



COURT OF APPEAL FOR ONTARIO

CITATION:
1298417 Ontario Ltd. v. Lakeshore (Town), 2014 ONCA
    802

DATE: 20141117

DOCKET: C56585

Feldman, MacFarland and Epstein JJ.A.

BETWEEN

1298417 Ontario Ltd.

Plaintiff (Respondent)

and

The Corporation of the Town of Lakeshore

Defendant (Appellant)

William V. Sasso, Werner H. Keller and
Jacqueline
A. Horvat, for the appellant

Claudio Martini, Myron Shulgan and Maria Marusic, for
    the respondent

Heard: February 11, 2014

On appeal from the judgment of Justice A. Duncan Grace of
    the Superior Court of Justice, dated January 7, 2013, with reasons reported at
    2013 ONSC 99, 6 M.P.L.R. (5th) 227.

Feldman J.A. (Concurring):

[1]

I have had the benefit of reading the reasons of Epstein J.A. I agree
    that the appeal should be allowed and the action dismissed because the damages
    claimed by the respondent, 1298417 Ontario Ltd. (129), the developer of the
    St. Clair Shores Subdivision, and awarded by the trial judge, are too remote
    and not compensable for the breach of contract that was alleged.

[2]

However, I would not uphold the trial judges interpretation of the
    contract. I do not agree that the town entered into an
ultra vires
contract. In my view, the trial judge erred in interpreting the contract and
    finding that Lakeshore breached it.

A. Article 3.1 does not grant 129 a monopoly over sewer
    capacity

[3]

The Supreme Court of Canada recently discussed the standard of review in
    cases involving the interpretation of contracts in
Sattva Capital Corp. v.
    Creston Moly Corp.
, 2014 SCC 53, 373 D.L.R. (4th) 393. At para. 50,
    Rothstein J. began by stating that [c]ontractual interpretation involves
    issues of mixed fact and law as it is an exercise in which the principles of
    contractual interpretation are applied to the words of the written contract,
    considered in light of the factual matrix. To the extent that the process of
    contractual interpretation involves fact-finding and mixed questions of fact
    and law, the reasons that favour deference on such issues, set out in
Housen
    v. Nikolaisen
, 2002 SCC 33, [2002] 2 S.C.R. 235, are applicable,
    particularly in cases where [t]he legal obligations arising from [the]
    contract arelimited to the interest of the particular parties:
Sattva
,
    at para. 52.
[1]

[4]

However, it may be possible to identify an extricable question of law
    from within what was initially characterized as a question of mixed fact and
    law, though courts should be cautious in doing so:
Sattva
, at paras.
    53-54. Examples of extricable legal errors include the application of an
    incorrect principle, the failure to consider a required element of a legal
    test, or the failure to consider a relevant factor, as well as the failure to
    construe the contract as a whole:
Sattva
, at paras. 53, 64.

[5]

The provision at issue is article 3.1 of the Supplementary Agreement
    between Lakeshore and 129, which states:

The Municipality hereby grants and approves the allocation of
    additional capacity in the Existing System so as to allow for full development
    of the St. Clair Shores Subdivision, in compliance with the existing zoning
    provisions for the said Subdivision. For greater certainty, said additional
    capacity shall be deemed to have been expressly reserved for the benefit of the
    St. Clair Shores Subdivision,
and the Municipality shall
    not, prior to completion of full development and build out of residential and
    commercial buildings in the St. Clair Shores Subdivision, grant and/or approve
    additional capacity in the Existing System for lands outside of the St. Clair
    Shores Subdivision
. [Emphasis added.]

[6]

The trial judge read the second half of the second sentence (underlined
    above) as Lakeshore effectively granting 129 an exclusive right or monopoly
    over sewer capacity until the St. Clair Shores Subdivision was completed. I
    agree with my colleague, that if the trial judges interpretation of article
    3.1 is correct, then  article 3.1 is
ultra vires
the authority of
    Lakeshore because it conflicts with Lakeshores obligation under s. 86(1)(c) of
    the
Municipal Act, 2001
, S.O. 2001, c. 25
.

[7]

In my view, however, the trial judge made extricable legal errors when
    interpreting article 3.1, most importantly by reading the words that appear to
    grant a monopoly in isolation, rather than construing the clause as a whole.
    Reading article 3.1 as a whole, the proper interpretation that gives full
    effect to the words used, the surrounding circumstances, and the intention of
    the parties, is that article 3.1 does not grant 129 a complete monopoly over
    sewer capacity pending the completion of the St. Clair Shores Subdivision.
    Rather, Lakeshore contracted to provide 129 with only sufficient sewer capacity
required for the full development of the St. Clair Shores Subdivision
.
    Lakeshore merely promised not to grant another development any of the capacity
required
    for the full development of the St. Clair Shores Subdivision
before that
    subdivision was completed.

[8]

Read in isolation, the clause underlined above may well bear the meaning
    attributed to it by the trial judge. However, it is an extricable error of law
    to read a provision of a contract in isolation rather than construe the
    contract as a whole. In
Sattva
, Rothstein J. stated at para. 64:

I accept that a fundamental principle of contractual
    interpretation is that a contract must be construed as a whole (McCamus, at pp.
    761-62; and Hall, at p. 15). If the arbitrator did not take the maximum
    amount proviso into account, as alleged by Creston, then he did not construe
    the Agreement as a whole because he ignored a specific and relevant provision
    of the Agreement. This is a question of law that would be extricable from a
    finding of mixed fact and law.

[9]

When reading article 3.1 as a whole, one looks first at the first
    sentence, in which Lakeshore grants the allocation of additional capacity in
    the Existing System so as to allow for full development of the St. Clair Shores
    Subdivision. In other words, the grant of sewer capacity is not unqualified or
    unlimited; it is a grant given for the stated purpose of allowing for the full
    development of the St. Clair Shores Subdivision.

[10]

The second sentence of article 3.1 is a further explanation of the first
    sentence. It begins with the words For greater certainty, indicating that it
    is intended to provide a fuller understanding of the first sentence. The second
    sentence refers to said additional capacity, that is, the capacity that will
    allow for full development of the St. Clair Shores Subdivision. That said
    additional capacity is deemed to be reserved for the benefit of the St. Clair Shores
    Subdivision. Finally, the second half of the second sentence says that
    Lakeshore shall not grant additional capacity in the Existing System  i.e.,
    the capacity referred to in the first sentence that is required for full
    development of the St. Clair Shores Subdivision  to other lands prior to
    completion of the buildings in the St. Clair Shores Subdivision.

[11]

When interpreting the second half of the second sentence, the trial
    judge failed to consider that the first sentence is the operative portion of the
    grant, and the second sentence is there only [f]or greater certainty.
    Therefore, by its plain language, the second sentence cannot change the meaning
    and intent of the first sentence. The first sentence grants only the amount of
    additional capacity necessary for the full development of the St. Clair Shores
    Subdivision, but not more. The disputed clause that appears to grant a monopoly
    must be interpreted in that context.

[12]

The trial judges interpretation also failed to give effect to the
    intent of the parties, which the Supreme Court has emphasized is the overriding
    concern in contractual interpretation. Rothstein J. wrote at para. 47 of
Sattva
:

the interpretation of contracts has evolved towards a
    practical, common-sense approach not dominated by technical rules of
    construction. The overriding concern is to determine the intent of the parties
    and the scope of their understanding (
Jesuit Fathers of Upper Canada v.
    Guardian Insurance Co. of Canada
, 2006 SCC 21, [2006] 1 S.C.R. 744, at
    para. 27
per
LeBel J.; see also
Tercon Contractors Ltd. v. British
    Columbia (Transportation and Highways)
, 2010 SCC 4, [2010] 1 S.C.R. 69, at
    paras. 64-65
per
Cromwell J.) To do so, a decision-maker must read the
    contract as a whole, giving the words used their ordinary and grammatical
    meaning, consistent with the surrounding circumstances known to the parties at
    the time of formation of the contract.

[13]

One of the key surrounding circumstances was that any contract that
    Lakeshore entered into had to comply with the
Municipal Act, 2001
. The
    trial judge erred in law in his conclusion that granting the sewer capacity
    monopoly to 129, to the exclusion of all other developers, was not
ultra
    vires
an Ontario municipality, because it is contrary to s. 86 of the
Municipal
    Act, 2001
. Having made this error, he failed to take into account, in
    interpreting the second half of the second sentence, the fact that the
    interpretation he gave would result in an illegal, and therefore unenforceable
    contract, which could not have been the intention of Lakeshore. Nor would 129
    have intended that a provision granting it additional sewer capacity in fact be
    unenforceable.

[14]

In addition, when interpreting contracts, courts
    prefer to give the contractual provisions a meaning that will make them legal, rather
    than illegal and unenforceable. As this court observed in
Ventas,
    Inc. v. Sunrise Senior Living Real Estate Investment Trust
, 2007 ONCA 205, 85 O.R. (3d) 254, at para. 57:

It is well accepted that where an agreement admits of two
    possible constructions, one of which renders the agreement lawful and the other
    of which renders it unlawful, courts will give preference to the former
    interpretation: John D. McCamus,
The Law of Contracts
(Toronto: Irwin
    Law, 2005), at 729.

