 (Ont. C.A.), aff’d [1986] 2 S.C.R. 537; Harris v. Universal
Explorations Ltd. (1982), 17 B.L.R. 135 (Alta. C.A.); and Inmet Mining
Corp. v. Homestake Canada Inc., 2003 BCCA 610, 189 B.C.A.C. 251.
[47]
A disclosure statement under the Real Estate
Act is analogous to the proxy solicitation in TSC Industries. The
analogy exists because the two documents share similar characteristics. That
is, both are (i) prepared unilaterally by management or a developer, (ii)
prepared pursuant to statutory and/or regulatory obligations, (iii) used to
provide information to investors (current or potential) to allow them to make
informed choices, and (iv) used by investors in making decisions (either
deciding how to vote or whether to invest). Both are used by investors to make
informed investment decisions based on information provided to them by a party that
unilaterally controls what specific information to disclose, pursuant to
statutory obligations. Therefore, it is appropriate to consider the TSC
Industries test to determine the materiality of the representations under
the Real Estate Act.
[48]
The U.S. Supreme Court indicated that it was
“universally agreed” that the question of materiality is objective (TSC
Industries, at p. 445). Materiality is based on an examination of how the
information would have been viewed by a “reasonable investor”. The U.S. Supreme
Court concluded that the objective standard formulated in TSC Industries
“best comports with the policies” (p. 449) of the proxy disclosure rules — the purposes of which were “not merely to
ensure by judicial means that the transaction, when judged by its real terms,
is fair and otherwise adequate, but to ensure disclosures by corporate
management in order to enable the shareholders to make an informed choice” (p.
448).
[49]
In order to define the appropriate threshold as
to “just how significant a fact must be” (TSC Industries, at p. 445) to
a reasonable investor before it becomes material, the court imposed a standard
that requires that there must be a “substantial likelihood” that an omitted
fact “would” be considered important. This standard was imposed rather than
the lesser standard which would require disclosure if an omitted fact “might”
have been considered important. In adopting the “would” standard, the U.S.
Supreme Court approved of the words of Chief Judge Friendly of the U.S. Second
Circuit Court of Appeals in Gerstle v. Gamble-Skogmo, Inc., 478 F.2d
1281 (1973), where he wrote:
We
think that, in a context such as this, the “might have been” standard . . .
sets somewhat too low a threshold; the very fact that negligence suffices to
invoke liability argues for a realistic standard of materiality. . . .
While the difference between “might” and “would” may seem gossamer, the former
is too suggestive of mere possibility, however unlikely. When account is taken
of the heavy damages that may be imposed, a standard tending toward probability
rather than toward mere possibility is more appropriate. [p. 1302]
[50]
At the same time, the U.S. Supreme Court
clarified that a shareholder is not required to prove that the omitted fact
would have caused a reasonable investor to change his or her vote. What is
required is proof of a substantial likelihood that the omitted fact would have
assumed actual significance in the deliberations of a reasonable shareholder.
The standard was seen as consistent with the court’s description of materiality
in its earlier decision in Mills v. Electric Auto-Lite Co., 396 U.S. 375
(1970), that the defect or omission “have a significant propensity to
affect the voting process” (p. 384 (emphasis in original)).
[51]
Given that materiality is determined
objectively, from the perspective of a reasonable investor, I would add that
the subjective views of the issuer do not come into play when assessing
materiality. As I will discuss later, with respect to VAC’s liability under
the Real Estate Act, VAC’s subjective views only are taken into account when
considering the defence under s. 75(2)(b)(viii), not when considering whether a
false statement was material. I make this observation because in art. 4.11 of
the Hilton Disclosure Statement VAC represented that it was “not aware of any
existing or potential conflicts of interest”. The Court of Appeal appears to
have treated this language as importing a subjective element into the analysis
of VAC’s conflict representation, rather than treating it as an element of the
statutory defence.
[52]
Finally, the U.S. Supreme Court indicated that
the importance of an omitted fact must be considered in the light of whether it
would be viewed by a reasonable investor as having “significantly altered the
‘total mix’ of information made available”. In certain situations, evidence of
the information made available may be such that common sense inferences will be
sufficient to establish materiality. In other cases, where there is evidence
that supports competing inferences, a court may be required to carry out a more
complex analysis to determine what the reasonable investor would have
considered important. For the majority of cases, materiality is a contextual
matter, involving the application of a legal standard to specific facts, that must
be determined in light of all of the information that was made available to an
investor. Canadian and American authorities and commentary on materiality
indicate that assessing materiality is a “fact-specific inquiry” (Basic Inc.
v. Levinson, 485 U.S. 224 (1988), at p. 240). Materiality is “to be
determined on a case-by-case basis” (p. 250) in light of all of the relevant
circumstances.
[53]
The United States Securities and Exchange
Commission (“SEC”), in SEC Staff Accounting Bulletin: No. 99 — “Materiality”
(August 12, 1999 (online)), says that quantitative and qualitative factors
should be considered in assessing materiality and that this requires “a full
analysis of all relevant considerations” (pp. 2-3). The SEC wrote that “an
assessment of materiality requires that one views the facts in the context of
the ‘surrounding circumstances,’ as the accounting literature puts it, or the ‘total
mix’ of information, in the words of the [U.S.] Supreme Court” (p. 3). A
fact-driven, contextual approach to determine materiality is also recommended
in the Canadian Securities Administrators National Policy 51-201 Disclosure
Standards (July 12, 2002).
[54]
Despite materiality being a question of mixed
law and fact, Sharbern asserts that “there is no need for a plaintiff to
tender industry or expert evidence as to what would influence a reasonable
investor because the question of materiality of conflicts of interest in a
prospectus is uniquely for the court, involving a question of construction”
(A.F., at para. 40). To support this assertion, Sharbern refers to the words
of Binnie J. in Kerr where he wrote that “disclosure is a matter of
legal obligation” (para. 54). In Kerr, Binnie J. was writing in the
context of explaining that the business judgment rule “should not be used to
qualify or undermine the duty of disclosure” (ibid.).
[55]
The business judgment rule is applied by courts
when they are asked to resolve disputes involving business decisions made by
managers (Kerr, at para. 54). In Kerr, Binnie J. adopted Weiler
J.A.’s description of the business judgment rule at p. 192 in Maple Leaf
Foods Inc. v. Schneider Corp. (1998), 42 O.R. (3d) 177 (C.A.) as follows:
The
court looks to see that the directors made a reasonable decision not a perfect
decision. Provided the decision taken is within a range of reasonableness, the
court ought not to substitute its opinion for that of the board even though
subsequent events may have cast doubt on the board’s determination. As long as
the directors have selected one of several reasonable alternatives, deference
is accorded to the board’s decision . . . .
[Emphasis deleted . . . .] [Text in brackets in original; para.
54.]
[56]
Binnie J. explained that the business judgment
rule has been traditionally justified with respect to business decisions
because (i) “judges are less expert than managers in making business
decisions”, and (ii) “[i]n order to maximize returns for shareholders, managers
should be free to take reasonable risks without having to worry that their
business choices will later be second-guessed by judges” (Kerr, at para.
58). These traditional justifications for the rule “do not apply to disclosure
decisions” (ibid.).
[57]
As I have explained, the question of materiality
involves the application of a legal standard to a given set of facts. Judges
are not less expert than business managers when it comes to the application of
a legal standard to a given set of facts; neither do managers’ assessments of
risk have anything to do with meeting their disclosure obligations. As Binnie
J. observed, “[i]t is for the legislature and the courts, not business
management, to set the legal disclosure requirements” (Kerr, at para.
55).
[58]
Nothing in these reasons departs from the law as
set out in Kerr. VAC’s statutory obligation in this case was to
disclose certain prescribed matters and, in doing so, to not make material
false statements. While VAC made its own assessment of what information it was
required to include in the Hilton Disclosure Statement, it is the court that
determines whether the disclosure made meets VAC’s legal obligations. The
court must therefore inquire into what the reasonable investor would consider
as significantly altering the total mix of information made available. This is
a fact-specific inquiry, and except in those cases where common sense
inferences are sufficient, the party alleging materiality must provide evidence
in support of that contention.
[59]
In carrying out a materiality assessment, a
court must first look at the information disclosed to investors at the time
they made their investment decision. In the present case, what I will refer to
as “disclosed information” was the information contained in the Hilton
Disclosure Statement. The next step in determining whether an omitted fact or
information (“omitted information”) would be considered as significantly
altering the total mix of information made available is to consider the omitted
information against the backdrop of what was disclosed. In the present case,
the significance of the Compensation Differences must be ascertained by
comparing the omitted information (the guaranteed rate of return to Marriott Owners
and the 5% management fee and added incentive payable to VAC by the Marriott
Owners) to the disclosed information. As part of this second step, a court may
consider contextual evidence which helps to explain, interpret, or place the
omitted information in a broader factual setting, provided it is viewed in the
context of the disclosed information. In this case, for example, evidence
about the strong economic environment at the time investors made their
investment decisions would help to evaluate whether the guaranteed rate of
return given to Marriott Owners would have been significant in the context of
the projections for high occupancy rates for the Hilton hotel that were
disclosed in the Hilton Disclosure Statement.
[60]
Another type of evidence relevant to the
materiality assessment is evidence of concurrent or subsequent conduct or
events that would shed light on potential or actual behaviour of persons in the
same or similar situations (“behaviour evidence”). For example, a plaintiff
would not be precluded from introducing evidence, if available, that the
defendant acted on a conflict of interest even though that evidence pertained
to events arising subsequent to the investors making their investment
decisions. Similarly, a defendant would not be precluded from bringing
evidence that investors had information not included in the disclosure
documents at the time they were making their investment decisions, or that
investors who had the information acted in a certain way. Beyond this
behaviour evidence, evidence of common knowledge or, depending upon the
circumstances, knowledge specific to particular investors would also be
admissible. Nonetheless, in considering the question of materiality, the
predominant focus is on the disclosed and omitted information.
