Abbtsford, The Maples, LMS 1463: Court of Appeal upholds decision to add defendants in leaky condo case; developers failed to disclose condos were leaking

COURT OF APPEAL FOR BRITISH COLUMBIA

Citation:

Strata Plan LMS 1463 v. Krahn,

 

2004 BCCA 190

Date: 20040406


Docket: CA031001

Between:

The Owners, Strata Plan LMS 1463

Respondents

(Plaintiffs)

And

449258 B.C. Ltd., Fred Krahn and Jacob Redekop

Appellants

(Defendants)

 


 

Before:

The Honourable Madam Justice Prowse

The Honourable Mr. Justice Mackenzie

The Honourable Mr. Justice Low

 

J.R. Singleton, Q.C. and
B. Cornish

Counsel for the Appellants

S.L. Booth

Counsel for the Respondents

Place and Date of Hearing:

Vancouver, British Columbia

March 8, 2004

Place and Date of Judgment:

Vancouver, British Columbia

April 6, 2004

 

Written Reasons by:

The Honourable Madam Justice Prowse

Concurred in by:

The Honourable Mr. Justice Mackenzie

The Honourable Mr. Justice Low


Reasons for Judgment of the Honourable Madam Justice Prowse:

NATURE OF APPEAL

[1]            This is an appeal from the decision of a chambers judge, made June 12, 2003, granting leave to the respondents (the "Owners") to add Fred Krahn ("Krahn") and Jacob Redekop ("Redekop") as defendants to an existing action; to add a further claim against the defendant 449258 B.C. Ltd. ("449258"); and to amend their pleadings accordingly.  The order also provided that the newly-added defendants could not raise limitation defences to the new claims set forth in the further amended pleadings.

[2]            The decision of the chambers judge is reported at [2003] B.C.J. No. 1396, 2003 BCSC 903.

GROUNDS OF APPEAL

[3]            Counsel for the appellants submits that the chambers judge erred in her interpretation and application of the decision of this Court in Lui v. West Granville Manor Ltd. (No. 2) (1987), 11 B.C.L.R. (2d) 273 ("Lui (No. 2)"), by adding Krahn and Redekop as defendants where there was a dispute as to whether the claims against them were barred by a limitation period.  On appeal, counsel submits that the appropriate order would have been an order joining these parties as defendants, but preserving their right to establish a limitation defence.

[4]            The appellants also submit that the chambers judge erred in permitting the Owners to amend their pleadings to make a claim on guarantees upon which no demand had been made.  The appellants submit that any action on the guarantees is premature.

BACKGROUND

[5]            The Owners are the plaintiffs in what is commonly referred to as a "leaky condo" action relating to an 80-unit condominium project in Abbotsford, B.C.  Phase I of the project was completed in October 1994; Phase II was completed in December 1995.

[6]            The project was originally owned and developed by 449258 as bare trustee for three corporations:  Krahn Bros. Construction Ltd. ("Krahn Bros."), Randal Pacific Developments Ltd., and Silver Maple Farms Ltd. ("Silver") (collectively, the "Developers").

[7]            On January 24, 1994, the Developers executed a Disclosure Statement in relation to the development pursuant to provisions of the Real Estate Act, R.S.B.C. 1996, c. 397.  The Disclosure Statement was accompanied by statutory declarations attesting to the accuracy of the facts in the Disclosure Statement, which were executed by the appellants, Krahn and Redekop, as directors of 449258 and Silver, respectively. 

[8]            On February 25, 1994, the Developers registered Phase I of the development with the New Home Warranty Program ("NHWP") and entered into a one-year agreement (the "Builders Agreement") with NHWP in relation to that enrolment.  At that time, Krahn executed a personal guarantee in favour of NHWP in relation to Krahn Bros.' obligations under the Builders Agreement. 

[9]            Pursuant to the Builders Agreement, the Developers and NHWP each provided warranties to the purchasers of the individual strata units relating to workmanship. 

