Court File and Parties

COURT FILE NO.: CV-16-252 DATE: 2023-04-17

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: Robert Bentley and Carla Bentley, Plaintiffs – and – Peter Charters and Donna Charters, Defendants

Counsel: Meagen J Swan and Anthony J. Gabriele, for the Plaintiffs J. Barry Eakins, for the Defendants

HEARD: September 19, 20, 21 and November 28, 2022

BEFORE: The Honourable Mr. Justice D.J. Gordon

Reasons for Decision

[1] The parties were involved in an unsuccessful business venture. Substantial losses were incurred. In this action, they seek a determination of apportioning those losses in terms of their financial contributions to the business.

Background

[2] For ease and reference and clarity, I will refer to the parties by their given names, or collectively by their surnames. No disrespect is intended by so doing.

[3] The parties currently reside in Cambridge, Ontario. Robert and Carla are a married couple. Peter and Donna are a married couple. Robert and Donna are siblings.

[4] The events resulting in this litigation commence in 2001. At that time, Robert and Carla resided in Nobleton. Robert was employed at Bombardier Airspace while Carla provided care for their disabled son. Peter and Donna were living in Orillia. Peter was employed by A&P Grocery and Donna was the manager of a local M&M Meat Shops Ltd. (“M&M”).

[5] As a result of her employment, Donna had made inquiry in 1999 as to the availability of franchise stores with M&M. Peter and Donna determined the purchase of such a store was beyond their financial ability. Subsequent discussions between the parties lead to further inquiry with the plan of equal ownership.

[6] As hereafter discussed, two franchise stores were purchased in 2001. Peter and Donna moved to Cambridge. They would be responsible for day-to-day operations and, as such, were paid a modest salary. Robert’s role was to oversee the financial side. The couples made an equal contribution towards the purchase. A company was incorporated to own the business. The parties entered into a unanimous shareholders agreement. Over time, Robert and Carla would contribute a larger amount of funds to the company.

[7] The franchise stores were initially successful, generating reasonable profits. Sales were increasing. The parties were aggressively paying down the debt incurred on the purchase. In result, no dividends were paid to the shareholders.

[8] In 2008, profitability of the stores began to decline. M&M had substantially increased the cost of product, advertising and royalty fees. The business would move to a loss position, requiring contribution of capital to continue.

[9] Conflict started to develop between the parties as a result of the change in the financial state of the business. In 2012, the parties were involved in mediation, attempting to resolve their dispute and be able to work together in dealing with problems created by M&M. They would sign a Letter of Understanding following mediation, the terms now being in dispute.

[10] The parties were contemplating sale of the franchise stores given the financial problems. In 2013, M&M was demanding a new franchise agreement. The parties commenced an action against M&M, settling in 2015. The stores were sold to M&M at a considerable loss.

[11] Following the sale, third party creditors were paid in full. The remaining creditors of the corporation are the parties. Their shareholders loans exceed the net sale proceeds. There is $92,702 on deposit in the corporate bank account, frozen by prior court order.

[12] When discussions between the parties failed to resolve their dispute, this litigation was commenced in 2016.

M&M Meat Shops Ltd.

[13] The first M&M store opened in Kitchener many years ago, then owned by a local family. It was one of the initial retail frozen food operations at the time. The store was successful. The owners decided to expand, doing so by a franchise system. This resulted in hundreds of stores throughout Canada.

[14] The franchise agreements included terms for the supply of product, advertising and royalty payments. There was also provision for geographic territory, granting the exclusive right to franchisees to restrict competition within the system. The franchise operations were profitable for both the franchisor and the franchisees.

[15] A different business model was implemented by the franchisor in 2007 either as a result of new ownership of M&M or, at least, a change in management. The franchisor decided to maximize its profits at the expense of the franchisees by increasing the cost of product, advertising and royalty fees. They would also open new stores to compete with franchisees. These changes lead to a significant decline in income for the franchisees. Many were now operating at a loss. Some would close their stores.

[16] Jim Brown, referred to later in this decision, was a franchise operator from 2003 to 2009. As a result of the changes imposed by M&M, he was involved in organizing an association for local franchisees, hoping to collectively negotiate improvements with M&M. They were unsuccessful. The organization considered a class action against M&M. Such did not occur.

[17] Mr Brown sued M&M, settling in 2009 and selling his stores to M&M. The parties would do the same in 2013.

Purchase of Business

[18] Two franchise stores were acquired, closing of the share purchase agreement occurring on May 1, 2001. The purchase price was $850,000.

[19] The existing business was owned by Suntree Developments Ltd. (“Suntree”). The parties incorporated a holding company, 1465726 Ontario Limited (“146”). This company purchased the shares of Suntree on closing. The parties have treated the operating company and the holding company as one and the same, save for accounting purposes.

[20] The funds required to pay the purchase price came from several sources. Each couple contributed $65,000 as an investment in, or loan to, 146. The Bentleys had the funds on hand. The Charters sold their home, using the net sale proceeds for their payment. There was a vendor take back mortgage, or general security agreement, for $190,000. the balance of the purchase price came from a loan provided by the Royal Bank of Canada (“RBC”).

[21] The RBC loan was initially for $625,000 with the excess finds being used to finance initial operations. The loan was provided to 146, with a guarantee from the Bentleys and collateral mortgage registered against the title to their residence. After selling their home, the Charters had no significant assets and were not required to provide a guarantee or other security to RBC.

Corporate Structure

[22] 146 owns all of the shares in Suntree. The Bentleys own fifty-one percent of the shares in 146, the Charters the remaining forty-nine percent.

[23] The parties are all directors of Suntree and 146. Robert, Carla and Donna are the officers.

[24] The only asset of Suntree was the two franchise stores. Suntree is the only asset of 146. The parties initial investment, and subsequent contributions, were recorded as loans to the corporations, primarily to 146.

