Sharbern Holding Inc. v. Vancouver Airport Centre Ltd.

Sharbern Holding Inc. v. Vancouver Airport Centre Ltd.
Collection
Supreme Court Judgments
Date
2011-05-11
Neutral citation
2011 SCC 23
Report
[2011] 2 SCR 175
Case number
33280
Judges
McLachlin, Beverley; LeBel, Louis; Deschamps, Marie; Fish, Morris J.; Abella, Rosalie Silberman; Rothstein, Marshall; Cromwell, Thomas Albert
On appeal from
British Columbia
Subjects
Commercial law
Torts
Notes
SCC Case Information: 33280
Decision Content
SUPREME COURT OF CANADA
Citation: Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2011 SCC 23, [2011] 2 S.C.R. 175
Date: 20110511 Docket: 33280
Between:
Sharbern Holding Inc.
Appellant
and
Vancouver Airport Centre Ltd., Larco Hospitality Management Inc.,
MM&R Valuation Services Inc. doing business as HVS International — Canada
and HVS International — Canada
Respondents
Coram: McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell JJ.
Reasons for Judgment: (paras. 1 to 178)
Rothstein J. (McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Charron and Cromwell JJ. concurring)
Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2011 SCC 23, [2011] 2 S.C.R. 175
Sharbern Holding Inc. Appellant
v.
Vancouver Airport Centre Ltd., Larco Hospitality Management Inc.,
MM&R Valuation Services Inc. doing business as
HVS International — Canada and HVS International — Canada Respondents
Indexed as: Sharbern Holding Inc. v. Vancouver Airport Centre Ltd.
2011 SCC 23
File No.: 33280.
2010: October 6; 2011: May 11.
Present: McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell JJ.
on appeal from the court of appeal for british columbia
Commercial law — Property — Disclosure statements — Company developing and marketing two hotels on same property — Purchasers of strata units in each hotel entering into differing agreements with developer — Purchasers of Hilton units not informed of different financial arrangements offered to purchasers of Marriott units — Hilton not performing as expected and owners of Hilton units incurring losses — Whether developer liable for misrepresentation under B.C. Real Estate Act for material false statements — Whether developer able to avail itself of statutory defence — Whether deemed reliance under Real Estate Act was rebuttable — Real Estate Act, R.S.B.C. 1996, c. 397, s. 75.
Torts — Negligent misrepresentation — Disclosure statements — Company developing and marketing two hotels on same property — Purchasers of strata units in each hotel entering into differing agreements with developer — Purchasers of Hilton units not informed of different financial arrangements offered to purchasers of Marriott units — Hilton not performing as expected and owners of Hilton units incurring losses — Whether developer liable for negligent misrepresentation under common law.
Fiduciary duty — Agent — Company developing and marketing two hotels on same property — Purchasers of strata units in each hotel entering into differing agreements with developer — Purchasers of Hilton units not informed of different financial arrangements offered to purchasers of Marriott units — Developer entering into non‑competition agreements with owners of Marriott units on behalf of owners of Hilton units without prior consent — Hilton not performing as expected and owners of Hilton units incurring losses — Whether developer owed a fiduciary duty to owners of Hilton units — If so, whether developer was in breach of its fiduciary duty.
The respondent developer Vancouver Airport Centre Ltd. (“VAC”) was incorporated for the purpose of developing and marketing two hotels on the same property: a Marriott hotel and a Hilton hotel. The two hotels were essentially identical and were joined by a concourse of shops and other amenities. Purchasers of strata lots in each hotel entered into separate Hotel Asset Management Agreements with VAC. The two hotels were marketed and developed at different times, resulting in differences in the financial arrangements offered to the purchasers of each hotel. VAC offered purchasers in the Marriott hotel a guarantee and VAC was entitled to a monthly management fee of a percentage of the gross rental revenue as well as an incentive management fee. VAC did not offer purchasers in the Hilton hotel a guarantee, and VAC’s monthly management fee for the Hilton was lower than for the Marriott. The Hilton Disclosure Statement did not disclose the differences in financial arrangements as between the Hilton Owners and the Marriott Owners. The Hilton Owners incurred losses.