[61]
In sum, the important aspects of the test for
materiality are as follows:
i. Materiality is a question of mixed law and fact, determined
objectively, from the perspective of a reasonable investor;
ii. An omitted fact is material if there is a substantial
likelihood that it would have been considered important by a reasonable
investor in making his or her decision, rather than if the fact merely might
have been considered important. In other words, an omitted fact is material if
there is a substantial likelihood that its disclosure would have been viewed by
the reasonable investor as having significantly altered the total mix of
information made available;
iii. The proof required is not that the material fact would have
changed the decision, but that there was a substantial likelihood it would have
assumed actual significance in a reasonable investor’s deliberations;
iv. Materiality involves the application of a legal standard to
particular facts. It is a fact-specific inquiry, to be determined on a
case-by-case basis in light of all of the relevant considerations and from the
surrounding circumstances forming the total mix of information made available
to investors; and
v. The materiality of a fact, statement or omission must be
proven through evidence by the party alleging materiality, except in those
cases where common sense inferences are sufficient. A court must first look at
the disclosed information and the omitted information. A court may also
consider contextual evidence which helps to explain, interpret, or place the
omitted information in a broader factual setting, provided it is viewed in the
context of the disclosed information. As well, evidence of concurrent or
subsequent conduct or events that would shed light on potential or actual
behaviour of persons in the same or similar situations is relevant to the
materiality assessment. However, the predominant focus must be on a contextual
consideration of what information was disclosed, and what facts or information
were omitted from the disclosure documents provided by the issuer.
(5) Analysis
of the Trial Judge’s Materiality Assessment
[62]
I now turn to the trial judge’s materiality
assessment. In my respectful view, the trial judge made three interrelated errors
of law in her treatment of the materiality of VAC’s alleged conflict of
interest stemming from the Compensation Differences, which impact upon her
assessment of whether the Hilton Disclosure Statement contained a material
false statement. First, she equated the existence of a potential or actual
conflict of interest with materiality, essentially treating a conflict of
interest as inherently material. Second, she reversed the onus on Sharbern as
plaintiff to prove materiality and placed an onus on VAC to disprove
materiality. Third, she failed to consider all of the evidence available to
her on the issue of materiality. I will deal with these errors in turn.
[63]
Although much time was dedicated to the question
in her analysis, the key issue before the trial judge was not whether a
potential or actual conflict of interest existed. The existence of non-material
conflicts of interest had been acknowledged by VAC in arts. 4.9(i) and 4.11 of
the Hilton Disclosure Statement. Rather, the key issue was whether the
Compensation Differences and the potential or actual conflict of interest they
created were material, thereby rendering VAC’s failure to disclose them
“material false statements” attracting liability under the statute.
[64]
A careful review of Wedge J.’s reasons shows
that once she had determined that there was a potential or actual conflict of
interest, she found that there was an obligation to disclose the conflict as if
the existence of the conflict itself was inherently material. For example,
before she had even considered the issue of materiality, Wedge J. states, at
para. 310, that “[g]iven the existence of the conflict described above, VAC was
required to disclose the nature of those agreements” evidencing the
Compensation Differences. Similarly, when speaking about the evidence led by
VAC concerning the benefits to the hotels of sharing resources and expenses,
she determined that “[i]t is for the investor to decide whether the benefits of
cost and resource sharing outweigh the detriment of the conflict. An investor
cannot engage in that weighing process unless the conflict is disclosed” (para.
304). Again, this is before the trial judge had made any determinations with
respect to the materiality of the conflict of interest.
[65]
Treating a conflict of interest as inherently
material led the trial judge to other manifestations of the same error of law.
One is that she misinterpreted the statutory disclosure requirement. She said
that the conflict of interest must be disclosed so that investors can weigh its
costs and benefits against those of other factors. However, the statutory
requirement does not impose on issuers an obligation to disclose all facts that
would permit an investor to sort out what was material and what was not. This
approach would not only result in excessive disclosure, regardless of
materiality, it would overwhelm investors with information and impair, rather
than enhance, their ability to make decisions.
[66]
Further, by holding that the failure to disclose
the existence of conflict of interest is sufficient to attract liability for a
material false statement, the trial judge misinterpreted the test for
materiality. If the mere existence of a potential or actual conflict of
interest creates an obligation to disclose it, without a proper inquiry into
the materiality of the conflict, this approaches the standard of material fact
used by the Court of Appeals in TSC Industries of “all facts which a
reasonable stockholder might consider important” (sub nom. Northway, Inc. v.
TSC Industries, Inc., 512 F.2d 324 (7th Cir. 1975), at para. 3). That
standard has been rejected by the U.S. Supreme Court and now by this Court in
these reasons.
[67]
In assessing materiality, the trial judge
pointed to the test set out in TSC Industries and concluded:
I
am satisfied that VAC’s ability to make more money under the Marriott guarantee
when a potential customer chose the Marriott over the Hilton would have assumed
actual significance in the deliberations of a reasonable investor, as would the
fact that VAC made more money in management fees if the Marriott revenue was
relatively higher than the Hilton revenue. [para. 321]
However, she does not
address how or why there is a substantial likelihood that the Compensation
Differences would be viewed by reasonable investors in the Hilton strata lots
as significantly altering the total mix of the information made available. She
appears to make a common sense inference that the Compensation Differences
would have been material, without offering any analysis of how the conflict
created by the Compensation Differences would fit into the mix of all other
relevant information, nor does she take notice of what the total mix of
information would be.
[68]
There was evidence, which I will discuss more
fully below, which could have supported the opposite inference, that the
Compensation Differences or the omitted information were not material in the
context of what had already been disclosed to investors. For example, the
disclosed information included information about the economic environment at
the time of the sale of the strata lots; the financial benefits offered to the
Hilton Owners, such as the management fee payable to VAC; information about
common management by VAC and resulting risk factors; and information relevant to
VAC’s limited ability to prefer its own interests. The trial judge also had
behaviour evidence led by VAC about what the conduct of fully informed
investors had been. In my view, this evidence demonstrated that competing
inferences could be drawn in this case and added a layer of complexity to the
materiality analysis that took it outside the realm of drawing a simple, common
sense inference. A more detailed analysis of the evidence constituting the
“total mix” of information was required in order to make a determination about
what a reasonable investor would have considered significant.
[69]
Wedge J.’s error in treating a conflict of
interest as inherently material is interrelated with her second error, which
was to reverse the onus of proof. Once she was satisfied that Sharbern had
proven the existence of a conflict of interest, she turned to VAC to show why
it was not material. The result was that she made the determination that the
conflict of interest was material without requiring Sharbern to satisfy its
burden, as plaintiff, of proving materiality.
[70]
Having found a conflict of interest to be
inherently material, the trial judge looked to VAC to show proof that it was
not. She considered VAC’s submissions that the Compensation Differences would
not have been material in light of all the disclosed information about common
management in the Hilton Disclosure Statement. She then stated: “I cannot
agree with VAC’s submission concerning materiality” (para. 320) and concluded
that “the presence of an actual or potential conflict of interest on the part
of [VAC] would concern any reasonable person contemplating investing more than
$100,000 in a strata unit” (para. 321). While observing that “no expert
evidence was advanced with respect to the knowledge of the reasonable investor”
(para. 317), she neither proceeded with an analysis of other evidence of
materiality adduced by Sharbern, nor commented upon the absence of any such
evidence. As stated above, the onus of proving the materiality of a fact,
statement or omission rests with the person alleging materiality. Sharbern did
not adduce any evidence supporting the materiality of the Compensation
Differences (other than the Hilton Disclosure Statement and the omitted
information). It did not provide evidence to explain or place the omitted
information into the context of the disclosed information in a way that would
show its materiality. There is nothing in the trial judge’s analysis to
indicate that Sharbern satisfied its burden.
[71]
The third error evident from the decision of
Wedge J. is that she failed to consider all the evidence available to her on
the issue of materiality. I am not unmindful that “[i]n reviewing the
decisions of trial judges in all cases . . .
it is important that the appellate court remind itself of the narrow scope of
appellate review” with respect to factual matters (Van de Perre v. Edwards,
2001 SCC 60, [2001] 2 S.C.R. 1014, at para. 11; see also Housen v.
Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 46). When a
question of mixed fact and law is at issue, the findings of a trial judge
should be deferred to unless it is possible to extricate a legal error (Housen,
at para. 37). Within this narrow scope of review, an appellate court may
“reconsider the evidence” proffered at trial when there is a “reasoned belief
that the trial judge must have forgotten, ignored or misconceived the evidence
in a way that affected his [or her] conclusion” and thereby erred in law (Van
de Perre, at para. 15). As I will now explain, Wedge J. ignored and
misconceived evidence relevant to the question of materiality in a way that
affected her conclusions.
[72]
The statutory disclosure requirements only
oblige issuers to disclose certain prescribed information. Where the issuer’s
disclosure is challenged, the court must determine whether the omitted
information was material in the context of the “total mix” of information made
available to the investor. While Wedge J. considered some evidence in relation
to materiality (i.e. the language and general circumstances surrounding the
Hilton Disclosure Statement), she failed to consider other relevant evidence.
For example, she rejected much of the evidence adduced by VAC as being
irrelevant to the issue of the existence of a conflict of interest. There is no
indication that she considered that evidence, as she was required to do, in
assessing the materiality of the Compensation Differences.
[73]
As I will detail below, evidence of factors such
as the general economic climate at the time the strata lots were sold, the
financial arrangements offered to Hilton Owners, the disclosure made by VAC of
common management and risk factors, and the limited extent of VAC’s ability to
act upon the Compensation Differences in its own interests may be of little
weight in determining whether a potential or actual conflict of interest
existed as a result of the Compensation Differences. However, as mentioned
above, those factors constituted disclosed information that would come into
play as relevant to the issue of whether reasonable investors would have
considered the omitted information important to their investment decision.
(a) The Economic Environment
[74]
The Hilton Disclosure Statement warned that “[t]o
the extent that there are more hotel rooms available in a particular market than
there is demand for those rooms, then both occupancy and room rental rates may
be adversely effected [sic]. There are other hotels which are planned
for the Richmond and Vancouver markets” (art. 4.9(b)). However, it also stated
that “Richmond is ranked as having the highest hotel occupancy of any market in
Canada and the United States for the full year 1996” and was showing similar
promise for 1997 (point 5 of the executive summary). The information about the
high hotel occupancy rates in Richmond, coupled with the optimistic projections
made in the Hilton Disclosure Statement, are relevant considerations the trial
judge should have taken into account and suggested that the Hilton would not
have a problem with occupancy rates, or need to worry about competition from
the Marriott. This information about the economic environment was disclosed
information forming part of the total mix of information made available to
investors, against which they would have weighed the importance of the omitted
information.
(b) Financial Benefits to
Hilton Owners
[75]
The omitted information about VAC’s agreements
with the Marriott Owners would have been assessed by a reasonable investor in
comparison to the disclosed information about the financial arrangements given
to Hilton Owners. Although they did not receive a guarantee, the lower
management fee of 3% instead of 5% and an added incentive had been given to
Hilton Owners to increase their projected rate of return. The advantage of
paying a low percentage management fee could have supported an inference that
there were financial arrangements to counterbalance the omitted information
about financial arrangements for the Marriott Owners even if they left the
alleged incentive for favouritism unchanged.