Shareholders Agreement

[25] On April 27, 2001, prior to closing of the purchase, the parties entered into a unanimous shareholder’s agreement regarding their interests in 146. Relevant to this litigation are the following terms:

3.01 Financial Matters

Guarantees and other security. Notwithstanding any joint and several liability under any guarantees of the indebtedness of the Corporation by the parties, and notwithstanding the execution of guarantees or the giving of security therefor by only one and not all of them, each party is hereby indemnified by the other party for any liability incurred in excess of his pro rata share of such liability provided that such liability has been approved by resolution duly passed by the Board of Directors of the Corporation. Such pro rata share shall be based on the proportion that the number of shares of the Corporation owned and controlled by the parties hereto at the time the liability is incurred is to the total number of issued and outstanding common shares of the corporation at that time.

3.02 Additional Funds. If, at any time hereafter, further funds are required to carry on the corporation’s business including the expansion thereof, then each of the parties shall loan to the corporation such further funds as the parties may unanimously agree upon.

3.03 Interest. Any monies advanced to the Corporation by any of the parties hereto shall bear interest at the rate established from time to time by the parties hereto and any repayment by the Corporation of such loans shall be paid on a pro rata basis to the parties hereto save and except for the provisions of Article 3.01.

6.03 Waivers.

(a) A waiver by any party hereto of any of his rights hereunder or of the performance by any part of any of his obligations here under shal be without prejudice to all or any other right hereunder of the party so waiving and shall not constitute a waiver of any of such other rights, or, in any other instance, of the rights so waived or a waiver of the performance by the party of any of his other obligations hereunder or of the performance, in any other instance, of the obligations so waived.

(b) No waiver on behalf of any part of the breach of any of the covenants, conditions and provisions herein contained shall be effective or binding upon such party unless the same shall be expressed in writing.

6.04 Mutual Indemnification. Each party hereto agrees to indemnify the other party hereto against and to reimburse the other party for any and all liabilities which such other party may incur or become subject to in amounts which such other party may pay or may be required to pay which are in excess of the proportionate share of such party of the liabilities and obligations of the parties under the terms of this agreement provided that nothing in this section 6.04 shall in any way be deemed to or shall require any part to incur any liability or provide any funds other than as may be expressly provided in other provisions of this agreement.

[26] Although Donna made reference to a lack of independent legal advice, I understood there was no complaint as to the validity of the shareholders agreement.

[27] The above-noted terms become important, subject to other evidence, given the difference in the amounts contributed by the couples over the years since acquiring the franchise stores.

Operation of the Business

[28] From the outset, Donna was responsible for day-to-day operations of the franchise stores. Peter continued his employment with A&P Grocery until 2002. At that point, he began working in the stores with Donna. The Charters were paid a salary, in the modest amount of $30,000 each, by agreement of the parties.

[29] Robert’s role, given his background, was to oversee the financial side of the business, monitoring sales, expenses and inventory. He and Carla had some involvement with deliveries and store demonstrations as needed. They did not receive a salary.

[30] As a result of the financial problems in the business and to reduce expense, beginning in 2012, Donna and Peter received their salary as a repayment against their shareholder loan. Subsequently the corporate accountant would make adjustments to the financial statements to correct these payments and accurately record the loans owed to the parties.

[31] The business was making a profit until 2009. From the outset, 146 was aggressively paying down the RBC loan and other initial debt, by agreement of the parties. They had expected such payments would quickly create equity in the business.

[32] Changes made by M&M in 2008 resulted in a decline in profitability at the business. By 2009, it was in a loss position. Payments to M&M were in arrears. The franchise agreement was due to expire, and more restrictive terms were being proposed by M&M for a renewal. Attempts to resolve matters with the franchisor were not successful.

[33] In 2012, the parties would decide, over a period of some months, to sell the franchise stores. The Bentleys contributed funds to pay the M&M arrears. However, the renewal terms being proposed by M&M were too restrictive and were frustrating their efforts to sell. Litigation followed.

Corporate Debt - 2012

[34] The parties acquired the franchise stores with an equal contribution of $65,000 from each couple. Subsequently, further funds were required for ongoing operations and to pay debt. These contributions were not on an equal or proportionate basis as contemplated by the shareholders agreement.

[35] According to Paul Drouillard, the corporate accountant, the total debt of the corporation, as at November 30, 2012, was $751,362. he also records the shareholder loans as follows:

Bentleys $450,070 Charters $140,480 Total $590,550

[36] This evidence is not in dispute.

[37] There were two significant contributions provided by the Bentleys that are included in the above amount.

[38] The original RBC loan was secured by a mortgage registered against the title to the Bentley residence in Nobleton. In July 2004, they relocated to Cambridge, acquiring a home of lesser value. RBC required the corporate loan be reduced by $150,000. The Bentleys provided those funds.

[39] Further funds were required by the corporation in September 2011. The Bentleys obtained a personal line of credit, secured by another mortgage registered against the title to their residence. The Bentleys provided $176,000 to Suntree and 146. From this account, $120,000 was applied to the accounts payable of Suntree and $50,845 was used to pay off an RBC loan. This contribution was recorded as an operating loan owing to the Bentleys, rather than as a shareholders loan. The difference in terminology has no impact.

[40] On September 14, 2011 the parties executed a written agreement regarding the above contributions from the Bentleys. Terms included the requirement for Suntree to pay at least $3,000 monthly against principal and interest, in default of such payments, the Charters were obliged to pay fifty percent of the loan balance to the Bentleys.

Letter of Understanding

[41] During the early years of their business, the parties became friends with James Brown, another franchisee of M&M. They would share information regarding the financial problems created by M&M. The relationship continued after Mr. Brown settled his lawsuit against M&M and departed from the franchise operation.

[42] Throughout 2011 and 2012, Mr Brown became aware of conflict developing between the parties. He would encourage them to work together so that they could pursue a resolution with M&M.

