John Will v. Geo. A. Kelson Company Limited, 2023 ONSC 29
Court File No.: 21-658113-0000 Date: 2023-01-03 Ontario Superior Court of Justice
Between: John Will, Applicant And: Geo. A. Kelson Company Limited, Respondent
Before: A.P. Ramsay J.
Counsel: Patrick Monaghan, for the Applicant D. Lederman, for the Respondent
Heard: July 14, 2022
Reasons for Decision
A. Overview
[1] At the end of a lengthy employment relationship, the applicant sold the company shares held by him back to the respondent, his former employer. The dispute between the parties stems from that transaction. The respondent elected to pay for the shares in annual installments over a ten-year period, with interest to be paid on the outstanding balance owing. The parties differed on the method of calculating the interest as well as the timing of the payment of the accrued interest.
B. Nature of the Application
[2] The applicant commenced this application seeking an order for the payment of all past and future sums in the amount of $550,000 from the respondent, pursuant to the terms of a share purchase plan. In the alternative, the applicant seeks an order interpreting the provisions of the agreement and an order pursuant to r. 38.10 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 directing a trial of any issue which requires a trial. The applicant also seeks interest and costs.
C. Background
[3] The applicant, John Will, started his employment with the respondent, Geo. A. Kelson Company Limited (“Kelson”) in May of 1999 as Senior Project Manager. Kelson is a privately held family-owned company. By 2004, the applicant was the Vice-President of Design Build.
[4] Kelson created an Employee Share Purchase Plan (the “Plan”) giving employees an opportunity to invest in Kelson. Employees who participated in the Plan entered into a Share Ownership Agreement (collectively referred to as “the agreement”). The applicant participated in the Plan between May 2011 to May 2015, acquiring 40,500 of Kelson’s shares.
[5] A document entitled “Becoming an Owner: Employee Share Purchase Plan” (the “ownership agreement”), circulated to employees, included the following information:
“ This Employee Share Purchase Plan has been designed to provide you with an opportunity to invest in the company and benefit from its future growth…..
This plan will add a valuable benefit to your Total Rewards package consisting of your pay, bonus, and benefits….” …
The document describes the share offer, among other things, and includes a description of tax impact noting: “You pay tax on any capital gains when you sell your shares. Capital gains represent the increase in the value of the shares from the time you purchase the shares to the time you sell.
[6] The Plan provided the following information to prospective purchasers regarding selling the shares back to the company:
“ Your shares will be sold at the Fair Value determined by the previous year’s financials which are calculated and audited in February of each year. The Board of Directors reserves the right to pay out 10% of the value each year until 100% is paid.”….
If your employment ends or if you retire, any shares you own will (sic) sold back to the company.
[7] Subparagraph 3.1(b) of the Plan states:
“In the event the Corporation exercises its option to acquire any such Shares, the Corporation may, in its sole discretion, elect to pay the aggregate purchase price for such Shares (a) in full on the closing date of the transaction or (b) as to not less than 10% of such aggregate purchase price on the closing date of the transaction, with the balance, plus interest (at the prime rate quoted from time to time by the Corporation’s principal bankers), payable thereafter in annual instalments of not less than 10% of such aggregate purchase price.
[8] In January 2017, the applicant advised Kelson that he wished to sell his shares. He left the company soon afterwards. Kelson purchased all 40,500 of the applicants at a purchase price of $23.80 per share, or $963,900. There is no dispute between the parties that when the applicant sold his shares, he executed the necessary documents to transfer the shares, and had performed his side of the bargain.
