Pacific National Investments Ltd. v. Victoria (City), [2004] 3 S.C.R. 575, 2004 SCC 75
Pacific National Investments Ltd. Appellant
v.
Corporation of the City of Victoria Respondent
Indexed as: Pacific National Investments Ltd. v. Victoria (City)
Neutral citation: 2004 SCC 75.
File No.: 29759.
2004: June 15; 2004: November 19.
Present: McLachlin C.J. and Major, Bastarache, Binnie, LeBel, Deschamps and Fish JJ.
on appeal from the court of appeal for british columbia
Municipal law — Zoning — Land development — Unjust enrichment — Developer suing municipality for unjust enrichment following “down‑zoning” of lots — Whether municipality entitled to retain improvements made by developer on these lots without paying.
Unjust enrichment — Land development — Municipalities — Developer suing municipality for unjust enrichment following “down‑zoning” of lots — Whether municipality entitled to retain improvements made by developer on these lots without paying — Whether conditions for unjust enrichment met.
In the 1980s, the provincial government and the respondent City agreed on the desirability of redeveloping, for residential and commercial uses, approximately 200 acres of provincial Crown land on the City’s inner harbour. With respect to Phase II of the project, once the rights and obligations of the provincial Crown agency that owned the land had been assigned to the appellant real estate developer, the City and the developer entered into an agreement which provided, amongst other things, that the developer would build roads, parkland, walkways and a new seawall. These works and improvements were completed at a cost of about $1.08 million. It was a condition precedent to the developer’s obligations that the City would re‑zone the 22 acres from the existing industrial designation to permit residential and commercial uses appropriate to carrying out the agreed upon project. However, when the developer applied for building permits to develop its two water lots, the City Council down‑zoned these lots to permit only one‑storey commercial buildings, thereby eliminating the two stories of residential condominiums. The developer sued the City for breach of contract and, in the alternative, for unjust enrichment. Ultimately, this Court rejected the contractual claim on the basis that, under the provincial law governing municipalities at the relevant time, the City lacked the statutory authority to make and be bound by an implied term to keep the zoning in place for a reasonable time to allow for completion of the project, and that its breach therefore could not give rise to an action for damages. The matter was remitted to the trial court to deal with the alternative claim. The trial judge, on that basis, for unjust enrichment, awarded $1.08 million to the developer. The Court of Appeal set aside the trial judge’s decision.
Held: The appeal should be allowed and the trial judgment restored. The City had no right in equity to retain the benefit of the extra works and improvements carried out by the developer without paying for them.
The doctrine of unjust enrichment provides an equitable cause of action that retains a large measure of remedial flexibility to deal with different circumstances according to principles rooted in fairness and good conscience. In this case, the City obtained $1.08 million worth of roads, parkland and walkways and a new seawall, wholly at the developer’s expense. These works and improvements were in excess of what the City could lawfully demand under the Municipal Act. The developer, having lost its earlier claim against the City for breach of contract, no longer attacks the validity of the down‑zoning. It no longer seeks damages for breach of contract that included loss of profits on a project it was unable to build. The Court is now dealing simply with the cost of extra works and improvements. The focus is not on the developer’s loss but on the City’s enrichment. The power to down‑zone in the public interest does not immunize the City against claims for unjust enrichment.
The test for unjust enrichment has three elements: (1) an enrichment of the defendant; (2) a corresponding deprivation of the plaintiff; and (3) an absence of juristic reasons for the enrichment. There are two stages to the juristic reason inquiry. At the first stage, a claimant must show that there is no juristic reason within the established categories that would deny it recovery. At this time, the established categories are the existence of a contract, disposition of law, donative intent and “other valid common law, equitable or statutory obligatio[n]”. At the second stage, the focus shifts to the defendant, who must rebut the prima facie case by showing that there is some other valid reason to deny recovery. Here, the developer has a valid claim for unjust enrichment: the City obtained, on the basis of its ultra vires demand, additional roads, parkland and walkways and a new seawall, wholly at the developer’s expense; the developer suffered a corresponding deprivation of $1.08 million; and there was no juristic reason for the enrichment.
The trial judge found the extra works and undertakings given in exchange for the ultra vires zoning commitment to be clearly separate and identifiable. The cost was $1.08 million. There is no difficulty on the facts in distinguishing between the City’s lawful entitlement and the ultra vires extras. It is not necessary for the developer in this action to try and set aside the entirety of its contractual arrangements with the City. It need only isolate the provisions related to the ultra vires demand, and show why the City ought not to be allowed to rely on them as a defence to a claim in unjust enrichment. Moreover, the trial judge found that the ultra vires arrangements rested on a common mistake. Both the City and the developer assumed the City had the legal authority to make zoning commitments the City did not possess. The finding of common mistake is important to the developer’s claim to recover the cost of the extra works and improvements. If there had been just the ultra vires transaction without the added element of common mistake, it would have been a different case and the outcome would not necessarily be the same.
Equity looks to substance rather than to form. A characteristic of the doctrine of unjust enrichment is the flexibility of remedies. Here the substance of the problem to be remedied is clearly identified. The City is sitting on $1.08 million worth of improvements which have been found to be the fruits of an ultra vires demand. The remedy sought is simply to reverse the wrongful transfer of wealth by ordering reimbursement of that amount to the developer.
