Court File and Parties
COURT FILE NO.: CV-04-279543 DATE: 2017-01-03 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
CIT Financial Limited Plaintiff – and – Canadian Imperial Bank of Commerce, Orix Financial Corporation, The Canada Life Assurance Company and Ontario Teachers’ Pension Plan Board Defendants
Counsel: John Chapman, Peter Wardle, Craig A. Mills, Baktash Waseil, for the Plaintiff David Byers, Daniel Murdoch, for the Defendant C.I.B.C. Kenneth A. Dekker, for the Defendant Orix Financial Corporation Myriam Seers, Vitali Berditchevski, for the Defendant The Canada Life Assurance Company George J. Karayannides, Daniel Zacks, for the Defendant Ontario Teachers’ Pension Plan Board
HEARD: November 23 and 24, 2016.
AKBARALI, J:
Overview
[1] Under a share purchase agreement dated August 6, 1997, Newcourt Credit Group Inc. purchased all the shares of Commcorp Financial Services Inc. Newcourt purchased almost all of these shares from the defendants, and a small number from individual management shareholders who are not defendants to this action. I refer to the individual management shareholders and the defendants as the vendors. The plaintiff, CIT Financial Ltd., is the corporate successor to Newcourt and Commcorp.
[2] Among other representations and warranties, the vendors gave a tax representation in respect of pre-closing taxation years to the effect that Commcorp’s tax returns were accurate, and that the taxes Commcorp had remitted to Revenue Canada, plus its reserves, were sufficient to meet Commcorp’s tax liabilities. The share purchase agreement contained a right of indemnity for, among other things, damages flowing from any incorrectness or breach of any representation or warranty.
[3] Following closing, Revenue Canada reassessed certain of Newcourt’s taxation years, referable to a period before closing, and sought payment for significant taxes from Newcourt as a result. As it was required to do under the share purchase agreement, Newcourt provided the vendors with a notice of claim, dated July 27, 1998, with respect to the alleged breach of the tax representation. In the notice, it estimated the amount of taxes, interest and penalties that Revenue Canada would seek at about $80 million in total.
[4] CIT seeks indemnity for alleged breaches of warranty and misrepresentation under the share purchase agreement. The matter is scheduled for a five week trial beginning in May 2017. The defendants bring this motion for summary judgment dismissing the action on the basis that it was commenced outside the limitation period. In the alternative, they seek partial summary judgment, or a determination before trial under r. 21.01(1)(a), in respect of CIT’s claim for damages for “loss of use of funds”.
[5] I conclude that this is an appropriate claim in which to grant summary judgment because the limitation period and loss of funds issues turn largely on the interpretation of the share purchase agreement, the provisions of which I set out in detail below. I can make the necessary findings of fact and apply the relevant law, and it is in the interests of justice to proceed by way of summary judgment.
[6] I find that CIT’s action is statute-barred because it was commenced more than six years after the claim arose. CIT knew of the material facts on which its claim is based by the time it delivered its notice of claim.
[7] I also allow the defendants’ motion for partial summary judgment and dismiss CIT’s claim for damages for loss of use of funds at anything other than the prime rate, because the parties contractually agreed that any damages or indemnification arising under the share purchase agreement would bear interest at the prime rate. Consequently, I strike those portions of the expert reports that purport to calculate “loss of use of funds” on any measure other than the contractual rate of interest.
The Share Purchase Agreement
[8] For purposes of this motion, the relevant representation, contained in Officers’ Certificates of two officers of Commcorp, [1] is a tax representation to the effect that Commcorp’s tax returns [2] “with respect to any Taxes required to be filed, paid or remitted by or on behalf of [Commcorp] on or before the Closing Date have been or will be properly filed, paid or remitted, and … are or will be complete and accurate”, subject to reserves reflected on Newcourt’s unaudited October 31, 1996 financial statements.
[9] Article 5.3(1) of the share purchase agreement speaks to survivability of the representations and warranties. It provides that
[t]he representations and warranties of the Vendors … including the Officers’ Certificates…shall survive the Closing for a period of 12 months from the Closing Date (except for … (ii) matters relating to the [tax representation] which shall survive until six months after the expiration of the latest time at which the assessment or reassessment of such Taxes is permitted under Applicable Law…) …after which time the Vendors shall be released from all obligations in respect of such representations and warranties except with respect to any Claims asserted by the Purchaser in writing (setting out in reasonable detail the nature of the Claim and the approximate amount of such Claim) within the applicable indemnification period…
[10] The survivability clause serves to limit the duration of the representations and warranties, except those with respect to which a notice of claim is given asserting a claim. The clause is meant to provide the parties with certainty with respect to the vendors’ obligations.
[11] Article 6 of the share purchase agreement deals with indemnification. Its terms are important to the resolution of this motion. I review them in some detail below.