[9] Kelson did not pay the full purchase price upon closing but rather elected to pay in annual installments of not less than ten percent of the aggregate purchase price, plus interest on any amount not paid. Kelson has made six payments as follows:
| Date | Principal Payment | Interest Payment | Total Payment |
|---|---|---|---|
| January 2, 2017 | $96,390.00 | $0 | $96,390.00 |
| January 3, 2018 | $96,390.00 | $2,804.75 (amortized) | $99,194.95 |
| September 30, 2018 | $96,390.00 | $5,182.00 (amortized) | $101,572.36 |
| September 30, 2019 | $96,390.00 | $8,989.76 (amortized) | $105,379.76 |
| September 30, 2020 | $96,390.00 | $0.00 | $96,390.00 |
| September 30, 2021 | $96,390.00 | $0.00 | $96,390.00 |
| Total paid to date | $578,340.00 | $16,977.07 | $595,317.07 |
[10] The applicant does not dispute that the interest rate used by Kelson to calculate the interest owed is correct. The applicant takes issue, however, with the interest payments received after the initial payment in January 2017. Kelson’s Comptroller and Chartered Accountant, Julie Johnson, initially communicated with the applicant. In 2018, the applicant reached out to Ms. Johnson after he received his second capital installment of $96,390 and interest in the amount of $2,804.95. Email exchanges between the two shows that Ms. Johnson agreed with the applicant’s position that he had in fact earned $25,244.54. Ms. Johnson indicated though that the interest was amortized over the remaining term.
[11] While the rate of interest fluctuated over time, the method of amortizing the interest accrued on the outstanding principal was initially used by Kelson for a period. In the result, Kelson paid the applicant $2,804.95 for the second installment, but issued a T5 for the full amount of $25,244.54. In the ensuing years, Kelson issued T5s to the applicant in the amount of $25,875.33 and $25,692.16, despite the applicant only receiving interest, amortized, in the amount of $5,182.36 and $8,099.76 over the same time frame. Kelson paid no interest in 2020 which triggered the initial request for information by the applicant personally, and, after he retained counsel, his counsel. Kelso did not respond. In her affidavit in response to the application, Ms. Kelson deposed that an explanation had already been provided to the applicant. On cross-examination, she testified that Ms. Johnson had complained to her about feeling harassed. The latter information was not communicated to the applicant.
[12] The applicant submits that he accepted, by his conduct, Kelson’s approach, that the capital and interest would be totaled and divided over the remaining term, but Kelson then repudiated its own approach thereafter advising him that he was not owed a dime.
[13] Kelson changed the timing of the annual payments, which resulted in the applicant receiving two payments in 2018. Kelson indicates it discovered in 2019 that the applicant had been overpaid. The CEO of Kelson, Michelle Kelson’s evidence is that interest should be calculated on the annual installments, and similar to a Visa account, interest was to be paid only if Kelson missed a payment.
[14] Both parties retained experts to calculate the overdue interest for the period of 2017 to 2021. The applicant’s forensic accountant, Brad Ebel of Matson Driscoll & Damico Ltd. (“MDD”) calculated the interest amount owing to the applicant as $86,563, whereas Kelson’s accountant, Chris Polson of Partner at PricewaterhouseCoopers LLP (“PWC”) indicates the amount outstanding is $82,141.18.
D. Position of the Parties
i. The Applicant
[15] The applicant asserts that Kelson failed to pay interest on overdue payments, failed to pay an outstanding installment in a timely fashion, and failed to communicate with him in breach of its agreement. In addition, although not set out in the Notice of Application, in his factum, and at the hearing, the applicant raised issues of repudiation of the contract by Kelson, anticipatory breach, and Kelson’s breach of its duty of good faith.
[16] The applicant submits that he tendered his shares and completely performed his part of the bargain. He argues that Kelson performed up to a point, but thereafter there was a complete failure of performance in two respects: failure to pay the interest and a failure to communicate and co-operate. The applicant submits that partway through paying the ten annual installment payments, Kelson reneged on its agreement claiming no interest was owed at all. The applicant argues that given the relationship between the parties, the applicant’s age, the applicant nearing retirement, and the amounts payable, communication between the parties was important. The applicant argues that Kelson walked away from the table, blocked his emails, and did not respond to his or his counsel’s questions, all which, the applicant argues, precipitated this proceeding.