Section 914 of the Local Government Act and s. 215(3) of the Land Title Act do not authorize the City’s retention without payment of the extra works and improvements. The claim here is not based on “the adoption of an official community plan or [zoning] bylaw”. While the earlier appeal alleged that the down‑zoning of the water lots breached an implied term of the contract, that claim was rejected, and the developer’s losses flowing from the down‑zoning are no longer in issue. The developer’s cause of action for unjust enrichment was complete when it put in place the extra works and improvements on the basis of a mutual mistake that its contract with the City in respect thereto was enforceable.
Neither the City nor the developer expected the extra works and improvements to be donated. The developer did not offer a “sweetener” for something it got. It offered consideration for an implied undertaking it turned out the City was able to repudiate. The reasonable expectation was that the works and improvements would be paid for out of the profits from those parts of the Phase II project the developer was prevented by the City from building. The City now owns the works, and it is consistent with the parties’ reasonable expectations that the appellant be reimbursed for their cost.
The grant of an equitable remedy in this case would not frustrate the legislature’s purpose in making such zoning commitments unenforceable. In fact, the City did down‑zone the lots in question and was held able to do so without having to pay damages for breach of contract. Whether or not it should pay the actual cost of benefits it actually demanded and received is a different question.
The City has not shown that it would be good public policy to allow municipalities to make development commitments, then not only to attack those commitments as illegal and beyond their own powers, but to scoop the resulting financial windfall at the expense of those who contracted with them in good faith.
Cases Cited
Applied: Peel (Regional Municipality) v. Canada, [1992] 3 S.C.R. 762; Garland v. Consumers’ Gas Co., [2004] 1 S.C.R. 629, 2004 SCC 25; Rathwell v. Rathwell, [1978] 2 S.C.R. 436; Pettkus v. Becker, [1980] 2 S.C.R. 834; Peter v. Beblow, [1993] 1 S.C.R. 980; referred to: Pacific National Investments Ltd. v. Victoria (City), [2000] 2 S.C.R. 919, 2000 SCC 64; Burrow v. Scammell (1881), 19 Ch. D. 175; Air Canada v. British Columbia, [1989] 1 S.C.R. 1161; Canadian Pacific Air Lines Ltd. v. British Columbia, [1989] 1 S.C.R. 1133; Reference re Goods and Services Tax, [1992] 2 S.C.R. 445.
Statutes and Regulations Cited
Land Title Act, R.S.B.C. 1979, c. 219, s. 215.
Local Government Act, R.S.B.C. 1996, c. 323, s. 914.
Municipal Act, R.S.B.C. 1979, c. 290, s. 989 [ad. 1985, c. 79, s. 8].
Authors Cited
American Law Institute. Restatement of the Law of Restitution: Quasi Contracts and Constructive Trusts, as Adopted and Promulgated by the American Law Institute, at Washington, D.C., May 8, 1936. St. Paul, Minn.: American Law Institute Publishers, 1937.
Smith, Lionel. “The Mystery of ‘Juristic Reason’” (2000), 12 S.C.L.R. (2d) 211.
APPEAL from a judgment of the British Columbia Court of Appeal (2003), 223 D.L.R. (4th) 617, 11 B.C.L.R. (4th) 234, 23 C.L.R. (3d) 181, 36 M.P.L.R. (3d) 222, 180 B.C.A.C. 104, 297 W.A.C. 104, [2003] B.C.J. No. 537 (QL), 2003 BCCA 162, reversing decisions of the British Columbia Supreme Court, [2002] B.C.J. No. 1379 (QL), 2002 BCSC 41, and (2002), 217 D.L.R. (4th) 248, 20 C.L.R. (3d) 251, 32 M.P.L.R. (3d) 235, [2002] B.C.J. No. 1847 (QL), 2002 BCSC 1185. Appeal allowed.
L. John Alexander, for the appellant.
Guy E. McDannold, for the respondent.
The judgment of the Court was delivered by
1 Binnie J. _ This case arrives in our Court for the second time. On the first occasion, the appellant real estate developer Pacific National Investments Ltd. (“PNI”) sought to make the respondent municipality liable for breach of contract because it down-zoned in mid-project part of the appellant’s 22-acre development on the Victoria waterfront. As a result of the down-zoning, a substantial amount of approved retail, residential and commercial space on the waterfront could not be built. The appellant sued the City on the basis that when PNI accepted an obligation to install $1.08 million in extra works and improvements, it had done so in exchange for an implied undertaking by the City to keep the zoning in place for a reasonable time to allow for completion of its project. By its down-zoning, the City had broken an implied term of the contract that went to the root of the arrangement between the parties. This Court, in a majority judgment, rejected the contractual claim on the basis that the municipality lacked the statutory authority to provide such an implied undertaking, which was ultra vires, and that its breach therefore could not give rise to an action for damages (see Pacific National Investments Ltd. v. Victoria (City), [2000] 2 S.C.R. 919, 2000 SCC 64). The matter was remitted to the trial court to deal with the appellant’s alternative claim of unjust enrichment. This lesser claim required proof of a different set of facts and offered a much reduced level of compensation because it viewed the dispute from the perspective of the City’s gain rather than (as in the contract claim) the appellant’s loss. The claim for unjust enrichment was upheld by the second trial judge, Wilson J., but was reversed by the British Columbia Court of Appeal. I would allow the appeal, set aside the judgment of the Court of Appeal and restore the trial judgment. In my view, with respect, the municipality in these circumstances has no right in equity to retain the benefit of the extra works and improvements without paying for them.