S represents a class of investors who purchased strata lots in the Hilton hotel from VAC. S claimed that VAC was liable for failing to disclose details about differences in the financial arrangements given to the Hilton Owners and those given to the Marriott Owners. S alleged that the differences resulted in an undisclosed conflict of interest in that they created an incentive for VAC to favour the Marriott over the Hilton in its operation and management of the two hotels.
The trial judge concluded that the undisclosed differences in financial arrangements gave rise to at least a potential conflict of interest, particularly in view of the potential for common management of the two hotels. She then concluded that VAC negligently misrepresented both the absence of an actual or potential conflict of interest and the nature of the agreements between VAC and the Marriott Owners and found both misrepresentations material. While her reasons were not entirely clear, it appears she found VAC liable both under common law and under the Real Estate Act. The trial judge concluded that under the Real Estate Act the investors were deemed to rely on material misrepresentations by VAC and that such deemed reliance was a non-rebuttable presumption. The trial judge also found that in its capacity as manager, VAC was a fiduciary of the Hilton Owners, that a conflict existed with respect to VAC’s interests as between the Hilton and the Marriott, and that VAC was liable for breach of fiduciary duty because it did not disclose that conflict. She also found that VAC was liable for breach of fiduciary duty as manager.
The Court of Appeal allowed VAC’s appeal. The appellate court found that the details of the financial arrangements between the two hotels were not material. As to breach of fiduciary duty, the Court of Appeal determined that there was no breach by VAC.
Held: The appeal should be dismissed.
Both the Securities Act and the Real Estate Act governed VAC’s disclosure obligations. VAC’s disclosure obligations were limited to disclosing specific prescribed matters. VAC issued one document that combined the two Acts’ requirements: the Hilton Disclosure Statement.
S claims that VAC is liable for misrepresentations found in the Hilton Disclosure Statement which resulted in the non‑disclosure of a material conflict of interest leading to two potential causes of action: one under s. 75 of the Real Estate Act, and the other at common law under the tort of negligent misrepresentation.
Under the Real Estate Act, a material false statement in a disclosure statement will result in the developer being liable to investors for any resulting loss they may have sustained. However, s. 75 also contains a defence which provides that if the developer had reasonable grounds to believe and did believe that the material false statement was true, it would not be liable.
A materiality standard is a legislated and regulatory balancing between too much and too little disclosure. The jurisprudence has recognized that it is not in the interests of investors to be buried in trivial information that will impair decision making. The Real Estate Act does not define what is meant by the term “material” when it is used in the context of the “material false statement” required for liability under s. 75. Information is material if there is a substantial likelihood that it would have been considered important by a reasonable investor in making his or her decision to invest. In other words, information is material if there is a substantial likelihood that its disclosure would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. Materiality is a question of mixed law and fact, and except in those cases where common sense inferences are sufficient, the party alleging materiality must provide evidence in support of that contention. In carrying out a materiality assessment, a court must first look at the information disclosed to investors at the time they made their investment decision. The next step is to consider the omitted information against the backdrop of what was disclosed. As part of this second step, a court may consider contextual evidence which helps to explain, interpret, or place the omitted information in a broader factual setting, provided it is viewed in the context of the disclosed information. Investors’ behaviour evidence is relevant to the materiality assessment. Evidence of common knowledge or, depending upon the circumstances, knowledge specific to particular investors would also be admissible. Nonetheless, in considering the question of materiality, the predominant focus is on the disclosed and omitted information.
The trial judge erred in law with respect to assessing the materiality of the alleged false statements in three ways. First, once she had determined that the differences in financial arrangements created a potential or actual conflict of interest, she found that there was an obligation to disclose them as if they were inherently material. This approach misinterprets the statutory requirement as well as the test for materiality. While it is true that in certain situations, common sense inferences will be sufficient to establish materiality, in this case, there was evidence to support the opposite inference that the omitted information was not material in the context of what had already been disclosed. Therefore, a more detailed analysis of the evidence constituting the total mix of information was required in order to make a determination about what a reasonable investor would have considered significant.
Second, the trial judge erred by reversing the burden of proof of materiality from the plaintiff to the defendant. Once the trial judge was satisfied that S had proven the existence of a conflict of interest, she turned to VAC to show why it was not material. The result was that she made the determination that the conflict of interest was material without requiring S to satisfy its burden, as plaintiff, of proving materiality.
