COURT OF APPEAL FOR ONTARIO
Feldman, Lauwers and Miller JJ.A.
BETWEEN
Jennifer Jackson
Respondent (Applicant)
and
Solar Income Fund Inc.
Appellant (Respondent)
A. Irvin Schein, for the appellant
Tina H. Lie, for the respondent
Heard: November 17, 2016
On appeal from the judgment of Justice G. Dow of the Superior Court of Justice, dated March 9, 2016.
ENDORSEMENT
OVERVIEW
1The respondent, having been refused payment by the appellant on a promissory note, brought a successful application to enforce payment in the amount of $263,600. The appellant appeals on the basis that the application judge erred by refusing to look beyond the face of the promissory note to the factual matrix, which included a share purchase agreement, service agreement, and side-agreement, all said to be part of a transaction to merge two corporations. For the reasons that follow, the appeal is allowed.
ANALYSIS
2The appellant argues that the promissory note is not a demand note, despite its plain language to the contrary, but merely evidence of the debt owing to the respondent as one component of the merger transaction. The appellant argues that a side-agreement, the last of the agreements executed by the parties, organizes the rest of the agreements between the parties, including the promissory note, and converts the promissory note from a demand note to a note not payable on demand. The debt evidenced by the promissory note, on the appellant’s version of the transaction, was to be paid out to the respondent from the profits the parties expected would be generated by the new enterprise, and on a schedule set out in the side-agreement.
3The respondent does not deny that she entered into the side-agreement or that she received some payments toward the amount owing in accordance with the side-agreement. Her argument, however, is that the side-agreement did not modify her right to demand immediate payment of any amount remaining owing under the promissory note. She argues that the promissory note is clear on its face and raises no interpretive difficulties. There is, she argues, no need, and no justification, to resort to surrounding circumstances to interpret it.
4The parties are both commercially sophisticated and made use of legal and other professional advice in structuring the merger. It is common ground that the transaction was structured the way that it was in order to achieve tax efficiencies. But it is not obvious, on the face of the various agreements, how they work together to achieve these tax efficiencies. Neither was there any expert evidence adduced on the application to explain the tax consequences of the various components of the transaction.
5The absence of evidence on this point is symptomatic of a greater problem: there is much about this transaction that is difficult to understand on the record as it stands. The appellant argues that this evidential deficit is the result of the proceeding being improperly commenced as an application. We agree.
6Rule 14.05(3)(d), which the respondent relies on, authorizes proceeding by way of application where the matter involves “the determination of rights that depend on the interpretation of a … contract or other instrument”. This sub-rule is not applicable here. What is at issue is not the interpretation of the promissory note, but the determination of whether the promissory note was modified by a subsequent agreement such that, despite its clear wording, it is not enforceable on demand. This requires an understanding of the broader factual matrix, which includes the other agreements that may or may not conflict with the promissory note. This cannot be determined simply by reading the promissory note in isolation from the larger transaction of which it appears to be a part, or of understanding what the various agreements together were expected to achieve.
7For the same reason, the respondent cannot rely on Rule 14.05(3)(h), which authorizes proceeding by way of application “where it is unlikely that there will be any material facts in dispute.” There are material facts in dispute, in particular, whether there was an agreement to convert the promissory note from a demand note to a note not payable on demand, and the resolution of this dispute requires the trial of an action.
DISPOSITION
8The appeal is allowed, the judgment below is set aside, and the application is directed to proceed as the trial of an action. Costs of the appeal are reserved to the trial judge.
“K. Feldman J.A.”
“P. Lauwers J.A.”
“B.W. Miller J.A.”