I. Facts
2 In the 1980s, the provincial government and the City of Victoria agreed on the desirability of redeveloping, for residential and commercial uses, approximately 200 acres of provincial Crown land located on Victoria’s inner harbour. The area was known as the Songhees lands (named after the First Nation displaced for the railway and industry). The first trial judge, Mackenzie J., found that “[t]he City had an intense interest in planning the redevelopment of such a large, strategically located site in the harbour area close to downtown” ([1996] B.C.J. No. 2523 (QL), at para. 3). Amongst other things, the City wanted to obtain additional parkland (closer to 30 percent of the project instead of the 5 percent ordinarily required), road improvements, walkways and a new seawall, which were not necessitated by the PNI project itself, but which would serve to make the whole area more efficient and attractive.
3 The province was sympathetic to the City’s concerns, as was the appellant, who first became involved in the planning exercise in 1984 as a party interested in eventually undertaking Phase II of the project (22 acres) as a private development. It was the appellant’s architect who contributed what became the conceptual plan for the waterfront development in 1985, long before any agreements had been signed between the City and the provincial Crown agency that owned the lands, British Columbia Enterprise Corporation (“BCEC”). The respondent argued that the appellant was a stranger to the negotiations between the City and BCEC, and that on a true interpretation of events, the Province had volunteered the extra amenities to the City and PNI had simply stepped into the shoes of BCEC. This theory was rejected by Mackenzie J., who concluded that the appellant was not a volunteer but a profit-oriented developer who had been a full participant in planning the project, including the efforts to accommodate the City’s demand for extra amenities (at para. 23):
. . . I am satisfied that at all material times both the City and BCEC expected that BCEC would sell phase 2 to PNI, and that PNI would assume BCEC’s rights and obligations with respect to phase 2 on the purchase.
4 The development of the Songhees lands proceeded in the following steps:
1. The City and BCEC entered into the Songhees Master Agreement dated August 28, 1987. BCEC itself proceeded with Phase I of the project.
2. A restrictive covenant was registered against title to the lands to prohibit building until appropriate servicing agreements had been entered into between the appellant and the City and subdivision plans had received City approval.
3. The appellant purchased the Phase II lands from BCEC conditional on zoning, park dedication, a service agreement between the appellant and the City, and formal subdivision approval.
4. The City enacted zoning bylaws to permit the appellant’s plans for the whole of Phase II to be carried out, including the two water lots where three-storey structures were to be built resting on piles driven into the harbour bed, or possibly free floating, with retail and commercial use on the first floor, and residential condominiums on the upper two floors.
5. Once BCEC’s rights and obligations had been assigned to the appellant, the appellant and the City entered into the Songhees Phase II Subdivision Servicing Agreement, dated January 29, 1988 which dealt with, amongst other things, the extra works and improvements which the parties have agreed cost about $1.08 million of the $2.5 million total service costs. It was a condition precedent to the appellant’s obligations that the City would re-zone the 22 acres from the existing (industrial) designation to permit residential and commercial uses appropriate to carrying out the agreed upon project.
6. The City registered a statutory right-of-way for a public walkway around the perimeter of the structures to be built on the water lots.
5 After reviewing the evidence, Wilson J. concluded that the provision of the extra works and improvements, in the view of all three parties, was inextricably bound up with retention of the zoning to permit construction of the PNI project as planned:
. . . the provision that the plaintiff was to supply and install certain works, commensurate with the development contemplated, was inextricably bound up with the provision that the development anticipated construction of improvements pursuant to the defining by-laws. And in this case, that meant two, three-storey improvements on the water.
((2002), 217 D.L.R. (4th) 248, at para. 5)
6 By 1993, the condominium residences on dry land had been built, or were under development or at least in contemplation and the appellant had already earned a very substantial profit on its investment with still other lands left to sell. The new residents and others from the municipality were also pleased. They had started to enjoy their new parks, cleaned up vistas and walkways around the new seawall, which had all been put in at the appellant’s expense. As Mackenzie J. observed (at para. 16):
The City had allowed the developer to come in and provide substantial tangible benefits to the City in terms of parks and other services at the developer’s cost in the expectation that the development of the water lots as then contemplated by the City, BCEC and PNI would be allowed to proceed.
7 However, when the appellant applied for building permits to develop the two water lots, including a marina, restaurants, shops, other commercial uses, and two stories of residential condominiums on the harbour, the local community objected, and the matter became an issue in the pending municipal election. Following the election, the new City Council, with one dissent, voted to down-zone the two water lots to permit only one-storey commercial buildings, thereby eliminating the two stories of residential condominiums above. The appellant complained that the down-zoning rendered development of its water lots uneconomical.