(c) Disclosure of Common
Ownership and/or Management and Risk Factors
[76]
The Hilton Disclosure Statement disclosed that
the developer of the Hilton was also developing the Marriott, and was the owner
of the Richmond Inn. In the risk factors, VAC disclosed that its agreements
with the Marriott “give rise to certain liabilities and obligations of the
Developer which could impact upon its ability to perform its obligations under
the Agreements” with the Hilton strata lot owners (art. 4.9(i)). VAC also
disclosed that the Asset Manager would be the same for the Hilton and the
Marriott, and that the day-to-day management of the Hilton would be
subcontracted to the manager of the Richmond Inn. The Hilton Disclosure
Statement states that “[t]he success of the Hotel will depend in large measure
on the ability of the Developer as Asset Manager” and that “the success or
failure of the Rental Pool will depend in part on the managerial abilities of
the Asset Manager” (art. 4.9(e) (emphasis deleted)).
[77]
Although the trial judge rejected VAC’s submission
that its disclosure of potential conflicts had been sufficient, she noted in
her reasons that because the two hotels were in direct competition for
clientele, “the interests of their owners were not congruent” (para. 299). Nonetheless,
she acknowledged that “Hilton Owners consented to VAC acting for other
principals competing in the same market” (para. 425). While all of this
evidence was reviewed by the trial judge in other contexts, in my respectful
opinion, she failed to assess whether there was a substantial likelihood that a
reasonable investor in a Hilton strata lot would have viewed the Compensation
Differences and their potential for creating a conflict of interest as
significantly altering the information already possessed about the potential
risk factors.
(d) VAC Had No Practical Means
or Incentive to Favour the Marriott
[78]
VAC led evidence at trial in an attempt to show
why it would not have preferred the Marriott and that it did not do so. VAC
submits that this evidence shows that the conflict of interest did not manifest
itself in practice, and that VAC had no practical means or the incentive to
favour the Marriott over the Hilton. VAC argues that this evidence “support[s]
VAC’s conclusion that the potential conflict of interest was not material at
the time of disclosure” (R.F., at para. 91). The trial judge considered this
evidence in the conflict of interest stage of her analysis. There, she found
that it did “not go to the issue of the existence of conflict” but rather “goes
only to whether VAC would have acted on the opportunities raised by the
conflict” (para. 306). She does not appear to have considered it with respect
to whether it would be relevant to the question of materiality.
[79]
The evidence adduced by VAC that would show it had
limited practical means and limited incentives to favour the Marriott over the
Hilton includes evidence that VAC had a limited ability to market the hotels in
a manner that favoured one hotel over the other. Evidence led at trial and
discussed by the trial judge in her fiduciary duty analysis suggested about
half of the hotels’ traffic was generated by marketing at the
international/national level by the Hilton and Marriott chains. While we
should avoid considering this percentage, which did not constitute disclosed
information, the Hilton Disclosure Statement did disclose that investors could
expect to “benefit from [the] strength of Hilton’s worldwide reservations
system and the worldwide recognition provided by [the Hilton chains]” (point 3
of the executive summary).
[80]
The Hotel Asset Management Agreement under which
VAC managed the Hilton hotel was disclosed information. That agreement required
VAC to manage the Hilton hotel in a commercially reasonable manner and
contained a number of obligations to use reasonable efforts. Even if the
Hilton Owners had been aware of the omitted information, their concerns about
any potential favouritism of the Marriott hotel would have been displaced by
this contractual obligation imposed on VAC. The requirement to operate the
hotel in a commercially reasonable manner would be inconsistent with VAC
favouring one hotel to the detriment of the other, and served as a means to
contractually preclude VAC from doing so.
(e) Evidence of Conduct of Fully
Informed Investor
[81]
Another piece of evidence that should have been
included in the trial judge’s materiality assessment was that Tevan Trading
Ltd. (“Tevan”) (the largest investor in the Hilton strata lots other than VAC’s
parent company) owned units in both the Hilton and the Marriott. Tevan
purchased six Hilton units on March 17, 1998, and then additional Hilton units
on March 23, 1998, along with four Marriott units on the same day. The
Marriott units became available to Tevan because certain buyers in the Marriott
had cancelled their purchases. While the details of the Compensation
Differences would have been known to Tevan when it invested in the Hilton on
March 23, 1998, they did not appear to affect Tevan’s decision to invest in the
Hilton as well as the Marriott. It is true that Tevan is only one investor,
and there is no evidence about Tevan’s intentions in buying strata units in the
Hilton and Marriott. Thus, one cannot jump to the conclusion that Tevan alone
represents the “reasonable investor”. Nonetheless, the trial judge was
required to consider this behaviour evidence as part of her determination of
the substantial likelihood that a reasonable investor would have seen any
conflict created by the Compensation Differences as significantly altering the
total mix of information he or she had available.
(f) Evidence of the
Investor Committee Meetings
[82]
Finally, there was also relevant behaviour
evidence concerning the Hilton Owners’ investor committee meetings. Minutes of
those meetings record questions raised by the Hilton Owners over concerns they
had with the hotel. There is no indication in these Minutes that the Hilton
Owners were concerned about the Compensation Differences prior to the filing of
their statement of claim in June 2003. This lack of concern would suggest that
the Compensation Differences were not material.
[83]
In particular, VAC disclosed the existence of
the guarantee in favour of the Marriott Owners at an investors committee
meeting with the Hilton Owners on June 14, 2000. The timing of the disclosure
of the differential management fee is not clear. While numerous concerns were
raised by the investors during these meetings — ranging from concerns over pastry
contracts to concerns over strata fees, advertising and the franchise agreement
— none of the Minutes of any of the investor committee meetings subsequent to
the June 14, 2000 disclosure record any questions that would evidence a concern
over the guarantee.
[84]
Under the guarantee, VAC sustained a liability
of over $13 million. The financial impact or incentive for VAC from the
management fee differentials would have been considerably less. While the
differential in management fees might be thought to support Sharbern’s argument
that it created an incentive for VAC to favour the Marriott, from the
perspective of the Hilton Owners, the lower management fee payable would also
have appeared favourable to them. Further, VAC manager Timothy Mashford, who
was present during many of the investor committee meetings, testified that at
no time did any of the investors express any concern that the Hilton, Marriott
and Richmond Inn were being commonly managed by VAC.
[85]
In sum, the evidence summarized in the preceding
paragraphs should have been considered by the trial judge in applying the
materiality standard to the facts of this case. Some of the evidence referred
to above helps to place the omitted information in the factual context of the
total mix of disclosed information, in order to evaluate whether the omitted
information would have been considered important by reasonable investors in
making their investment decisions. While not part of the total mix, the
behaviour evidence of fully informed investors, either prior to making their
investment decisions (e.g. the Tevan evidence) or subsequent to their
investment (e.g. the investor committee meetings evidence), when they learned
of the guarantee, was also relevant to the trial judge’s determination of
whether the reasonable investor would have considered the Compensation
Differences material.
(6) Sharbern’s
Burden of Proof
[86]
For its part, Sharbern was not required to prove
that investors would not have purchased the Hilton strata lots had they known
about the Compensation Differences. However, Sharbern did have the burden of
proving, on a balance of probabilities, the substantial likelihood that
disclosure of the omitted information would have significantly altered the
total mix of information made available to reasonable investors in the Hilton
strata lots.
[87]
To the extent it existed, in cases where common
sense inferences are not sufficient, a plaintiff could lead the following types
of evidence in the discharge of that burden:
i. that potential investors who knew of the Compensation
Differences declined to invest in Hilton strata lots or exhibited concern and
doubts about the investment because of them;
ii. that potential investors declined to invest in the Hilton
strata lots because they found there was insufficient disclosure about the
common management of the Hilton and Marriott hotels and the conflict of
interest;
iii. that once the Hilton Owners became aware of the
Compensation Differences, they expressed significant concerns about them and
challenged VAC’s ability to properly manage the Hilton hotel in accordance with
its contractual obligations;
iv. that VAC’s marketing efforts and management of the hotel were
not carried out diligently in good faith; and
v. that VAC acted on the conflict of interest to the detriment
of Hilton Owners.
Some of this evidence
might have required expert evidence. However, if it existed, evidence could
have been obtained through the pre-trial discovery process, including
production of documents, or demonstrated at trial through the cross-examination
of VAC’s employees. The above list is not exhaustive, nor is a plaintiff
required to lead all of the evidence on that list in order to prove
materiality. Because the materiality determination is case-specific, the
evidence that is required in any given case will vary with the circumstances.
[88]
The only evidence adduced by Sharbern in
relation to these types of considerations was evidence of a non-competition
policy implemented by VAC in 2002 that provided that the Hilton, the Marriott
and the Richmond Inn would not engage in price competition with respect to each
other’s top ten clients by undercutting room rates. Without deciding upon the
merits or actual effect of the policy, the trial judge commented that because
the Marriott had been in operation one year longer than the Hilton, it had a
competitive advantage over the Hilton such that any agreement favouring the status
quo was to the benefit of the Marriott. Sharbern alleged that the policy
was detrimental to the Hilton hotel and therefore proved that VAC had used its
position as a common manager to favour the Marriott hotel and, consequently,
its own interests.
[89]
As the non-competition policy was developed long
after the time period of VAC’s statutory disclosure obligations, I will
concentrate my analysis of it on the alleged breaches of fiduciary duty. As
discussed more fully below, in my view the materiality of the non-competition
agreement was not established on the evidence. The evidence was that the
Marriott would match the Hilton’s pricing in order to retain customers. It is
indeed dubious that any hotel would sit idly by and watch its competitor take
its customers through lower pricing in a poor market environment without taking
steps to retain those customers. It is apparent that VAC saw price competition
as merely resulting in an attrition of revenue for all three hotels and sought
to prevent such a result. That could hardly be seen as prejudicial to the Hilton.
Moreover, whether or not it could be viewed as material or as having an effect
on the Hilton occupancy rates would have depended upon an assessment of how it
compared with the other arrangements that existed between the hotels, such as
evidence about the sharing or referral of Marriott customers to the Hilton and
Richmond Inn. We do not have the benefit of such an assessment.
[90]
Sharbern failed to adduce any other evidence to
prove there was a substantial likelihood that disclosure of the Compensation
Differences would have significantly altered the total mix of information that
was made available to reasonable investors in the Hilton strata lots.