[15]

Because the trial judge failed to recognize that his interpretation of
    the contract made article 3.1
ultra vires
, he failed to prefer an
    interpretation of article 3.1 that rendered it legal and enforceable rather
    than illegal and unenforceable.

[16]

To summarize, in article 3.1, Lakeshore agreed to grant 129 sufficient
    sewer capacity to allow for the full development of the St. Clair Shores
    Subdivision. To that end, Lakeshore also agreed not to grant any of the
    capacity that 129 needed to fully develop the St. Clair Shores Subdivision to any
    other development before the St. Clair Shores Subdivision was completed.

[17]

This interpretation is the result of reading article 3.1 as a whole. It
    recognizes that the phrases additional capacity in the Existing System and
    additional capacity are used in the first sentence and consistently and in
    the same way in the second sentence of article 3.1, and are therefore both
    modified by the important qualification, so as to allow for full development
    of the St. Clair Shores Subdivision. This interpretation recognizes the
    context of the municipalitys obligations under s. 86(1) of the
Municipal
    Act, 2001
. It gives full effect to the intent of the parties and fully
    complies with the applicable principles of contract interpretation.

B. Lakeshore did not breach the contract

[18]

The trial judge observed that the issue of breach seems obvious.  He
    interpreted article 3.1 as giving 129 an effective monopoly over sewage
    capacity until the St. Clair Shores Subdivision was completed. Lakeshore
    violated the monopoly by allocating sewage capacity to another developer before
    the St. Clair Shores Subdivision was completed. The trial judge found that,
    therefore, Lakeshore did the very thing it promised not to do.

[19]

The trial judge nevertheless also examined whether there was sufficient
    capacity in the enhanced sewage system to accommodate full development of both
    the St. Clair Shores Subdivision and the Tecumseh Golf lands and found that
    there was not. On that analysis, Lakeshore would have been in breach of the
    contract, even as properly interpreted.

[20]

My colleague used the doctrine of severance to effectively reach the
    same result that I have regarding the proper interpretation of article 3.1.
    Based on that interpretation, under Issue 5, she discusses whether Lakeshore
    breached the agreement by allocating sewer capacity to the Tecumseh Golf lands
    development. I agree with her analysis and conclusion under Issue 5 that, on
    the record, the future sewer requirements of the developments could not be
    known in 2005, and consequently, there was no evidence of a breach of article
    3.1, properly interpreted.

C. There are no damages

[21]

I also agree with my colleague that the damages claimed and awarded by
    the trial judge are too remote from the alleged breach and are not compensable.
    On that basis alone, the judgment would be set aside and the action dismissed.

D. Conclusion

[22]

For these reasons, I would allow the appeal and grant judgment
    dismissing the action.

K.
    Feldman J.A.

I
    agree.
J. MacFarland J.A.





Epstein J.A.:

INTRODUCTION

[23]

The
    appellant, the Town of Lakeshore, and the respondent, 1298417 Ontario Limited,
    a developer, entered into a Subdivision Agreement in which Lakeshore undertook
    to provide capacity in its sewage system to the respondents proposed
    development. Subsequently, the parties entered into a Supplementary Agreement
    that provided for an enhancement to the towns sewage system that would
    increase the capacity available to the respondents proposed development. When
    Lakeshore provided another developer access to the enhanced sewage capacity
    prior to the completion of the respondents development, the respondent sued
    Lakeshore for breach of contract.  The respondent claimed damages stemming from
    the loss of commercial tenancies to the competing developer.

[24]

The
    trial judge found that by providing the other developer access to the sewer
    system, Lakeshore breached the Supplementary Agreement.  He awarded the
    respondent damages of $2,423,860, based on the profits that the other developer
    purportedly realized from certain commercial tenancies.

[25]

Lakeshore
    appeals.  Lakeshore argues that the trial judge erred in interpreting the
    Supplementary Agreement, specifically article 3.1, as prohibiting it from
    allocating sewage capacity to anyone else pending completion of the
    respondents subdivision. Lakeshores position is that, properly interpreted,
    article 3.1 requires it to provide the respondent with sufficient capacity to
    complete its subdivision.  Lakeshore argues that the respondent failed to prove
    any breach, since the evidence does not establish that the capacity in the
    system is insufficient to allow for the completion of the respondents
    subdivision.  Lakeshore submits in the alternative that, if the trial judges
    contractual interpretation is correct, the Supplementary Agreement is
ultra
    vires
.  Lakeshore further contends that even if it did breach the
    Supplementary Agreement, the trial judges assessment of damages cannot stand.

[26]

For
    the reasons that follow, I would allow the appeal, set aside the judgment below
    and dismiss the action.  In my view, the last portion of article 3.1 is
ultra
    vires
as it imposes a blanket restriction on Lakeshores ability to
    provide sewage capacity to others, regardless of the availability of
    unallocated capacity.  Such a restriction conflicts with Lakeshores statutory
    obligation under s. 86(1) of the
Municipal Act, 2001
, S.O. 2001, c. 25
    (the Act), which provides that where there is sufficient capacity, a
    municipality shall, upon request, supply a building lying along a supply line
    with a sewage public utility.

[27]

My
    conclusion that a portion of article 3.1 of the Supplementary Agreement is
ultra
    vires
does not end the analysis.  In the circumstances, it is appropriate,
    in my view, to sever the
ultra vires
portion, particularly having
    regard to the fact that the Supplementary Agreement contains a severability
    clause.

[28]

In
    article 3.1, as revised after severance, Lakeshore promises 129 sufficient
    sewage capacity to enable it to complete St. Clair Shores.  This promise is
    enforceable.  However, as of the trial date, the evidence does not establish
    that Lakeshore will be unable to honour that promise.  As a result, the action
    must fail.

[29]

For
    completeness, I have also considered Lakeshores appeal with respect to
    damages.  In my view, the trial judge erred in his determination of damages.
    The type of damages 129 sought was too remote.

THE FACTS

The Subdivision Agreement

[30]

In
    1998, 1298417 Ontario Limited (129) purchased 170 acres of land (the Lands)
    for $6.5 million. At the time, the Lands were vacant, undeveloped and
    unserviced.  129 proposed to build a subdivision known as St. Clair Shores on
    the Lands.  To this end, on January 4, 2000, the parties entered into a
    Subdivision Agreement.

[31]

Under
    the terms of the agreement, 129 promised to design and install, at its expense,
    all required services including sanitary sewers.  In the Subdivision Agreement,
    Lakeshore stated its intention to construct a new trunk main.  The Subdivision
    Agreement provided that, pending completion of the new trunk main, 129 would
    have access to a specified amount of capacity (0.8 cubic feet per second or
    cfs) in the existing downstream system that serviced that part of the town in
    order to outlet St. Clair Shores sewage.  If it turned out that there were
    additional capacity in the downstream system, such capacity would be allotted
    to 129.  129 agreed to pay for any works necessary to take advantage of any
    additional capacity.

[32]

129s
    consulting engineers, Hanna, Ghobrial and Spencer Ltd. (Spencer), designed
    the sewer system for the new subdivision.  The system, ultimately approved by
    the required public authorities, including Lakeshore, was designed to service
    St. Clair Shores and the existing uses on two neighbouring properties.  The
    system would outlet into Lakeshores existing downstream system, as set out in
    the Subdivision Agreement.  One of the neighbouring properties was a golf
    driving range on the Tecumseh Golf Lands (the TGL).

The Supplementary Agreement

[33]

By
    2003, the sewage system Spencer designed had been installed underneath the
    Lands and 129 had completed the first phases of commercial and residential
    development. 129 asked Lakeshore to approve further phases of development. 
    However, Lakeshore had not constructed the new trunk main and became concerned
    about the sufficiency of sewer capacity as development of the subdivision
    progressed.  129 took the position that there was ample sewage capacity in the
    existing downstream system to permit further residential and commercial
    development.  Lakeshore therefore asked its engineer, Stantec Consulting Ltd.,
    to examine and report on the matter.

[34]

In
    a report dated August 22, 2003, Stantec recommended that improvements to be
    made to the downstream system to increase its capacity, such that 1.5 cfs of
    sewage capacity could be allocated to St. Clair Shores.   In a further report,
    dated September 12, 2003, Stantec proposed that the improvements, estimated to
    cost $730,000, be shared roughly equally between Lakeshore and 129.  129
    agreed.  On September 22, 2003, Lakeshores council approved the reports
    recommendations.

[35]

During
    the next 12 months, 129 through its lawyer, Jeffrey Slopen, and Lakeshore
    through its planner, Cindy Prince, negotiated a supplement to the Subdivision
    Agreement in order to incorporate Stantecs recommendations.  Following passage
    of an enacting by-law on October 25, 2004, the parties entered into a
    Supplementary Agreement.  The Supplementary Agreement set out, among other
    things, the parties responsibilities relating to the enhancement of the
    downstream system.