8 In its Statement of Claim filed on October 8, 1993, the appellant alleged causes of action at common law (breach of contract) and equity (unjust enrichment). With respect to its contractual claim, the appellant alleged that the Songhees Master Agreement was subject to an implied term that the zoning permitting the contemplated development to proceed would be left in place for a reasonable period of time. The City’s solicitor had expressed the view that the project would proceed “in several stages over a period of 10 to 12 years”. The common law cause of action was allowed by Mackenzie J. He therefore found it unnecessary to address the claim for unjust enrichment. His judgment in the appellant’s favour was reversed by the British Columbia Court of Appeal. The reversal was affirmed as correct by a majority judgment of this Court on December 14, 2000. Under the provincial law governing municipalities at the relevant time, the City did not have the capacity to make and be bound by an implied term to keep the zoning in place for a number of years or to pay damages if it modified it. Our Court then remitted the case “to trial on any unjust enrichment argument that may exist” (para. 75).
II. Relevant Statutory Provisions
9 Local Government Act, R.S.B.C. 1996, c. 323
914 (1) Compensation is not payable to any person for any reduction in the value of that person’s interest in land, or for any loss or damages that result from the adoption of an official community plan or a bylaw under this Division or the issue of a permit under Division 9 of this Part.
(2) Subsection (1) does not apply where the bylaw under this Division restricts the use of land to a public use.
Land Title Act, R.S.B.C. 1979, c. 219
215. . . .
(3) Where an instrument contains a covenant registrable under this section, the covenantee is binding on the covenantee and his successors in title, notwithstanding that the instrument or other disposition has not been signed by the covenantee.
III. Judicial History
A. Supreme Court of British Columbia ((2002), 217 D.L.R. (4th) 248)
10 Wilson J. adopted the findings of fact from the earlier trial. Then, having regard to the outcome of the appeal to this Court, he found that the parties had proceeded on a mistaken assumption that the zoning would not change in a manner that would substantially and adversely affect the development before the plaintiff developer had a reasonable opportunity to implement the whole of Phase II, and a parallel mistake of law, i.e., that the City had the capacity to make such a contractual commitment. The extra works and improvements carried out by the appellant were in excess of works which the respondent could lawfully have demanded. He accepted the evidence that the excess work the appellant did as a result of the mistake was worth $1.08 million.
11 Wilson J. found that the City had been enriched by the extra works and improvements which, but for the mistake, it would not have received. The appellant had suffered a corresponding deprivation. He then found there was no juristic reason for the City to retain the benefit without accounting to the appellant. He therefore gave judgment for the appellant for $1.08 million with interest at registrar’s rates from time to time commencing October 1, 1993 to the date of his judgment, being May 7, 2002.
B. Court of Appeal of British Columbia (Southin, Braidwood and Hall JJ.A.) ((2003), 223 D.L.R. (4th) 617)
12 Southin J.A. for the court found the claim concerning unjust enrichment to be misconceived. She agreed that the criteria for a finding of unjust enrichment were the enrichment of the person claimed against, a corresponding deprivation of the claimant and the absence of any juristic reason for retaining the enrichment. Applying these criteria to the facts, Southin J.A. concluded that there was no deprivation. The extra works were “part and parcel of the consideration [the appellant] gave for the benefit which it received under the agreements. There is no true correspondence between the asserted enrichment and the asserted deprivation, that is to say, the downzoning of the two water lots” (para. 25). Not only was there no deprivation, but even if there was, “the juristic reason for what the appellant did in 1993 is that the Legislature had conferred upon it the power to do the act of downzoning. The by-law is of the same force and effect as if it had been enacted by the Legislature itself and provides a complete answer to any and all claims arising out of it” (para. 26). Accordingly, the appeal was allowed and the action was dismissed.
IV. Analysis
13 The doctrine of unjust enrichment provides an equitable cause of action that retains a large measure of remedial flexibility to deal with different circumstances according to principles rooted in fairness and good conscience. This is not to say that it is a form of “‘palm tree’ justice” (Peel (Regional Municipality) v. Canada, [1992] 3 S.C.R. 762, at p. 802) that varies with the temperament of the sitting judges. On the contrary, as the Court recently reaffirmed in Garland v. Consumers’ Gas Co., [2004] 1 S.C.R. 629, 2004 SCC 25, a court is to follow an established approach to unjust enrichment predicated on clearly defined principles. However, their application should not be mechanical. Iacobucci J. observed that “this is an equitable remedy that will necessarily involve discretion and questions of fairness” (para. 44).
14 As accepted by the courts in British Columbia, the test for unjust enrichment has three elements: (1) an enrichment of the defendant; (2) a corresponding deprivation of the plaintiff; and (3) an absence of juristic reason for the enrichment (Rathwell v. Rathwell, [1978] 2 S.C.R. 436, at p. 455; Pettkus v. Becker, [1980] 2 S.C.R. 834, at p. 848; Peter v. Beblow, [1993] 1 S.C.R. 980, at p. 987; Peel, supra, at p. 784; Garland, supra, at para. 30).
A. Was There Enrichment of the City?
15 The existence of an enrichment to the defendant is governed by “a straightforward economic approach” (Peter, supra, at p. 990). An enrichment may “connot[e] a tangible benefit” (Peel, supra, at p. 790), or it can be relief from a “negative”, such as saving the defendant from an expense he or she would otherwise have been required to make.