[10]        On April 7, 1995, 449258 entered into a second enrolment agreement with NHWP in relation to both phases of the development and agreed to be bound by the terms of the Builders Agreement in relation to both phases.  449258 also provided an indemnification of NHWP for any liability on the part of Krahn Bros. arising from the Builders Agreement.  In addition, the Developers executed guarantees in relation to 449258's obligations.

[11]        On October 4, 1995, the Developers executed an Amended Disclosure Statement and Krahn and Redekop executed statutory declarations on behalf of 449258 and Silver attesting to the accuracy of the facts in the Amended Statement. 

[12]        In early 1995, the development exhibited signs of water damage which allegedly continued until the Owners undertook repairs at an estimated cost of $2.5 million. 

[13]        In May 1999, the Owners commenced action against the Developers and other parties involved in the design and construction of the project alleging negligence, breach of fiduciary duty and breach of contract (the "action"). 

[14]        In September 1999, the Owners submitted a proof of claim to NHWP in the amount of $2.5 million.  NHWP has apparently accepted that there are warrantable claims by the Owners and has entered into a claims-processing agreement providing for the valuation of those claims.  However, NHWP has since gone into bankruptcy.

[15]        In September 2000, the Owners obtained documents which suggested to them that Krahn, Redekop and 449258 may have made misrepresentations in relation to the Amended Disclosure Statement.  The Owners allege that their suspicions were confirmed as a result of their examination for discovery of Krahn on May 10, 2002.

[16]        On September 4, 2002, NHWP's trustee and interim receiver assigned to the Owners the benefit of the guarantees NHWP had received from Krahn and the Developers. 

[17]        On September 19, 2002, the Owners applied, amongst other things, to:

(a)   add Krahn and Redekop as defendants to the action in relation to their statutory declarations attesting to the accuracy of the facts in the Amended Disclosure Statement;

(b)   add a claim against Krahn and 449258 in relation to their execution of the Builders Agreements and related guarantees to NHWP.

[18]        As earlier noted, the chambers judge granted the relief sought by the Owners on June 12, 2003.

RELEVANT STATUTORY PROVISIONS

[19]        The Owners applied to add Krahn and Redekop as defendants to the action pursuant to Rule 15(5)(a)(iii) of the Rules of Court and to amend their pleadings in relation to all three appellants pursuant to Rule 24(1).  Those Rules provide, in part:

[Rule 15]

(5)   (a)   At any stage of a proceeding, the court on application by any person may

. . .

(iii)     order that a person be added as a party where there may exist, between the person and any party to the proceeding, a question or issue relating to or connected

(A)   with any relief claimed in the proceeding, or

(B)   with the subject matter of the proceeding, 

which in the opinion of the court it would be just and convenient to determine as between the person and that party.

* * *

[Rule 24]

(1)   A party may amend an originating process or pleading issued or filed by the party at any time with leave of the court, and, subject to Rules 15(5) and 31(5)

(a)   once without leave of the court, at any time before delivery of the notice of trial or hearing, and

(b)   at any time with the written consent of all the parties.

[20]        The relevant provisions of the Limitation Act, R.S.B.C. 1996, c. 266 (the "Act") are ss. 4 and 6(3).  Section 4 provides, in part:

4    (1)    If an action to which this or any other Act applies has been commenced, the lapse of time limited for bringing an action is no bar to

. . .

(d)   adding or substituting a new party as plaintiff or defendant,

under any applicable law, with respect to any claims relating to or connected with the subject matter of the original action.

. . .

(3)   Subsection (1) does not operate so as to interfere with any judicial discretion to refuse relief on grounds unrelated to the lapse of time limited for bringing an action.

(4)   In any action the court may allow the amendment of a pleading, on terms as to costs or otherwise that the court considers just, even if between the issue of the writ and the application for amendment a fresh cause of action disclosed by the amendment would have become barred by the lapse of time.

[21]        Section 6(3) provides for the postponement of limitation periods in certain circumstances.