[36]

Article
    3.1 of the Supplementary Agreement, the interpretation of which is the focus of
    this appeal, reads as follows:

The Municipality hereby grants and approves the allocation of
    additional capacity in the Existing System so as to allow for full development
    of the St. Clair Shores Subdivision, in compliance with the existing zoning
    provisions for the said Subdivision. For greater certainty, said additional
    capacity shall be deemed to have been expressly reserved for the benefit of the
    St. Clair Shores Subdivision, and the Municipality shall not, prior to
    completion of full development and build out of residential and commercial
    buildings in the St. Clair Shores Subdivision, grant and/or approve additional
    capacity in the Existing System for lands outside of the St. Clair Shores
    Subdivision.

The Golf Lands Development

[37]

In
    the summer of 2005, Manning Developments Inc. (MDI) sought access to sewage
    capacity to develop a two-acre portion of the TGL.  Counsel for Lakeshore
    advised MDI as follows:

It is our understanding that you are concerned that the
    Supplementary Agreement ... as amended ... excludes [the TGL] from available
    sanitary sewage capacity. In our view, you[r] conclusion is not correct. [The
    TGL] are clearly described as [B]enefiting [L]ands in the Agreement and
    therefore will have access to additional sewage capacity not required by St.
    Clair Shores upon paying the costs as outlined in the agreement. Having regard
    to all of the circumstances, the agreement was not intended to prevent the
    [B]enefiting [L]ands from developing prior to the completion of St. Clair
    Estates but rather to ensure sufficient capacity for that development. We have
    been assured that there is sufficient capacity to complete St. Clair Estates as
    well as to service [the TGL].

[38]

As
    part of the original design of the subdivision, 129 retained a one-foot reserve
    on the north side of the Lands.  This one-foot reserve blocked TGLs access to
    the sewer line. To allow MDI to connect the TGL to the existing sewage system,
    Lakeshore asked 129 for a transfer of the one-foot reserve.  Lakeshore took the
    position that it was entitled to the conveyance pursuant to the Subdivision
    Agreement.  129 refused.

[39]

Mr.
    Slopen wrote a letter to Lakeshores counsel dated November 3, 2005, asserting
    that Lakeshore had agreed that the TGL would not be serviced until 129 had
    completed St. Clair Shores.  He indicated that Lakeshore granted this concession
    in consideration of 129s commitment to spend in excess of $10,000,000 to
    service the subdivision and the resulting tax benefit to Lakeshore.

[40]

Through
    its counsel, Lakeshore responded by confirming that it intended to comply with
    its contractual obligations.  However, Lakeshore disagreed with 129s
    interpretation of the parties obligations under the Supplementary Agreement. 
    Lakeshore asserted that it could not withhold capacity from the TGL because
    sewage is a municipal service and there was sufficient capacity in the system
    to service both the TGL and St. Clair Shores.  Lakeshore argued that it would
    be unreasonable to interpret the agreement as promising 129 a market advantage
    over others.

[41]

In
    2007, over 129's objection, Lakeshore expropriated the one-foot reserve.  In
    the expropriation proceeding, 129 and Lakeshore filed an agreed statement of
    facts in which 129 took the position that there was adequate capacity in the
    system for St. Clair Shores and the two-acre portion of the TGL that was being
    developed by MDI.

[42]

Ultimately,
    Lakeshore allowed MDI to connect to the sewage system that ran underneath the
    Lands. The TGL were developed. By March 2007, MDI had leased 17,265 square feet
    of commercial space to tenants including Boston Pizza, Pizza Pizza and Bulk
    Barn.

[43]

In
    proceedings commenced in July, 2007, 129 sued Lakeshore for breach of contract,
    claiming damages stemming from the loss of these commercial tenancies to MDI.

THE TRIAL DECISION

[44]

In
    analyzing the scope of the parties agreement, at para. 133, the trial judge
    identified the issue as being 
when
[Lakeshore] was permitted to
    allocate sewage capacity to someone other than 129 in light of the provisions
    of the Supplementary Agreement (emphasis in original).

[45]

The
    determination of that issue rests on the interpretation of article 3.1.

[46]

The
    trial judge summarized the parties positions.  According to Lakeshore, while
    it promised that 129 would have sufficient sewage capacity to complete St.
    Clair Shores, it did not promise that 129 would have a monopoly, exclusivity or
    priority over development in that part of the town until the subdivision was
    fully developed.  According to 129, it was promised such a priority as
    Lakeshore had agreed not to allocate sewage capacity in the existing system to
    anyone else until St. Clair Shores was fully developed.

[47]

The
    trial judge accepted 129s interpretation.  It followed that by allocating
    sewage capacity to MDI prior to the completion of St. Clair Shores, Lakeshore
    did the very thing it promised not to do.  Lakeshore was therefore in breach of
    the Supplementary Agreement.

[48]

The
    trial judge went on to reject the reasons Lakeshore advanced for why it should
    not be found to have breached the Supplementary Agreement.

[49]

The
    only issue relevant to this appeal is the trial judges rejection of
    Lakeshores
ultra vires
defence. Lakeshore argued that its statutory
    duty to supply sewage public utility, under s. 86(1) of the Act, prevented it
    from denying access to MDI: as a result, any agreement that purported to
    prevent it from honouring its statutory obligations is
ultra vires
and
    therefore unenforceable.

[50]

Upon
    hearing expert evidence from both sides, the trial judge found that the sewage
    capacity that ultimately will be required for the full development of St. Clair
    Shores and the TGL will exceed 1.5 cfs, which was the capacity in the enhanced
    downstream system allocated to St. Clair Shores.  As a result, the trial judge
    concluded that Lakeshore was not obligated to provide sewage capacity to MDI
    under s. 86(1) of the Act.  In addition, he found that s. 86(1) did not affect
    [Lakeshores] contractual obligations to 129 (para. 198).

[51]

In
    awarding 129 damages, the trial judge referred to the evidence as limited, but
    sufficient to support the following findings, at para. 222:

[F]irst, if the Supplementary Agreement had not been breached,
    sewage capacity would not have been allocated to MDI; second, without the
    allotment, [the TGL] would not have been developed; third, there was precious
    little alternative commercial space in the vicinity of the Lands before
    completion of the MDI and Spidrock developments and fourth, income 129
    otherwise would have generated was lost.

[52]

Based
    on these findings, the trial judge was satisfied that there was a reasonable
    probability that 129 would have leased commercial space on the Lands had
    Lakeshore not breached the Supplementary Agreement and allowed MDI to develop. 
    After considering the evidence relevant to the specific leases upon which 129
    relied, as well as the costs of developing the commercial space, and then
    applying a contingency allowance to reflect a degree of uncertainty, the trial
    judge concluded that 129 sustained damages of $2,423,860 as a result of
    Lakeshores breach.

[53]

The
    trial judge dismissed 129s claim for punitive damages.

ISSUES ON APPEAL

[54]

This
    appeal raises the following issues:

1. Did the trial
    judge err in interpreting article 3.1 of the Supplementary Agreement?

2. What is the
    proper interpretation of s. 86(1) of the Act?

3. Is article
    3.1, or a portion of the provision,
ultra vires
as a result of
    Lakeshores obligations pursuant to s. 86(1)?

4. If article
    3.1, or a portion of the provision, is
ultra vires
, should the
    offending words be severed?

5. If severance
    is permitted, do the facts demonstrate that Lakeshore breached article 3.1, as
    revised?

6. If Lakeshore,
    in providing sewage capacity to MDI, breached an enforceable agreement, what
    remedy is 129 entitled to?

ANALYSIS

ISSUE ONE  Did the trial judge err
    in interpreting article 3.1 of the Supplementary Agreement?

[55]

The
    trial judge accepted 129s interpretation of article 3.1 of the Supplementary
    Agreement.  He found that Lakeshore had promised not to provide sewage capacity
    in the existing downstream system to anyone other than 129 until the completion
    of St. Clair Shores.