(7) Conclusions
on Materiality
[91]
In sum, the trial judge erred in law by treating
this conflict of interest as inherently material, reversing the onus of proof
of materiality, and failing to consider all of the evidence relevant to the
determination of materiality. It also appears from the record before the trial
court that no evidence was adduced by Sharbern which could reasonably have
supported a finding that the Compensation Differences and any conflict of
interest they created were material. Separating materiality from the conflict
of interest analysis, applying the burden of proof appropriately and taking
account of all relevant evidence, I am of the opinion that it has not been
demonstrated that there was a substantial likelihood that disclosure of the
Compensation Differences would have assumed actual significance in a reasonable
investor’s investment decision.
B. The
Statutory Defence
(1) The
Legal Test
[92]
Even if VAC were found to have made a “material
false statement”, s. 75(2)(b)(viii) of the Real Estate Act provides VAC
with a defence if it can prove that it “had reasonable grounds to believe and
did, up to the time of the sale . . . believe that the statement was true”. To
rely on the defence, VAC had to show (1) that it subjectively believed the
representations it made were true, and (2) that it objectively had “reasonable
grounds” for such a belief. In considering the defence, the question is not
whether VAC’s conclusion itself was reasonable. Rather it is whether VAC
subjectively believed its representations, and whether that belief had an
objective basis in the sense that there were reasonable grounds for the belief.
[93]
The statutory defence found in s. 75(2)(b)(viii)
of the Real Estate Act does not appear to have been considered by the
trial judge. It is not mentioned by her at any point. At para. 323, Wedge J.
reproduced portions of s. 75 of the Real Estate Act; however, she did
not go so far as to reproduce the portion of s. 75 that contained the statutory
defence. In addition, the common liability questions made no mention of the
statutory defence.
[94]
When a trial judge does not consider a statutory
defence, an appellate court may do so or remit the defence to the trial court
for its consideration (Hollis v. Dow Corning Corp., [1995] 4 S.C.R. 634,
at para. 33). In this case, it is both feasible on a practical level and in
the interests of justice for this Court to make a fresh assessment of the
evidence on the record with respect to the defence.
[95]
In my opinion, even if VAC were shown to have
made a material false statement, the statutory defence contained in s.
75(2)(b)(viii) of the Real Estate Act would preclude VAC from being
found liable under s. 75(2). As I will shortly explain, the evidence indicates
that VAC subjectively believed, and objectively had reasonable grounds to
believe, that it was making true statements when it did not disclose the
details of the Compensation Differences and represented in the Hilton
Disclosure Statement: (i) that it had entered into agreements with the
Marriott that were “similar in form and substance” to those governing the
Hilton (art. 4.9(i)); and (ii) that it was “not aware of any existing or
potential conflicts of interest . . . that could reasonably be
expected to materially affect the purchaser’s investment decision” (art. 4.11).
[96]
The evidence establishing the subjective and
objective components of the defence is evidence of (i) common industry
practices and (ii) VAC’s limited practical means and incentives to prefer the
Marriott. Significantly, Sharbern did not draw this Court’s attention to any
evidence that would negate the defence.
(2) Common
Industry Practice Evidence
[97]
The Hilton Disclosure Statement disclosed that
VAC’s parent company, Larco Investments, itself or through its subsidiaries,
concurrently owned or managed a Delta and a Ramada hotel in Vancouver, a
Holiday Inn at Whistler, a Delta and a Radisson hotel in Toronto and other
hotels across Canada. As noted by the Court of Appeal, “VAC relied on the
extensive factual and expert evidence it adduced concerning actual and industry
practice in the management of multiple hotels by a single entity. There was no
evidence to the contrary and no evidence objectively to support the conclusion
a reasonable investor would be concerned about the details of the financial
arrangements” (para. 76).
[98]
Wedge J. rejected VAC’s industry practice
evidence finding it of “little probative value” in relation to whether it
proved that a conflict of interest existed in the common management of the
Hilton and the Marriott (para. 296). This finding was based on her view that
there
was no evidence offered by VAC (or its experts) as to whether those properties
were in the same competitive set, whether the management fee or other financial
arrangements governing the properties were the same, whether those details were
disclosed to the owners, or, most importantly, whether there were
representations to investors concerning potential or actual conflicts of
interest as a result of common management. [ibid.]
However, as I will now
explain, I am of the opinion that Wedge J. erred in law when she said that
there was “no evidence”, as there was evidence. Further, while proving the
lack of a material conflict of interest in one common management scenario may
be of little help in proving or disproving the existence of a material conflict
of interest in another, evidence that hotel managers routinely act for
competing hotels would be relevant to the question of whether resulting
conflicts of interest are generally seen as material.
[99]
VAC adduced evidence that it was a common
industry practice for different hotels to be commonly managed in the same
market, with different management contracts and financial arrangements for each
hotel, and with different owners who were not aware of the terms of the
contract with the other hotels. VAC’s witnesses, including Joann Pfeifer,
testified that they believed that common management would be an advantage
allowing the participating hotels to maximize profits. Joel Rosen, who was
qualified as an expert in the hotel consulting field, testified that it was a
common practice in the hotel industry for the same manager to commonly manage
competing hotels in the same market and that this practice had “been the case
for many years” (R.R., vol. 6, at p. 1159). In his expert report, Mr. Rosen
opined that “a hotel management company operating multiple competing properties
in a market is not uncommon” (R.R., vol. 30, at p. 6006). By way of example he
discussed certain luxury hotels in various cities in the United States,
remarking that
the management contracts may be the same
or different in each city, depending on the negotiations at the time the
contracts were determined. The fees may differ, the calculation of the
incentive fee may differ, the termination clause may differ, etc. The
contracts do not mirror each other at all in each city and in fact the owner of
one hotel would not know the terms of the contract at the other hotel in their
city.
(Ibid.
(emphasis added))
[100]
VAC also adduced evidence of the perspective and
experience of its principals and senior managers. VAC’s sole director and
officer, Amin Lalji, when asked about separately owned, commonly managed
hotels, testified that “there were plenty of examples prevailing in the market
where this is a common practice of most hotel companies, where they would be
managing hotels for different ownership structures” (R.R., vol. 8, at p.
1478). Lalji then cited examples in the B.C. market in which there was common
management of competing hotels. Similarly, a senior manager hired by Lalji,
Joann Pfeifer, testified that some of the Delta hotels in Vancouver were
managed by the same company, with different owners, and with different
compensation structures in place for the manager.
[101]
The evidence is that it was a common industry
practice for different competing hotels to be commonly managed with the
different owners not being aware of the terms of the contracts at each hotel.
From this evidence, it can be inferred that VAC had both a subjective and objective
basis for concluding that a reference to the Compensation Differences in the
Hilton Disclosure Statement was neither expected nor required.
(3) Evidence
of Limited Practical Means and Incentives to Prefer
[102]
The evidence of VAC’s limited practical means
and incentives to prefer the Marriott over the Hilton (which I summarized
above) is also relevant to determining whether the subjective and objective
components of the statutory defence have been established. For example,
evidence, provided on the details of industry and client practices that would
have affected comparative occupancy rates and limited VAC’s ability to induce
Hilton clients to switch to the Marriott, is relevant to whether there was an
objective basis for VAC’s belief that the Compensation Differences were not
material. Evidence was adduced that relative hotel occupancy was affected to a
large degree by independent factors such as international or national
marketing.
[103]
With respect to the hotel business that was
generated locally, the trial judge observed that much was won through a formal
request-for-proposal process from corporate clients. The manner in which VAC
participated in this formal request-for-proposal process would have been
subject to VAC’s contractual obligations under the Hotel Asset Management
Agreement to manage the Hilton in a commercially reasonable manner. To avoid
liability for breach of contract, VAC would have no room under the formal
request-for-proposal process to market the hotels in a manner that favoured the
Marriott over the Hilton. Thus, there was an objective basis for VAC believing
that, even if the Compensation Differences created an incentive to favour the
Marriott, it could not have materially affected the relative occupancy rates of
the Hilton or the Marriott had it tried to do so.
[104]
Evidence of VAC’s knowledge and motivations
would also be relevant to the inquiry. Such evidence included testimony
provided by VAC’s senior manager that she could not have retained managers for
the Hilton and the Marriott if these managers had been directed to favour one
hotel over the other. One of VAC’s principals also testified that neither Larco
Investments nor VAC would have risked their reputations by engaging in
preferential conduct.
[105]
Further, evidence about the sharing of common
resources and expenses between the Marriott, the Richmond Inn and the Hilton,
such as joint contracts for airport shuttle bus service, airline crew
transportation, dry cleaning, hotel laundry and armoured car pickup, and shared
personnel such as a chief engineer, executive housekeeper and payroll
assistant, substantiates VAC’s belief that the Hilton would derive benefits
from the common management arrangement. In my opinion, the efficiencies of
shared services and the potential for business referrals could reasonably have
factored into VAC’s assessment of whether the Compensation Differences were
material.
[106]
According to s. 75(2)(b)(viii) of the Real
Estate Act, the relevant time period to assess VAC’s beliefs is “up to the
time of the sale”. When the lots were being marketed, occupancy rates were
expected to remain high. The evidence was that VAC would not have been
concerned at that stage about liability from the guarantee of gross revenues
given to Marriott Owners, especially given that, on the evidence, it had
intended to make the same offer to Hilton Owners until dissuaded by legal
advisors. Similarly, it had reduced the management fee payable by Hilton
Owners, not to provide a benefit to itself or an advantage to Marriott Owners,
but in order to give increased revenues to Hilton Owners.
[107]
In my view, the evidence supports the claim that
VAC subjectively believed and had a reasonable basis for believing that the
financial arrangements for the two developments were similar, despite the
differences in detail. It is no coincidence that Sharbern’s action against VAC
focussed mainly on the claims of negligent misrepresentation and fraud in
relation to the financial projections. Occupancy rates and how they might be
influenced by the Compensation Differences only seemed important in hindsight,
with the change in economic conditions, 9/11, the SARS crisis, and the
increased supply of hotel rooms in Richmond.
[108]
The evidence adduced by VAC proves, on a balance
of probabilities, that VAC subjectively believed and had reasonable grounds for
believing that the Compensation Differences would not materially affect a
purchaser’s investment decision, that its agreements with the Marriott Owners
were similar to its agreements with the Hilton Owners, and that the
representations it made in the Hilton Disclosure Statement were true.
(4) No
Evidence to Negate the Defence
[109]
Sharbern did not direct this Court to any
evidence to the contrary or to specific passages in the reasons of the trial
judge that would have negated the defence established by VAC’s evidence.