[12] Article 6.1 deals with indemnity by the vendors. It provides:
The Vendors, severally… but not jointly, shall indemnify and hold the Purchaser… harmless in respect of any claim, demand, action, cause of action, damage, loss, cost, liability or expense (hereinafter referred to as a "Claim") which may be made or brought against an Indemnified Party or which it may suffer or incur directly or indirectly as a result of, in respect of or arising out of:
(1) any incorrectness in or breach of any representation or warranty … in connection with the Officers' Certificates…;
(2) any breach of or any non-fulfilment of any covenant or agreement on the part of
any of the Vendors under this Agreement.
[13] Article 6.3 sets out limitations in respect of indemnification, including a $5 million threshold that must be exceeded before a claim for indemnification arises. It also provides, in art. 6.3(6) that indemnification under the share purchase agreement is the exclusive remedy for a breach of a representation, warranty, covenant or any other provision of the share purchase agreement:
The rights of indemnification contained in this Article 6 shall be the exclusive
remedy following the Closing for any breaches or alleged breaches of any representation, warranty, covenant or other provision of this Agreement or in respect of the transactions contemplated hereby, and shall be subject to the provisions of Section 5.3 (Survival of Representations and Warranties). For greater certainty, no claim for breach of the representations, warranties or covenants herein may be brought at common law generally if such claim would be prohibited by this Agreement. All claims in relation to this Agreement and the documents delivered in connection herewith shall be governed by the provisions of this Article 6.
[14] Article 6.4 requires that an indemnified party give notice of a claim in respect of which the share purchase agreement provides for indemnification:
If an Indemnified Party becomes aware of a Claim in respect of which indemnification is provided for pursuant to either of Section 6.2 or 6.1, as the case may be, the Indemnified Party shall promptly give written notice of the Claim to the Indemnifying Party. Such notice shall specify whether the Claim arises as a result of a claim by a Person against the Indemnified Party (a "Third Party Claim") or whether the Claim does not so arise (a "Direct Claim"), and shall also specify with reasonable particularity (to the extent that the information is available):
(a) the factual basis for the Claim; and
(b) the amount of the Claim, if known.
[15] Articles 6.5 and 6.6 deal with direct and third party claims. Article 6.5 provides that, in the case of direct claims, an indemnifying party “shall have 120 days from receipt of notice of the Claim” to investigate the claim. At the end of 120 days (or any mutually agreed-upon extension), the indemnifying party will pay the indemnified party the full agreed upon amount of the claim, failing which the parties will proceed to binding arbitration or to court.
[16] Article 6.6 addresses third party claims. It gives each indemnifying party the right to participate in or control the negotiation, settlement or defence of the third party claim and provides a code for such participation or control. It also provides that an indemnifying party is required to make any payment that is required by law with respect to a third party claim before completion of settlement, negotiation or legal proceedings:
In the case of a Third Party Claim, each Indemnifying Party shall have the right, at its expense, to participate in or assume control of the negotiation, settlement or defence of the Claim. If any Third Party Claim is of a nature such that (i) the Indemnified Party is required by Applicable Law or the order of any court, tribunal or regulatory body having jurisdiction,… to make a payment to any person (a "Third Party") with respect to the Third Party Claim before the completion of settlement negotiations or related legal proceedings, as the case may be, then the Indemnified Party may make such payment and the Indemnifying Party shall, promptly after demand by the Indemnified Party, reimburse the Indemnified Party for such payment.
[17] Article 6.8 of the share purchase agreement provides that interest on claims submitted under art. 6.1 (and art. 6.2, which is not at issue here) will be calculated at the prime rate:
The amount of any Claim submitted under Section 6.1 or Section 6.2 as damages or by way of indemnification shall bear interest from and including the date any Indemnified Party is required to make payment in respect thereof at the Prime Rate calculated from and including such date to but excluding the date reimbursement of such Claim by the Indemnifying Party is made, and the amount of such interest shall be deemed to be part of such Claim.
The Reassessment [3]
[18] On March 19, 1998, after the share purchase transaction closed, Revenue Canada notified Newcourt that it intended to reassess Commcorp in respect of a transaction in the 1993 taxation year. That transaction involved the sale and leaseback of software assets. At the same time, Revenue Canada noted that Newcourt had agreed to provide documents related to similar leaseback transactions that occurred in the 1994 taxation year so Revenue Canada could review those transactions as well.
[19] Three of Commcorp’s transactions were eventually at issue. All were carried out prior to Newcourt’s purchase of Commcorp.
[20] In each of these transactions, Commcorp had claimed a deduction of capital cost allowance under the Income Tax Act, R.S.C., 1985, c.1 (5th Supp) at the rate of 50% of the value of the software per year for two years. It then took into income the lease payments for the software for the years the payments were made. The CCA deductions were applied to other taxable income of Commcorp to reduce its tax payable. The total CCA deductions claimed by Commcorp prior to its sale to Newcourt was over $150 million.
[21] Newcourt advised the vendors of the proposed reassessments for the 1993 and 1994 taxation years by way of letter dated April 27, 1998 and expressed its view that Commcorp’s tax treatment of the transactions was proper.
[22] Revenue Canada delivered a formal notice of reassessment for the 1993 taxation year (which included a reassessment for the 1992 taxation year) on June 18, 1998.