[43] Eventually, the parties realized the business could not continue. Negotiations with M&M were not leading to a resolution. Mr. Brown understood there was disagreement between the parties and agreed to discuss matters with them. During that conversation, the parties would agree to try and sell the franchise stores. However, the conflict continued.

[44] In the fall of 2012, Robert contacted Mr. Brown, requesting him to mediate a resolution with the parties. He was prepared to do so as an “informal mediator”. Several meetings would take place.

[45] At the outset of this process, Mr. Brown did not have any specific financial information regarding the business, being only aware such was no longer profitable. He understood the couples had an equal ownership interest but had no knowledge of the corporate structure.

[46] The first meeting occurred on November 29, 2012. Mr Brown met with each couple separately. He described the meetings a conceptual in nature with each couple expressing a view of what should happen when the stores sold.

[47] All of the financial information provided to Mr. Brown at this meeting came from Robert. He recorded in his notes the following outstanding debt:

Bank loan $135,000 Line of credit $90,000 Owed to M&M $45,000 Owed to Bentleys $150,000

[48] Mr Brown, therefore, understood the total debt was $420,000. In these meetings, there was also a discussion as to a payment of “sweat equity” to the Charters.

[49] Robert could not recall what specific information he had provided to Mr. Brown but referred to the $420,000 as the approximate amount owing to him and Carla, what he expected to receive on a sale.

[50] Donna identified the $420,000 as the total debt of the corporation, relying, she said on Robert as he was in charge of the finances. In para. 25 of their statement of defence, the Charters refer to the amount above as the third-party debt, that is not including amounts owing to shareholders.

[51] On November 30, 2012 Mr. Brown met with the Charters to review a formula provided by Robert to follow on a sale. The Charters were content with the approach but wanted the initial $30,000 to be paid to them.

[52] Mr. Brown met with the Bentleys on December 1, 2012. They were content with the sweat equity payment to the Charters. Following this meeting, Mr. Brown prepared a Letter of Understanding, assisted by Robert. The document was signed by the parties that day.

[53] The Letter of Understanding provides as follows:

Letter of Understanding

This is an agreement between Rob Bentley, Carla Bentley, Peter Charters and Donna Charters agree to this 1st day of December, 2012, where all parties agree to the following terms should their M&M Meat Shops stores (Suntree Developments Ltd.) be sold:

• If the corporation or assets are sold for an amount of $400,000, then Peter and Donna will receive $30,000 from the proceeds and the remaining will go towards the outstanding debt, estimated to be approximately $420,000,
• If the corporation or assets are sold for an amount above $400,000, then Peter and Donna will receive a minimum amount of $30,000 until such time as the amount would exceed the $30,000 as directed by the following formula:
  • Proceeds to pay off the legitimate outstanding debt of $420,000,
  • The next $50,000 is to be paid to Peter and Donna,
  • Any amounts above this will be slipt between the two partners (Peter and Donna & Rob and Carla) on a 50/50 basis.

Further loans to Business

[54] The business operations continued after signing the Letter of Understanding until the settlement with M&M in September 2015. However, additional funds were required from the shareholders, as follows:

Bentleys $305,382 Charters $97,418 Total $402,800

[55] As of September 30, 2015, the corporate accountant recorded the total debt owing to the shareholders as follows:

Bentleys $648,923 Charters $237,898 Total $886,821

Parties sue M&M

[56] In July 2013, M&M gave notice to the parties to either sign the new franchise agreement or to have the stores shut down. The parties instructed litigation counsel to commence in action.

[57] In September 2015, a settlement was negotiated with M&M. The stores would be sold to M&M for $625,000.00, subject to certain adjustments including inventory. The net proceeds received, after payment to their counsel, was $468,223.

Payment to Bentleys

[58] On October 2, 2015, $334,548 was paid to the Bentleys from the sale proceeds. Robert reported the payment being used towards funds he and Carla had provided to the corporation from their line of credit, as follows:

RBC Home Line Plan $165,298 RBC Home line Plane $131,605 146 Operating Loan $27,645

[59] Included in the payment received was a further $10,000, said by Robert to be a reimbursement to them for frozen food taken by the Charters.

[60] The Charters were then unaware of this latter matter and, in this litigation, denied Robert’s allegations.

[61] There was a delay in payment by the Bentleys to RBC, said to be inadvertent. As such, the loan payments continued to be made by the corporations, in the amount of $10,283. It is agreed this amount should be shown as an adjustment, reducing the debt owed to the Bentleys.

[62] Subject to the determination regarding the food claim above, the debt owed is as follows:

Bentleys $304,097 Charters $237,898

Payment to Charters

[63] The parties were unable to resolve their dispute following the settlement with M&M. There were some discussions. The Charters also expressed concern with the continued loan payments mentioned above. They decided to withdraw $80,000.00 from the corporate bank account to prevent the Bentleys taking more funds, doing so in January 2016.

[64] When these funds were not returned, the Bentleys commenced this action. The statement of claim was issued on March 4, 2016. A motion was also served with pleading. On March 16, 2016, Taylor J. granted an order directing the Charters to repay the $80,000 to the corporate bank account and also freezing that account, subject to further agreement or court order. The Charters complied with the order.

Funds on Deposit

[65] There have been several deposits to the corporate bank account, primarily HST reimbursement. The accountant’s invoice was paid. At the present time, $92,702 remains on deposit, as at October 21, 2022.

Winding up

[66] As neither couple has expressed an interest in retaining Suntree or 146, it will be necessary to wind up both corporations. The expense for that process, involving legal and accounting fees and disbursements, is estimated to be $20,000, leaving $72.702 available for distribution to the parties.

Issues

[67] The ultimate determination required pertains to the distribution of remaining funds and whether either couple remains indebted to the other. In this regard, the issues involve the validity and interpretation of the Letter of Understanding and the shareholders agreement.