During oral argument, when asked if there was a specific passage in the trial
judge’s reasoning that negated the defence, Sharbern’s counsel observed that
there was “not a specific passage” but rather that “the burden of [the trial
judge’s] reasoning as a whole” was responsive to the question of the defence (transcript,
at p. 9). Counsel also asserted that “it would be obvious in the
circumstances” (ibid., at pp. 8-9). With respect, it is not obvious,
particularly in light of the evidence led by VAC showing that the subjective
and objective components of the defence had been established.
[110]
A finding of fraud at trial would have contradicted
the conclusion drawn from the evidence that VAC subjectively believed the truth
of its representations. There was no such finding. Similarly, a finding that
VAC negligently misrepresented the absence of a potential or actual conflict of
interest in the Hilton Disclosure Statement could preclude VAC from proving
that there were reasonable grounds for its belief in the truth of its
representations, and prevent it from establishing the objective basis of its
statutory defence. However, as I will set out more fully below, in my view the
trial judge did not consider all of the elements necessary to establish
negligent misrepresentation.
[111]
As a result, even if VAC were found to have made
material false statements, VAC cannot be held liable under s. 75 of the Real
Estate Act because the evidence establishes that the statutory defence
found in s. 75(2)(b)(viii) applies.
C. Deemed
Reliance
[112]
A final issue with respect to VAC’s potential
liability under the Real Estate Act is whether the deemed reliance provided
for under the statute is rebuttable when the contrary is proved, with evidence,
on a balance of probabilities. Section 75(2)(a) of the Real Estate Act
provides that every purchaser of any part of land to which a prospectus relates
“is deemed to have relied on the representations made in the prospectus whether
the purchaser has received the prospectus or not”. Given my conclusion that
VAC cannot be held liable for making material false statements under the Real
Estate Act, it is not strictly necessary to consider whether the deemed
reliance provided under that Act is rebuttable. The issue is even less germane
given the subsequent repeal of the Real Estate Act. Nevertheless, as
both parties argued the issue on appeal, I will briefly comment on the matter.
[113]
The trial judge found that deemed reliance is
not rebuttable. She concluded that the purpose of the Real Estate Act
was to “protect the investing public” (para. 333). She wrote that it would
“undermine the purpose of the legislation” to allow a developer to attempt to
rebut the presumption and “direct the focus of the inquiry to what the investor
knew rather than what the developer failed to disclose” (ibid.). The
Court of Appeal came to the opposite conclusion. It found that deemed reliance
is rebuttable because the language used in s. 75 did not expressly create a
non-rebuttable presumption.
[114]
The Real Estate Act used the words “deemed
to have relied”. In St. Peter’s Evangelical Lutheran Church v. Ottawa,
[1982] 2 S.C.R. 616, at p. 629, the majority of this Court wrote that “the
words ‘deemed’ or ‘deeming’ do not always import a conclusive deeming into a
statutory scheme” and that “[t]he word must be construed in the entire context
of the statute concerned.”
[115]
Sharbern submits that the broad purpose of the Real
Estate Act is to protect investors, and that investors are best protected
when they do not have to prove reliance. It argues that conclusive deeming
strengthens an investor’s civil right of action, particularly when a class
action is involved, and makes it more likely that a wronged investor will
prosecute his or her claim without having to focus on what was read or
understood by the investor or what motivated the investor to invest. Sharbern
also contends that textual considerations, like the structure of s. 75, suggest
the deemed reliance is not rebuttable.
[116]
I do not accept Sharbern’s argument that the
purpose of the Real Estate Act would be undermined by allowing deemed
reliance to be rebutted. The successor legislation to the Real Estate Act,
the Real Estate Development Marketing Act, S.B.C. 2004, c. 41, allows
for the deemed reliance provided in s. 22(3) of that Act to be rebutted under
s. 22(5) when it can be proven that “the purchaser had knowledge of the misrepresentation
at the time at which the purchaser received the disclosure statement”. The
related Securities Act also provides at s. 131 for rebuttable deemed
reliance on misrepresentations in a prospectus. The existence of rebuttable
presumptions under this successor and related legislation suggests that such
presumptions accord with the investor protection purposes of those Acts.
[117]
I acknowledge that the Real Estate Act,
unlike the successor and related legislation, did not expressly provide for a
rebuttable presumption. Nonetheless, as St. Peter’s indicates, the use
of the word “deemed” does not always result in a conclusive, non-rebuttable
presumption. It is the purpose of the statute that must be examined in order
to determine if the presumption is rebuttable. The successor and related
legislation in this case can assist with interpreting the purpose of deemed
reliance in the Real Estate Act. Lord Mansfield explained this
principle in R. v. Loxdale (1758), 1 Burr. 445, 97 E.R. 394, observing
that “[w]here there are different statutes in pari materia though made at different
times, or even expired, . . . they shall be taken and construed
together . . . and as explanatory of each other” (p. 395). Estey J.
provided a more modern explanation of this principle, and explained how
“sometimes assistance in determining the meaning of [a] statute can be drawn
from similar or comparable legislation within the jurisdiction or elsewhere” (Nova,
an Alberta Corp. v. Amoco Canada Petroleum Co., [1981] 2 S.C.R. 437,
at p. 448).
[118]
As I have discussed above, disclosure is a
matter of legislative policy that involves “[b]alancing the needs of the
investor community against the burden imposed on issuers” (Kerr, at
para. 5). A non-rebuttable presumption could interfere with this balancing and
would not serve the statutory purpose behind legislated disclosure
obligations. For example, a non-rebuttable presumption would allow an investor
to claim reliance on a misrepresentation, even if the investor was fully
informed and had complete knowledge of all the facts. In doing so, the issuer
would be held liable for a misrepresentation of which the investor was fully
aware. This would be an absurd and unjust result, which would place issuers
into the position of having to guarantee the losses of fully informed
investors. The purpose of the disclosure obligation is to balance the amount
of disclosure made, not to place VAC into the role of insurer for Sharbern and
the other Hilton Owners.
[119]
Given that similar statutes expressly allow
deemed reliance to be rebutted, the legislature does not view rebuttable
presumptions to be contrary to investor protection. Further, a non-rebuttable
presumption could be contrary to the legislative balancing that underlies the
disclosure requirements in the Real Estate Act and would result in
absurd and unjust results. I would therefore conclude that the presumption of
deemed reliance under the Real Estate Act was rebuttable when it could
be proven, on a balance of probabilities, that the investor had knowledge of
the misrepresented or omitted facts or information at the time the investor
made the purchase.
D. Common
Law Negligent Misrepresentation
[120]
In addition to its claim under s. 75 of the Real
Estate Act, Sharbern alleges that VAC is liable for the tort of negligent
misrepresentation. The trial judge did not distinguish between the common law
and statutory causes of action in her reasons, and they were not distinguished
in the list of common issues on liability. Nonetheless, I proceed on the basis
that when the trial judge found that “VAC negligently misrepresented” (paras.
322 and 473) the Compensation Differences, this finding applied to both the
statutory and common law causes of action.
[121]
I am of the opinion that the trial judge’s
findings pertaining to the common law of negligent misrepresentation cannot
stand because she did not consider all of the elements necessary to establish
the tort. As set out in Queen v. Cognos Inc., [1993] 1 S.C.R. 87:
The decisions of this Court cited above
suggest five general requirements: (1) there must be a duty of care based on a
“special relationship” between the representor and the representee; (2) the
representation in question must be untrue, inaccurate, or misleading; (3) the
representor must have acted negligently in making said misrepresentation; (4)
the representee must have relied, in a reasonable manner, on said negligent
misrepresentation; and (5) the reliance must have been detrimental to the
representee in the sense that damages resulted. [p. 110]
[122]
The requirements set out in Cognos were
not included in the list of common liability issues. Nor was the framework
discussed or utilized by the trial judge in her reasons. While she clearly
dealt with the duty of care, and it might be inferred that her misrepresentation
analysis dealt with whether the Compensation Differences were untrue,
inaccurate or misleading (though this was not done so expressly), the trial
judge did not consider the third Cognos requirement. She also did not
consider the fourth requirement of reasonable reliance and fifth requirement of
resulting damages. However, reasonable reliance and damages would likely be
dealt with in the class action proceeding through future common or individual
trials.
[123]
The third Cognos requirement obligated Sharbern
to prove that VAC had “acted negligently in making [the] misrepresentation”.
This requirement is concerned with the standard of care, and was described by
Iacobucci J. in Cognos:
The
applicable standard of care should be the one used in every negligence case,
namely the universally accepted, albeit hypothetical, “reasonable person”. The
standard of care required by a person making representations is an objective
one. It is a duty to exercise such reasonable care as the circumstances
require to ensure that representations made are accurate and not misleading
. . . . [Emphasis added; p. 121.]
[124]
In considering the standard of care, the trial
judge would have had to address whether, on an objective basis, VAC had taken
such reasonable care as the circumstances required to ensure that the
representations made in the Hilton Disclosure Statement were accurate and not
misleading. She made no such finding. Instead, she summarily concluded that
VAC “negligently misrepresented” the Compensation Differences, without having
addressed the standard of care.
[125]
Sharbern submits that the trial judge’s
conclusion that VAC’s representations were negligent is “sound” (A.F., at para.
47). In oral argument, counsel for Sharbern conceded that the trial judge’s
“reasoning is sparse on her conclusion as to negligence” but insisted that her
conclusion was “obvious in the circumstances” (transcript, at pp. 8-9).
[126]
I am unable to agree. I do not think it
appropriate to collapse the Cognos requirement into a bare assertion of
obviousness. Failure to demonstrate how VAC breached the standard of care is
fatal to Sharbern’s common law claim. Sharbern, as plaintiff, bears the burden
of proving its allegations. Sharbern does not point to evidence that could
support a finding that the standard of care was breached. Nor does it explain
how such a conclusion could have been reached based on the trial judge’s
“sparse” reasoning.
[127]
Rather, Sharbern asserts that it was not
required to adduce expert evidence as to what a developer ought to disclose.
It argues that the case is about an experienced businessman (Mr. Lalji) who,
while aware of the undisclosed incentive, defends his failure to disclose it by
assuring us he would not put his own interests first. Sharbern contends that
VAC’s evidence of its reliance upon industry and expert evidence and upon the
advice of its solicitors in respect of its disclosure obligations did not
establish that VAC did not breach the standard of care.