Third, the trial judge erred when she failed to consider all of the evidence relevant to the determination of materiality. Relevant evidence was available concerning the general economic climate at the time the strata lots were sold, the financial arrangements offered to Hilton Owners, the disclosure made by VAC of common management and risk factors, and the limited extent of VAC’s ability to act upon the differences in financial arrangements in its own interests. There was also evidence of the conduct of fully informed investors, either prior to making their investment decisions or subsequent to their investment, when they had learned of the guarantee given to the Marriott Owners. This evidence was relevant to the trial judge’s materiality assessment.
While S was not required to prove that investors would not have purchased the Hilton strata lots had they known about the differences in financial arrangements, it did have the burden of proving materiality, on a balance of probabilities. S failed to adduce evidence to prove the materiality of the differences in financial arrangements.
Even if VAC were shown to have made a material false statement, the statutory defence contained in s. 75(2)(b)(viii) of the Real Estate Act would preclude VAC from being found liable under s. 75(2). To rely on the defence, VAC had to show that it subjectively believed the representations it made were true and that it objectively had reasonable grounds for such a belief. The statutory defence does not appear to have been considered by the trial judge. Evidence of common industry practices and of VAC’s limited practical means and incentives to prefer the Marriott hotel over the Hilton hotel indicates that VAC subjectively believed, and objectively had reasonable grounds to believe, that it was making true statements when it did not disclose the details of the differences in financial arrangements and represented in the Hilton Disclosure Statement that it had entered into agreements with the Marriott that were similar in form and substance to those governing the Hilton and that it was not aware of any existing or potential conflicts of interest.
The presumption of deemed reliance under the Real Estate Act was rebuttable when it could be proven, on a balance of probabilities, that the investor had knowledge of the misrepresented or omitted facts or information at the time the investor made the purchase. While the Real Estate Act did not expressly provide for a rebuttable presumption, the use of the word “deemed” does not always result in a conclusive, non‑rebuttable presumption. It is the purpose of the statute that must be examined in order to determine if the presumption is rebuttable.
VAC is also not liable for the tort of negligent misrepresentation. The trial judge did not consider whether VAC breached the standard of care. S’s failure to demonstrate how VAC breached the standard of care is fatal to its common law claim.
Although VAC, as manager of the Hilton, had fiduciary obligations to S, S did not discharge its onus of proving a breach of fiduciary duty. The nature and scope of the fiduciary duty owed by VAC must be assessed in the context of the contract giving rise to those duties. When VAC was acting as an issuer, its relationship with S was not fiduciary in nature. However, when VAC began acting as S’s agent under the Hotel Asset Management Agreement, a fiduciary relationship arose. VAC’s position of conflict in managing both the Hilton and the Marriott hotels had already been disclosed to S.
The disclosure obligations with respect to VAC’s fiduciary duty are different from the disclosure obligations under the Real Estate Act. As a fiduciary, VAC was obligated to disclose any material facts or information, such as if there was a substantial risk that VAC’s fiduciary relationship with the Hilton Owners would be materially and adversely affected by VAC’s own interests or by VAC’s duties to another. VAC’s statutory duty was simply to disclose to investors certain prescribed information, without making material false statements. It is also necessary to inquire whether circumstances changed during the course of the fiduciary relationship such as to require VAC to make additional disclosure and obtain renewed consent.
S did not adduce evidence to establish that the different financial arrangements constituted material facts or information beyond what had already been disclosed by VAC. S also failed to establish the materiality of the non‑competition agreement implemented by VAC to prevent the Hilton and Marriott hotels from undercutting each other’s room rates. The evidence before the trial court could not support a finding that VAC was liable for a breach of fiduciary duty either for failing to disclose the differences in financial arrangements or in implementing the non‑competition policy.