Position of the Parties

[68] Briefly stated, the positions of the parties may be summarized in the following manner:

i) Plaintiffs

[69] The primary position of the Bentleys is that the Letter of Understanding is void on account of mutual mistake. They say the mistake relates to the stated debt of $420,000 and whether such includes third party debt and the debt owing to the shareholders, or one of them. In result, the Bentleys claim the dispute is governed by the shareholders agreement. Contributions to the corporation were to be made in accordance with their shareholders and indemnification is now required. Such, they say, can be accomplished by resort only to the funds remaining on deposit.

[70] If the Letter of Understanding is not void, the Bentleys raise a number of issues regarding interpretation of its terms and also with respect to the subsequent disproportionate contributions. Regardless, the Bentleys claim the Charters would be indebted to them for a significant amount.

ii) Defendants

[71] The charters rely on the Letter of Understanding as a valid agreement, replacing or varying the terms in the shareholders agreement. They say there was either no mistake or the mistake was unilateral by Robert, and not known to them at the time.

[72] The Charters claim entitlement to the first $30,000. The balance of the debt, they suggest, should be shared on a proportionate basis to their respective investment, namely 72:28, not as provided in the shareholders agreement.

[73] In this regard, the Charters claim the Bentleys are indebted to them for a significant amount.

Legislation

[74] The relevant provisions in the Business Corporations Act, R.S.O. 1990, c. B.16, as amended are as follows:

Agreement between shareholders

108 (1) A written agreement between two or more shareholders may provide that in exercising voting rights the shares held by them shall be voted as therein provided.

Idem

(2) A written agreement among all the shareholders of a corporation or among all the shareholders and one or more persons who are not shareholders may restrict in whole or in part the powers of the directors to manage or supervise the management of the business and affairs of the corporation.

Where shareholder has power, etc., of director

(5) A shareholder who is a party to a unanimous shareholder agreement has all the rights, powers, duties and liabilities of a director of a corporation, whether arising under this Act or otherwise, including any defences available to the directors, to which the agreement relates to the extent that the agreement restricts the discretion or powers of the directors to manage or supervise the management of the business and affairs of the corporation and the directors are relieved of their duties and liabilities, including any liabilities under section 131, to the same extent.

Unanimous shareholder agreement

(5.1) Nothing in this section prevents shareholders from fettering their discretion when exercising the powers of directors under a unanimous shareholder agreement.

Directors

115 (1) Subject to any unanimous shareholder agreement, the directors shall manage or supervise the management of the business and affairs of a corporation.

Delegation by directors

127 (1) Subject to the articles or by-laws, directors of a corporation may appoint from their number a managing director or a committee of directors and delegate to such managing director or committee any of the powers of the directors.

Standards of care, etc., of directors, etc.

134 (1) Every director and officer of a corporation in exercising his or her powers and discharging his or her duties to the corporation shall,

(a) act honestly and in good faith with a view to the best interests of the corporation; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

Approval by directors

159 (1) The financial statements shall be approved by the board of directors and the approval shall be evidenced by the signature at the foot of the balance sheet of any director authorized to sign and the auditor’s report, unless the corporation is exempt under section 148, shall be attached to or accompany the financial statements.

Legal principles

i) Interpretation of Contracts

[75] In rejecting the historical approach of treating the interpretation of contracts as a question of law and, instead, concluding it was mixed fact and law, in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, at para. 47, Rothstein J. provided the following direction:

… the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine “the intent of the parties and the scope of their understanding” (Jesuit Fathers of Upper Canada v. Guardian Insurance Co. Canada, 2006 SCC 21, [2006] 1 S.C.R. 69 (S.C.C.), at para. 27per LeBel J.;see also Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways), 2010 SCC 4, [2010] 1 S.C.R. 69(S.C.C.), at paras. 64-65 per Cromwell J.). To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning.

[76] In Ottawa (City) v. Clablink Corporaton ULC, 2021 ONCA 847, Roberts J.A. provided further commentary, at para. 52 saying:

…the basic rules of contract interpretation require the determination of the intention of the parties in accordance with the ordinary and grammatical words they have used, in the context of the entire agreement and the factual matrix known to the parties at the time of the formation of the contract, and in fashion that corresponds with sound commercial principles and good business sense: Weyerhaeuser Company Limited v. Ontario(Attorney General), 2017 ONCA 1007, 77 B.L.R. (5th) 175 para. 65, rev’d on other grounds, Resolute FP Canada v. Ontario (Attorney General), 2019 SCC 60, 444 D.L.R. (4th) 77.

See, also: Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, at para 16; and RBC Dominion Securities Inc. v. Crew Gold Corp., 2016 ONSC 5529, at paras. 51-52.

[77] Montreal Trust Co. of Canada v. Birmingham Lodge Ltd. (1995), 24 O.R. (3d) 97 (Ont. C.A.), involved a guarantee on a mortgage when the mortgage was subsequently amended without the consent of the guarantor. In considering “intent”, Laskin J.A., at para. 117, said:

The court should examine the entire document to ascertain the parties intention. If the court is uncertain about the correct interpretation it may resort to extrinsic evidence to assist it. …Subsequent conduct may be used to interpret a written agreement because “it may be helpful in showing what meaning the parties attached to the document after its execution, and this in turn may suggest that they took the same view at the earlier date”. (authorities omitted)

ii) Mistake

[78] Professor Fridman, in The Law of Contracts in Canada (sixth Edition) (Toronto: 2011, Carswell), at para. 13, identifies the essence of a contract in the following manner:

Agreement is at the basis of any legally enforceable contract. There must be a consensus ad idem. Without a meeting of the minds of the parties there can be no contract.

[79] In Chapter 7, Professor Fridman addresses mistake by one or both parties, reporting such may create a problem in finding a valid and binding agreement. He identifies three types of mistake: common, mutual and unilateral. A common mistake is when the parties make the same mistake. A mutual mistake involves both parties being mistaken, but their mistakes are different. A unilateral mistake occurs when only one of the parties is mistaken.