[17] The applicant submits that Kelson’s conduct amounted to a breach of good faith. The applicant argues that all the contracts were Kelson’s. This was a contract of adhesion and also a contract that would require the employer to administer it over time, which would require dealing with the applicant. Kelson was obliged under the contract to pay the annual amount owed, determine the interest on a yearly basis, issue the appropriate tax documents, and administer the declining balance for the duration, which requires good faith.
ii. The Respondent - Kelson
[18] Kelson argues that while it interpreted the interest owing on the annual instalments differently, it is prepared to accept the applicant’s interpretation and will pay any amounts of interest outstanding. Kelson undertakes to abide by the applicant’s interpretation for the balance of the term.
[19] Kelson submits that the only dispute is the interest owing to the applicant over the balance of the term. It argues that the breach is the failure to pay the correct amount of interest is the breach, which amounts to a difference of approximately $4,500.00.
[20] Kelson argues that at the time of the hearing, the company had made six payments to the applicant totaling $595,317.07, of which $578,340.00 was allocated to the principal payment and $16,977.07 was allocated to interest owing. Kelson submits that it discovered in 2019 that the applicant had been overpaid for the years 2017 to 2019 as he was entitled to receive $481,950 plus interest for years 2017 to 2021. Kelson submits that the applicant admitted that only five instalments are owed to him, plus interest, but as the applicant was paid twice in 2018, only 4 annual installments are owed to him. Kelson submits that on cross-examination, the applicant confirmed that apart from the question of interest owed to him, Kelson has met all of its obligations under the Agreement.
E. Disposition
[21] I make the following disposition:
i. Kelson shall pay interest to the applicant on any principal balance outstanding, as agreed, for the balance of the term. ii. The overdue interest for the period of 2017 to 2021 is $82,141.18. iii. Kelson shall reissue the T5s to the applicant in the correct amount for 2018 and 2019 and shall co-operate with the applicant to provide any additional information required by Canada Revenue Agency. iv. I would dismiss the relief sought by the applicant for repudiation, anticipatory breach, or breach of the duty of good faith on the part of Kelson.
F. Analysis
i. How is the Contract to be interpreted?
[22] Since Kelson has agreed with the applicant’s interpretation on the interest owing, this issue appears to be moot. However, considering Ms. Kelson’s evidence on cross examination that she understood that interest was to be calculated on the annual installment, not the full balance, and that Kelson would only pay interest if it missed a payment just like a Visa account, some clarification is warranted. I agree with the applicant that interest should be calculated on the outstanding balance. Payment for the shares was due on closing; having exercised its option to make payments in installments over ten years, Kelson was obliged to pay interest on the debt which crystallized on the date the transaction closed. Kelson’s first approach therefore had been the correct one. There is no evidence that Ms. Kelson’s personal approach was implemented in its dealings with the applicant.
ii. Was Kelson’s conduct carried out in breach of its duty of good faith?
[23] The applicant argues that Kelson’s conduct, given the nature of the employment relationship, the unilateral change to the payment, and the applicant’s age, among other things, is indicative of bad faith. He argues that parties are obliged to perform their contractual duties honestly and reasonably and not capriciously or arbitrarily and relies on the Supreme Court of Canada decisions of Bhasin v Hrynew, 2014 SCC 71 [Bhasin] and C.M. Callow Inc v Zollinger, 2020 SCC 45 [C.M. Callow].
[24] The Notice of Application does not plead a breach of the duty of good faith, which is a separate and distinct contractual breach giving rise to a claim for damages. Neither party addressed in the materials if the court could determine whether Kelson was in breach of its duty of good faith in the absence of any notice to Kelson in the Notice of Application, or, for that matter, whether such a breach could occur in circumstances where an employee resigns, but there may be a breach of an agreement or plan, separate from the employment agreement. In this case, the share purchase plan was put in place by Kelson after the applicant had been employed with the company. The Plan afforded employees a chance to invest in the company.