[128]
Nonetheless, in the circumstances of this case,
a bare assertion that something is obvious, without more, cannot establish the
applicable standard of care. In the face of considerable evidence before the
trial court as to why the Compensation Differences or the potential conflict of
interest they created would not have been material to the decision of
investors, Sharbern did not provide the court with any evidence to counter
VAC’s position. For this reason, Sharbern’s common law claim of negligent
misrepresentation must fail.
[129]
I would add one observation on the fourth Cognos
requirement — reasonable reliance. In this case, Sharbern did not adduce
evidence of actual reliance. Instead it relied upon the statutory deeming
provision in the Real Estate Act. While the trial judge appears to have
contemplated the necessity of individual trials on the issue of reliance at the
outset of this litigation, her failure to differentiate between the common law
and statutory claims in her reasons conveys the impression that the statutory
deeming provision can establish common law reliance, removing the need for
further trials. This approach would be problematic. I do not think a
plaintiff may dip into a statutory cause of action for a helpful element in
order to establish the “actual reliance” required to maintain a common law
claim for negligent misrepresentation.
[130]
For these reasons I conclude that VAC cannot be
held liable for negligent misrepresentation at common law.
E. Breach
of Fiduciary Duty
[131]
The final issues to be determined in this appeal
are whether a fiduciary duty existed between VAC and Sharbern and, if so,
whether VAC breached that fiduciary duty. The breach issue can be broken down
into two aspects: (i) whether VAC breached its fiduciary duty to Sharbern by
failing to disclose the alleged conflict of interest created by the
Compensation Differences; and (ii) whether VAC breached its fiduciary duty to
Sharbern when it implemented the non-competition policy between the Hilton, the
Richmond Inn and the Marriott. I will deal with these issues and sub-issues in
turn.
(1) Lower
Court Treatment of the Fiduciary Duty Issues
[132]
Wedge J. described the content of VAC’s
fiduciary duties to Sharbern and other Hilton Owners in the following terms:
. . . I find that VAC did not owe a
fiduciary duty to not work for other principals competing in the same hotel
market as the Hilton. I also find that VAC did not owe a duty to the Hilton
Owners to disclose information that it had received from its other principals.
Rather, the Hilton Owners consented to VAC acting for other principals
competing in the same market, and could expect VAC to keep all information it
received from each of its principals confidential.
. . .
I find that VAC owes the
following fiduciary duties to the Hilton Owners:
1. A fiduciary duty to not act for other
principals competing in the same market and with respect to whom VAC has a
personal interest in favouring.
2. A
fiduciary duty to not act as agent for the Hilton Owners and any third party
contracting with them without first making complete disclosure to them and
obtaining their consent. [paras. 425 and 429]
[133]
The trial judge went on to find that, as a
result of the Compensation Differences, VAC had a personal interest in
favouring the Marriott over the Hilton. She concluded that
VAC’s
personal interest in favouring the Marriott over the Hilton conflicts with its
fiduciary duty to the Hilton Owners. Unless VAC disclosed this conflict of
interest, and obtained fully informed consent from the Hilton Owners to act in
those circumstances, it would be in breach of its fiduciary duty by continuing
to act. [para. 439]
[134]
Wedge J. then confirmed that whether the common
management of the Hilton and the Marriott had affected the operation of the
Hilton to its detriment had not been quantified on the evidence, and did not
need to be quantified at that stage in the proceedings. However, she found that
there was some evidence “that the Hilton has been disadvantaged by the common
management” (para. 447). By this she was referring to a non-competition policy
VAC implemented between the Hilton, the Richmond Inn and the Marriott. Since
the Hilton brand was proving weaker than the Marriott, senior management at the
Hilton tried to lure away corporate clients from the Marriott by undercutting
the Marriott’s room rates. When the Marriott complained that this was eroding
business and causing both hotels to lose money, sales staff proposed that the
Hilton, Marriott and Richmond Inn agree not to pursue the top ten corporate
preferred accounts of each by offering lower rates. However, other forms of
inducement were permitted. The non-competition policy was implemented in 2002.
[135]
Wedge J. considered this arrangement to be an
agreement between the Hilton and the Marriott with VAC acting as agent for
both. Irrespective of the merits of the contract, she found it to be a breach
of VAC’s equitable obligation to the Hilton Owners to commit them to a contract
with another party for whom VAC was also acting as agent, without obtaining the
Hilton Owners’ informed consent.
[136]
The Court of Appeal found that there was no
breach of fiduciary duty. Chiasson J.A. interpreted the trial judge’s
reasoning to mean that VAC was in breach of its fiduciary duty as soon as it
contracted with the Hilton Owners because of its agreement with the Marriott Owners.
However, having previously concluded that VAC did not misrepresent its
arrangements with the Marriott Owners, he found that VAC was not in breach of
fiduciary duty on entering into the contract with the Hilton Owners. In his
view, the issues were interrelated. He reconfirmed that “in this case, the
relationship between VAC and the Marriott Hotel unit owners was disclosed” and
that the question of whether VAC was in breach of its fiduciary duty because of
its failure to disclose the Compensation Differences “depends on whether that
information was material” (para. 98). Chiasson J.A. concluded that “in the
circumstances of this case, the information objectively was not material”
(para. 99).
[137]
Chiasson J.A. also held that “the consent given
to VAC to act for competing hotels is an answer to any contention the
implementation of the price competition policy was per se a breach of
fiduciary duty” (para. 104). The issue again turned on whether VAC had been
required to disclose the Compensation Differences, and in his view, it was not.
(2) A
Fiduciary Relationship Existed
[138]
VAC argues that the trial judge erred in finding
that VAC’s relationship with Sharbern was fiduciary in nature. VAC says that
the trial judge’s “decision to characterize VAC as a fiduciary was not based on
a careful consideration of the individual relationship between the parties” but
was instead based on a “simplistic categorical analysis” in which “[s]he held
that VAC was in some respects [Sharbern’s] agent, and that the principal-agent
relationship was a classic fiduciary relationship” (R.F., at para. 112). VAC
submits that the parties were simply dealing in an arm’s-length commercial relationship
characterized by self interest.
[139]
I cannot agree with VAC’s position. In my
opinion, the trial judge did not conduct a “simplistic categorical analysis”.
She made a comprehensive review of the jurisprudence and observed that
“[f]iduciary duties will not necessarily exist in all agency relationships”
(para. 398). She then carefully considered the relationship that existed under
the Hotel Asset Management Agreement before concluding that the relationship
was fiduciary. She noted that VAC was given discretion as a manager, that it
had the ability to unilaterally affect the hotel owners’ legal or practical
interests, and that the hotel owners were especially vulnerable in that
regard. It is clear that she evaluated the relationship created under the
Hotel Asset Management Agreement in light of the typical characteristics of
fiduciary relationships set out by Wilson J. in her well-known dissent in Frame
v. Smith, [1987] 2 S.C.R. 99, at p. 136.
[140]
In my opinion, there is no basis upon which to
differ with the conclusion of the trial judge that while acting as manager of
the Hilton, VAC owed fiduciary obligations to the Hilton Owners, including
Sharbern.
[141]
That said, the nature and scope of the fiduciary
duty owed by VAC must be assessed in the context of the contract giving rise to
those duties. As noted by Cromwell J., for a unanimous Court, in Galambos
v. Perez, 2009 SCC 48, [2009] 3 S.C.R. 247, at para. 75: “. . .
what is required in all cases is an undertaking by the fiduciary, express or
implied, to act in accordance with the duty of loyalty reposed on him or her”.
He also stated that “[i]n cases of per se fiduciary relationships, this
undertaking will be found in the nature of the category of relationship in
issue” and that “[t]he fiduciary’s undertaking may be the result of
. . . the express or implied terms of an agreement” (para. 77).
While an express undertaking can be found in the terms of a contract for an
agency relationship, an implied undertaking can be found with regard to “the
particular circumstances of the parties’ relationship” which could include
“professional norms, industry or other common practices and whether the alleged
fiduciary induced the other party into relying on the fiduciary’s loyalty”
(para. 79).
[142]
In this case, purchasers in the Hilton strata
lots knew that they would be entering into the Hotel Asset Management Agreement
giving VAC exclusive management of the hotel for at least 20 years. In
exchange, VAC contracted to, among other things, use commercially reasonable
efforts to rent out the strata units, maximize each owner’s proportionate share
of monies available for distribution, and faithfully perform its duties and
responsibilities and supervise and direct hotel operations. The Hilton
Disclosure Statement explained to investors that the success or failure of the
rental pool would depend in part on the managerial abilities of the manager.
It also contained the reassurance that VAC’s related companies had experience
in concurrently owning or managing competing hotels. Investors undoubtedly
counted on VAC to provide managerial experience and expertise. However, they
did so understanding and consenting to VAC receiving a management fee, and acting
as the manager of the competing Marriott hotel. Disclosure of that conflict
position was coupled with the warning that this “could impact upon its ability
to perform its obligations under the [Hotel Asset Management Agreement]” (art. 4.9(i)).
[143]
While Sharbern was in a fiduciary relationship
with VAC, and VAC owed a duty to use its discretionary powers as manager to act
in the interests of Sharbern, this relationship was entered into with the
knowledge that there would be common management of the Hilton and Marriott, and
that VAC’s related companies had a history of concurrent ownership or
management of competing hotels. The fiduciary relationship in this case must
therefore be circumscribed by the contractual bargain and the knowledge that
VAC would be simultaneously balancing fiduciary obligations owed to the Hilton
Owners and owners of a competitor: Galambos, at para. 79.
(3) Distinguishing
the Misrepresentation and Fiduciary Duty Claims
[144]
When VAC issued the Hilton Disclosure Statement,
it was acting in its role as a developer/issuer, and was not an agent of
Sharbern. As issuer, its relationship with Sharbern was not fiduciary in
nature. An issuer and investor in these circumstances deal with each other in
an arm’s-length commercial relationship characterized by self interest.
[145]
However, when VAC began acting as Sharbern’s
agent under the Hotel Asset Management Agreement, a fiduciary relationship
arose.
[146]
It is important to recognize that these are two
distinct relationships that happen to be between the same parties: a
non-fiduciary issuer-investor relationship, and a fiduciary principal-agent
relationship. Therefore, although the underlying factual basis of the
issuer-investor misrepresentation issue and the principal-agent fiduciary duty
issue are largely the same, the two issues constitute distinct causes of action
arising at different times. The misrepresentation claim is related to
VAC’s disclosures made when it was the developer of the Hilton hotel and issuer
of the Hilton Disclosure Statement. The breach of fiduciary duty claim is
related to VAC’s activities when it began acting as an agent and managed the
Hilton hotel.