[80] At paras. 251-252, Professor Fridman refers to the confusion in the caselaw between common and mutual mistake but concludes there is little, if any theoretical or practical effect flowing from the differentiation in the terms, saying:

…In the final analysis, the rationale for invalidating the alleged contract at common law is the same: was there any error as to the intention of the contract…

[81] A unilateral mistake is treated differently, at paras. 252-254 Professor Fridman identifying relevant principles, namely:

a) If the unmistaken party is ignorant of the other’s mistake, the contract will be valid: and,

b) If the unmistaken party knows of ought to have known of the other’s mistake, any purported agreement may not be enforceable on the ground that equity will not permit a party to take advantage of the error.

[82] In Lee v. 1435375 Ontario Ltd., 2013 ONCA 516, Strathy J.A., as he then was, addressed common mistake, at paras. 37-39, saying:

37.The formation of a legally binding contract requires a meeting of the minds- consensus ad idem. When the meeting of the minds is based on common error as to some fundamental fact, the parties’ agreement, viewed objectively, is “robbed of all efficacy”: Ron Ghitter Property Consultants, at para. 13, referring to M.P. Furnston, Cheshire, Fifoot and Furston’s Law of Contract, 14th ed. (London: Butterworths, 2001).

38. The motion judge accepted the test set out by Lord Atkin in the famous decision of the House of Lords in Bell v. Lever Brothers Ltd. (1931), [1932] A.C. 161 (U.K. H.L.), at para 225:

The proposition does not amount to more than this that, if the contract expressly or impliedly contains a term that a particular assumption is a condition of the contract, the contract is avoided if the assumption is not true.

39. In R. v. Ontario (Flue-Cured Tobacco Grower’s Marketing Board), [1965] 2 O.R. 411(Ont. C.A), at para. 24, this court accepted the following definition taken from William R. Anson, Principles of the English Law of Contracts and of Agency in Relation to Contract, 21st ed. By A.G. Guest (Oxford: Clarendon Press, 1959):

Where the parties contract under a false and fundamental assumption, going to the root of the contract, and which both of them must be taken to have had in mind at the time they entered into it as the basis of their agreement, the contract is void.

[83] Not every mistake will invalidate an agreement. The mistake must be fundamental, as Fraser C.J. addressed in Ron Ghitter Property Consultants Ltd. v. Beaver Lumber Co., 2003 ABCA 221. At paras. 10, 11, and 14, the concept is addressed as follows:

10. There are, of course, many reasons why parties may never reach consensus ad idem. Mistake is one of them. The manner in which mistake may prevent formation of a contract was explained by Lord Phillips, M.R. in Great Peace Shipping v. Tssvliris Salavage (2002), [2003] Q.B. 679 (Eng. C.A.) at 690:

A mistake can be simply defined as an erroneous belief. Mistakes have relevance in the law of contract in a number of different circumstances. They may prevent the mutuality of agreement that is necessary for the formation of a contract. In order for two parties to conclude a contract binding in law each must agree with the other the terms of the contract. Whether two parties have entered into a contract in this way must be judged objectively, having regard to all the material facts. It may be that each party mistakenly believes that he has entered into such a contract in circumstances where an objective appraisal of the facts reveals that no agreement has been reached as to the terms of the contract.

11. But to prevent the formation of a contract, the mistake must be fundamental, in the sense that it must go to an essential term of the alleged contract. As explained in Cheshire, Fifoot and Furmstom, Law of Contract, supra, at 270:

Translated into the familiar rubric of offer and acceptance, this means that the only type of mistake which is ever capable of excluding offer and acceptance is one that prevents the mistaken party from appreciating the fundamental character of the offer and acceptance.

14. The test to determine whether a mutual mistake prevents the formation of an agreement necessarily includes the following:

15. Has there been a mistake?

16. Were the parties, on an objective basis, ad idem notwithstanding any alleged mistake?

17. If not, is the mistake fundamental?

iii) Shareholder Agreements

[84] Section 108, Business Corporations Act, permits shareholders to enter into unanimous shareholder agreements. Such agreements have become common, allowing shareholders to address operation of the business, future events such as sale or disagreement and other matters.

[85] There is no dispute as to the validity of the initial shareholder agreement, dated April 27, 2001. But there were two subsequent purported agreements, at least one being in dispute, namely the Letter of Understanding, including whether it qualifies as a shareholder agreement.

[86] Duha Printers (Western) Ltd. v. R., [1998] 1 S.C.R. 795 (S.C.C.) was an income tax case involving a shareholder agreement. At paragraph 3, Iacobucci, J. made reference to the common law preventing shareholders from agreeing to fetter or interfere with the direction of shareholders, observing that “…legislative intervention was needed to allow shareholders to choose their corporate control and management structure…”.

[87] Iacobucci, J. continued the discussion, at paragraphs 64-67 saying:

64 The advent of the USA, first in the CBCA and then in other statutes modelled after it, materially altered this situation by providing a mechanism by which the shareholders, through a unanimous agreement, could strip the directors of some or all of their managerial powers as desired by the shareholders. Rather than removing the directors from their positions, a USA simply relieves them of their powers, rights, duties, and associated responsibilities. This may be accomplished without specific formality; all that is required appears to be some unanimous written expression of shareholder will. The result, however, amounts to a fundamental change in the management of the company, as s. 140(5) of the Corporations Act provides that the shareholders who are parties to the USA assume all the rights, powers, duties and liabilities of the directors which are removed by the agreement, and that the directors are relieved of their duties and liabilities to the same extent. As I have already intimated, what is in effect created is an “incorporated partnership” with statutory force.