DECISION OF THE CHAMBERS JUDGE

[22]        The chambers judge concluded it would be just and convenient to add Krahn and Redekop as defendants to the action within the meaning of Rule 15(5)(a)(iii) and bearing in mind s. 4 of the Act.  In coming to that conclusion, she assumed, without deciding, that the defendants were correct in stating that the relevant limitation period had expired in relation to the new claims.  Because she concluded that it would be just and convenient to add the parties assuming the limitation period had expired, she did not find it necessary to go on to determine whether the limitation period had expired in fact.

[23]        In concluding that it would be just and convenient to add the parties, the chambers judge referred to several decisions of this Court including Lui v. West Granville Manor Ltd. (No. 1) (1985), 61 B.C.L.R. 315; Lui (No. 2), supra; Tri-Line Expressways v. Ansari (1997), 30 B.C.L.R. (3d) 222; and Teal Cedar Products (1977) Ltd. v. Dale Intermediaries Ltd. (1996), 19 B.C.L.R. (3d) 282.  The chambers judge expressed her conclusion with respect to the addition of parties at paras. 51-52 of her decision as follows:

      Therefore I find that even if the parties are outside of the limitation period, I would exercise my discretion under s. 4(3) and (4) of the Limitation Act and Rule 15(5)(a)(iii) and Rule 24(1) and permit the addition of the parties and the concomitant amendment to the pleadings.  Therefore I do not need to consider the issue of the postponement of the limitation period pursuant to s. 6(3) of the Act.

      The result is that the defendants may not raise a limitation defence at trial with respect to this issue.

[24]        The chambers judge also concluded that it was appropriate to permit the Owners to claim against the appellants pursuant to the guarantees executed in favour of NHWP and assigned to the Owners, despite the fact that no demand had been issued for payment under the guarantees.  In coming to that conclusion, she found that the new claims under the guarantees could not be said to be "frivolous" within the meaning of this Court's decision in MacMillan Bloedel Ltd. v. Binstead (1981), 58 B.C.L.R. 173.

DISCUSSION OF THE ISSUES

      (1)   The Limitation Issue – Application of Lui (No. 2)

[25]        At the outset of the appeal, counsel for the appellants advised the court that the only issue he was pursuing with respect to the addition of Krahn and Redekop as parties (and the consequential amendment of the pleadings) was whether the chambers judge erred in precluding these appellants from raising a limitation defence at trial.  In his submission, the chambers judge failed to appreciate the significance of the fact that there was a dispute as to whether a limitation defence applied to the new claims and that, as a consequence, she failed to properly apply the decision of this Court in Lui (No. 2), particularly Part V of that decision, to the facts before her.  He also relies on the earlier decision of this Court in Cominco Ltd. v. Canadian General Electric Company Limited (1983), 45 B.C.L.R 35.  

[26]        Counsel for the Owners submits that the chambers judge properly interpreted and applied the decision of this Court in Lui (No. 2) and that the appellants are seeking to attribute a meaning to Part V which it cannot bear.

[27]        In Lui (No. 2), this Court sat with five judges to consider several previous decisions of the court dealing with the interrelationship between the Rules of Court providing for the addition of parties to proceedings (Rules 15 and 22) and limitation periods under ss. 4 and 9 of the Act.  In that case, the defendants had added third parties to the proceedings by way of a third party notice under Rule 22.  Thereafter, the third parties applied to strike the notice on the basis that it raised a separate and independent cause of action for which the limitation period had expired.  The third parties were ultimately successful in striking the claims. 

[28]        The only portions of Lui (No. 2) which are directly relevant to this appeal are Parts IV and V of the majority decision (although the entire judgment should be read to place these Parts in context).  In Part IV, the majority addressed the question of "what standards should be applied in deciding whether to permit or to prevent claims against new parties which are begun after the limitation period has expired for original proceedings against those parties?"  (Emphasis added.)  In other words, Part IV addresses the situation where the applicable limitation period has expired, and the question is whether the new parties should be added despite its expiry.