[23] On July 27, 1998, Newcourt wrote to the vendors, pursuant to the terms of the share purchase agreement, to give notice of a third party claim. Newcourt gave notice with respect to Revenue Canada’s reassessment of the 1993 taxation year and its expected reassessment for the 1994 taxation year. The reassessments were expected to trigger significant taxes payable for the 1992-1995 years. Newcourt wrote:
Our estimate is that the combined additional federal and provincial taxes sought by the tax authorities under such reassessments for Commcorp’s 1992-1995 tax years would be approximately $60 million plus interest penalties [sic] of approximately $20 million with respect to the software transactions alone.
[24] Newcourt outlined its proposed course of action to contest the reassessment, including that it intended to request that Revenue Canada issue the reassessment for the 1994 taxation year so that all issues for all affected tax years could be addressed in a single proceeding. However, Newcourt also alerted the vendors to the fact that, as a large corporation under the Income Tax Act, it was required to pay half the taxes reassessed plus interest and penalties immediately upon reassessment. I refer to this obligation as the large corporation tax advance payment. Newcourt advised that the taxes owing would be well in excess of the $5 million threshold in the share purchase agreement, and as such “an indemnity payment will be required to be made by the Vendors to indemnify Newcourt for such amounts so paid as taxes”.
[25] Newcourt also acknowledged the rights the vendors had under the share purchase agreement to participate in or take over the defence, but requested that the vendors not exercise those rights.
[26] Thereafter the parties had discussions about the reassessments, but the formal response to the July 29, 1998 notice did not come until February 11, 1999, when counsel for a number of the vendors wrote to consent to Newcourt having carriage of the matter, but without waiving the vendors’ rights or defences in connection with any assertion of liability. No mention was made of the large corporation tax advance payment that would have to be made to Revenue Canada.
[27] The parties continued to communicate with each other. On August 26, 1999, Newcourt wrote many of the vendors to update them on the status of the reassessment. In this letter, Newcourt explained that the large corporation tax advance payment of about $9.6 million had to be paid by August 29, 1999. Newcourt invoked art. 6 generally, and art. 6.1 specifically, to allege that the amounts were “fully indemnifiable” by the vendors and to ask them to make the payment. It did not specifically invoke art. 6.6.
[28] On September 17, 1999, most of the vendors responded through counsel, raising defences on the merits to the obligation to indemnify and stating that they found it difficult to quantify the payment that may be required under the share purchase agreement. Consequently they suggested a meeting to resolve the differences between the parties.
[29] Newcourt did not respond. On April 10, 2000, CIT (which by then had acquired Newcourt) wrote to the vendors to update them, and to suggest that it was in everyone’s interest that CIT and the vendors focus their efforts on the litigation with Revenue Canada rather than the disagreements between the parties.
[30] The vendors never made any payments in respect of the large corporation tax advance payment to Revenue Canada. CIT made no further requests for any such payments. By November 30, 2003, CIT had deposited over $103 million with Revenue Canada in respect of the large corporation tax advance payment.
[31] After lengthy litigation with respect to one transaction, followed by a negotiated resolution of all issues, CIT paid about $20 million in tax, interest and penalties to Revenue Canada. [4] CIT got back about $112 million from Revenue Canada, of which about $80 million was the large corporation tax advance payment that was refunded. The remainder was the statutory interest that had accrued on the $80 million refunded large corporation tax advance payment.
The Claim
[32] CIT issued a Statement of Claim (since amended) on November 24, 2004. In its amended claim, it seeks “a judgment for indemnity in the amount of $330,000,000 for breach of warranty and misrepresentation…”. It also seeks “pre-judgment and post-judgment interest at the Canadian Imperial Bank of Commerce’s prime rate in accordance with the terms of the Agreement”, and alternatively pre- and post-judgment interest under the Courts of Justice Act, R.S.O. 1990 c. C. 43.
[33] In reply to the amended defences, which plead that the limitation period has expired, CIT pleads that by July 27, 1998, when it gave its notice of claim, there was “no demand by the Plaintiff that the Defendants do anything – and no breach by the Defendants at that time of the indemnity obligations and no commencement of the accrual of any limitation period”. The reply also notes that the defendants did not assert that they had no obligation to eventually indemnify in connection with the 1993 reassessment and hence they “did not purport to anticipatorily repudiate their obligations.”
[34] In response to a demand for particulars with respect to the losses CIT was claiming, CIT delivered an expert report in which the expert quantifies damages for “loss of use of funds”. This claim is calculated in three ways: (i) based on the prime rate; (ii) based on the cost of debt of CIT’s parent company, a non-party to this action; and (iii) based on the alleged yield/cost of funds relating to alleged lost opportunities. There is some suggestion, as yet undeveloped, that another measure to calculate the value of loss of use of funds could be based on the earnings of the defendants during the time that CIT was deprived of its funds.