65 Stone J.A. opined that, if an agreement can be viewed as a USA within the definition in the Corporations Act, it is to be read alongside the corporation’s constating documents in determining the issue of de jure control. I agree. The fact that the USA has supplanted the long-standing principle of shareholder non-interference with the directors’ powers to manage the corporation, an exclusive right which is granted by the statute and the corporate constitution, clearly indicates that it is at least as important as the “traditional” constating documents in assessing de jure control. It would be truly artificial to conclude, only on the basis of the share register, the articles of incorporation, and the by-laws, that one shareholder has de jure control over the corporation by virtue of its apparent power to elect the majority of the board of directors, if a USA exists which limits substantially the power of the board itself.

66 In other words, the USA is a corporate law hybrid, part contractual and part constitutional in nature. The contractual element is immediately apparent from a reading of s. 140(2): to be valid, a USA must be an “otherwise lawful written agreement among all the shareholders of a corporation, or among all the shareholders and a person who is not a shareholder”. It seems to me that this indicates not only that the USA must take the form of a written contract, but also that it must accord with the other, general requirements for a lawful and valid contract. More generally, the USA is by its nature able to govern both the procedure for running the corporation and the personal or individual rights of the shareholders…

67 The constitutional element of the USA is even more potent than its contractual features. Numerous provisions of the Corporations Act that govern fundamental aspects of the running of the corporation, including the management of its business and affairs (s. 97(1)), the issuing of shares (s. 25(1)), the passing of by-laws (s. 98(1)), the appointment of officers (s. 116), and the situations in which a dissenting shareholder can request dissolution of the company (s. 207(1)(b)), are expressly made subject to the USA. …

[88] At paragraph 74, Iacobucci J. summarized the requirements for a valid unanimous shareholder agreement, namely:

a) It must be otherwise lawful;

b) It must be among all of the shareholders; and

c) It must restrict, in whole or in part, the powers of the directors to manage the business and the affairs of the corporation.

[89] Bernier v Kinzinger, 2022 ONSC 1794, involved a shareholder’s dispute and whether there was an agreement to grant shares to one of the parties. At paragraph 48, Pattillo J. made reference to the well-known principal that “…parties to a contract may, by mutual agreement, expressed or implied, as determined by their words or conduct, rescind or vary their contract.” Citing Chitty on Contracts, at paragraph 50 he went on to say:

…A recission of the contract will also be implied where the parties have effected such an alteration of its terms as to substitute a new contract in its place. The question whether a recission has been effected is frequently one of considerable difficulty, for it is necessary to distinguish a rescission of the contract from a variation which merely qualifies the existing rights and obligations. If a rescission is effected the contract is extinguished; if only a variation, it continues to exist in an altered form. The decision on this point will depend on the intention of the parties to be gathered from an examination of the terms of the subsequent agreement and from all the surrounding circumstances. Recission will be presumed when the parties enter into a new agreement which is entirely inconsistent with the old, or, if not entirely inconsistent with it, inconsistent with it to an extent that goes to the very root of it.

iv) Waiver

[90] The issue of waiver was addressed in Saskatchewan River Bungalows Ltd. v. Maritime Life Insurance Co., [1994] 2 S.C.R. 490 (S.C.C.). At paragraph 499, Major J. identified waiver occurring “…where one party to a contract or to proceedings takes steps which amount to foregoing reliance on some known right or defect in the performance of the other party.” He then cited, with approval, the following statement from Federal Business Development Bank v. Steinbock Development Corp. (1983), 42 A.R. 231 (Alta.C.A.):

The essentials of waiver are thus full knowledge of the deficiency which might be relied upon and the unequivocal intention to relinquish the right to rely on it. That intention may be expressed in a formal legal document, it may be expressed in some informal fashion or it may be inferred from conduct. In whatever fashion the intention to relinquish the right is communicated, however, the conscious intention to do so is what must be ascertained.

[91] At paragraph 500, Major J. concluded:

Waiver will be found only where the evidence demonstrates that the party waiving had (1) a full knowledge of rights; and (2) an unequivocal and conscious intention to abandon them. The creation of such a stringent test is justified since no consideration moves from the party in whose favour a waiver operates. An overly broad interpretation of waiver would undermine the requirement of contractual consideration.

Discussion and Analysis

i) Overview

[92] Having regard to the evidence, the failure of the business cannot be said to have been unexpected. It was, however, a surprise to the parties. Perhaps their lack of business experience was a factor as they did not consider obvious warnings or “red flags”, including:

a) establishing a business with a family member;

b) only two of four owners had the financial resources;

c) the other two would be responsible for day-to-day operations and more financially dependent on the success of the business;

d) minimal funds were used to acquire the business; and

e) significant loans were needed to finance the purchase and for ongoing operations.

[93] Another factor, not addressed in evidence, was the parties failure to notice the changing landscape in franchise operations. They acquired the franchise stores when the franchisor was the original owner of M&M. The franchise model then in place was financially rewarding for both the franchisor and the many franchisees. But, long before 2001, changes had been occurring in other franchises. New franchisors, or a new management team, were imposing new terms to benefit themselves and to the detriment of franchisees. The parties neglected to consider the potential for change as had been occurring in many of the largest franchise operations in Canada and elsewhere.

[94] The parties made a wise decision to pursue meditation in 2012. As Mr. Brown observed, they needed to resolve their personal conflict so that they could work together in addressing the dispute with M&M. As hereinafter discussed, the mediation process was flawed. Mr. Brown was a volunteer, not a professional mediator. Full financial disclosure was not provided. The parties should have known the financial details of the business or, at least, have consulted the accountant or invited him to be involved in the process. Failure to address the financial information that was available lead to mediation that is now challenged.

[95] The parties should have also considered mediation, or some other process to resolve this dispute. Rather, they have chosen the most expensive forum to address their dispute and the litigation expense may well exceed the amount in dispute.

[96] In the absence of documents from the corporate minute book being tendered in evidence, and in response to my inquiry, counsel confirmed:

a) there are no by-laws or resolutions impacting this litigation; and,

b) the corporate financial statements prepared by the accountant were approved annually by resolutions of the directors and shareholders.

