Court File and Parties

Court of Appeal for Ontario Citation: Cannabis Inc., 2022 ONCA 381 Date: 2022-05-12 Docket: C69729

Before: Huscroft, Thorburn and George JJ.A.

Between: 2056706 Ontario Inc., Kozo Holdings Inc., Cancor Debt Agency Inc. Applicants

And: Pure Global Cannabis Inc., PureSinse Inc., 237A Advance Inc., 237B Advance Inc., SPRQ Health Group Corp. and The Great Canadian Hemp Company Respondents

Counsel: Ryan Atkinson, Avi Freedland and Saurabh Singhal for the appellant, TS Pharmaceutical Ltd. Leanne Williams, Rachel Nicholson, and Mitch Grossell, for the respondent, A. Farber & Partners Inc.

Heard: May 5, 2022

On appeal from the order of Justice Sean F. Dunphy of the Superior Court of Justice, dated June 28, 2021, with reasons reported at 2021 ONSC 5533.

Reasons for Decision

[1] The appellant, TS Pharmaceuticals Ltd. (“TS”), attempted to purchase assets, including the shares of a cannabis manufacturing company, PureSinse Inc., from a court appointed receiver, the respondent A. Farber & Partners Inc. (“Receiver”).

[2] The appellant and Receiver entered into an Asset Purchase Agreement (“APA”) on November 26, 2020, which required each to negotiate the share purchase transaction in good faith and to use “best efforts” to complete the share purchase transaction. On December 23, 2020, a Share Purchase Agreement (“SPA”) was signed. Then, on January 5, 2021, the Receiver learned that PureSinse’s Health Canada cannabis licence had expired on December 28, 2020. This information was conveyed to the appellant the next day. Without the licence, PureSinse could not carry on its cannabis business. The SPA was subsequently terminated.

[3] Of note, the order appointing the Receiver did not allow it to possess or control some assets, including the cannabis licence (“Excluded Assets”). For that reason, the licence remained in the possession of the debtors. The former principal of PureSinse remained the responsible person in charge (“RPIC”) of the cannabis assets, even after the agreements were signed. Also, it appears that neither the appellant nor Receiver were aware that the licence was about to lapse at the time they executed the SPA.

[4] The first agreement, the APA, contained this clause, which the appellant says imposed an obligation on the Receiver to maintain the licence:

8.1 The Parties covenant and agree to negotiate in good faith and on a best effort basis to complete a share purchase transaction whereby: (i) the [appellant] will acquire all of the issued and outstanding shares of PureSinse Inc., (ii) certain obligations, liabilities and claims against PureSinse Inc. will be vested out and channeled to a new corporation to be incorporated by the [receiver], as described in section 4.1, and (iii) the Parties will work cooperatively towards obtaining approval from Health Canada for the change of control contemplated by the share purchase transaction such that the Health Canada Licence will be valid and in good standing following Closing of the share purchase transaction. [Emphasis added.]

[5] The second agreement, the SPA, contained this clause:

5.6 Prior to and after Closing, the Receiver shall work cooperatively with the Purchaser and make reasonable best efforts to assist the Purchase with approval from Health Canada in respect of the change of control of the Company, such that the Health Canada Licence will be valid and in good standing.

[6] The appellant brought a motion in which it sought $350,000 in damages for what it says was the Receiver’s failure to perform its obligations under the APA.

[7] The motion was dismissed. The motion judge found that the Receiver had no positive obligation to keep the licence in good standing, as it had no authority over the Excluded Assets. Nor did the Receiver have the authority to direct or otherwise orchestrate the appointment of a new RPIC, or the transfer of the licence. He noted that the Receiver did not undertake to keep the licence in good standing, or to seek a new RPIC to manage it. He also relied on the fact that the APA contained an extensive acknowledgment by the appellant that it would rely on its own due diligence and that the assets were being purchased on an “as is, where is” basis.

[8] The motion judge found that s. 8.1 of the APA created two distinct obligations. First, to negotiate the share purchase price in good faith. Second, to use best efforts to complete the transaction the parties were required to negotiate. The motion judge found that the Receiver complied with the first obligation of the APA as it, in good faith, successfully negotiated the SPA. In his view, the second, “best efforts” obligation commenced on the date the SPA was executed. He found that, because the licence was to expire on December 28, 2020, virtually the first business day after the execution of the SPA, there was nothing the Receiver could have done to maintain the licence, even if it had the ability to transfer or otherwise deal with it.

[9] The appellant advances one ground of appeal. It argues that the motion judge erred by not concluding that the Receiver failed to use its “best efforts” to complete a share purchase transaction, whereby the parties would “work cooperatively towards obtaining approval from Health Canada for the change of control contemplated by the share purchase transaction such that the Health Canada License will be valid and in good standing following closing”, as required by s. 8.1 of the APA. In other words, the appellant submits that the Receiver had an obligation to prevent the lapse of the cannabis licence, and that the motion judge was wrong to find otherwise.

[10] Contractual interpretation involves issues of mixed fact and law: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 53, at para. 50. A trial court’s interpretation of a negotiated contract is reviewed on a standard of palpable and overriding error, absent a “rare” extricable question of law, which attracts a correctness standard: Sattva, at paras. 53 and 55; Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at para. 21. In this case, the appellant has not identified any extricable legal errors, which means the appropriate standard of review is palpable and overriding error.

[11] We see no palpable and overriding error in the motion judge’s decision. It was open to the motion judge to find that the “share purchase transaction” referred to in s. 8.1 pertained to the SPA, as the shares in PureSinse were not part of the assets purchased in the APA. In other words, the APA did not involve the purchase of shares. Even the appellant’s representative conceded that s. 8.1 of the APA required the Receiver to use its best efforts to complete the SPA. This is what the Receiver did. Further, it was open to the motion judge to find that the Receiver had no obligation to request that Health Canada change the RPIC. In any event, there was no evidence that the Receiver could have done anything in the one business day between the execution of the SPA and the expiry of the license to renew or forestall its expiry, even if it had the authority to do so.

[12] The appellant submits that the motion judge failed to properly consider material evidence, such as the evidence of communications between the parties before the execution of the SPA. However, a trial judge is presumed to have considered the evidence in its entirety, absent proof that an omission in their reasons was due to misapprehension or neglect of the evidence: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 72. The motion judge indicated that he reviewed the communications between the parties.

[13] The appeal is therefore dismissed. Costs are awarded to the respondent in the agreed amount of $25,000, inclusive of HST and disbursements.

“Grant Huscroft J.A.”

“J.A. Thorburn J.A.”

“J. George J.A.”