[25] To the extent that it was raised, and argued, I am not satisfied on the evidence that there was a breach of good faith by Kelson. The Supreme Court of Canada noted that a breach of good faith is a separate contractual breach which may arise where an employer breaches its duty to act honestly in the performance of the employment contract: Bhasin, at para. 73, referencing Wallace v. United Grain Growers Ltd., at para. 98; Honda Canada Inc. v. Keays, 2008 SCC 39, at para. 58. Such a breach includes the termination of the employment relationship and gives rise to a claim for damages. In that Court’s recent decision of Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26, Kasirer J., speaking for the Court commented:
I recognize that, generally speaking, the mental distress that an employee might feel as a result of employer dishonesty is translated by law, in financial terms, as damages, and that, further, Mr. Matthews has declined to seek such damages here. Nevertheless, a proper acknowledgment that an employer’s conduct was contrary to the expected standard of good faith can transcend the request for damages, and may be meaningful for an employee in a way that a mere finding that reasonable notice was provided cannot. One aspect of this relates to dignity in the workplace, and the non-financial value associated with fair treatment upon dismissal [Internal citations omitted]
[26] While there was some dispute as to whether the applicant was terminated, forced to resign, or voluntarily resigned, I am satisfied, by the applicant’s own evidence when he was cross examined, that he resigned from Kelson. The applicant went on to work elsewhere. On the evidence, the applicant has not established that Kelson’s conduct was oppressive or unfair, or that the applicant was otherwise mistreated when his employment with Kelson was terminated. Both parties interpreted the interest provision differently. While Ms. Kelson’s later position is at odds with how Kelson had been dealing with the interest component, I do not find that Kelson’s action or conduct was dishonest or misleading. Kelson’s position that the applicant had been overpaid could be supported by the evidence. Both sides had agreed to the amortization approach. The applicant received two payments in 2018. Kelson is on track to pay off the debt owing ahead of schedule -in nine years as opposed to ten years called for by their agreement.
[27] Kelson has issued T5s to the applicant for interest totaling $76,812.03, whereas the applicant only received $16,077.07 in interest payments. While the applicant no doubt paid taxes on the full amount while, correspondingly, Kelson would have received a tax reduction, this was not an item noted by the applicant as part of the constellation of conduct that would amount to a breach of the duty of good faith. Kelson has agreed to work with the applicant to remedy the situation.
[28] The applicant complained that communications with Kelson was blocked which amounts to bad faith. Ms. Kelson testified on cross examination that Kelson blocked the communications because Ms. Johnson had complained to her that she felt that she was being harassed. Counsel for the Kelson conceded that it could have been handled better. I agree with him that this conduct does not give rise to a finding of bad faith. On the evidence, I do not find that Kelson’s grounds a finding of bad faith.
[29] In the result, I would dismiss this relief as it was not set out in the Notice of Application and, I am not satisfied, on the evidence, that there was any such breach.
iii. Did Kelson repudiate the contract/agreement?
[30] The applicant argued in its factum and at the hearing that Kelson’s refusal to pay interest signals its intention to no longer be bound by the terms of the agreement and amounts to a repudiation. The applicant says that he wants out of the agreement. The applicant’s Notice of Application does not seek any relief based on Kelson’s repudiation of the agreement.
[31] In Guarantee Co. of North America v. Gordon Capital, [1999] 3 S.C.R. 423, at para. 40 [Gordon Capital], the Supreme Court of Canada indicated that repudiation of a contract occurs where one party, by words or conduct, show an intention not to be bound by the contract.
[32] The innocent party has two choices: they can elect to treat the contract as still being in full force and effect and sue for damages for past or future breaches or, they may accept the repudiation and the contract is terminated, discharging each side from any future obligations: Gordon Capital, supra.