[97] The primary corporate documents relevant to the issues are the shareholder agreement and Letter of Understanding. The terms of the shareholder agreement are not in dispute. Nor are the financial statements of the corporation.

ii) Credibility and Evidentiary Findings

[98] In general terms, the parties presented their evidence in a credible manner. There can be no issue regarding the credibility of Mr. Brown and Mr. Drouillard, both being independent and having no interest in the outcome.

[99] There are concerns with some of the evidence presented, perhaps better described as reliability. As to the parties, in my view, some of their recollection of events or interpretation of documents or other matters was influenced by positions advanced. There are two critical areas in this regard, necessitating findings prior to proceeding with the analysis.

a) Responsibility for Financial Matters

[100] The arrangement between the parties required the Charters to manage the day-to-day operations of the business. Robert would monitor the financial aspects. The Charters go further, placing responsibility for financial matters on Robert and claiming to have no knowledge of same. They also say they were dependant on him with respect to all financial dealings.

[101] This evidence is rejected for the following reasons:

a. the Charters were aware of the initial equal investment by the couples and of the loans required to finance the purchase and for business operations;

b. the Charters also knew the Bentleys provided a guarantee for the bank loans and that the bank required a partial repayment when the Bentleys moved to Cambridge;

c. the Charters knew that over time the contributions by the couples were not provided on a proportionate basis;

d. as the managers of the stores, the Charters were aware of some, at least, financial circumstances including declining sales and increasing franchise expense;

e. the parties met with Mr. Drouillard annually to review the corporate financial statements and they signed the resolutions approving same;

f. the Charters had access to Mr. Drouillard at any time and did consult him before the mediation;

g. the Charters had access to bank statements, as directors, and could have contacted the bank for that purpose, independent of the Bentleys;

h. all of the parties had a fiduciary duty under the Business Corporations Act, including an obligation to make themselves aware of the financial circumstances of the corporation; and

i. Robert was not appointed as the managing director of the corporation and, therefore, all parties shared that responsibility as directors.

[102] I conclude the Charters, at the very least, had a general understanding of the financial circumstances. To the extent some information was lacking, they had an obligation to make inquiry so that they could participate in making informed decisions for the corporation. It would be improper to rely on only one director. Equity does not permit a litigant to rely on his/her own lack of diligence and thereby gain an advantage. Simply put, the Charters should have known.

b) Financial Information Provided to Mediator

[103] The financial information for the mediation was provided by Robert. There is a disagreement as to what that information was meant to convey.

[104] Mr. Brown understood the corporate debt was $420,000, based on this information, and recorded the details in his notes. Robert says the $420,000 was an estimate of the debt owing by the corporation to him and Carla (later determined to be $450,000). He reported that was the information provided to Mr. Brown.

[105] I accept the evidence of Mr. Brown and reject that presented by Robert for the following reasons:

a. Mr. Brown made notes at the time, specifically recording various debt items, and, while he may not now recall all matters discussed, a record made at the time is more persuasive and reliable than memory of the event years later;

b. Robert did not make notes during or after the meeting, but did acknowledge the numbers recoded by Mr. Brown “do make sense”;

c. Robert did not request information from the accountant prior to mediation, providing details to Mr. Brown based on his understanding of the situation;

d. Mr. Brown did not record the debt as owed only to the Bentleys;

e. It would be illogical to discuss only the debt of the Bentleys during mediation when there was also debt owing to the Charters and, as well, third party debt, Robert being aware of both of these other debts; and,

f. It would be even more illogical to mediate a resolution that results in only the Bentley’s being paid in full before any amount would be paid to the Charters, save the sweat equity amount of $30,000.

[106] Conversely, if the financial information provided by Robert only involved the debt owing to the Bentleys, it would have been a material misrepresentation by him given the reference to “outstanding debt” and “legitimate outstanding debt” in the Letter of Understanding.

[107] I conclude the intent of the mediation was to consider all debt owed by the corporation.

iii) Letter of Understanding

[108] The Letter of Understanding identified two scenarios, sale at $400,000 and sale at a higher amount than $400,000. Regardless, there are two matters addressed in this document:

a. Payment of $30,000 to the Charters; and

b. Payment of the remaining funds.

[109] The proposed payment of $30,000 to the Charters was referred to as “sweat equity”, a reference to the services they provided to the corporation and intending to lead to increasing the parties equity. All of the parties made reference to a discussion of this payment, ultimately agreed in the document. In my view, such a payment was logical, made good business sense and was consistent with the circumstances known to the parties, for the following reasons:

a. the Bentleys contributed a larger portion of the funds needed by the corporation but were not involved in the daily management of the business and had an independent source of income;

b. the Charters were the managers of the stores and were financially dependant on the corporation as it provided their sole source of income;

c. the parties had agreed on an aggressive plan to repay debt, a greater benefit to the Bentleys as they had provided a guarantee to the bank;

d. the Charters were paid a salary of $30,000 each, as agreed, which must be considered modest, being only slightly above minimum wage; and,

e. Robert informed Mr. Brown that he was putting money aside for Donna and Peter, an indication of support for his sister and a recognition of the financial disparity between the parties.

[110] The second item in the Letter of Understanding addressed payment of debt and distribution to shareholders. The concern is obvious.

[111] The Letter of Understanding refers to “proceeds” and “legitimate outstanding debt”, neither term being defined in the document. Interpretation of these terms is said to be required. It is not clear why given the nature of these terms.

[112] At the time of mediation, the parties were contemplating sale of the franchise stores and the distribution of funds thereafter. In those circumstances, proceeds had to have been meant to describe net sale proceeds. Sale expense and third-party debt were required to be paid before any distribution to shareholders, given the priority of same.

[113] There is no suggestion of illegitimate debt. Accordingly, legitimate debt would have included all debt owed by the corporation but, having regard to net sale proceeds, the only remaining debt was that owed to the shareholders.