16 In this case, the City obtained $1.08 million worth of roads, parkland and walkways and a new seawall, wholly at the appellant’s expense. These works and improvements were in excess of what the City could lawfully demand under s. 989 of the Municipal Act, R.S.B.C. 1979, c. 290. Mr. Clive Timms, the principal witness on behalf of the City, acknowledged that it was “beyond the authority of the approving officer to require [the extra works] under what we have characterized as a simple subdivision”.
17 The City now argues that these extra works and improvements are not really a benefit because they were built on what was then provincial Crown land, and their upkeep by the City costs about $40,000 per year. The City’s portrayal of itself as a victim of the appellant’s generosity is not credible. The trial judge at the original trial, Mackenzie J., found as a fact that the City had pushed hard to obtain the extra amenities whose cost of upkeep it now grumbles about. Mackenzie J. noted, at para. 20, that “[t]he City wanted planned development with services, parks and other amenities at no cost to the City taxpayers.” The City insisted on a restrictive covenant that prevented any construction until the subdivision plans had been approved and servicing agreements entered into, and it was the City that required the appellant as successor in title to assume BCEC’s commitments for services, works and improvements beyond those it could lawfully have demanded (para. 23, per Mackenzie J.). On this point the Restatement of the Law of Restitution: Quasi Contracts and Constructive Trusts (1937), at p. 12, makes the useful comment that “[a] person confers a benefit upon another if he . . . performs services beneficial to or at the request of the other” (emphasis added).
18 The City argues that while the extra works and improvements “may benefit either PNI as a developer or the neighbourhood and the community, it does not benefit the Corporation of the City of Victoria” (emphasis in original). However, it was the City that contracted with the appellant for ownership of “the Works”, wherever built, under clause 11(c) of the Songhees Phase II Subdivision Servicing Agreement, dated January 29, 1988, which provides:
Save and except those works installed for public utility companies, the Works shall be and remain the absolute property of the City when accepted in writing by the City Engineer. [Emphasis added.]
19 The City’s present argument that the extra works and improvements it demanded are not an enrichment but something of a burden should be rejected.
B. Did the Appellant Suffer a Corresponding Deprivation?
20 Using the straightforward economic approach, the appellant suffered a corresponding deprivation of $1.08 million. The appellant was required to spend funds to provide the amenities and had to give up the extra parkland out of the lands they had purchased. No other person or entity contributed to the enrichment. In these circumstances, as Cory J. put it in Peter, supra, at p. 1012, “I would have thought that if there is enrichment, that it would almost invariably follow that there is a corresponding deprivation suffered by the person who provided the enrichment.”
21 The City claims that the appellant had already turned a handsome profit on the project even without development of the two water lots. So it did, but that is beside the point. The question here is not whether the developer made a success of its project generally, but whether it suffered a detriment corresponding to the City’s enrichment. The appellant is not required to subsidize city amenities from the profits earned elsewhere on the project in the absence of some legal requirement. The significance of the Servicing Agreement in this respect is an issue to be considered at the third stage.
C. Is There a Juristic Reason to Deny Recovery to the Appellant?
22 This branch of the test for unjust enrichment is pivotal, for as McLachlin J. observed in Peter, supra, at p. 990:
It is at this stage that the court must consider whether the enrichment and detriment, morally neutral in themselves, are “unjust”.
23 The use of the expression “juristic reason” in this connection emphasizes that “unjust” is to be addressed as a matter of law and legal reasoning rather than a free-floating conscience that may risk being overly subjective; see L. Smith, “The Mystery of ‘Juristic Reason’” (2000), 12 S.C.L.R. (2d) 211, at p. 219. This third step has to some extent been redefined and reformulated in Garland, supra, at paras. 44-46. There are now two stages to the juristic reason inquiry. At the first stage, a claimant (here the appellant) must show that there is no juristic reason within the established categories that would deny it recovery. The established categories are the existence of a contract, disposition of law, donative intent, and “other valid common law, equitable or statutory obligatio[n]” (Garland, at para. 44). The categories may be added to over time (para. 46). On proving that none of these limited categorical reasons exist to deny recovery, the plaintiff (here the appellant) will have made out a prima facie case of unjust enrichment. It will have demonstrated “a positive reason for reversing the defendant’s enrichment” (Smith, supra, at p. 244).
24 Although this formulation requires the plaintiff to prove a negative, the task is made manageable by the limited number of categories, and it is only fair to put on the claimant the onus of proving the essential elements of its cause of action.
25 At the second stage, the onus shifts to the defendant (here the respondent City), who must rebut the prima facie case by showing that there is some other valid reason to deny recovery. In the absence of a convincing rebuttal, the transfer of wealth will be reversed. According to Garland, it is at this stage that the court should have regard to the reasonable expectation of the parties and public policy considerations. However, as Iacobucci J. added, at para. 46:
The point here is that this area is an evolving one and that further cases will add additional refinements and developments.
26 With respect to the absence of a valid juristic reason in this case, the second trial judge was emphatic (at para. 17):
There is no juristic reason for the City to retain the benefits without accounting to the plaintiff. I think it would be against conscience to have that result obtain.