Cases Cited
Discussed: Kerr v. Danier Leather Inc., 2007 SCC 44, [2007] 3 S.C.R. 331; TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), rev’g 512 F.2d 324 (1975); Queen v. Cognos Inc., [1993] 1 S.C.R. 87; referred to: Sparling v. Royal Trustco Ltd. (1984), 6 D.L.R. (4th) 682, aff’d [1986] 2 S.C.R. 537; Harris v. Universal Explorations Ltd. (1982), 17 B.L.R. 135; Inmet Mining Corp. v. Homestake Canada Inc., 2003 BCCA 610, 189 B.C.A.C. 251; Gerstle v. Gamble‑Skogmo, Inc., 478 F.2d 1281 (1973); Mills v. Electric Auto‑Lite Co., 396 U.S. 375 (1970); Basic Inc. v. Levinson, 485 U.S. 224 (1988); Maple Leaf Foods Inc. v. Schneider Corp. (1998), 42 O.R. (3d) 177; Van de Perre v. Edwards, 2001 SCC 60, [2001] 2 S.C.R. 1014; Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235; Hollis v. Dow Corning Corp., [1995] 4 S.C.R. 634; St. Peter’s Evangelical Lutheran Church v. Ottawa, [1982] 2 S.C.R. 616; R. v. Loxdale (1758), 1 Burr. 445, 97 E.R. 394; Nova, an Alberta Corp. v. Amoco Canada Petroleum Co., [1981] 2 S.C.R. 437; Frame v. Smith, [1987] 2 S.C.R. 99; Galambos v. Perez, 2009 SCC 48, [2009] 3 S.C.R. 247; McGuire v. Graham (1908), 11 O.W.R. 999; R. v. Neil, 2002 SCC 70, [2002] 3 S.C.R. 631.
Statutes and Regulations Cited
Class Proceedings Act, R.S.B.C. 1996, c. 50, s. 37.
Real Estate Act, R.S.B.C. 1996, c. 397 [rep. 2004, c. 42, s. 146], ss. 66, 75.
Real Estate Development Marketing Act, S.B.C. 2004, c. 41, ss. 22(3), (5).
Securities Act, R.S.B.C. 1996, c. 418, ss. 45(2)(5), 74(2)(4), 131.
Authors Cited
British Columbia. Securities Commission. Notice and Interpretation Note No. 96/36. “Real Estate Securities”, October 10, 1996 (online: www.bcsc.bc.ca/print.asp?id=3727).
Canadian Securities Administrators. National Policy 51‑201 Disclosure Standards, July 12, 2002.
Ng, Michael. Fiduciary Duties: Obligations of Loyalty and Faithfulness. Aurora, Ont.: Canada Law Book, 2003 (loose-leaf updated May 2007).
Reynolds, F. M. B. Bowstead and Reynolds on Agency, 17th ed. London: Sweet & Maxwell, 2001.
United States. Securities and Exchange Commission. SEC Staff Accounting Bulletin: No. 99 — “Materiality”, August 12, 1999 (online: www.sec.gov/interps/account/sab99.htm).
Waters’ Law of Trusts in Canada, 3rd ed. by Donovan W. M. Waters, Mark R. Gillen and Lionel D. Smith. Toronto: Thomson Carswell, 2005.
APPEAL from a judgment of the British Columbia Court of Appeal (Ryan, Chiasson and D. Smith JJ.A.), 2009 BCCA 224, 57 B.L.R. (4th) 1, 93 B.C.L.R. (4th) 256, 271 B.C.A.C. 116, 458 W.A.C. 116, [2009] B.C.J. No. 1007 (QL), 2009 CarswellBC 1337, reversing a decision of Wedge J., 2007 BCSC 1262, 38 B.L.R. (4th) 171, [2007] B.C.J. No. 1845 (QL), 2007 CarswellBC 1948, with supplementary reasons, 2008 BCSC 245 (CanLII). Appeal dismissed.
Stephen R. Schachter, Q.C., and Geoffrey B. Gomery, for the appellant.
Peter A. Gall, Q.C., Donald R. Munroe, Q.C., M. Ali Lakhani and Edward Iacobucci, for the respondents.