[114] The Bentleys say this debt was limited to the monies owed to the, previously rejected. The Charters suggest the $420,000 referred to all corporate debt, yet their pleadings only address third-party debt. That evidence is rejected. As above, I conclude the intent was to address all shareholder loans.

[115] At the time of mediation, the total debt of the corporation was $751,362, with $590,550 of that amount owed to shareholders. None of the parties consulted the accountant to ascertain the debt. They should have.

[116] There was clearly a mistake. The purpose of the mediation was to establish a formula for the distribution of funds. Hence, the discussion was meant to address $590,550, not $420,000. The difference is significant, a material mistake.

[117] As Robert provided the financial information, the Charters say if there was a mistake it was a unilateral mistake by Robert. They claim to have been unaware of his mistake. This position was previously rejected. I conclude the Charters knew, or ought to have known, the extent of the corporate debt. Indeed, Donna spoke to the accountant prior to mediation and was aware of the debt owing to her and Peter. The Charters also knew the debt owed to the Bentleys was significantly higher.

[118] In result, I conclude this was either a common or mutual mistake. With reference to Professor Fridman’s test, I see no difference in the classification as there was no meeting of the minds on this fundamental term.

[119] By December 1, 2012 the corporation was insolvent. Debts exceeded assets. There were insufficient funds on had to pay creditors. Financial contributions by the parties were required. The parties could have considered an assignment in bankruptcy by the corporation.

[120] Regardless, there was no evidence to suggest any of the parties intended to waive their rights, either by the wording in the Letter of Understanding or by their conduct. Ignorance of the financial circumstances of the corporation cannot be considered waiver.

[121] Salah recognizes that the interpretation of a contract may render one or more terms ineffective. In my view, a common or mutual mistake can have the same result.

[122] I conclude:

a. there was an agreement to pay the first $30,000 to the Charters; and

b. there was no agreement as to the distribution of the remaining funds.

iv) Shareholders Agreement

[123] Subject to my determination above, the Letter of Understanding met the requirements of section 108 and as identified in the caselaw to be considered a shareholder agreement. The parties were then attempting to establish a formula for the distribution of funds on the sale of the stores. This, I conclude, demonstrated an intent to vary of replace some of the terms in the initial shareholder agreement. However, they were only successful in terms of the sweat equity payment to the Charters.

[124] The Letter of Understanding must be considered in the circumstances as they existed on December 1, 2012. The dispute with M&M was ongoing and while litigation may not have been specifically addressed it was a possibility, perhaps a probability, as that was the process used by Mr. Brown. But what could not have been known in December 2012 was the time required to sell the stores and the funds needed to finance operation and the litigation that followed.

[125] The financial contribution required after December 2012 was considerable. There were outstanding accounts payable, particularly for franchise payments. The litigation would be expensive. The Bentleys had access to the funds needed by the corporation. The Charters did not. As before, there was no evidence to suggest any of the parties intended to waive their rights in terms of these financial contributions. Nor was there any evidence to suggest that parties had agreed to subsequently distribute funds on a 72:28 basis.

[126] It would be improper, in my view, to treat subsequent loans to the corporation by the shareholders on this pro rata formula as suggested on behalf of the Charters. Regardless of the Letter of Understanding, the subsequent loans must be addressed by reference to the initial shareholder agreement and in the same manner as the prior loans. Only the sweat equity payment to the Charters can be treated differently.

v) Revised Debt Owed to Shareholders

[127] The adjusted amount owed to the shareholders was as follows:

Bentleys $304,092 Charters $237,898

[128] These amounts were subject to a determination regarding the $10,000 claimed, and received, by the Bentleys regarding frozen food said to have been taken by the Charters.

[129] The Charters denied the allegation of taking food. The onus of proof is on the Bentleys. The evidence of Robert was only a bald allegation with no detail presented as to what was purportedly taken or how he had determined it occurred. Further, he attributes a value of $10,000 but identified it only as an “estimate’. In result, there is a lack of evidence. Rather, it presents only as speculation. The onus of proof was not met. The claim to $10,000 is rejected.

[130] The Bentleys have received this amount. Accordingly, the debt owed to them is now reduced to $294,092.

vi) Distribution of Funds

[131] The parties agree on winding up the corporations. The estimated expense is $20,000. Such amount shall be held in reserve, perhaps by transfer to the corporate solicitors so that the bank account can be closed. Once the winding up is completed, any excess funds shall be distributed to the parties on a 51:49 basis. Conversely, any shortfall shall be paid by the parties in the same manner. The parties are direct to co-operate in the winding up process.

[132] Given the above reserve, there is $72,702 available for distribution to the parties. From this amount, $30,000 shall be paid to the Charters, leaving $42,702 on hand.

[133] The total debt owed by the corporation to the shareholders is $531,990 ($294,092 plus $237,898). Had funds been contributed on a proportionate basis, as required by the shareholders agreement, this debt would have been as follows:

Bentleys $271,315 Charters $260,675

[134] To correct the disproportionate contributions, and following the calculations provided by counsel for the Bentleys, $22,777 shall be paid to the Bentleys.

[135] The remaining $19,925 shall be distributed on a 51:49 basis as follows:

Bentleys $10,162 Charters $9,763

[136] I conclude there is no remaining debt owed by either party to the other.

Summary

[137] Judgment is granted on the terms herein. All other claims are dismissed.

[138] I expect counsel to resolve the issue of costs; failing which, brief written submissions, along with any offers to settle, are to be delivered to my chambers in Kitchener, in the following manner:

a. the party seeking costs shall serve their written material within 30 days of the release of this decision;

b. the party responding to the claim for costs shall serve their written material within 15 days thereafter; and

c. any reply submissions shall be served within 7 days thereafter.

[139] All submissions shall be forwarded to my attention by email, care of Kitchener.SCJJA@ontario.ca. If no written submissions are received within the prescribed time period, the issue of costs will be considered settled and the file will be closed.

D.J. Gordon J. Released: April 17, 2023