27 I turn then to whether the appellant has demonstrated that the established categories do not apply.
(1) Stage One: The Established Categories
(a) Contract
28 In the usual course, the existence of a contract, such as was made by the parties to this appeal, would be a complete answer to the claim for unjust enrichment. The City relies on four contracts, namely (i) the purchase agreement between the appellant and BCEC; (ii) the subdivision servicing agreement; (iii) the assumption agreement; and (iv) the Songhees Master Agreement. There is no doubt that the parties were entitled to enter into agreements respecting the development of the 22-acre site, and that the project would not have been allowed to proceed without the appellant contributing to the City appropriate works and improvements. The problem is that the City insisted on receiving more than s. 989 of the Municipal Act permitted it to ask for, and in exchange, as found in the first trial, it offered an implied undertaking regarding zoning that it was not authorized to give. The development agreements therefore included a perfectly valid core, which has been carried out by all parties, but we are now required to address the extra works and improvements demanded by the City and given by the appellant in exchange for guaranteed zoning. The City successfully argued in the first appeal to this Court that the sale of zoning was ultra vires its powers, and therefore incapable of giving rise to a cause of action for breach of contract. The logical conundrum for the City at this stage is that it is the very elements of the contract the City demonstrated were ultra vires (extra services for guaranteed zoning) that it now argues are the juristic reason for its just retention of $1.08 million in improvements “at no cost to the City taxpayers” (Mackenzie J., at para. 20). In my opinion, it is not open to the City to rely on the contractual arrangements, which in their relevant parts flowed from the City’s ultra vires demand, to defeat the appellant’s claim on the particular facts of this case.
29 The trial judge found the “extra” works and undertakings given in exchange for the ultra vires zoning commitment to be clearly separate and identifiable. The cost was $1.08 million. There is therefore no difficulty on the facts in distinguishing between the City’s lawful entitlement and the ultra vires extras.
30 The agreements have been carried into execution by the appellant, who no longer seeks to enforce the ultra vires provisions. The question is whether equity will take into account the ultra vires nature of the City’s demand, which is the root of the legal difficulties that followed, in determining whether the contract of which it forms a central part is fatal to the appellant’s claim in unjust enrichment.
31 The general rule, of course, is that it is not the function of the court to rewrite a contract for the parties. Nor is it their role to relieve one of the parties against the consequences of an improvident contract. None of that arises in this case. The question here, more precisely, is whether the City can be permitted in the first appeal to argue that it is absolved by the doctrine of ultra vires from any contractual responsibility to carry out the zoning obligations (that the trial court found it had undertaken to the appellant on the basis of a common mistake) and then in this appeal, in the same litigation (albeit in relation to a different cause of action), permitted to succeed on the basis that the same contract constitutes a juristic reason to obtain the extra works and improvements without paying for them. In my view, the City’s success in the 2000 appeal knocked out of contention the juristic reason (the contractual provisions) on which it primarily relies in this appeal. I say that for two reasons. First, as a matter of equity, it is not necessary for the appellant in this action to try and set aside the entirety of its contractual arrangements with the City. It need only isolate the provisions relating to the ultra vires demand, and show why the City ought not to be allowed to rely on them as a defence to a claim in unjust enrichment. Secondly, the trial judge found that the ultra vires arrangements rested on a common mistake. Both the City and the appellant assumed the City had the legal authority to make zoning commitments the City did not possess. The finding of common mistake is important to the appellant’s claim to recover the cost of the extra works and improvements. If there had been just the ultra vires transaction without the added element of common mistake, it would have been a different case and the outcome would not necessarily be the same.
(i) The Fruit of the Ultra Vires Demand
32 In many cases, no doubt, municipalities make demands that are not strictly authorized and developers do what they are asked to do because in the end they get the zoning they want. There is no suggestion that in the ordinary case such arrangements should be unwound on the basis of the doctrine of unjust enrichment. This case is different. As Mackenzie J. observed after the first trial (at para. 17):
In short, everyone involved miscalculated. What are the legal consequences of this imbroglio?
To which Wilson J., presiding at the second trial, added, somewhat darkly (at para. 4):
The plaintiff failed to adhere to the admonition, “put not your faith in princes”, and must now accept the consequences.
33 Recognizing, as the trial judge did, that the source of the problem in this case is the City’s ultra vires demand for works and improvements to which it was not entitled, one approach is to sever from the contractual arrangements the exchange of promises that flowed from that initial ultra vires demand.
34 It is true that these commercial agreements are, as one would expect, complex, and do not readily lend themselves to “blue-pencil” deletions. We are dealing, however, with an equitable cause of action, and equity looks to substance rather than to form. As stated earlier, a characteristic of the doctrine of unjust enrichment is the flexibility of remedies. Here the substance of the problem to be remedied is clearly identified. The respondent is sitting on $1.08 million worth of improvements which have been found to be the fruits of an ultra vires demand. The remedy sought is simply to reverse the wrongful transfer of wealth by ordering reimbursement of that amount to the appellant.
35 The City seeks to enjoy an unjustified windfall at the appellant’s expense. The equitable doctrine would be a feeble thing if it did not possess the remedial flexibility to reverse an enrichment that has been established to the satisfaction of an experienced trial judge to be manifestly unjust. I would not give effect to a defence based on the form as opposed to the substance of the contractual documents.
(ii) Common Mistake
36 Wilson J. found as a fact that the City and the appellant had entered into their contractual arrangements on the basis of a common mistake as to the City’s legal authority. He said (at para. 34):
I have already found that each of these parties believed in a set of circumstances which have now been found [in the earlier appeal] not to be true.