(4) Disclosing
the Compensation Differences
[147]
The question to be answered here is whether VAC
breached its fiduciary duty to Sharbern and the other Hilton Owners while
acting as their hotel asset manager, by failing to disclose the Compensation
Differences and obtaining the informed consent of the Hilton Owners.
[148]
A breach of fiduciary duty would occur if the
undisclosed Compensation Differences were material or placed VAC into a
conflict of interest to which Sharbern had not consented. This is because
equity “forbids trustees and other fiduciaries from allowing themselves to be
placed in ambiguous situations. . . . [T]hat is, in a situation where a
conflict of interest and duty might occur” (D. W. M. Waters, M. R. Gillen and
L. D. Smith, eds., Waters’ Law of Trusts in Canada (3rd ed. 2005), at p.
914). As M. Ng writes, in Fiduciary Duties: Obligations of Loyalty and
Faithfulness (loose-leaf), at p. 2-10:
Where
fiduciaries put themselves in a position where their own interests or those of
others may conflict with their duty to their principal, they will be required
to disclose all material information regarding the transaction in order to
obtain their principal’s informed consent as to their acting despite the
conflict.
[149]
Sharbern submits that the question of whether
VAC breached its fiduciary duty to avoid undisclosed conflicts of interest was
“one of consent” (A.F., at para. 54). That is, Sharbern argues that the Court
must ask whether VAC “made sufficient disclosure, in the [Hilton Disclosure
Statement], of the facts pertaining to its conflict of interest that investors
purchasing under the [Hilton Disclosure Statement] must be taken to have
consented to the conflict” (ibid.). Sharbern’s position is premised
upon the assumption that the Compensation Differences constituted a material
fact or information beyond what had already been disclosed. If that were true,
then the onus would fall on VAC, as fiduciary, to prove that it had received
the informed consent of the Hilton Owners with respect to the Compensation
Differences: McGuire v. Graham (1908), 11 O.W.R. 999 (C.A.), at pp.
999-1000.
[150]
However, the materiality of the Compensation
Differences must first be established. This is because “[n]ot every
self-interested act by a fiduciary conflicts with his fiduciary duties;
otherwise, he could never do anything for his own benefit” (Waters’, at p.
914). As stated by F. M. B. Reynolds in Bowstead and Reynolds on
Agency (17th ed. 2001), at para. 6-057, “[t]he duty does not completely
prohibit the adoption of a position or the entering into of transactions in
which such a conflict might occur; it rather prohibits doing so without
disclosure of all material facts to the principal so as to obtain his
consent” (emphasis added). Here, the principal had consented to the agent’s
conflict of interest — to act for other principals competing in the same market
— and knew that the agent would be simultaneously acting in the interests of
the principal and competitors. The first question that Wedge J. ought to have
asked, therefore, was whether the Compensation Differences constituted a
material fact or information beyond what had already been disclosed, such as to
impose a fiduciary duty upon VAC to disclose their particulars.
[151]
The standard for identifying when a conflict of
interest exists in a fiduciary context was discussed by this Court in R. v.
Neil, 2002 SCC 70, [2002] 3 S.C.R. 631. There, Binnie J. dealt with
conflicts of interest arising out of the solicitor-client fiduciary
relationship. He set out the following standard for identifying when a lawyer
is in a position of conflict of interest:
I
adopt, in this respect, the notion of a “conflict” in § 121 of the Restatement
Third, The Law Governing Lawyers (2000), vol. 2, at pp. 244-45, as a “substantial
risk that the lawyer’s representation of the client would be materially
and adversely affected by the lawyer’s own interests or by the lawyer’s
duties to another current client, a former client, or a third person”.
[Emphasis added; para. 31.]
[152]
The essential first step was for the court to
determine if the Compensation Differences constituted material facts or
information beyond what had already been disclosed, thereby giving rise to a
fiduciary duty for VAC to disclose them and obtain consent. In this regard,
VAC submits that “[a]ll of the evidence on the issue of materiality that [it]
adduced, and that the trial judge disregarded, was therefore as relevant to
determining the existence of a conflict of interest as it was to determining
whether [it] had made a misrepresentation in the [Hilton Disclosure Statement]”
(R.F., at para. 106).
[153]
This is essentially correct, except for one
qualification. It must be remembered that the fiduciary duty issue is distinct
from the misrepresentation issue. The materiality evidence and analysis carried
out with respect to Sharbern’s claim that VAC made material false statements
attracting statutory liability under the Real Estate Act related to the
time period during which the Hilton strata units were marketed and sold. VAC’s
disclosure obligations under its fiduciary duty related to matters existing or
arising during its role as manager of the Hilton hotel. This requires a
consideration of the time period following the Hilton Disclosure Statement and
also the time period covering the later stages of the fiduciary relationship.
[154]
The Hilton Disclosure Statement was issued in
February 1998, and the hotel opened for business in June 1999. VAC had
disclosed in the Hilton Disclosure Statement its management of the Marriott
hotel and the similar and additional agreements it had with that hotel, “all of
which give rise to certain liabilities and obligations of the Developer which
could impact upon its ability to perform its obligations under the Agreements”
(art. 4.9(i)). I place no significance on VAC’s description of itself as
“Developer” instead of “manager” in this context, as the former would have been
the term by which it was defined in the Hilton Disclosure Statement. As found
by the trial judge, “the Hilton Owners consented to VAC acting for other
principals competing in the same market” (para. 425). I agree with Chiasson
J.A.’s observation that the question is invariably reduced to whether the
Compensation Differences were material, thereby obliging VAC to disclose them
and obtain the Hilton Owners’ consent to those details. It is also necessary to
inquire whether circumstances changed during the course of the fiduciary
relationship such as to require VAC to make additional disclosures and obtain
renewed consent.
[155]
The materiality of the Compensation Differences
when the investors were making their decision to invest has been dealt with in
detail in the discussion of VAC’s alleged statutory liability under the Real
Estate Act. However, I would add that the disclosure obligations with
respect to VAC’s fiduciary duty are different from the disclosure obligations
under the Real Estate Act. As a fiduciary, VAC was obligated to
disclose any material facts or information, such as if there was a substantial
risk that VAC’s fiduciary relationship with the Hilton Owners would be
materially and adversely affected by VAC’s own interests or by VAC’s duties to
another (Neil, at para. 31). VAC’s statutory duty was simply to
disclose to investors certain prescribed information, without making material
false statements. Nonetheless, in that regard, much of the evidence about the
materiality of the Compensation Differences as it related to VAC’s alleged
statutory liability under the Real Estate Act would also have been
relevant to the question of materiality under the fiduciary duty analysis.
[156]
VAC submitted extensive evidence in support of
its position that its lack of disclosure of the Compensation Differences in the
Hilton Disclosure Statement did not constitute a material false statement under
the legislation. There is no need to repeat that evidence here, which has been
discussed in detail above. However, I would add that, in the context of
proving or disproving the alleged breach of fiduciary duty, the parties are not
precluded from bringing evidence that did not form part of the total mix of
information available to investors at the time of their investment decisions,
or evidence that would not have been available through the Hilton Disclosure
Statement.
[157]
For example, the evidence with respect to an
industry practice of common management of competing hotels that was considered
in relation to VAC’s statutory defence is, in my view, also relevant to the
question of whether the Compensation Differences were material in the context
of the claim of breach of fiduciary duty. After all, the fiduciary
relationship arose in the context of a disclosed conflict of interest of common
management, and a reported practice of common management of competing hotels by
VAC’s related companies. Beyond the testimony of VAC’s witnesses that common
management of competing hotels took place without disclosure of the contractual
terms to the different owners, it seems highly unlikely that management
agreements negotiated between different parties at different times would have
identical terms. This case yields one example, where the guaranteed rate of
return offered to Marriott Owners apparently could not be offered in the Hilton
Disclosure Statement a year later because of changes in securities laws. The
fact that common management was nonetheless an accepted industry practice for
different hotel chains in the same market suggests that industry players did
not treat differing management compensation arrangements as material to the
efficient operation or profitability of the hotels. Such evidence would have
been relevant to the trial judge’s consideration of the materiality of the
Compensation Differences.
[158]
In contrast to the evidence adduced by VAC,
Sharbern did not provide any evidence as to the materiality of the Compensation
Differences in this context. Nor did the trial judge consider all the evidence
submitted by VAC in her assessment of the materiality of the financial
incentives. Although the misrepresentation issue is distinct, the error seen
in relation to that analysis applies equally to the analysis of the issue of
whether VAC was liable for breach of fiduciary duty. The party seeking to
establish the materiality of the undisclosed facts or information did not
provide evidence upon which a finding of materiality could reasonably have been
made.
[159]
The fiduciary relationship also existed during
the later period of time, during which VAC was managing the Hilton hotel. The
Hilton hotel opened in June 1999. VAC disclosed the existence of the guarantee
in favour of Marriott Owners in a meeting with Hilton Owners on June 14, 2000.
The timing of the disclosure of the differential in management fee is not
clear. At some point, when the economy deteriorated and occupancy rates
plummeted, the Compensation Differences potentially became more germane. So
too would VAC’s retention of the 24 strata lots in the Hilton hotel, at least
in the eyes of Marriott Owners. VAC could then have had a renewed obligation
to disclose what had arguably developed into a material conflict of interest,
assuming a rejection of VAC’s arguments that it lacked the practical means and
incentive to act upon the Compensation Differences. How did the timing of
these events compare to the timing of the June 2000 disclosure of the
guaranteed rate of return to Marriott Owners? Did the conduct of the Hilton
Owners subsequent to disclosure constitute consent, at least until the filing
of the plaintiff’s statement of claim in June 2003 or perhaps when they sought
legal advice in the fall of 2002? Evidence on these considerations is not
before us, and did not form part of the record before the trial judge.
[160]
In sum, not only did the trial judge not
consider all the evidence relevant to the issue of materiality, there was a
failure on the part of the plaintiff to adduce evidence on the issue of the
materiality of the Compensation Differences, either at the time of the Hilton
Disclosure Statement or during the later stages of the fiduciary relationship. I
am of the opinion that Sharbern failed to demonstrate that the Compensation
Differences constituted a material fact or information beyond what had already
been disclosed by VAC. Also, as found in the analysis of the misrepresentation
issue, the trial judge’s conclusions on the issue of breach of fiduciary duty
were tainted by an expectation that VAC must disprove, rather than Sharbern
satisfy its onus of proving, the materiality of the Compensation Differences.
These problems loom large over the consideration of whether to remit the matter
to the trial judge for a determination on the issue of the materiality of the
Compensation Differences for the purpose of assessing VAC’s liability for
breach of fiduciary duty.