[29]        As earlier noted, the chambers judge in this case assumed for the purpose of her analysis that the limitation period against Krahn and Redekop had expired and she concluded, nonetheless, that it was "just and convenient" within the meaning of Rule 15(5)(a)(iii) to add them as parties.  Because she made her decision based on the most favourable argument available to Krahn and Redekop, she found it unnecessary to consider Part V of the decision. 

[30]        Part V deals with the question of "what should be done about proceedings to bring a new party into an action in circumstances where there is a dispute about whether a limitation defence that would affect the new party has accrued or not?"  It is this portion of the judgment upon which the appellants, Krahn and Redekop, now rely.  In their submission, Part V of the judgment indicates that, where a limitation period is in dispute, the court should permit the new party to be added, provide a mechanism for the resolution of the limitation defence, and give effect to the defence if it is established.

[31]        It is important to emphasize, however, that Part V does not apply where the court has determined that it would be just and convenient to add a party despite a fully accrued limitation defence.  This is apparent from the introduction to Part V, where Mr. Justice Lambert, speaking for the majority, states (at pp. 303-4):

      For the purposes of this question [i.e., whether to add a party if the limitation period is in dispute], it should be assumed that a case does not meet the guidelines for bringing a new party into an existing action, as those guidelines are set out in Pt. IV of these reasons.  So, if the limitation defence had fully accrued, the new party would not be allowed into the action.  But, if the limitation defence had not fully accrued, there would be no harm in permitting the new party to enter the action and, in the usual course, the new party would be permitted into the action.  The problem lies in providing a means for determining the limitation issue, perhaps, most conveniently, at trial, without doing away with a fully accrued limitation defence, which, on the basis of the guidelines in Pt. IV of these reasons, ought to be preserved.

[Emphasis added.]

[32]        In other words, if the court has concluded that it would not be just and convenient to add a party if the limitation period has expired, and where the limitation issue cannot be resolved on the application for joinder, the party seeking joinder should be given an opportunity to establish that the limitation has not expired, since that may tip the balance in favour of joinder.  If the limitation period has not expired then, as Mr. Justice Lambert stated, "there would be no harm in permitting the new party to enter the action and, in the usual course, the new party would be permitted into the action."  In those circumstances, Part V discusses various mechanisms which can be put in place to determine the limitation issue.

[33]        Further, where it would not otherwise be just and convenient to add a party, but that party is joined solely for the purpose of determining whether the limitation period has expired, the party added should be given the benefit of the limitation defence, if successful.  This is apparent from Mr. Justice Lambert's comments at p. 305 of the decision:

The important point is that if a case does not meet the guidelines set out in Pt. IV of these reasons for bringing a new party into existing proceedings if a limitation period affecting the party had already expired, then the fact that there is a dispute about the limitation period should not mean that the new party must be permitted into the proceedings if the result is that what might turn out to be a fully accrued limitation defence is swept away.

[34]        In effect, Part V of the judgment gives the party seeking joinder, who has not established that it would be just and convenient to add another party if the limitation period has expired, an opportunity to show that the limitation period has not expired and that, in all of the circumstances, joinder would be just and convenient.

[35]        What Part V of the judgment assuredly does not permit is what these appellants are seeking to do.  It does not permit the parties seeking to avoid joinder to resist the application on the basis that a limitation period has expired; and if unsuccessful, to then argue that the limitation period is in issue and that they should be added for the purpose of arguing the limitation issue.  That is what Krahn and Redekop are seeking to do by this appeal.  They asserted before the chambers judge that the limitation period had expired and that, for a variety of reasons (including the expiration of the limitation period), it would not be just and convenient to add them as parties.  When the chambers judge found that it would be just and convenient to add them as parties on the assumption that the limitation period had expired, they appealed on the basis that she had erred in failing to add them as parties for the purpose of permitting them to argue the limitation defence.  They further submit that if the limitation issue were subsequently resolved in their favour, they would be entitled to have the action against them dismissed. 