[35] Importantly for this motion, CIT claims loss of use of funds with respect to all heads of damage. This includes (i) the additional tax payment of about $20 million that CIT had to make; (ii) the cost of the professional fees CIT incurred related to dealing with the tax issues; (iii) what was referred to before me as “lost losses”, referring to Revenue Canada’s reduction in the reassessment of the loss carry forward that Commcorp had in 1993; and (iv) the refunded payments from Revenue Canada – that is, the approximately $80 million in the large corporation tax advance payment that was eventually refunded with statutory interest after the issues with Revenue Canada were resolved. CIT claims damages for loss of use of funds up until July 2013, when CIT received the refunded payments. From that point forward, CIT claims pre-judgment interest.
Issues
[36] The issues before me are:
a. Should the action be dismissed in its entirety because it is statute-barred? The parties agree the six year limitation period under the old Limitations Act, R.S.O. 1990, c. L. 15, applies to CIT’s claim.
b. Should CIT’s claim for loss of use of funds be dismissed summarily under r. 20, or alternatively, determined before trial under r. 21.01(1)(a) because it is plain and obvious it cannot succeed at trial?
[37] If the claim for loss of use of funds on any measure other than the prime rate is dismissed, the defendants seek also to strike the portions of CIT’s expert reports that address the loss of use of funds calculation on any basis other than the contractual rate of interest.
Analysis
The Appropriate Test for Summary Judgment
[38] Summary judgment is appropriate where there is no genuine issue for trial. This will be the case where the summary judgment process provides me with the evidence required to fairly and justly adjudicate the dispute, by allowing me to make the necessary findings of fact and to apply the law to the facts, and where summary judgment is a timely, affordable and proportionate procedure: see Hyrniak v. Mauldin, 2014 SCC 7, 1 S.C.R. 87, at paras. 49-50, 66.
[39] Proportionality turns on more than the amount at stake in a claim. Where a motion judge can find the necessary facts and resolve the dispute, proceeding to trial will generally not be proportionate, timely or cost-effective: see Hyrniak at para. 50.
[40] In this case, I do not need to use the new fact-finding powers in r. 20. The facts are not contentious; they are readily discernible from the documentary record and affidavit evidence. The issues turn on the interpretation of the share purchase agreement and the legal effect of the facts. I am able to find the necessary facts, interpret the share purchase agreement and apply the relevant law. This will result in a proportionate, more expeditious and less expensive determination on the merits.
[41] CIT does not argue that the limitation period issue is not amenable to summary judgment; rather, it objects to the timing of the motion, noting that the motion could have been brought long ago, rather than now, when it will jeopardize the trial date currently set for May 2017.
[42] While it would have been preferable for this motion to have been brought earlier, this is not a basis to decline to proceed summarily when summary judgment provides a just and more timely, affordable and proportionate procedure.
[43] CIT raises particular issues about the appropriateness of summary judgment with respect to its claim for loss of use of funds which I address below, in my analysis of that issue.
Is the action statute-barred?
[44] It is common ground between the parties that the relevant statutory limitation period is the six year period provided for in s. 45(1)(g) of the Limitations Act. Here, the statement of claim was issued on November 24, 2004. Thus, the question is whether the limitation period started to run before November 24, 1998.
[45] It is well-established that “a cause of action arises for purposes of a limitation period when the material facts on which it is based have been discovered or ought to have been discovered by the plaintiff by the exercise of reasonable diligence”: see Central Trust Co. v. Rafuse, [1986] 2 S.C.R. 147, at para. 89.
[46] The defendants argue the latest the limitation period could have begun to run was when the notice of claim was delivered on July 27, 1998 because that is the latest that Newcourt discovered the material facts on which its claim is based. If so, the action was commenced after the expiry of the limitation period.
[47] CIT argues the earliest the limitation period could have begun to run was when CIT first made a demand under the indemnity provisions (which it says was on August 26, 1999), or alternatively, the date the defendants actually refused their obligation to indemnify (which it says happened not before September 17, 1999). If CIT is correct, the action was commenced within the applicable limitation period.
[48] The resolution of this question involves properly defining the claim that is made. The defendants argue that the claim is for breach of a representation and warranty, and that the breach occurred on the day the share purchase agreement was signed. [5] On this analysis the breach was discovered subsequently, when Revenue Canada notified Newcourt of its proposed reassessment. Revenue Canada’s reassessment, and the consequent tax payment owing, constitutes the damage, or the “claim” under art. 6.1 which is broadly defined in the share purchase agreement to include any “claim, demand, action, cause of action, damage, loss, cost, liability or expense… which may be made or brought against [CIT] or which it may suffer or incur directly or indirectly…” arising out of the breach of the tax representation and warranty.
[49] CIT argues the claim is for breach of the indemnity, and so did not arise until the vendors breached their obligations under the indemnity provisions of the share purchase agreement, by refusing to indemnify when CIT made a demand for indemnity.
[50] I agree with the defendants. The claim is for breach of a representation and warranty, and the limitation period began to run latest when the notice of claim was delivered. At that time, CIT knew the material facts on which its claim is based, including that it had suffered damage that met the parties’ contractually agreed-upon definition of a “claim”, which triggered the right to indemnity. This conclusion is consistent with the share purchase agreement, the statement of claim and the case law.