The judgment of the Court was delivered by
Rothstein J. —
TABLE OF CONTENTS
Paragraph
I. Introduction.................................................................................................... 1 II. Facts................................................................................................................ 9 A. The Hilton and Marriott Hotels....................................................................... 9 B. Procedural Background................................................................................ 17 III. Lower Court Decisions................................................................................. 19 A. British Columbia Supreme Court, 2007 BCSC 1262, 38 B.L.R. (4th) 171... 19 B. British Columbia Court of Appeal, 2009 BCCA 224, 57 B.L.R. (4th) 1....... 23 IV. Issues............................................................................................................ 26 V. Analysis........................................................................................................ 27 A. Misrepresentation Under the Real Estate Act............................................... 27 (1) VAC’s Statutory Disclosure Obligations..................................................... 27 (2) Liability Under the Real Estate Act.............................................................. 37 (3) Materiality..................................................................................................... 40 (4) The Test for Materiality................................................................................ 44 (5) Analysis of the Trial Judge’s Materiality Assessment.................................. 62 (a) The Economic Environment.......................................................................... 74 (b) Financial Benefits to Hilton Owners............................................................. 75 (c) Disclosure of Common Ownership and/or Management and Risk Factors.. 76 (d) VAC Had No Practical Means or Incentive to Favour the Marriott............. 78 (e) Evidence of Conduct of Fully Informed Investor........................................... 81 (f) Evidence of the Investor Committee Meetings............................................... 82 (6) Sharbern’s Burden of Proof.......................................................................... 86 (7) Conclusions on Materiality........................................................................... 91 B. The Statutory Defence................................................................................... 92 (1) The Legal Test.............................................................................................. 92 (2) Common Industry Practice Evidence........................................................... 97 (3) Evidence of Limited Practical Means and Incentives to Prefer................. 102 (4) No Evidence to Negate the Defence.......................................................... 109 C. Deemed Reliance........................................................................................ 112 D. Common Law Negligent Misrepresentation................................................ 120 E. Breach of Fiduciary Duty........................................................................... 131 (1) Lower Court Treatment of the Fiduciary Duty Issues............................... 132 (2) A Fiduciary Relationship Existed............................................................... 138 (3) Distinguishing the Misrepresentation and Fiduciary Duty Claims............. 144 (4) Disclosing the Compensation Differences.................................................. 147 (5) The Non-Competition Agreement.............................................................. 161 VI. Summary and Conclusions......................................................................... 168
[1]
I. Introduction
[1] When securities are offered to the general public, the rule of caveat emptor no longer applies. Securities legislation imposes on issuers a statutory duty of disclosure. That duty may vary in detail from one Act to another or from one jurisdiction to another. However, the common theme is that issuers must disclose to potential investors information affecting their investment decision. Even so, issuers are not subject to an indeterminate obligation, such that an unhappy investor may seize on any trivial or unimportant fact that was not disclosed to render an issuer liable for the investor’s losses. Rather than issuers being required to provide unlimited disclosure, disclosure obligations have been enacted to provide a balance between too much and too little disclosure.
[2] The appeal arises from a class action lawsuit in which the appellant, Sharbern Holding Inc. (“Sharbern”), represents a class of investors who purchased strata lots in a Hilton hotel (the “Hilton Owners”) from the respondent developer, Vancouver Airport Centre Ltd. (“VAC”). Sharbern claimed that VAC was liable for failing to disclose details about differences in the financial arrangements given to the Hilton Owners, and those given to purchasers of strata lots in the adjacent Marriott hotel (the “Marriott Owners”) that VAC was developing on the same property. Sharbern alleged that the differences resulted in an undisclosed conflict of interest in that they created an incentive for VAC to favour the Marriott over the Hilton in its operation and management of the two hotels.
[3] Two main questions are raised on appeal. The first is whether VAC is liable for alleged misrepresentations contained in the offering memorandum and disclosure statement (the “Hilton Disclosure Statement”) that VAC used to sell the Hilton strata lots. The second is whether VAC is liable for breach of fiduciary duty when it acted as manager of the Hilton under an agreement (the “Hotel Asset Management Agreement”) entered into between VAC and the Hilton Owners, including Sharbern. In the reasons that follow, I conclude that Sharbern’s claims fail on both grounds, and I would dismiss the appeal.
[4] As to the first question, I am of the opinion that the trial judge erred in law in concluding that VAC is liable for misrepresentation, either under the statutory cause of action found in the Real Estate Act, R.S.B.C. 1996, c. 397, or under the common law of negligent misrepresentation.