[36]        While Part V of Lui (No. 2) did not deal with this particular scenario, I have no hesitation in saying that it could not have been intended to revive a limitation defence which, on a Part IV analysis, had been treated as having expired. 

[37]        In this case, I am satisfied that the chambers judge properly interpreted and applied the decision in Lui (No. 2).  She concluded that, even if the limitation period against Krahn and Redekop had expired, it was just and convenient to add them as parties and to permit the Owners to amend their pleadings accordingly.  The effect of joining them in these circumstances was to preclude them from arguing the limitation defence at trial.  This follows from an application of s. 4 of the Act, and, in particular, ss. 4(1)(d) and (4) which I will repeat here for convenience:

4    (1)    If an action to which this or any other Act applies has been commenced, the lapse of time limited for bringing an action is no bar to

. . .

(d)   adding or substituting a new party as plaintiff or defendant,

under any applicable law, with respect to any claims relating to or connected with the subject matter of the original action.

. . .

(4)   In any action the court may allow the amendment of a pleading, on terms as to costs or otherwise that the court considers just, even if between the issue of the writ and the application for amendment a fresh cause of action disclosed by the amendment would have become barred by the lapse of time.

[38]        I am not persuaded that the Cominco decision leads to a different conclusion.  In that case, a chambers judge added a defendant to a proceeding in circumstances where there was a dispute as to whether s. 6(3) of the Act applied to extend the limitation period.  The limitation issue was argued at trial and, on appeal, it was decided in favour of the defendant.  In the circumstances of that case, this Court held that the fact that the defendant had been added as a party did not deprive him of the right to argue a limitation defence.

[39]        In Lui (No. 2), the majority concluded that Cominco was correctly decided on its facts in relation to s. 6(3) of the Act and that it was in accord with the majority's analysis under Part V.  In coming to that conclusion, the majority emphasized that the Cominco decision made "no reference to any argument that no limitation defence is available in subordinate proceedings of the type described in paras. (a) to (d) of s. 4(1)."  (At 306.)  That is sufficient to distinguish it from this case, in which the analysis of the chambers judge was conducted on the basis of Rule 15(5)(a)(iii) and s. 4 of the Act, giving the appellants the benefit of an assumption that the limitation period had expired.

[40]        In the result, I am not persuaded that there is any basis for interfering with the order of the chambers judge adding Krahn and Redekop as parties and precluding them from arguing a limitation defence at trial in relation to the new claims.

[41]        I would dismiss this ground of appeal.

(2) The Guarantee Claims

[42]        Counsel for 449258 and Krahn submit that the chambers judge erred in permitting the Owners to amend their pleadings to add a claim based on the guarantees provided by these parties to NHWP.  They submit that a claim could only be made against them pursuant to their guarantees if demand was first made upon them for payment pursuant to those guarantees.  No such demand has been made.  Thus, these appellants submit that the action against them is premature.

[43]        Counsel for the Owners submits that this claim does not necessarily turn on whether a demand has been made and that there are live issues as to whether the nature and effect of the guarantees is to provide for liability even where the amount owing pursuant to the guarantees has not been finally determined, as here.  He submits that a determination has been made by the trustee for NHWP that Krahn and 449258 are liable under their guarantees and that the only question still open is that of quantum.  In these circumstances, he submits that the chambers judge was correct in permitting the addition of this claim.  He notes that the trial of this action is set to proceed in September 2005 and that the issue of quantum will likely be decided well before the trial commences.

[44]        The chambers judge decided that, whatever the ultimate merit of the Owners' claim on the guarantees, the claim could not be said to be frivolous, by which I take her to mean clearly lacking in merit.  In coming to this conclusion, the chambers judge relied on the following passage from this Court in MacMillan Bloedel Ltd., supra, at p. 175:

It seems to me clear that one of the functions of the chambers judge hearing an application under this rule [15(5)(a)(iii)] must be to decide whether there may exist between the appropriate parties a question which can be answered or an issue which can be decided by a court of law or by a judge exercising jurisdictio