[51] The indemnity provisions in the share purchase agreement are not free-standing covenants. They do not apply unless there is an underlying breach of a representation or warranty under art. 6.1(1). [6] It is the untrue or misleading representation or warranty that constitutes the wrong which led to the “claim, demand… loss, cost, liability or expense… which may be made or brought…or which [CIT] may suffer or incur directly or indirectly…” – that is, Revenue Canada’s reassessment and demand for payment, including the large corporation tax advance payment.
[52] The indemnity provisions oust any common law cause of action, instead providing a contractually agreed-upon code, including rights and remedies, to make good the damage – the “claim” as contractually defined – caused by the breach. The indemnification is irrevocably tied to the underlying breach of representation and warranty and the consequent damage. One could not, for example, assess the loss arising out of breach of the indemnity obligation without quantifying the loss caused by the breach of the representation and warranty.
[53] This is consistent with the claim advanced by CIT in its statement of claim: it seeks “a judgment for indemnity in the amount of $330,000,000 for breach of warranty and misrepresentation…” The claim does not plead breach of indemnity. Rather the word “indemnity” refers to the contractually agreed-upon remedy, in the same way a pleading based on misrepresentation or breach of contract at common law refers to “damages”. Article 6.3(6) refers to the “rights of indemnification” as the “exclusive remedy”. Although the reply refers to breach of the indemnity obligations, it does so in reply to the limitation period defence that was asserted by the defendants, not as a separate claim for relief.
[54] Moreover, if there could be a free-standing claim for breach of the indemnity obligation, it could not be brought under art. 6.1(1), the only article relied upon in this action. It would have to be brought under art. 6.1(2) because that is the provision which deals with a “breach of or any non-fulfillment of any covenant or agreement…” and the indemnity obligation is a covenant or agreement. Accepting this interpretation of the share purchase agreement would render art. 6.1(1) useless because no claim could ever be brought under it; the underlying wrong would always be a breach of the indemnity obligation rather than the misrepresentation that gave rise to the obligation to indemnify. An interpretation of a contract that renders a term meaningless ought to be avoided: see Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, 85 O.R. (3d) 254 at para. 24.
[55] This interpretation of the claim that may be asserted under the share purchase agreement is also consistent with the share purchase agreement as a whole. [7] If the claim was for breach of the indemnity obligation, the limitation period would not start to run when the notice of claim was given. It would commence, in CIT’s submission, when CIT either made a demand for indemnity or the demand was refused. If CIT were correct, it would be up to CIT, in its sole discretion, to start the limitation period, even after it knew the material facts on which its claim is based.
[56] Not only is that a commercially unreasonable interpretation, it is inconsistent with the provision dealing with survivability. The notice provision in art. 6.4 operates in conjunction with the survivability clause in art. 5.3. When notice is given, the vendors are not released from their obligations as they would otherwise be under the survivability clause; the claim is preserved. The survivability clause provides certainty about, and limitations on, the vendors’ responsibilities. It would be contrary to that goal if giving notice of a claim allowed the vendors’ obligations to continue indefinitely, at the whim of the purchaser.
[57] I find support for this interpretation of the share purchase agreement in NFC Acquisition L.P. v. Centennial 2000 Inc., 2010 ONSC 733, 67 B.L.R. (4th) 218, aff’d 2011 ONCA 43, 78 B.L.R. (4th) 11. In that case, the issue was whether a contractually agreed-upon notice period varied or excluded the limitation period prescribed by statute. Cameron J. found it did not. The Court of Appeal agreed. The notice period was a contractual condition precedent for triggering a right of indemnity. The Court of Appeal held, at para. 4, that “[o]nce a timely notice is given, the cause of action accrued and at that point, the statutory limitation period begins to run”.
[58] The issue in NFC Acquisition L.P. was not about when the limitation period began to run. Accordingly, it is not apparent from the decisions whether the notice of claim included a demand. However the vendors in that case denied their obligation to indemnify after receiving the notice of claim. The Court of Appeal did not opt for refusal of the obligation as the date on which the limitation period began to run; it found the limitation period began to run on the date of the notice – a conclusion consistent with my conclusion in this case.
[59] CIT argues that jurisprudence under the old Limitations Act established that a claim for indemnity for third party claims did not commence until the amount and nature of the third party claim had been determined. CIT relies on Peterson Steels Inc. v. Arctic Steamship Line, [1981] 2 F.C. 192, a case where two defendants sought leave to proceed with a claim over for indemnity in third party proceedings against a co-defendant. It also relies on jurisprudence which deals with the right to claim indemnity under contracts of indemnity, including Ontario New Home Warranty Program v. 567292 Ontario Ltd. (1990), 71 O.R. (2d) 535 (S.C.) [8] and Gibraltar General Insurance Co. v. Yingst (L.E.) Co. (1990), 89 Sask. R. 93 (Q.B).