[56]

The
    trial judge set out his reasons for accepting 129s interpretation at para.
    136:

I make this finding because:

a. First, 129
    sought - and was given - priority from the outset of its relationship with
    [Lakeshore].  As noted previously, the existing system's known capacity (0.8
    cfs) was allotted to 129 in its entirety in article D.4 of the Subdivision
    Agreement. If additional capacity was identified, 129 was to receive that
    allotment too;

b. Second, the
    reason for the inclusion of article D.4 in the Subdivision Agreement still
    existed. Capacity in the existing/downstream system was limited. Construction
    of a new trunk line would have eliminated the problem. However, that work had
    never been undertaken. While the existing/downstream system was to be enhanced,
    capacity was still limited;

c. Third, the
    Supplementary Agreement was a product of discussions following delivery of
    Stantec's August 22, 2003 report. It identified 1.5 cfs of capacity in the
    existing system if enhancements were made. Stantec did not discuss the capacity
    needed to complete development of the Lands or [the TGL]. 129's plans for
    developing vacant parcels were not yet fully known. [Lakeshore] seeks to ascribe
    to Stantec an opinion it did not form. I should add here that the author of
    Stantec's report - Mr. Manzon - did not testify. He is no longer employed by
    Stantec. Donald Joudrey of Stantec did testify both as a fact and, ultimately
    with the consent of 129's counsel, expert witness. In cross-examination Mr.
    Joudrey fairly acknowledged that he assumed 1.5 cfs was sufficient to allow
    completion of development of 129's lands but could point to nothing as a
    foundation for it;

d. Fourth,
    sewage capacity was of continuing concern to 129.
Article
    3.1 included a qualification from the first draft
: [Lakeshore] was
    prohibited from allocating sewage capacity to others
if
the downstream
    system would no longer be able to accommodate full development of the Lands.
[Lakeshores] March 31, 2004 request for significant changes
    left the qualification untouched
;

e. Fifth,
the final version of article 3.1 reflected revisions made by
    Mr. Slopen to make 129's position - and hence priority - even more clear. The
    qualification was deleted
. In its place was a prohibition: sewage
    capacity could not be allocated by [Lakeshore] to MDI or anyone else until
    129's development was complete. [Lakeshore] signed the Supplementary Agreement
    in that form. [Italics in original; underlining added.]

[57]

In
Sattva Capital Corp. v. Creston Moly Corp
., 2014 SCC 53, 373 D.L.R.
    (4th) 393, Rothstein J. set out the standard of review for contractual
    interpretation.  He wrote for the court, at para. 50:

Contractual interpretation involves issues of mixed fact and
    law as it is an exercise in which the principles of contractual interpretation
    are applied to the words of the written contract, considered in light of the
    factual matrix.

[58]

Sattva
directs that an appellate court should defer to a trial judges contractual
    interpretation unless it was based on an extricable error of law.

[59]

With
    respect, I am of the view that, in interpreting the Supplementary Agreement,
    the trial judge may have erroneously taken into account the factors found in
    parts of subparagraphs d. and e. in para. 136 (underlined above).  These
    factors involve the subjective intentions of the parties when drafting the
    agreement, as largely inferred from the evolution of the drafts.  The trial
    judge may have erred in taking these factors into account as the Supreme Court
    has held that, (1) subjective intentions of the parties are not relevant to
    contractual interpretation:
Eli Lilly & Co. v. Novopharm Ltd.
,
    [1998] 2 S.C.R. 129, at paras. 54, 58-59; and, (2) prior drafts are
    inadmissible as evidence of subjective intentions:
Indian Molybdenum Ltd.
    v. The King
, [1951] 3 D.L.R. 497 (S.C.C), at pp. 502-3; Geoff R. Hall,
Canadian
    Contractual Interpretation Law
, 2nd ed. (Markham, Ontario: LexisNexis
    Canada, 2012), at pp. 64-65, 79-81.  I also note that the Supplementary
    Agreement contains an entire agreement clause (article 6.10) expressly
    stating that the written contract supersedes all prior understandings,
    agreements, negotiations and discussions, whether oral or written, among the
    parties.

[60]

I
    have somewhat qualified my assessment of whether, by taking the above-noted
    factors into account, the trial judge erred, as
Sattva
does not appear
    to limit what courts may look at to interpret a contract.  At para. 47,
    Rothstein J. says:

[T]he interpretation of contracts has evolved towards a
    practical, common-sense approach not dominated by technical rules of
    construction. The overriding concern is to determine the intent of the parties
    and the scope of their understanding... To do so,
a
    decision-maker must read the contract as a whole, giving the words used their
    ordinary and grammatical meaning, consistent with the surrounding circumstances
known to the parties at the time of formation of the contract. Consideration of
    the surrounding circumstances recognizes that ascertaining contractual
    intention can be difficult when looking at words on their own, because words
    alone do not have an immutable or absolute meaning... [Emphasis added.]

[61]

In
Sattva
, the Supreme Court appears to direct an appellate court to
    defer to the trial judges findings concerning the relevant antecedent facts.

[62]

In
    this regard, at para. 136 of his reasons, reproduced above, the trial judge
    sets out a number of different grounds, derived from the text of the agreement
    and the factual matrix, for reaching his conclusion as to how the Supplementary
    Agreement should be interpreted. With the guidance from
Sattva
in
    mind, the trial judges interpretation is consistent with the ordinary and
    grammatical meaning of article 3.1. Indeed, I am unable to read the second
    half of the second sentence of article 3.1, underlined below, as promising
    anything less than a monopoly over the existing system pending the completion
    of St. Clair Shores.  For convenience I set out article 3.1 again.  It reads:

The Municipality hereby grants and approves the allocation of
    additional capacity in the Existing System so as to allow for full development
    of the St. Clair Shores Subdivision, in compliance with the existing zoning
    provisions for the said Subdivision. For greater certainty, said additional
    capacity shall be deemed to have been expressly reserved for the benefit of the
    St. Clair Shores Subdivision, and
the Municipality shall
    not, prior to completion of full development and build out of residential and
    commercial buildings in the St. Clair Shores Subdivision, grant and/or approve
    additional capacity in the Existing System for lands outside of the St. Clair
    Shores Subdivision
. [Emphasis added.]

[63]

Lakeshore
    submits that article 3.1 contains no promise of a monopoly, but merely
    prescribes the terms and conditions for enhancement of the downstream system.

[64]

With
    respect, Lakeshore has not persuaded me that the monopoly is contrary to sound
    commercial principles or the business purpose of the whole agreement.  Further,
    such considerations cannot overcome the unambiguous words underlined above. 
    The following passage from
Novopharm
, at para. 56, encapsulates my
    view on this issue:

[I]t would be absurd to adopt an interpretation which is
    clearly inconsistent with the commercial interests of the parties, if the goal
    is to ascertain their true contractual intent. However, to interpret a plainly
    worded document in accordance with the true contractual intent of the parties
    is not difficult, if
it is presumed that the parties
    intended the legal consequences of their words
.  [Emphasis added.]

[65]

I
    note that Lakeshore also stressed that the provisions in the Supplementary
    Agreement in which it promised to collect development charges from third
    parties and remit them to 129 to defray the up-front costs of the enhancements
    were not consistent with the trial judges interpretation of article 3.1. But,
    I also note that these terms could apply after the promised monopoly came to an
    end upon completion of St. Clair Shores.

[66]

In
    short, I am not convinced that the trial judges interpretation is so contrary
    to commercial sense that the parties must have intended something other than
    what is expressed by the plain words of article 3.1. As stated by Hall, at p.
    39:

[S]eeking a commercially sensible interpretation is not a
    policy goal in and of itself. The purpose of the commercial efficacy principle
    is not to protect business people from absurd results of their own contracts. 
    Instead, the commercial efficacy principle relates to the overall goal of contractual
    interpretation, which is to give an accurate meaning to the parties
    intentions.

[67]

Lakeshore
    also contends that the trial judges interpretation of article 3.1 made it
ultra
    vires
: thus, this court should reject his interpretation.  I am aware that
    [c]ourts will avoid a contractual interpretation which results in rendering
    the agreement unlawful:
Unique Broadband Systems, Inc.(Re),
2014
    ONCA 538, 121 O.R. (3d) 81, at para. 87.  But, there is no ambiguity in article
    3.1 to resolve by way of that principle.

[68]

There
    were, however, two related aspects of the Supplementary Agreement that
    initially gave me some pause as they might be interpreted as demonstrating an
    intention to create sewage capacity sufficient to allow for the full
    development of St. Clair Shores
and
the TGL. First, in article 2.1,
    the agreement gave effect to the cost-sharing arrangement set out in the
    September 12, 2003, Stantec report.  Lakeshores contribution was based on the
    premise that [u]ltimate development in the service area
not including
St. Clair Shores would create peak flows higher than the existing pumping
    system can handle (emphasis in original).  Second, the Supplementary Agreement
    contains a recital stating that the enhancements are necessary not only to
    accommodate the St. Clair Shores Subdivision, but in order to accommodate
    ultimate expected flows from the existing service area.  The recital goes on
    to state that the enhancements will be to the benefit of the Benefiting
    Lands, which included the TGL and undeveloped portions of St. Clair Shores. 
    The entire recital reads:

AND WHEREAS
it has been determined by way of
    engineering studies and consultation between [Lakeshore and 129] that certain
    enhancements to [Lakeshores] existing sanitary sewer system (the
Existing
    System
) are necessary not only to accommodate the St. Clair Shores
    Subdivision, but in order to accommodate ultimate expected flows from the
    existing service  area of the Existing System, and which enhancements will be
    to the benefit of the lands described in Schedule B attached hereto (the
Benefiting
    Lands
), being that portion of the St. Clair Shores Subdivision which
    is undeveloped as of the date of this Supplementary Agreement, as well as other
    lands abutting the St. Clair Shores Subdivision to the north;... [Emphasis in
    original.]