[5] Under s. 75 of the Real Estate Act, VAC could only be liable if it is found to have made material false statements to Sharbern, and cannot rely on the defence contained in the section. I am of the respectful view that the trial judge erred in law with respect to the materiality of the alleged false statements. The legal errors were: treating the conflict of interest as inherently material; reversing the burden of proof of materiality from the plaintiff to the defendant; and failing to consider all of the evidence relevant to the determination of materiality. She further erred in not considering the statutory defence which would avail to the benefit of VAC.
[6] Although this Court has previously dealt with the issues of materiality and disclosure obligations in the context of securities law, this case represents the first time that the Court has considered the common law test for materiality. Even though the test is not new in Canadian law, this case represents an opportunity to clarify important aspects of the test.
[7] Under the common law of negligent misrepresentation, the trial judge erred by not considering whether VAC breached the standard of care. As there is no evidence capable of supporting a finding of breach of standard of care, her finding under the common law of negligent misrepresentation cannot stand.
[8] As to the second question, although VAC, as manager of the Hilton, had fiduciary obligations to Sharbern, Sharbern did not discharge its onus of proving a breach of fiduciary duty. A fiduciary is required to disclose material facts and information, and conflicts of interest. VAC’s position of conflict in managing both the Hilton and the Marriott hotels had already been disclosed to Sharbern. The trial judge again failed to consider all the relevant evidence on the issue of materiality that was before her, and Sharbern did not adduce evidence to support a finding that the different financial arrangements constituted material facts or information beyond what had already been disclosed by VAC.
II. Facts
A. The Hilton and Marriott Hotels
[9] VAC is owned by Larco Investments Ltd. (“Larco Investments”), a company involved in real estate and hotel development. By the mid 1990s, there was an extraordinary boom in the Richmond hotel market. Larco Investments already owned the Best Western Richmond Inn in that market, and decided to develop and market two additional hotels on the same property. It incorporated VAC for that purpose. The Marriott hotel, a strata-titled hotel tower marketed through an offering memorandum and disclosure statement issued September 11, 1996, opened for business in June 1998. A second, identical strata-titled hotel tower was built and marketed through the Hilton Disclosure Statement issued February 3, 1998. It opened as a Hilton hotel in June 1999. The two hotels were essentially identical and were joined by a concourse of shops and other amenities.
[10] Purchasers of strata lots in each hotel entered into separate Hotel Asset Management Agreements with VAC, whereby VAC was given exclusive management of the hotel for 20 years, with an option to renew. In return, VAC contracted to, among other things, use commercially reasonable efforts to rent out the strata units, maximize each owner’s proportionate share of monies available for distribution, and faithfully perform its duties and responsibilities and supervise and direct hotel operations.
[11] The two strata unit hotels were marketed and developed at different times, resulting in differences in the financial arrangements offered to the purchasers of each hotel. Since the popularity of marketing a strata unit hotel in an urban area solely for the income stream was unknown, VAC offered purchasers in the Marriott hotel a gross operating guarantee. For the first five years of the hotel’s operation, VAC guaranteed a gross return of 12% of the purchase price of the owner’s unit, so that each strata lot owner’s annual proportionate share of funds available for distribution after projected operating expenses and other deductions was a projected net return of 8.29%.
[12] Under the Hotel Asset Management Agreement entered into between the Marriott Owners and VAC, VAC was entitled to a monthly management fee of 5% of the gross rental revenue, and an incentive management fee equal to 25% of the amount by which the owners’ net annual return on investment exceeded 8%.
[13] VAC’s evidence was that it intended to market the Hilton with a guaranteed rate of return, but was advised by Larco Investments’ securities solicitor that changes to securities regulations precluded making reference to a guarantee in the Hilton Disclosure Statement. Instead, VAC marketed the Hilton on the basis of projections. In an effort to increase the projected return for potential investors of the Hilton strata units, VAC increased the revenue available to them by including food and beverage revenues (which were retained by VAC for the Marriott hotel), decreasing the management fee charged by VAC under the Hotel Asset Management Agreement to 3%, and removing the hotel lobby lease expense.
[14] The guaranteed gross return offered to Marriott Owners, and the 5% gross rental revenue and added incentive provided to VAC as its fee for managing the Marriott versus the 3% management fee provided to VAC for managing the Hilton (collectively the “Compensation Differences”), are the differences in the financial arrangements made with purchasers of the two hotels that are the essential focus of Sharbern’s claims on appeal.