[60] I find these cases of little assistance in view of the contractual terms set out in the share purchase agreement. Article 6.1(1) defines “claim” very broadly; it includes, among other things, “any demand…which may be made… against [CIT]…” as a result of the breach of the tax representation and warranty. [9] The indemnity provision thus provides that the obligation to indemnify arises on a demand made to the indemnified party. Revenue Canada’s reassessment was a demand in an amount that well exceeded the threshold.
[61] CIT also argues that, to trigger the limitation period, there has to be a demand under the indemnity and a refusal. There is no provision in the share purchase agreement that requires a demand be made under the indemnity provision for the right to indemnity to arise.
[62] CIT relies on case law that establishes that a claim under an insurance policy for indemnification must be made and refused for the limitation period to start to run. These cases deal with contracts the primary purpose of which is to indemnify. I do not find the reasoning in those cases to be persuasive in this case, where sophisticated commercial actors have negotiated an agreement, the primary purpose of which is to effect a share purchase.
[63] For example, in Tucker v. Unknown Person, 2015 NLCA 21, 365 N.F.L.D. & P.E.I.R. 307, at para. 22, the Newfoundland Court of Appeal wrote: “It is elementary that AXA [the insurer] had to have done something to give rise to Mr. Tucker’s cause of action. That something, in an indemnity contract, is to refuse to indemnify the insured in accordance with the contract.” This passage makes clear the distinction. Here, the defendants had already committed a wrong: the breach of the representation and warranty. Once the breach was known, and a “claim” (as broadly defined in the share purchase agreement) arose, CIT knew the material facts on which its claim is based. In a contract of indemnity, the wrong committed by the party who is to indemnify is the failure to indemnify. Until the refusal to indemnify is known, the indemnified party does not know the material facts on which its claim is based.
[64] CIT also relies on the decision in Hole v. Hole, 2016 ABCA 32, 27 Alta. L.R. (6th) 217 which it submits supports its argument that a demand to comply with a contractual obligation must be made, and a corresponding refusal given, for the limitation period to begin to run.
[65] In Hole, an appellant entered into a letter of understanding which provided that the respondents would pay it certain payments on dates that were not specified but were “dependent on the success and the financial stability” of a joint venture. The Alberta Court of Appeal found the financial stability of the joint venture was a condition precedent to the obligation to make the payment. The limitation period could not run until the appellants knew about the success and financial stability of the joint venture. The fact that the respondents had earlier communicated their position that the payment was only a potential future payment did not start the limitation period because the appellants had no knowledge that the condition precedent to the payment was met and “the limitations legislation is contingent on knowledge”: see paras. 59-64.
[66] Hole is thus consistent with NFC Acquisition: a contractual condition precedent must be met before the statutory limitation period begins to run. Hole does not support the argument that a demand for, and refusal of, a contractual obligation must be made for the limitation period to begin to run. Moreover, in Hole, there was no contractual code governing the parties’ relationship like there is art. 6 of the share purchase agreement.
[67] I also reject CIT’s argument that the notice provision in the share purchase agreement is akin to providing notice of potential claims under a contract of (for example) directors’ and officers’ insurance. The analogy does not work because in an insurance contract, the insured is the alleged wrongdoer, and gives notice to the insurer that indemnity may be required under the contract. The insurer has not committed a wrong until it refuses to indemnify (if indemnification is warranted). In this case, the purchaser gives notice to the wrongdoers (the vendors) with respect to a wrong the purchaser has discovered the vendors have committed (the breach of the representation and warranty) and for which it has a claim (as broadly defined in the share purchase agreement).
[68] CIT also argued that art. 6 of the share purchase agreement makes a distinction between direct claims and third party claims [10], such that it is not commercially sensible to conclude that the limitation period began to run on the delivery of the notice of claim. This is because, CIT argues, the third party claim could be frivolous, might never be brought, and the amount of the claim could be uncertain, including whether the $5 million threshold in the share purchase agreement would be surpassed such that the indemnity provisions would apply. I disagree that this demands a conclusion that the limitation period cannot begin to run. A cause of action will accrue even where the extent or type of damage is unknown, as long as the plaintiff knows some damage has occurred: see Peixeiro v. Haberman, [1997] 3 S.C.R. 549, at para. 18. Moreover, on the facts of this case, Revenue Canada’s reassessment was not frivolous, there was no reason to think it would not proceed, and the threshold would be exceeded (CIT having estimated the tax, interest and penalties that would be sought at about $80 million). CIT also knew that the large corporation tax advance payment would have to be made. Revenue Canada’s reassessment met the definition of “claim” in art. 6.1(1).
[69] I do not accept CIT’s argument that the 120 day investigation period for direct claims set out in art. 6.5 means the limitation period could not begin to run for such claims from the date notice of such a claim is given. The investigation period simply provides a contractually agreed-upon course of action; it demands a deferral of the commencement of any action or arbitration for 120 days to allow for investigation and negotiation between the parties before a direct claim can be escalated to litigation or arbitration.