[33] The non-repudiating party must communicate the election to the other party within a reasonable time: Chapman v. Ginter, [1968] S.C.R. 560 at 568). The decision to treat the contract at an end may be found to have been sufficiently communicated by the innocent party’s conduct: John D. McCamus, The Law of Contracts, (Toronto: Irwin Law Inc., 2005) at pp. 641-42; Place Concorde East Limited Partnership v. Shelter Corporation of Canada (2006), at para. 50. In my view, the commencement of a legal proceeding, such as the application in this instance, is tantamount to sufficient communication. The application was commenced soon after the applicant (and his counsel) did not receive any response from Kelson. However, on the evidence, I do not find that Kelson repudiated the contract.
[34] A repudiation occurs in circumstances where the breach deprives the innocent party of substantially the whole benefit that it was intended that the party should have obtained from the contract: Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426 at 499-500. Thus, a breach of contract that arises to the level of a substantial failure of performance can operate as a repudiation of the contract: see S.M. Waddams, The Law of Contracts, 5th ed. (Toronto: Canada Law Book Inc., 2005), at para. 587. Kelson has made the minimum ten percent of the purchase price each year, called for by the agreement. Until Ms. Kelson’s involvement, the interest owing was being calculated on the entire balance of the debt, amortized over the remaining term.
[35] The Supreme Canada makes it clear that a breach that allows the non-repudiating party to elect to put an end to all unperformed obligations of the parties is an exceptional remedy, available only in circumstances where the entire foundation of the contract has been undermined, that is, where the very thing bargained for has not been provided: Hunter Engineering, supra; see also Gordon Capital, supra, at para. 50.
[36] In Place Concorde East Limited Partnership v. Shelter Corporation of Canada (2006) Laforme J.A., speaking for the Court, set out the five factors articulated by Weiler J.A in 968703 Ontario Ltd. v. Vernon (2002), at para. 16 to assist the court in determining whether a breach amounts to being a substantial breach. The factors are:
- the ratio of the party’s obligation not performed to the obligation as a whole;
- the seriousness of the breach to the innocent party;
- the likelihood of repetition of the breach;
- the seriousness of the consequences of the breach; and
- the relationship of the part of the obligation performed to the whole obligation.
[37] As the Supreme Court noted in Hunter Engineering, putting an end to the contract is an exceptional remedy, and is only to be ordered in circumstances where the very thing bargained for has not been provided. The court does not find that Kelson has shown an intention to no longer be bound by the terms of the agreement.
[38] The interest component, while not insignificant, is a minor component of the bargain that the parties agreed to. The dispute between the approach to the interest calculation and the timing of payment is less substantial than a possible dispute about non-payment of the annual installments, called for under the agreement. In this respect, the present case is distinguishable from Cosolo v Geo. A. Kelson Limited, 2017 ONSC 4150 (S.C.J.); aff’d 2018 ONCA 318 [Cosolo]. In Cosolo a departing employee sold his company shares back to Kelson for $891,820.00. Kelson paid the first of ten installments plus interest but refused to make any further payments on the basis that Mr. Cosolo had made misrepresentations and had breached his fiduciary duties owed to Kelson. Perell J. found that Kelson had repudiated its contract to pay Mr. Cosolo the installments for the shares. The facts are vastly different here. The agreement provides that 10 annual instalments of $96,390 plus applicable interest are owing in years 2017 to 2026. Having regard to the factors in Vernon, Kelson has made the “annual instalments of not less than 10% of such aggregate purchase price” in accordance with the agreement. Kelson has not missed a payment; four payments remain. As of 2022, the amount that Kelson owes is $496,390, which it anticipates paying off faster than the 10 years – that is within nine years, because of the double payment in 2018.