[69]

The
    trial judge interpreted the words existing service area in the first part of
    the recital as pertaining to parts of Lakeshore lying to the east of St. Clair
    Shores and the TGL.  This interpretation is a finding of mixed fact and law to
    which deference must be given.  It follows from this finding that Lakeshores
    share of the enhancements in the cost-sharing arrangement was to provide, at
    least in part, for the ultimate development of areas of Lakeshore unrelated to
    the Lands.  The trial judge went on to find that, although the TGL are included
    in the Benefiting Lands, there was no representation in the recital that the
    enhancements would accommodate the ultimate expected flows from the TGL.  All
    that was represented was that TGL would benefit: the extent of that benefit
    was unstated and could have been anticipated as capacitys being available
    following full build-out of St. Clair Shores.  Based on the trial judges
    analysis, in which I detect no error, I do not think that the cost-sharing
    arrangement and the related recital are so contradictory to the plain words of
    article 3.1 that effect should not be given to their ordinary meaning.

[70]

In
    concluding my analysis of the issue of whether the trial judge erred in
    interpreting article 3.1, I return to
Sattva
.  Specifically, I note
    para. 55, where Rothstein J. reinforces the reviewing courts obligation to
    defer to the trial judges interpretation of a contract by saying that the
    circumstances in which a question of law can be extricated from the interpretation
    process will be
rare
.

[71]

In
    the light of the clear direction in
Sattva
, and the trial judges
    interpretive exercise, both reviewed above, I would not interfere with the
    trial judges finding that, in article 3.1 of the Supplementary Agreement,
    Lakeshore promised not to provide sewage capacity in the existing system to
    anyone other than 129 until full build-out of St. Clair Shores had been
    completed.

ISSUE TWO - What is the proper interpretation of s. 86(1) of
    the Act?

[72]

Lakeshore
    submits that article 3.1, as interpreted by the trial judge, is
ultra vires
,
    because the provision would prevent Lakeshore from meeting its obligations
    under s. 86(1) of the Act.  Before addressing the
ultra vires
argument
    it is necessary to understand a municipalitys obligations under that
    provision.

[73]

Section
    86(1) governs the municipalitys obligation to supply water or

sewage.  It provides:
[2]

86. (1) Despite section 19, a municipality shall
    supply a building with a water or sewage public utility if,

(a) the building lies along a supply line of the
    municipality for the public utility;

(b) in the case of a water public utility, there
    is a sufficient supply of water for the building;

(c) in the case of a sewage public utility, there
    is
sufficient capacity
for handling sewage from
    the building; and

(d) the owner, occupant or other person in charge
    of the building requests the supply in writing.

(2) Subsection (1) does not apply if the supply of
    the public utility to a building or to the land on which the building is
    located would contravene an official plan under the
Planning Act
that
    applies to the building, land or public utility. [Emphasis added.]

[74]

The
    subsection at issue is s. 86(1)(c), specifically, what is meant by sufficient
    capacity.  The question is what a municipality is required to take into
    account in deciding whether there is sufficient capacity to trigger  its
    obligation under s. 86(1).  Must it take into account capacity currently being
    used or capacity currently being used as well as capacity that has been
    previously allocated into the future?

[75]

In
John Doe v. Ontario (Finance)
, 2014 SCC 36, 373 D.L.R. (4th) 601, at
    para. 18, Rothstein J. repeated Driedgers modern principle that governs the
    approach to statutory interpretation:

The modern approach to statutory interpretation requires the
    words of s. 13(1) to be read in their entire context and according to their
    grammatical and ordinary sense, harmoniously with the scheme and object of the
    Act and the intention of the legislature (R. Sullivan,
Sullivan on the
    Construction of Statutes
(5th ed. 2008), at p. 1;
Rizzo & Rizzo
    Shoes Ltd. (Re)
, [1998] 1 S.C.R. 27, at para. 21).

[76]

With
    respect to legislative intent, an overriding object of the Act was to provide
    more authority, accountability and flexibility so that municipal governments
    would be able to deliver services as they saw fit:
Croplife Canada v.
    Toronto (City)
(2005), 75 O.R. (3d) 357 (C.A.), at para. 6.  The Act moved
    away from the prescriptive approach of earlier municipal legislation, which had
    set out itemized lists of what municipalities could do, toward providing
    municipalities with greater flexibility and independence: John Mascarin and
    Christopher J. Williams,
Ontario Municipal Act & Commentary
, 2014
    ed. (Markham, Ontario: LexisNexis Canada, 2013), at pp. 6-13. Part II of the
    Act sets out general municipal powers, including natural person powers and the
    power to pass by-laws within broad spheres of jurisdiction: Mascarin and
    Williams, at p. 19.  One of these spheres is public utilities: s. 11(3)4 of the
    Act.

[77]

Section
    8(1) of the Act expressly states that municipal powers are to be interpreted
    broadly:

8. (1)  The powers of a municipality under this or
    any other Act shall be interpreted broadly so as to confer broad authority on
    the municipality to enable the municipality to govern its affairs as it
    considers appropriate and to enhance the municipalitys ability to respond to
    municipal issues.

[78]

I
    start from the premise, therefore, that s. 86(1)(c) should be interpreted
    broadly, meaning so as not to unnecessarily restrict a municipality from
    allocating and promising sewage capacity into the future.

[79]

Policy
    considerations are also important here.  In
Statutory Interpretation
,
    2nd ed. (Toronto: Irwin Law, 2007), at pp. 218-19, Ruth Sullivan identifies
    policy analysis as an essential and appropriate part of the interpretative
    process.... [I]t is a legitimate part of statutory interpretation in so far as
    the values and preferences relied on are rooted in legislation or the common
    law or in the evolving legal tradition.

[80]

An
    interpretation of s. 86(1)(c) that prevents a municipality from allocating
    sewage capacity into the future has the potential to stymie development and to
    create unfairness.  In Lakeshore itself, the trial judge found that capacity
    allotted to one developer for future development would not ordinarily be given
    to another (para. 151).  This is because, as the facts of this case
    demonstrate, municipal development is forward-looking.  Providing for orderly
    development requires a municipality to be able to allocate public utilities
    going forward in order to prevent future shortages, avoid conflicts, and
    facilitate growth.  A developer would be far less willing to invest the
    resources necessary for a building project if access to sewage services were
    uncertain.

[81]

It
    would follow from these considerations that s. 86(1)(c) should also be
    interpreted as allowing municipalities to contract with developers in a manner
    that allows allocations of future sewage supply.

[82]

Furthermore,
    as the facts of this case demonstrate, such contracts provide municipalities
    with a means of funding the extension of services into a new development.  This
    is a policy preference rooted in legislation. Through the Act and related
    legislation, the legislature has provided municipalities with tools to secure
    contributions from developers for the provision of services to new
    developments. For instance, under ss. 51(25) and 51(26) of the
Planning Act
,
    R.S.O. 1990, c. P.13, subdivision of land can be made conditional on entry into
    an agreement with a municipality to provide services. Similarly, under ss. 44
    and 45 of the
Development Charges Act
, 1997, S.O. 1997, c. 27, a
    municipality can enter into a front-ending agreement in which a developer
    that agrees to contribute to the upfront costs of providing certain services
    can be reimbursed by third parties who later develop land within the service
    area, as was contemplated in the Supplementary Agreement.

[83]

Interpreting
    s. 86(1)(c) as providing that sufficiency of capacity be assessed without
    regard to any previous allocation of future supply, contractual or otherwise,
    has the potential of exposing developers who rely on the allocated capacity to
    be co-opted by another developer who finishes their building first. The
    resultant uncertainty risks interfering with a municipalitys ability to secure
    contributions from developers for the upfront costs of sewage services.  As I
    have noted, there is also an obvious potential for unfairness and conflict.

[84]

These
    factors lead me to conclude that, properly interpreted, under s. 86(1)(c ) a
    municipality, in assessing whether a sewage systems remaining capacity is
    sufficient to grant a request for supply, must  take into account both capacity
    that is currently being used as well as capacity that has been reasonably
    allocated into the future.

[85]

I
    say
reasonably
allocated into the future because it would be contrary
    to the intent of s. 86(1) for a municipality to be in a position to avoid its
    obligations under that provision by promising a favoured developer an
    unreasonable amount of future capacity.

[86]

First
    and foremost, s. 86(1) creates a duty on the municipality.  It obliges a
    municipality to supply a sewage public utility if three conditions are met: the
    building lies upon a supply line, there is sufficient capacity and a person
    in charge of the building makes a written request.

[87]

The
    jurisprudence on s. 86(1), and its predecessor, s. 55 of the
Public
    Utilities Act
, R.S.O. 1990, c. P.52, is limited.  But, the courts have
    interpreted these provisions generously so as to prevent a municipality from
    using its control over public utilities to pursue its objectives at the expense
    of those requesting supply.  In
St. Lawrence Rendering Co. v. Cornwall
    (City)
, [1951] O.R. 669 (H.C.), a city council passed a resolution that
    the water supply to a rendering plant should be discontinued. Council members
    frankly admitted that the purpose of the resolution was to drive the plant out
    of Cornwall because of the foul odours it was emitting.  The trial judge held
    that the resolution was contrary to the citys duty under s. 55.  In
Holmberg
    v. Sault Ste. Marie Public Utilities Commission
, [1966] 2 O.R. 675 (C.A.),
    the commission refused to supply the applicants house with water. The
    applicants had purchased land in a subdivision and built a home.  The original
    developer of the subdivision had failed to test the water main it had
    installed, as required by a subdivision agreement.  The commission demanded
    that the applicants pay for the testing of the water main before it would
    supply water to their home.  Writing for this court, Laskin J.A. relying on s.
    55, upheld the order for
mandamus
requiring the commission to supply
    water to the applicants.