[15] While the Hilton Disclosure Statement disclosed that VAC owned the Best Western Richmond Inn and that VAC was currently developing the adjacent Marriott hotel, it did not disclose the Compensation Differences as between the Hilton and Marriott Owners.
[16] The marketing of the Hilton strata units was not as successful as that of the Marriott, in which all of the units were sold within a few hours. At some point, VAC decided to retain the last 24 Hilton units rather than continue to incur significant marketing costs. Ultimately, neither hotel achieved their anticipated financial performances. By 2001, the Richmond hotel market was one of the weakest hotel markets in Canada. The hotel market was further weakened by the events of September 11, 2001. The Marriott did not achieve a 12% gross return on investment for any of the years covered by the 5-year guarantee. As a result, VAC sustained liability of over $13 million under the guarantee, which was ultimately paid by Larco Investments. The Hilton Owners incurred losses instead of obtaining the projected 16.6% returns. The Hilton did not perform as well as the Marriott.
B. Procedural Background
[17] On June 16, 2003, Sharbern brought an action against VAC, HVS International — Canada (“HVS”) and Larco Hospitality Management Inc. (formerly known as HMS Hospitality Management Services Ltd. (“HMS”)). HVS was the company that prepared the financial projections for the Hilton hotel that were included in the Hilton Disclosure Statement. HMS was an affiliate of VAC that carried out the day-to-day management of the Hilton hotel, the Marriott hotel and the Best Western Richmond Inn.
[18] Sharbern obtained certification of the action as a class proceeding under the Class Proceedings Act, R.S.B.C. 1996, c. 50, on behalf of approximately 200 unit owners (Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2005 BCSC 232 (CanLII), aff’d 2006 BCCA 96, 223 B.C.A.C. 80). Twenty-four common issues on liability were certified. The trial judge summarized what she called the “central contentious” common liability issues (2007 BCSC 1262, 38 B.L.R. (4th) 171, at para. 10 and Appendix A), which I paraphrase as:
1. Whether the financial projections made by HVS were negligent misrepresentations, and whether the investment returns projected by VAC in the Hilton Disclosure Statement constituted fraudulent or negligent misrepresentations.
2. Whether VAC’s representations about conflicts of interest and the nature of the financial arrangements as between the Hilton and Marriott hotels were fraudulent or negligent.
3. Whether the members of the Hilton class could be deemed to have relied on any of the impugned representations pursuant to s. 75(2) of the Real Estate Act and the effect of the repeal of the Real Estate Act.
4. Whether VAC and HMS owed fiduciary and/or trust duties to the members of the Hilton class, and if so, whether they breached those duties.
III. Lower Court Decisions
A. British Columbia Supreme Court, 2007 BCSC 1262, 38 B.L.R. (4th) 171
[19] Madam Justice Wedge made a number of findings that are not at issue in this appeal. She determined that neither VAC nor HVS were liable for negligent misrepresentation concerning the financial projections. She observed that the allegation of fraud against VAC with respect to the projected investment returns had been withdrawn by Sharbern. She found that HMS did not owe fiduciary duties to Sharbern. In supplemental reasons, she also clarified that VAC was not liable for fraudulent misrepresentation with respect to its conflict of interest representations because Sharbern did not “prove that VAC did not have an honest belief in the representation and either intended to deceive investors or was reckless as to whether it did so” (2008 BCSC 245 (CanLII), at para. 12).
[20] With respect to her findings that are at issue in this appeal, Wedge J. concluded that the undisclosed Compensation Differences gave rise to at least a potential conflict of interest, particularly in view of the potential for common management of the two hotels. She then concluded that VAC negligently misrepresented both the absence of an actual or potential conflict of interest and the nature of the agreements between VAC and the Marriott Owners. She found both misrepresentations material. It is not entirely clear from Wedge J.’s reasons whether she found VAC liable under the common law or under the Real Estate Act, although I proceed on the basis that she found VAC liable under both.
[21] Wedge J. concluded that under the Real Estate Act, the investors were deemed to rely on material misrepresentations by VAC. She determined that such deemed reliance was not a rebuttable presumption, irrespective of the actual knowledge of the investors.