37 The “mistake” was the belief that the City had the authority to contract for the extra works and improvements in exchange for what was found to be an implied contractual obligation to maintain the zoning in place for a reasonable time, estimated at 10 to 12 years, to allow completion of the appellant’s project. The mistake was not wholly unreasonable. The judges of this Court were divided 4 to 3 on that issue in the first PNI appeal.
38 The City now denies that it was under any such misapprehension, suggesting that it knew all along that it could not carry out what was found to be its side of the bargain, but that position was rejected on the facts by the trial judge as noted above.
39 The result, accordingly, is that the City and the appellant purported to contract with respect to the extra works and improvements under a common mistake of law as to the enforceability of their agreement. “It cannot be disputed”, wrote Bacon V.C. in 1881, that “Courts of Equity have at all times relieved against honest mistakes in contracts . . . where not to correct the mistake would be to give an unconscionable advantage to either party”: (Burrow v. Scammell (1881), 19 Ch. D. 175, at p. 182). Such a mistake undermines the juristic reason relied upon by the City, as La Forest J. pointed out in Air Canada v. British Columbia, [1989] 1 S.C.R. 1161, at p. 1200:
From his analysis, Dickson J. [in Hydro Electric Commission of Nepean v. Ontario Hydro, [1982] 1 S.C.R. 347] concluded that the judicial development of the law of restitution or unjust (or as Dickson J. noted, “unjustified”) enrichment renders otiose the distinction between mistakes of fact and mistakes of law. He would abolish the distinction, and would allow recovery in any case of enrichment at the plaintiff’s expense provided the enrichment was caused by the mistake and the payment was not made to compromise an honest claim, subject of course to any available defences or equitable reasons for denying recovery, such as change of position or estoppel. [Emphasis added.]
See also Canadian Pacific Air Lines Ltd. v. British Columbia, [1989] 1 S.C.R. 1133, at p. 1157.
40 Southin J.A. in the Court of Appeal (at para. 24) accepted the existence of the Songhees Phase II Subdivision Servicing Agreement as a valid juristic reason to deny recovery because
there is nothing in any of this [evidence] from which one could conclude that the original transaction would have come to fruition had the [appellant] asserted it would do only what could lawfully be required of a landowner under s. 989 of the Act.
41 This is true, but the fact is that the City and the appellant did make a deal on a basis which this Court found to be ultra vires. The City might not have done the deal on any other basis and certainly it is clear the appellant would not have undertaken the extra works and improvements without the zoning assurances it thought it had contracted for. However, the deal was done on the basis of a common mistake of law, the extra works and improvements are in place, and the relevant question now is who is to pay for them.
42 Southin J.A. also accepted the City’s argument that what the appellant “asserts to be the deprivation, that is to say, the extra works, was part and parcel of the consideration it gave for the benefit which it received under the agreements” (para. 25). On this view, “the benefit” was the acquisition of the 22 acres of land and approval of the subdivision plan. Such a view, with respect, is at odds with the findings of fact by the trial judge as to the “consideration” the City and the appellant had agreed upon, namely the maintenance of the zoning in place for a reasonable time to permit the completion of the project. As noted earlier, the “extra” works and improvements were found to be distinct from what was lawfully required.
43 For these reasons, I conclude that the appellant has negatived the contractual provisions as a juristic reason permitting the City to retain the extra works and improvements without paying for them.
(b) Disposition of Law
44 It is evident that the appellant’s claim must fail if the City’s retention without payment of the $1.08 million enrichment is authorized by statute (Peter, supra, p. 1018; Reference re Goods and Services Tax, [1992] 2 S.C.R. 445, at p. 476).
45 The City relies on s. 914 of the Local Government Act which provides that no compensation is payable to anyone for any “reduction in the value of that person’s interest in land, or for any loss or damages that result from the adoption of an official community plan or a bylaw under this Division or the issue of a permit under Division 9 of this Part”. The City argues that the loss claimed by the appellant flows from the down-zoning, and is therefore unrecoverable by reason of the statute.
46 In my view, the claim here is not based on “the adoption of an official community plan or [zoning] bylaw”. While the earlier appeal alleged that the down-zoning of the water lots breached an implied term of the contract, that claim was rejected, and the appellant’s losses flowing from the down-zoning are no longer in issue. The appellant’s cause of action for unjust enrichment was complete when it put in place the extra works and improvements in the mistaken belief that its contract with the City in respect thereto was enforceable. The mistake formed the basis of the City’s successful appeal after the first trial.
47 The City also relies on s. 215(3) of the Land Title Act under which the restrictive covenant bound the appellant to do the works “notwithstanding that the instrument . . . has not been signed by the covenantee”. The City’s argument amounts to the proposition that registration allows the City to do indirectly what would be ultra vires if done directly, and thereby to subvert the legislative intent to limit a municipality’s authority, even as the municipality itself escapes its side of the bargain by pleading the doctrine of ultra vires. I would not give effect to the City’s s. 215 argument. The second trial judge, Wilson J., found, at para. 5, that the appellant’s obligations were “inextricably bound up” with the other provisions of the agreements including the City’s ultra vires promise to maintain in place the requisite zoning. The appellant does not deny its obligation under the restrictive covenant or the underlying agreements. Its position is that in the circumstances, the agreements, flawed as they are, cannot be relied upon by the City as a juristic reason to keep the works and improvements without paying for them. I agree with that position.