ISSUE THREE - Is article 3.1, or a
    portion of the provision,
ultra vires
as a result of Lakeshores
    obligations pursuant to s. 86(1)?

[88]

In
    the words of Ian MacF. Rogers,
The Law of Canadian Municipal Corporations
,
    loose-leaf (2012-Rel. 6), 2d ed. (Toronto: Carswell, 2009), at p. 1049, [i]t
    is clear that a municipality can set up the defence of
ultra vires
and
    is not debarred as an individual person would be from showing and relying on
    its incompetency to make the agreement in question (footnote omitted).  A
    person contracting with a municipality is bound at its peril to take notice of
    the limits within which the council has the power to contract:
Pacific
    National Investments Ltd. v. Victoria (City)
, 2000 SCC 64, [2000] 2 S.C.R.
    919, at para. 68; Rogers, at pp. 1035-36.

[89]

Lakeshore
    submits that, as interpreted by the trial judge, article 3.1 is
ultra vires
.

[90]

The
    trial judge, based on his finding that the existing downstream system was
    inadequate to accommodate development of the TGL, rejected this argument, saying,
    at para. 198:

For the purposes of this dispute, I am not satisfied that the
    Town was obligated to allocate sewage capacity to MDI under section 86 (1) of
    the
Municipal Act
. That section did not affect the Town's contractual
    obligations to 129. The Supplementary Agreement was not
ultra vires
.
    The Town was bound by and breached its terms.

[91]

For
    the reasons that follow, I am of the view that the trial judge erred in
    concluding that article 3.1 was
intra vires
.  Properly interpreted,
    article 3.1 of the Supplementary Agreement is
ultra vires
, as it
    requires Lakeshore to make a promise that is directly contrary to its
    obligations under s. 86(1) of the Act.  Lakeshore does not have the
    jurisdiction to make such a promise.

[92]

In
    explaining my reasoning on this issue, it may be best to start with what I have
    not concluded.

[93]

First,
    it is not my opinion that any promise of future sewage capacity is
ultra
    vires
.  Given my interpretation of s. 86(1), a contractual promise to
    reserve a specific and reasonable amount of sewage capacity for future
    development, to the exclusion of all others, may well be
intra vires
.

[94]

Second,
    it is not my opinion that a promise of future sewage capacity is necessarily
ultra
    vires
if it has the effect of creating a
de facto
monopoly over
    development.  Such a
de facto
monopoly may well be acceptable under s.
    86(1), as interpreted, if the municipality promises a specific and reasonable
    amount of future sewage capacity to a developer and that specific amount is equal
    to all of the remaining capacity in the sewage system.

[95]

The
    offending portion of article 3.1 is the wording at the end of the article 
    wording, as found by the trial judge - in which Lakeshore promises that,
    pending completion of St. Clair Shores, it will not allocate sewage capacity in
    the existing system to anyone else.  The promise is absolute.  It is not
    qualified.  The promise ties Lakeshores hands until some unknown date when St.
    Clair Shores is fully built out.  Significantly, even if capacity becomes
    available before the completion of St. Clair Shores, Lakeshore is prevented
    from allocating it to building owners otherwise entitled to sewage supply under
    s. 86(1).

[96]

What
    distinguishes the monopoly promised to 129 and the hypothetical
de facto
monopoly, set out above, is that the
de facto
monopoly would end in
    the event sufficient capacity becomes available for others, allowing the
    municipality to meet its obligations under s. 86(1).  However, article 3.1 does
    not allow for this.

[97]

The
    parties disagreed over whether, at the time Lakeshore allocated capacity to
    MDI, there was capacity in the downstream system to enable St. Clair Shores to
    be fully developed and for the TGL.  After an extensive analysis, the trial
    judge concluded, at paras. 194-97, that the full development of St. Clair
    Shores alone would require sewage capacity in excess of the 1.5 cfs the
    enhancements created in the downstream system.  That is, there was insufficient
    capacity to grant MDIs request in 2005 because, at some point prior to the
    build-out of St. Clair Shores, the downstream system would run out of
    capacity.  Although one may question whether this fact will prove to be
    accurate to the completion of St. Clair Shores, particularly given the expert
    evidence about how malleable the determination of available sewage capacity is,
    deference is owed to this finding and I would not interfere with it.

[98]

However,
    I disagree with the trial judges conclusion that this conclusion saves article
    3.1 from being
ultra vires
.  I note that s. 86 is located in Part III
    of the Act.  As Mascarin and Williams opine, at p. 33, The structure of the
Municipal
    Act
, 2001 requires that the general powers in Part II co-exist with and be
    supplemented,
or restricted by
, the specific
    powers in Part III (emphasis added). In my view, s. 86(1) does not just
    require a municipality to provide sewage supply if certain conditions are met. 
    By implication, the section also restricts a municipalitys powers to enter
    into an agreement that would have the effect of preventing it from providing
    sewage supply if the conditions are met.

[99]

Accepting
    that an agreement to exclude all others from a sewage system could be justified
    by proof that sufficient capacity for others never was (or never will be)
    available over the duration of the contract, such that an obligation under s.
    86(1) never arises, would be contrary to the intention of s. 86(1), which is to
    provide fair and predictable access to public utilities. Such a holding would
    also create uncertainty because the enforceability of such an agreement would
    be contingent on the availability of sewage capacity, which is subject to
    constant change and which, at any given time in the life of the contract, may
    or may not be known to the parties.  The agreement could flicker in and out of
    legal existence as the sewage system changed. With respect to subdivision
    agreements, which are publicly available documents upon which third parties
    rely for their own decision-making, such uncertainty is particularly
    objectionable.

[100]

Furthermore, the
    connection between a municipalitys obligation to supply sewage under s. 86(1)
    and its lack of jurisdiction to make a promise to exclude all others from a
    sewage system, is supported by the trial record.  The evidence in this case was
    that a municipality cannot be completely certain when it makes such a promise
    that a s. 86(1) obligation will not arise in the future.  Even if, at the time
    of contracting, there is only enough capacity in the system for the property
    owner who receives the promise to exclude all others, sufficient capacity to
    grant other requests may well arise.

[101]

In saying that
    it may well turn out that additional capacity will become available, I rely
    on the expert evidence of both parties - Donald Joudrey, called by Lakeshore,
    and David Archer, called by 129.  Their evidence demonstrates that, in any one
    or more of a number of ways, capacity may become available in Lakeshores
    downstream system beyond that needed for the full build-out of St. Clair
    Shores.

[102]

First, and most
    obviously, further enhancement of the downstream system might generate
    additional capacity.  Lakeshore may still build the trunk main contemplated by
    the Subdivision Agreement.

[103]

Second,
    different developments lying to the east of St. Clair Shores, also connected to
    the downstream system, might be completed without using all of their previously
    allocated capacity. Theoretical calculations form the basis for a
    municipalitys allocation of future capacity to a developer.  The experts
    agreed that it is difficult to compute, with precision, the amount of sewage
    capacity a development will ultimately require.

[104]

Third, buildings
    connected to the downstream system might reduce or stop altogether their
    production of sewage, freeing up capacity for others. Businesses change.  They
    also shutter and move.

[105]

Fourth, the
    means by which a municipality determines if there is sufficient capacity in a
    sewage system is subject to change.   The evidence revealed that determining
    whether a sewage system has available capacity is a question on which
    reasonable experts can disagree.  For instance, a municipality may have
    guidelines for calculating capacity that are more or less stringent.  In
    addition, as the evidence in this case demonstrates, experts differ on what
    indicates that a sewage system is overcapacity.

[106]

The issue of
    surcharging (i.e. overflow) provides an example.   At para. 195 of his reasons,
    the trial judge appears to interpret s. 86(1) as providing that there will not
    be sufficient capacity in a sewage system if there is any level of
    surcharging.  With respect, I see nothing in the Act that limits s. 86(1) to
    such a technical definition of sufficient capacity.  To the contrary, as
    discussed above, the Act was meant to empower municipalities to manage their
    own affairs.  Mr. Joudrey testified that a small amount of surcharging in a
    sewer system would have no consequences (e.g. no basement flooding).  Thus,
    another means by which additional capacity can be found within a sewage system
    is if a municipalitys standards are relaxed (e.g. to allow for more
    surcharging).