Conclusion on Limitations Issue
[70] Because the wrong that is sought to be addressed is the breach of the representation or warranty, the question is when CIT knew of the material facts on which its claim for breach of the representation and warranty is based. In this case, CIT knew of the breach, and the existence of its claim, by the time of Revenue Canada’s reassessment. By June 27, 1998 at the latest, it knew the claim exceeded the threshold because it estimated Revenue Canada would be seeking an additional $80 million in taxes, interest and penalties. The limitation period began to run at the latest on June 27, 1998. The claim is therefore statute-barred.
Loss of Use of Funds
[71] I also dismiss CIT’s claim for loss of use of funds under r. 20 at anything other than the prime rate provided for in art 6.8 of the share purchase agreement.
[72] CIT argues that summary judgment is not appropriate because r. 20 applies to judgment or partial judgment on “claims” or “defences”; it submits that the measure of its loss of use of funds is an “issue”. I disagree. CIT’s claim for loss of use of funds turns on the interpretation of the share purchase agreement, and the recovery that it permits. As I have already noted, the facts are not contentious; it is the legal effect of the facts when considered in the context of the interpretation of the share purchase agreement that is at issue here.
[73] I accept the defendants’ submission that CIT’s claim for loss of use of funds based on the yield/cost of funds relating to alleged loss of opportunities is significant, both in its absolute value and in the time it will take to prepare for and address at trial. The calculation of loss of use of funds at prime (at approximately $45-48 million) is less than half of the claim for the loss of use of funds when it is valued by the yield/cost of funds relating to alleged loss of opportunities. On this latter measure, the claim for loss of use of funds exceeds $100 million. Although the question regarding the loss of use of funds that is available to CIT is significant, it can be resolved by application of the facts that are easily discernible and the interpretation of the share purchase agreement. It is thus in the interests of justice to proceed summarily.
[74] In addressing the question of the loss of use of funds, I group the losses which CIT claims into two categories: first, the losses it incurred consisting of the tax it had to pay to Revenue Canada, the cost of its professional advisors and the value of its lost losses; second, the losses it claims relating to the large corporation tax advance payment that Revenue Canada eventually returned (together with statutory interest).
[75] Although CIT maintains its claim to loss of use of funds in respect of the losses in the first category, its argument on this issue was directed to the second category.
[76] The losses in the first category flowed from the breach of the tax representation and warranty. Accordingly, they fall to be indemnified under art 6.1(1) of the share purchase agreement. Article 6.8 of the share purchase agreement provides that any claim submitted under 6.1 bears interest at the prime rate. The share purchase agreement is clear and unambiguous. It was negotiated between sophisticated parties. Effect must be given to its terms. I note that s. 128(4)(g) of the Courts of Justice Act provides that the statutory rate of interest shall not be paid where interest is payable by a right other than under the statute. Thus, although the statement of claim makes an alternative claim for interest under the Courts of Justice Act, it is the contractually agreed-upon interest rate that applies here.
[77] I find that the contractual rate of interest also applies to the second category of losses.
[78] Newcourt, in its letter dated August 26, 1999, demanded that the vendors pay the large corporation tax advance payment on its behalf in the amount of about $9.6 million. In support of its demand it invoked art. 6, and specifically art. 6.1, but not art. 6.6. Under art. 6.6, the vendors were obligated to reimburse Newcourt for the payment “promptly after demand”.
[79] I do not think anything turns on the fact that Newcourt did not specifically rely upon art. 6.6. Newcourt referred to the entirety of art. 6. This was a share purchase agreement between sophisticated parties. I am satisfied that this letter constituted a demand, at least for the payment of $9.6 million, and that there was a corresponding refusal.
[80] Eventually, and without ever making another demand, CIT deposited about $103 million with Revenue Canada with respect to the large corporation tax advance payment of which about $80 million was eventually returned with statutory interest.
[81] CIT argues that it is entitled to damages for the loss of use of these funds under art. 6.1(1), because it lost the use of them due to a breach of the tax representation and warranty.
[82] I do not accept this argument. Assuming CIT lost the use of those funds because of the breach of the tax representation and warranty, [11] the indemnity to which it was entitled was repayment of the funds (during the time Revenue Canada held them) and interest at prime as contractually agreed under art. 6.8. Once the funds were repaid, CIT’s sole loss related to those funds was interest at prime, less the statutory interest it received.
[83] Moreover, under CIT’s argument, the damages for loss of use of funds arises only because there is a breach of the tax representation and warranty. If Revenue Canada had been wrong, and CIT had succeeded in its litigation such that no additional tax was payable, on CIT’s analysis, there would be no amount owing to it for damages for loss of use of funds because there would be no breach of the tax representation and warranty. On this analysis, the vendors could breach their obligation under art. 6.6 with impunity. However, if even one dollar in taxes were found owing, CIT’s significant claim for loss of use of funds would arise because there would have been a breach of the representation and warranty. This is not a commercially reasonable interpretation of art. 6.1(1).