[22] She also found that in its capacity as manager, VAC was a fiduciary of the Hilton Owners, that a conflict existed with respect to VAC’s interests as between the Hilton and the Marriott, and that VAC was liable for breach of fiduciary duty because it did not disclose that conflict. Finally, she found that VAC was also liable for breach of fiduciary duty as manager, because of a non-competition arrangement that it put in place between the Marriott and the Hilton, preventing each hotel from competing for certain customers with the other or with the Richmond Inn.
B. British Columbia Court of Appeal, 2009 BCCA 224, 57 B.L.R. (4th) 1
[23] VAC appealed and Sharbern cross-appealed aspects of the trial decision. The Court of Appeal allowed VAC’s appeal, overturning Wedge J.’s findings with respect to misrepresentation, deemed reliance and breach of fiduciary duty. Sharbern’s cross-appeal was dismissed.
[24] On the issue of misrepresentation, Chiasson J.A. found that the details of the financial arrangements between the two hotels were not material. He observed that at trial “VAC relied on the extensive factual and expert evidence it adduced concerning actual and industry practice in the management of multiple hotels by a single entity” and that “[t]here was no evidence to the contrary and no evidence objectively to support the conclusion a reasonable investor would be concerned about the details of the financial arrangements” (para. 76). He found that
[h]aving made the disclosure [VAC] did, recognizing industry and actual practice and considering the subjective belie[f] of [VAC’s officers and employees], VAC did not misrepresent that it was unaware of any conflict that reasonably could affect materially the investment decisions of the Hilton Hotel investors. [para. 84]
He therefore ruled that the trial judge had erred in concluding VAC materially misrepresented its conflict of interest and its agreements with the Marriott Owners.
[25] As to breach of fiduciary duty, Chiasson J.A. determined that there was no breach by VAC. He observed that the answer to whether VAC was “obliged to tell the Hilton Hotel unit owners the details of its financial arrangements with the Marriott Hotel unit owners . . . depends on whether that information was material” (para. 98). He went on to conclude that “in the circumstances of this case, the information objectively was not material” (para. 99). In his view, “the consent given to VAC to act for competing hotels is an answer to any contention the implementation of the price competition policy was per se a breach of fiduciary duty” (para. 104). The issue was again reduced to the question of whether VAC was required to disclose the details of its financial arrangements with the Marriott. Chiasson J.A. concluded it was not.
IV. Issues
[26] This appeal raises five issues, which I will address in turn:
1. Did the trial judge err in finding that VAC was liable under s. 75 of the Real Estate Act for material false statements?
2. Did the trial judge err in not considering the statutory defence available to a developer under s. 75(2)(b)(viii) of the Real Estate Act, and whether VAC could avail itself of that defence?
3. Did the trial judge err in finding that the deemed reliance under s. 75(2)(a) of the Real Estate Act was non-rebuttable?
4. Did the trial judge err in finding that VAC was liable for negligent misrepresentation under the common law?
5. Did the trial judge err in finding VAC liable for breach of fiduciary duty?
V. Analysis
A. Misrepresentation Under the Real Estate Act
(1) VAC’s Statutory Disclosure Obligations
[27] I commence with a summary of the statutory disclosure requirements that were applicable in the context of this case.
[28] The Hilton hotel strata lots were a combination of an interest in real estate and an interest in a rental pool, governed by the Securities Act, R.S.B.C. 1996, c. 418, and the Real Estate Act. Both statutes governed VAC’s disclosure obligations. Pursuant to those obligations, VAC marketed the strata lots using a document that was a combination of both a Securities Act “offering memorandum” and a Real Estate Act “disclosure statement”.
[29] As to VAC’s disclosure obligations under the Securities Act, the strata lots were marketed on the basis of exemptions then found in ss. 45(2)(5) and 74(2)(4) of that Act. Section 45(2)(5) provided that VAC did not have to register with the British Columbia Securities Commission to trade in the strata lots. Section 74(2)(4) provided that VAC did not have to provide a Securities Act prospectus for the strata lots. Both exemptions applied to trades — such as those involving the strata lots — in which a person purchased the security as a principal and the security had an aggregate acquisition cost of not less than a prescribed amount, in this case $97,000.
[30] The minimum