[107]

These examples,
    identified in the evidence, about how additional capacity might yet be found in
    Lakeshores downstream system, are only meant to illustrate the many ways a
    conflict can arise between a contractual promise to exclude all others and a
    municipalitys s. 86(1) obligation.  However, my conclusion that article 3.1 is
ultra vires
is not dependent on any of these examples occurring. 
    More generally, my conclusion that article 3.1 is
ultra vires
is not
    dependent on whether or not additional capacity has been or ever will be found
    in Lakeshores downstream system.  Rather, it is dependent on the wording of s.
    86(1) of the Act and its clear intention to restrict, in at least this one way,
    a municipalitys power to contract.

ISSUE FOUR - If article 3.1, or a
    portion of the provision, is
ultra vires
, should the offending words
    be severed?

[108]

An
ultra
    vires
contract is void
ab initio
. But, based on the above
    analysis, I am of the view that only the words at the end of article 3.1 are
ultra
    vires
; namely, . . . and the Municipality shall not, prior to completion
    of full development and build out of residential and commercial buildings in
    the St. Clair Shores Subdivision, grant and/or approve additional capacity in
    the Existing System for lands outside of the St. Clair Shores Subdivision.

[109]

This conclusion
    begs the following questions.  What should be done about an agreement that
    contains a term that is void?  Can severance be used to preserve the remainder
    of the parties bargain?

[110]

Under the common
    law doctrine of severance, a court can excise or even reword an illegal or
ultra
    vires
contractual term so as to give effect to the remainder of the
    agreement.  By eliminating or rewording a contractual term a court is making a
    new agreement:
Transport North American Express Inc. v.  New Solutions
    Financial Corp.,
2004 SCC 7, [2004] 1 S.C.R. 249, at para. 30.  As a
    result, as stated by Rothstein J. in
Shafron v. KRG Insurance Brokers
    (Western) Inc.,
2009 SCC 6, [2009] 1 S.C.R. 157, at para. 32, courts will
    be restrained in their application of severance because of the right of parties
    to freely contract and to choose the words that determine their obligations and
    rights.

[111]

Notwithstanding
    the courts cautious approach to severance, I am of the view that, here,
    severance is appropriate and I would excise from article 3.1 the above-quoted
    words in which Lakeshore promises 129 that it will not grant sewage capacity to
    any other lands until completion of St. Clair Shores.

[112]

In concluding
    that severance is warranted, I start with the important observation that, in
    this case, the parties expressly put their minds to the possibility that a
    provision in the Supplementary Agreement may be unenforceable and agreed that
    severance could be used to remedy the problem.  I refer to article 6.5 that
    reads:

If any provision of this Supplementary Agreement shall be held
    to be invalid, illegal or unenforceable, the validity, legality and
    enforceability of the remaining provisions of this Supplementary Agreement
    shall not in any way be affected or impaired thereby.

[113]

The clause indicates
    the parties clear intention that they did not want their rather complex
    agreement impaired by a finding that a specific provision is invalid.  In
    determining whether the doctrine of severance should be applied, substantial
    weight should be given to a severability clause: see e.g.
Miller v.
    Convergys CMG Canada Limited Partnership
, 2014 BCCA 311, 2014 CarswellBC
    2260, at para. 44.

[114]

Turning to the
    jurisprudence surrounding the issue of severability, I note that courts
    typically conduct a two-step analysis: McCamus, p. 510.  First, it is
    determined whether severance would radically change the purport and substance
    of the original contract.  Here, in
The Law of Contract in Canada
, 6th
    ed. (Toronto: Carswell, 2011), at pp. 412-13, G.H.L. Fridman describes the
    true test as being whether the subtraction of the void part of a contract
    affects the meaning of the remainder, or merely the extent.  Second, it is
    determined whether severance would be contrary to public policy, particularly
    that underlying the law infringed by the offending contractual term.

[115]

No radical
    change is required here.  All that is needed to remedy article 3.1 is the
    deletion of the offending words.  This application of the doctrine of severance
    would meet the traditional blue-pencil test: McCamus, pp. 515-22.  This
    revision renders article 3.1
intra vires
and enforceable.  Under the
    article, as revised, Lakeshore promises to 129 a specific and reasonable amount
    of sewage capacity; namely, that amount required for full build-out of St.
    Clair Shores.  Significantly, upon receiving a third party request for sewage
    supply, if there is sufficient capacity to meet both the promise to 129 and the
    third party request, Lakeshore will be able to meet its obligations under s.
    86(1).

[116]

Revising article
    3.1 in this manner does not offend public policy.  In
New Solutions
,
    at paras. 42-46, a majority of the Supreme Court applied four considerations
    relevant to the determination of whether public policy ought to allow an
    otherwise illegal agreement to be partially enforced rather than being declared
    void
ab initio
.  These considerations were identified by this court
    in
William E. Thomson Associates Inc. v. Carpenter
(1989), 69 O.R.
    (2d) 545 (C.A.), leave to appeal refused, [1989] S.C.C.A. No. 398, at para 17
    as:

1. whether that
    object and policy of the provision, in this case s. 86(1) of the Act, would be
    subverted by a partial performance of the agreement;

2. whether one
    or both parties intended to break the law;

3. whether the
    parties were in an equal bargaining position; and

4. whether one
    party would be unjustly enriched if the contract was not enforced.

[117]

In my view, the
Thomson
considerations support severance.  First, severing the offending words would
    not, in my view, subvert the purpose or policy of s. 86(1) of the Act  as
    provision that, as previously indicated governs a municipalitys orderly
    allocation of water and sewage services.  The essence of the parties bargain
    is that 129 would benefit from its investment in the downstream sewage system
    and be in a position to complete St. Clair Shores.   It is a bargain in keeping
    with the purpose of the Act.  Severance would not subvert that purpose. 
    Second, there is no evidence that supports a finding that either party intended
    to circumvent s. 86(1) of the Act.  Third, both parties were sophisticated and
    had extensive resources.  The trial judges description of the bargaining process
    indicates that it was chaotic but not patently unfair.  Fourth, voiding the
    entirety of article 3.1 might create a windfall in that Lakeshore would no
    longer be liable if the development of St. Clair Shores is halted due to lack
    of sewage capacity.

[118]

I am mindful of
    the fact that we received no submissions on severance.  In my view, this is not
    an impediment to assist the parties by severing of what amounts to several
    lines of a lengthy agreement.  It is clear that neither party would have reason
    to find severance objectionable. From 129s perspective, without severance,
    Lakeshore would have no obligations under article 3.1.  From Lakeshores
    perspective, severance gives effect to its consistent interpretation of article
    3.1, namely that Lakeshore guarantee[d] that [129] would have sufficient sewer
    capacity for full build-out of the Subdivision: see trial reasons, at paras.
    114 and 132.

[119]

Finally, I
    return to the fact that the parties expressly agreed to severance by including
    a severability provision in their agreement.

ISSUE FIVE - If severance is
    permitted, do the facts demonstrate that Lakeshore breached article 3.1, as
    revised?

[120]

Following the
    decision to sever the offending portion of article 3.1, the issue that must be
    addressed is whether Lakeshore breached the revised provision.

[121]

The trial judge
    had no reason to turn his mind to this question.  However, given the fullness
    of the record, this court is in a position to exercise its broad jurisdiction
    under s. 134 of the
Courts of Justice Act
, R.S.O. 1990, c. C.43,
    jurisdiction that includes drawing inferences of fact from the evidence and
    determining this issue.

[122]

Based on the
    analysis that follows, I conclude that 129 has not proven that Lakeshore
    breached article 3.1, as revised, when it allocated sewage capacity to MDI.

[123]

Lakeshore has
    promised to provide enough sewage capacity to 129 to allow for full build-out
    of St. Clair Shores.  As of the time of trial, St. Clair Shores remained only
    partially developed.  There was no evidence that the amount of sewage capacity
    available to that point in time had had any negative impact on the development
    of St. Clair Shores.

[124]

As discussed, in
    his reasoning on
ultra vires
, the trial judge found that full-build
    out of St. Clair Shores will require more than 1.5 cfs, which was the amount of
    additional capacity in the downstream system that was purportedly created by
    the enhancements.  But, it does not follow that Lakeshore breached article 3.1,
    as revised, by providing capacity to MDI.  This is because the trial judges
    finding is merely a prediction of future events that, as of the time of trial,
    had yet to be proven accurate.

[125]

I would not find
    that the trial judges prediction is inaccurate, only that it lacks sufficient
    certainty to prove breach on a balance of probabilities.  I reiterate that the
    trial judge never had to consider whether breach of the revised article 3.1 was
    proven by his prediction.  The trial judges prediction lacks sufficient
    certainty for at least two reasons.

[126]

First, even as
    of the trial date, it was not known whether St. Clair Shores will ever be fully
    built-out or, if it is, whether the final flows will exceed 1.5 cfs.  The trial
    judge himself acknowledged this uncertainty, writing at para. 168, 
Ultimate flow would depend on the nature of the businesses
    occupying the Lands. The mix was  and still is - unknown
.

[127]

Second, even as
    of the trial date, it was not known whether St. Clair Shores would only have
    access to 1.5 cfs by the time of full-build out.  As the four examples provided
    earlier in these reasons demonstrate, the available capacity in a sewage system
    is subject to change.