(5) The
Non-Competition Agreement
[161]
Apart from the non-disclosure of the
Compensation Differences, Sharbern submits that it was a breach of VAC’s
fiduciary duty for VAC to direct its staff at the Hilton not to engage in price
competition with the Marriott.
[162]
The trial judge observed that VAC implemented a
“non-competitive pricing policy which prevented the [Hilton, Marriott and
Richmond Inn] from undercutting each other’s room rates” with respect to the
top ten corporate preferred accounts of each hotel (para. 161). The policy was
implemented shortly after the Hilton’s 2002 budget was put in place. She found
that “[u]nder the policy, both the Hilton and the Marriott were constrained,
but the status quo favoured the Marriott” as the Hilton was “trying to
close the gap” (para. 454) that the Marriott had obtained because of a “year’s
head start by the time the Hilton opened” (para. 448).
[163]
Irrespective of the merits of the contract, the
trial judge held that it was a breach of fiduciary duty for VAC to commit the
Hilton Owners to a price competition agreement with the Marriott Owners in the
absence of the former’s consent.
[164]
VAC argues that the evidence at trial
established that the price competition policy was not a manifestation of a
conflict of interest as a matter of fiduciary law. It says that the policy was
in the best interests of both the Hilton and the Marriott Owners. For example,
the general manager of the Marriott hotel, James Nesbitt, testified that the
Marriott would have matched prices with the Hilton if necessary to retain any
business that the Hilton hotel might have attempted to poach by underbidding.
He observed that undercutting on price was “not a strategy that works at all”
(R.R., vol. 11, at p. 2102). When asked about his experience with customers
threatening to move hotels because of lower rates, Nesbitt testified that “in
all cases - - because it’s much easier to retain an existing customer, than
spend a lot to go out and find a new customer, in every case you would match
that rate to make sure you kept the business” (ibid., at p. 2104).
[165]
First, I cannot agree with the trial judge’s
conclusion that it was a breach of fiduciary duty for VAC to enter into
agreements with the Marriott Owners on behalf of the Hilton Owners without
prior consent. With three hotels located on the same property, connected by a
shopping concourse, and managed through common management, agreements entered
into by VAC on behalf of and between Hilton Owners and Marriott Owners would
have been part of the ordinary course of business, as day-to-day matters that
could not feasibly require prior consent of all Hilton Owners. Agreements to
effect the sharing of common resources and expenses mentioned earlier would be
one example. Significantly, the Hilton Disclosure Statement provided that VAC
had the right to enter into such agreements. As stated at art. 4.4(b):
. . .
the Asset Manager shall have the right to enter into such agreements and
contracts, and to do such acts and things, as the Asset Manager, in its
discretion, considers necessary or desirable, including without limitation
entering into affiliation, management, reservation, marketing agreements or
licensing or franchise agreements with a hotel chain.
[166]
Second, the trial judge erred by failing to
consider evidence which was relevant to the materiality of the non-competition
agreement, such as evidence of other effects of common management and their
impact on the Hilton Owners. Wedge J. simply saw the non-competition agreement
as proof of the potential conflict of interest created by common management,
commenting that “[t]he highly competitive hotel industry does not embrace the
notion of even-handedness” (para. 303). She ignored other evidence to the
effect that the three hotels also shared business with each other. VAC’s
evidence indicated that the Marriott referred business to the Hilton or the
Richmond Inn when it did not have the capacity or did not wish to accommodate
the lower room rate requested by the client. When the Marriott did not have
the capacity to accommodate all the Cathay Pacific air crews, it negotiated a
contract which gave a portion of the Cathay Pacific business to the Hilton. In
my view, the trial judge erred in assessing the materiality of the
non-competition agreement to Hilton Owners without determining, on the totality
of evidence, whether it was part of an overall practice of cooperation that was
to the ultimate benefit of the three hotels.
[167]
In sum, without proof that the non-competition
agreement constituted a material fact or information beyond what had already
been disclosed by VAC, I cannot accept that the non-competition agreement
constituted a breach of fiduciary duty.
VI. Summary
and Conclusions
[168]
In view of the length of these reasons, it will
be useful to summarize my conclusions at this point.
[169]
As to VAC’s liability for material false
statements under the Real Estate Act:
1. The key question for liability under s. 75(2) of the Real
Estate Act was to determine if the Compensation Differences were material.
Except in cases where materiality can reasonably be established through common
sense inferences, materiality must be proven through evidence, and is a
fact-specific inquiry, determined on a case-by-case basis. Investors do not
have to prove that the undisclosed information would have changed their
decision to invest. However, they must prove a substantial likelihood that it
would be considered important by a reasonable investor in making an investment
decision. That is, there must be a substantial likelihood that a reasonable
investor would consider the fact as having significantly altered the total mix
of available information.
2. The trial judge made three errors in her materiality
assessment. First, she treated the conflict of interest as inherently
material; second, she reversed the onus of proof of materiality; and, third,
she did not consider all of the evidence available to her on the issue of
materiality.
3. The onus was on Sharbern to prove that the Compensation
Differences were material. It did not adduce any evidence which could
reasonably do so.
4. Even if VAC were found to have made a “material false
statement”, the statutory defence found in s. 75(2)(b)(viii) of the Real
Estate Act would have availed to its benefit. The trial judge erred by not
considering this defence. The statutory defence was established. VAC led
evidence to show that it subjectively believed and had reasonable grounds for
believing that the Compensation Differences were not material. Sharbern did
not direct this Court to any evidence to the contrary.
5. The presumption of deemed reliance under the Real Estate
Act was rebuttable when it could be proven, on a balance of probabilities,
that the investor had knowledge of the misrepresented or omitted facts or
information at the time the investor made the purchase.
[170]
As to VAC’s liability for negligent
misrepresentation, the trial judge erred by not considering whether VAC
breached the standard of care. As there was no evidence capable of supporting
a finding of breach of standard of care, VAC cannot be held liable for
negligent misrepresentation.
[171]
As to VAC’s liability for breach of fiduciary
duties:
1. When VAC began acting as manager under the Hotel Asset
Management Agreement, a fiduciary relationship arose between VAC and Sharbern
(and the other Hilton Owners).
2. VAC had already disclosed, and the Hilton Owners had
consented to, VAC’s common management of the Hilton and the Marriott hotels. Therefore,
that conflict of interest was not a breach of VAC’s fiduciary duty. VAC was
only obliged to disclose the Compensation Differences if they constituted
material facts or information beyond what had already been disclosed. Sharbern
did not adduce evidence to establish the materiality of the Compensation
Differences. Additionally, the trial judge erred by reversing the onus of
proof of materiality and by not considering all the evidence adduced by VAC
relevant to the issue of materiality.
3. The trial judge erred by not assessing the materiality of
the non-competition agreement, and Sharbern did not adduce evidence to
establish its materiality.
[172]
I am mindful of the time and resources expended
by the parties in the eight years since this litigation commenced. It cannot
be in the interests of justice or the parties to prolong the matter further
than necessary.
[173]
Had I not found that Sharbern had failed to
adduce any evidence to establish the materiality of the Compensation
Differences or that VAC could claim the benefit of the statutory defence under
s. 75(2)(b)(viii) of the Real Estate Act, I would have considered
remitting the matter to Wedge J. for a determination of the issues in
consideration of all the relevant evidence and in accordance with these
reasons. However, she would be placed in the position of reassessing the
issues upon a consideration of a wider swath of evidence, all in support of
only VAC, without any evidence to support the position of Sharbern. The same
dilemma arises if she is directed to reconsider whether VAC breached its
fiduciary duty to the Hilton Owners by failing to disclose the Compensation
Differences during the course of its management of the Hilton hotel.
[174]
Cases such as Hollis v. Dow Corning Corp.
have discussed the circumstances under which it is appropriate for an appellate
court to make a fresh assessment of the evidence on the record. Whether the
appellate court should do so will depend upon what is in the interests of
justice, and whether a fresh assessment is feasible on a practical level.
Feasibility often depends upon the extent to which the credibility of witnesses
is at issue as opposed to a consideration of documentary evidence. I am
mindful that this case involved a two-month trial, which included much viva
voce evidence. However, none of the findings of fact by the trial judge
appear to be predicated upon her assessment of the credibility of witnesses.
[175]
It has been a recurring finding throughout my
consideration of the issues in this case that Sharbern failed to adduce
evidence to support key aspects of its claims. As plaintiff, Sharbern had the
burden of proving all the necessary elements of its claims, on a balance of
probabilities. Sharbern was given the opportunity of a two-month trial to
produce such evidence. Nonetheless, it failed to lead sufficient evidence to
discharge its onus with respect to establishing the requisite breach of the
standard of care necessary to its claim of negligent misrepresentation.
[176]
It also failed to produce evidence in support of
the materiality of the Compensation Differences, both with respect to whether a
failure to disclose them resulted in (i) a material false statement attracting
liability under the Real Estate Act, or (ii) a breach of its fiduciary
duty to the Hilton Owners as the manager of the Hilton hotel. The first may
have been due to its position argued in this Court that “there is no need for a
plaintiff to tender industry or expert evidence as to what would influence a
reasonable investor because the question of materiality of conflicts of
interest in a prospectus is uniquely for the court” (A.F., at para. 40). As I
said previously, this position misapprehended the fact-based inquiry that is
required in order to establish materiality, as well as the onus on a plaintiff
to adduce evidence in support of materiality. Sharbern’s failure to adduce
evidence of materiality in the context of the claim of breach of fiduciary duty
may similarly stem from a misapprehension of the principle that there is only a
duty to disclose material facts or information.
[177]
This Court is in the same position as was the
Court of Appeal, which signalled throughout its reasons for judgment that the
plaintiff had failed to adduce objective evidence to support its claims. In my
opinion, the evidence before the trial court could not support a finding that
VAC was liable under the Real Estate Act, for negligent
misrepresentation or for a breach of fiduciary duty either for failing to
disclose the Compensation Differences or in implementing the non-competition
policy.
[178]
I would dismiss the appeal. Leave to appeal in
this matter was granted with costs in the cause. Section 37 of the British
Columbia Class Proceedings Act establishes a no costs regime in the trial
court and the Court of Appeal. However, that statute does not apply to this
Court. The respondents are entitled to their costs in this Court.
Appeal
dismissed with costs.
Solicitors
for the appellant: Nathanson, Schachter & Thompson, Vancouver.
Solicitors for the respondents: Heenan
Blaikie, Vancouver; Lakhani & Company, Vancouver.
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