[84] In addition, given my conclusion that the contractual rate of interest applies to the first category of losses, were I to accede to CIT’s argument with respect to the refunded large corporation tax advance payment, the vendors would owe substantially more to CIT for the payments Revenue Canada was wrong to demand, and which were unrelated to any breach of the tax representation and warranty, than with respect to the funds that were properly owing to Revenue Canada and which could be tied to the breach of the representation and warranty. This would also not be a commercially reasonable interpretation of art. 6.1(1).
[85] CIT relies on Toronto Industrial Leaseholds Ltd. v. Posesorski (1994), 21 O.R. (3d) 1 (C.A.), where the majority of the Court of Appeal held that an overpayment made due to a solicitor’s error caused the clients to pay $100,000 more than they should have for some property, and they were entitled to be paid the amount they could have earned by investing the overpayment.
[86] Subsequent cases from the Court of Appeal have moved away from this proposition. They make clear that loss of use of money is compensated by an award of prejudgment interest: see Whitefish lake Band of Indians v. Canada (Attorney General), 2007 ONCA 744, 87 O.R. (3d) 321, at para. 66; Bozzo v. Giampaolo (2005), 31 R.P.R. (4th) 212 (Ont. C.A.) at para. 23.
[87] In any event, art. 6 of the share purchase agreement sets out a complete code to deal with indemnification and ousts any common law remedies. Article 6.8 could not be clearer: the parties intended loss of use of money for which art. 6.1 provides indemnification to be calculated at the prime rate.
Conclusion on Loss of Use of Funds Issue
[88] As a result, I dismiss summarily any claim for loss of use of funds based on anything other than art. 6.8, in which the parties contractually agreed that interest on claims would be calculated on the basis of the prime rate. It follows that I strike those portions of the expert reports that purport to calculate loss of use of funds at any rate other than the contractual rate of interest. Given my conclusion on this issue, there is no need to address the motion to strike the claim for loss of use of funds under r. 21.01(1)(a).
Conclusion
[89] CIT’s action is dismissed in its entirety. It is statute-barred. I also summarily dismiss CIT’s claim for loss of use of funds at anything other than the prime rate provided for by art. 6.8 of the share purchase agreement and strike the portions of the expert reports that purport to calculate loss of use of funds at anything other than the contractual rate of interest.
[90] The parties agreed on costs of this motion at $50,000 inclusive of HST and disbursements. Since the defendants have been wholly successful, they are entitled to this amount.
[91] Because I have dismissed CIT’s action, costs of the action must also be addressed. Counsel explained to me that preparing a costs outline in respect of this action, which has been ongoing for years, will be a complicated and time-consuming task. I ask counsel to confer with each other. If costs cannot be agreed upon, counsel should agree upon a schedule for the exchange of costs submissions and write to me to advise what they propose. Written costs submissions should not exceed six pages, not including any offers to settle, bills of costs or other relevant attachments. If there are any issues that cannot be resolved with respect to scheduling, counsel may seek a case conference before me to address them.
[92] Finally, I thank counsel for their hard work and thoughtful argument, all of which was very helpful to me.
Madam Justice Jasmine T. Akbarali
Date: January 3, 2017
Footnotes
[1] There is no issue that the representations and warranties in the Officers’ Certificates are also representations and warranties of the vendors. They are described in that manner in art. 5.3 and described in a consistent manner in arts. 4.1(1) and 5.1 of the share purchase agreement. Before me, counsel for the plaintiff and counsel for the defendants agreed that the fact that the tax representation was included in the Officers’ Certificates was of no moment.
[2] The term “Tax Returns” was defined to include returns, declarations, remittances, installments, information returns and reports of every nature.
[3] Although these reasons refer to the reassessment of Commcorp, there was also a reassessment of a related company, OE Financial Service Inc., now known as Image Financial Services Inc., in which Commcorp had a 50% interest. The final reassessment related to Image led to net additional tax of $4,102,672, of which CIT claims 50% from the defendants. That some of the claimed losses came through the reassessment of Image does not affect my analysis.
[4] By then, Revenue Canada was Canada Revenue Agency, but for consistency, I use “Revenue Canada” throughout these reasons.
[5] For the purposes of this motion, I assume that there was an incorrectness in or breach of the tax representation and warranty.
[6] The indemnity provisions would also apply, under art. 6.1(2), to an underlying breach of a covenant or agreement.
[7] Contracts must be read as a whole: see Sattva Capital Corp. v. Creston Moly Corp. 2014 SCC 53, [2014] 2 S.C.R. 633 at para. 47.
[8] Although the contract in this case was a vendor/builder agreement, the court characterized it and treated it as a contract to indemnify: see para. 21.
[9] Other definitions of “Claim” in art. 6.1(1) may also apply in this case.
[10] CIT also sought to distinguish the NFC Acquisition L.P. v. Centennial 2000 Inc., supra decisions on the basis that the case dealt with direct claims, not third party claims. I am unable to conclude from the decisions in that case whether the claims at issue were third party or direct claims and so decline to distinguish the case on that basis.