[128]

It may be argued
    that Lakeshores allocation to MDI amounted to an anticipatory repudiation of
    the revised article 3.1, as the allocation would make performance impossible: 
    McCamus, at p. 693.

[129]

In my view,
    however, Lakeshores allocation to MDI was not conduct that demonstrated an
    intention to repudiate the revised article 3.1.

[130]

In 2005, when
    129 expressed concern over the towns plans to provide sewage access to the
    TGL, Lakeshore expressly confirmed its intention to adhere to the Supplementary
    Agreement, or at least its interpretation of the agreement,  which, as
    discussed, is the promise remaining in the revised article 3.1. As stated in
Standard
    Precast Ltd. v. Dywidag Fab Con Products Ltd.
(1989), 56 D.L.R. (4th) 385
    (B.C.C.A.), at p. 386, [r]epudiation is not lightly to be inferred from a
    party's conduct, particularly where, as here, prior to the time for performance
    that party has repeated its intention to carry out the contract.  See also
McBride
    v. Johnson
, [1962] S.C.R. 202, at pp. 207-8.

[131]

Furthermore, in
    my view, the allocation of capacity to MDI does not meet the test for
    anticipatory repudiation; namely, depriving 129 of substantially the whole
    benefit of the revised article 3.1: McCamus, pp. 693-94;
Place Concorde
    East Ltd. Partnership v. Shelter Corp. of Canada Ltd
., [2006] O.J. No.
    1964, 270 D.L.R. (4th) 181 (C.A.), at para. 51.  For the reasons discussed
    above, it is impossible to know whether the allocation to MDI will have a
    major, minor, or insignificant effect on when, in the development of St. Clair
    Shores, sewage capacity becomes limiting (assuming the trial judges prediction
    comes true).  As the effect of the allocation to MDI was highly uncertain at
    the time  and, in fact, remains uncertain - Lakeshores conduct in 2005 could
    not have been reasonably interpreted as depriving 129 of substantially the
    whole benefit of article 3.1, as revised.

[132]

In summary,
    article 3.1, as revised through severance, is enforceable.  However, I conclude
    that the evidence does not support a finding that Lakeshore is in breach of its
    obligations or a finding that Lakeshore has repudiated its promise.   As a
    result, 129s action for breach of contract must fail.

ISSUE SIX - If Lakeshore, in
    providing sewage capacity to MDI, breached an enforceable agreement, what
    remedy is 129 entitled to?

[133]

While my
    conclusion that the revised article 3.1 has not been breached or repudiated
    disposes of the matter, for completeness, I will briefly explain why I am of
    the view that the trial judge erred in determining damages.

[134]

The $2,423,860
    that the trial judge awarded 129 for breach of contract was calculated based
    on  lost profits arising out of certain leases that MDI was able to secure for
    commercial space on the TGL.

[135]

In assessing
    whether this loss of income flowed from the breach of contract, the trial judge
    cited, at para. 202, the following passage in
Hadley v. Baxendale
(1854), 156 E.R. 145, at p. 151:

Where two parties have made a contract which one of them has
    broken, the damages which the other party ought to receive in respect of such
    breach of contract should be such as may fairly and reasonably be considered
    either arising naturally, i.e., according to the usual course of things, from
    such breach of contract itself, or such as may reasonably be supposed to have
    been in the contemplation of both parties, at the time they made the contract,
    as the probable result of the breach of it.

[136]

The trial judge
    accepted 129s claim that it was entitled to damages for rental income that was
    lost when prospective tenants chose to lease commercial space in MDIs new
    development on the TGL. The trial judge summarized his conclusions at para.
    222, which, for convenience, I will set out again:

I recognize the evidence is limited. However, four things are
    clear: first, if the Supplementary Agreement had not been breached, sewage
    capacity would not have been allocated to MDI; second, without the allotment,
    [the TGL] would not have been developed; third, there was precious little
    alternative commercial space in the vicinity of the Lands before completion of
    the MDI and Spidrock developments and fourth, income 129 otherwise would have generated
    was lost.

[137]

Although
    correctly noting at the start of the section on damages, at para. 202, that the
    relevant legal principle was remoteness, the trial judge provided no analysis
    as to whether the loss of commercial leases to otherwise lawful competition was
    the type of loss that fell within the parties reasonable contemplation.
    Instead his analysis is devoted to causation and quantifying the loss.

[138]

In
RBC
    Dominion Securities Inc. v. Merrill Lynch Canada Inc
., 2008 SCC 54, [2008]
    3 S.C.R. 79, at paras. 63-64, Abella J. (dissenting in part) summarized the
    test for remoteness of damages following a breach of contract:

The defining explanation of the contractual breach principles
    of reasonable foreseeability and remoteness is found in
Hadley v. Baxendale
...
A court must therefore ask itself "what was in the
    reasonable contemplation of the parties at the time of contract formation
"
    (
Fidler v. Sun Life Assurance Co. of Canada
, [2006] 2 S.C.R. 3, 2006
    SCC 30, at para. 54).

The principle of remoteness "imposes on damage awards
    reasonable limits which are required by fairness"
(Matheson (D.W.)
    & Sons Contracting Ltd. v. Canada (Attorney General)
(2000), 187
    N.S.R. (2d) 62, 2000 NSCA 44, at para. 69, per Cromwell J.A.).
It aims "to prevent unfair surprise to the defendant, to
    ensure a fair allocation of the risks of the transaction, and to avoid any
    overly chilling effects on useful activities by the threat of unlimited
    liability"
(Jamie Cassels and Elizabeth Adjin-Tettey,
Remedies:
    The Law of Damages
(2nd ed. 2008), at p. 352). This principle will be
    informed by the nature and culture of the business in question, and the
    particular contractual relationship between the parties... [Emphasis added.]

[139]

In Angela Swan
    and Jakub Adamski,
Canadian Contract Law
, 3d ed. (Markham, Ontario:
    LexisNexis Canada, 2012), at p. 480, the authors helpfully frame the issue as
    the determination of the extent of the risk that a promisor assumes when he
    makes a promise.

[140]

In my view, the
    nature of the damages 129 claimed and the trial judge awarded was not in the
    reasonable contemplation of the parties when the contract was executed.

[141]

The problem is
    not with rental income
per se
as a type of loss.  The type of loss
    that was not reasonably contemplated is rental income that was lost as a result
    of ordinary, commercial competition.  It only indirectly related to Lakeshores
    purported breach: the actions of a third party were also involved.  It does not
    follow in the usual course of things that a grant of sewage capacity to a
    third party will result in a competing commercial development. Even if, as MDI
    did, a third party chose to compete with 129 for the same commercial tenancies,
    the loss of rental income depends on a myriad of commercial vagaries. Vacancy
    rates, profit margins, business relationships, and the relative attractiveness
    of the lots must be factored in.  For instance, Mr. Valente acknowledged under
    cross-examination that, at least for Bulk Barn, the location of MDIs
    development on the TGL was preferable to that of 129s proposed development.

[142]

Significantly,
    129 points to no evidence that, prior to execution of the Supplementary
    Agreement, it alerted Lakeshore that the town would be liable for rental income
    lost as a result of commercial competition stemming from a breach.  Thus, the
    second branch of
Hadley v. Baxendale
does not come into play. To the
    contrary, the evidence was that there was risk to 129s success with commercial
    tenancies that was entirely independent of Lakeshore.  The evidence was that
    129 also lost tenancies to a commercial development across the road from St.
    Clair Shores in the Town of Tecumseh. Thus, at the time of executing the
    contract, the parties had knowledge that spoke against Lakeshores liability
    for the loss of rental income to ordinary, commercial competition; namely, that
    this competition might arise in Tecumseh regardless of Lakeshores decisions.

[143]

I conclude that
    even if article 3.1, as written, were enforceable and Lakeshore breached it,
    the damages 129 claimed in this proceeding are too remote.

[144]

In such
    circumstances 129 would be entitled only to nominal damages that I would have
    fixed at $1: see e.g.
Southcott Estates Inc. v. Toronto Catholic School
    Board
, 2010 ONCA 310, 104 O.R. (3d) 784, at para. 30, affd 2012 SCC 51,
    [2012] 2 S.C.R. 675.

DISPOSITION

[145]

For these
    reasons, I would allow the appeal.  I would set aside the judgment below and
    dismiss the action.

[146]

Further to
    counsels agreement, Lakeshore is entitled to its costs of the appeal fixed in
    the amount of $40,000, including disbursements and applicable taxes.  Failing
    resolution of the issue of costs below, I would ask the parties to make
    submissions with respect to the costs of the trial within 15 days of the
    receipt of these reasons.

Released: KF November 17, 2014

G.J. Epstein J.A.





[1]
I note that in this case, where one of the parties is a public body, that
    principle may have a somewhat more limited application.



[2]
Section 19 concerns the geographic application of a municipalitys powers.  For
    instance, section 19(1) states, By-laws and resolutions of a municipality
    apply only within its boundaries, except as provided in subsection (2) or in
    any other provisions of this or any other Act.  There is no need to consider
    s. 19 here.