(c) Donative Intent
48 The City contends that it is common for developers to offer “sweeteners” in excess of what a municipality can demand for zoning and subdivision approvals. This is true. Each side gets what it wants and moves on. However, their deal is not based on a common mistake. And here the appellant did not get what the City undertook to give it. Mackenzie J., at the initial trial, whose findings were adopted by Wilson J. at the second trial, flatly rejected any suggestion that the appellant possessed a donative intent (at para. 29):
The characterization of park dedications and service cost expenditures as voluntary belies the reality. PNI was pursuing a business venture. It negotiated terms of purchase with BCEC and a services agreement with the City with a precise expectation of the lots it would acquire, the zoning for each lot and the extent of development thereby permitted. It made commitments pursuant to written agreements with mutual obligations that it considered enforceable. Its motives were commercial and not philanthropic.
49 The appellant did not offer a “sweetener” for something it got. It offered consideration for an implied undertaking it turned out the City was able to repudiate.
(d) Other Valid Common Law, Equitable or Statutory Obligation
50 Southin J.A. stated, at para. 26:
In any event, the juristic reason for what the appellant did in 1993 is that the Legislature had conferred upon it the power to do the act of downzoning. The by-law is of the same force and effect as if it had been enacted by the Legislature itself and provides a complete answer to any and all claims arising out of it.
51 With respect, this argument presupposes that the claim for unjust enrichment “arose” out of the down-zoning. However, the claim for unjust enrichment does not depend on the down-zoning. It depends on the fact that the City has obtained $1.08 million worth of extra works and improvements at the appellant’s expense to which, after securing a court order declaring that it had no power to do what it purported to undertake to do, the City has no legitimate entitlement.
52 The City also argues that requiring it to pay for the extra works and improvements would constitute an “indirect fetter” on the exercise of its legislative power, but this is not so. The appellant has never attacked the validity of the down-zoning. The appellant no longer seeks damages for breach of contract that included loss of profits on a project it was unable to build. We are now dealing simply with the cost of extra works and improvements. The focus is not on the appellant’s loss but on the City’s enrichment. The power to down-zone in the public interest does not immunize the City against claims for unjust enrichment.
(2) Stage Two: Reasonable Expectation of the Parties and Public Policy Considerations
53 Under stage two of the “juristic reason” inquiry, the onus falls on the City to show that to allow the claim of unjust enrichment in this case would frustrate the reasonable expectation of the parties. It has not discharged this onus. On the contrary, Wilson J. found that neither the City nor the appellant expected the extra works and improvements to be donated. The reasonable expectation was that the works and improvements would be paid for out of the profits from those parts of the Phase II project the appellant was prevented by the City from building. The City did not expect to get the extra works and improvements for nothing, but the agreed form of consideration (guaranteed zoning) turned out to be beyond its powers. The City now owns the works, and it is consistent with the parties’ reasonable expectations that the appellant be reimbursed for their cost.
54 The City contends that the grant of an equitable remedy in this case would be bad public policy.
55 First, the grant of the equitable remedy would not frustrate the legislative purpose in making such zoning commitments unenforceable. In fact, the City did down-zone the lots in question and was held able to do so without having to pay damages for breach of contract. Whether or not it should pay the cost of benefits it actually demanded and received is a different question.
56 Second, it is not suggested that the City or the appellant made these agreements for an improper purpose. On the contrary, Mackenzie J. at the first trial considered the “interlocking agreements [to be] an innovative means of achieving the parties’ differing objectives by hinging binding obligations on each piece going into place” (para. 26). He pointed out that the exchange of contractual promises ultimately found to be ultra vires was designed, as stated by the City’s solicitor, “to facilitate an unusual rezoning of a large area of undeveloped and unsubdivided land” (para. 26). No one disputes that the redevelopment, as planned, was thought to be in the overall best interest of the municipality.
57 Third, I am not persuaded that it would be good public policy to have municipalities making development commitments, then not only have them turn around and attack those commitments as illegal and beyond their own powers, but allow them to scoop a financial windfall at the expense of those who contracted with them in good faith. This is precisely the sort of unfairness that the doctrine of unjust enrichment is intended to address.
58 The City has not pointed to any other public policy that ought to preclude recovery on the facts of this case. The City insisted on the works and improvements it now owns on the Songhees lands. It should pay for the cost of their construction. Municipalities are subject to the law of unjust enrichment in the same way as other individuals and entities.
V. Disposition
59 I would therefore allow the appeal, set aside the decision of the British Columbia Court of Appeal, and restore the trial judgment requiring the respondent City to pay the appellant $1.08 million. Interest will accrue on that amount at registrar’s rates from time to time commencing the 1st day of October 1993 to the date of this judgment. The appellant is entitled to its costs of the trial before Wilson J. and of the appeal from that judgment to the British Columbia Court of Appeal, and the costs of the present appeal in this Court.
Appeal allowed with costs.
Solicitors for the appellant: Cox, Taylor, Victoria.
Solicitors for the respondent: Staples McDannold Stewart, Victoria.