[39] By the applicant’s own admission, aside from the interest, Kelson has performed all of its obligations under the agreement. I agree with Kelson that the failure to pay the correct amount of interest is not a substantial breach and does not put an end to the agreement between the parties (at the election of the applicant). Under the agreement, Kelson is obliged to pay interest “as to not less than 10% of such aggregate purchase price on the closing date of the transaction, with the balance, plus interest (at the prime rate quoted from time to time by the Corporation’s principal bankers), payable thereafter in annual instalments of not less than 10% of such aggregate purchase price”. In my view, as long as Kelson has paid annual instalments of not less than 10% of the aggregate purchase price, which it has, and will pay interest on the balance, which it will ultimately do by the end of the ten-year term, the court does not find that there has been a fundamental breach of the agreement nor any breach which deprives the applicant of substantially the whole benefit that it was intended that he receive under the agreement. Admittedly, Kelson has conceded that it has breached the agreement by not paying the correct interest. The agreement is silent as to when the accrued interest on the outstanding principal is to be paid. The parties had agreed the interest would be amortized. The dispute really arose because of the second payment made by Kelson in 2018 and its position that the applicant had been overpaid. Arguably, Kelson ought to have conveyed its position to the applicant. Without deciding the issue, since it was Kelson which voluntarily changed the timing of the payments, I accept that there is some explanation for Kelson’s position.
[40] Kelson will ultimately pay the full interest accrued on the outstanding principal balance by the end of the term. It is not clear, on the evidence before me, that Ms. Kelson’s understanding as to the approach to calculating the interest on the outstanding balance was implement by Kelson, and the court is mindful of the fact that this evidence was elicited after the proceeding had commenced, and Ms. Kelson conceded that she did not know what Ms. Johnson was doing.
[41] There is not a scintilla of evidence before me to establish that Kelson intends not to be bound by its agreement in the future. Kelson has given an undertaking to abide by the applicant’s interpretation of the interest payable and will pay any amounts of interest outstanding. As Kelson has met its obligation to pay not less than ten percent of the purchase price annually, I find that there has not been a fundamental breach of the agreement. In my view, the applicant has not been deprived of substantially the whole benefit of the agreement.
G. Past Interest Outstanding
[42] The parties have calculated the overdue interest for the period 2017 to 2021. There is a difference of only $4,442 between the two calculations. I accept the Kelson’s figure of $82,141 over the applicant’s calculation of $86,562 as Kelson used the actual, or correct, interest rate whereas the applicant predicted what the interest would be, resulting in an initial discrepancy of $2,267, then compounded by the accrual of interest on the interest, resulting in an additional discrepancy of $2,155.
H. Costs
[43] There the conclusion of the hearing, counsel made submissions on costs.
[44] Despite the fact that success is divided, in this case, the applicant should have his costs. Had Kelson responded to the applicant in a timely fashion, the application proceeding could have been avoided. Moreover, there were five Civil Practice Court Attendances, though admittedly three of those occurred before counsel for Kelson was appointed, and at one of those case conferences he sought to narrow the issues to be determined on the application. And, although this is not a reflection on counsel for Kelson, who was thorough in his arguments, Kelson only accepted the applicant’s interpretation of the interest after the factum was delivered. Finally, there are instances where even a successful party may be ordered to bear the costs. In this case, I consider the failure of Kelson to respond, which precipitated the commencement of these proceedings, the timing of the concession made by Kelson with respect to the interest (after cross examinations were completed and when Kelson delivered its factum), and the fact that Kelson, through the manner in which it has dealt with the interest payment created uncertainty which required clarification, including remedying the situation with Canada Revenue Agency, which will require steps to be taken by the parties, post judgment. The last mentioned was entirely avoidable.
[45] Neither party provided a Costs Outline. Both the Rules of Civil Procedure and the Consolidated Practice Direction requires the parties to exchange a Costs Outline before the Hearing and bring a copy to the hearing (uploaded to CaseLines). Part V, clause 19 of the Toronto Consolidated Practice Direction provides as follows:
Parties are reminded that unless they have agreed on the costs of a motion or application, Rule 57.01(6) requires every party who intends to seek costs for a motion or application to give to the other party before the hearing of the motion or application a costs outline not exceeding three pages in length (Form 57B) and bring a copy to the hearing. It is within the discretion of the court not to entertain cost submissions unless the parties have complied with this rule [Emphasis added].
[46] In the absence of a Costs Outline, and given the divided success, I am not prepared to award costs to the applicant in excess of $50,000. However, having regard to Mr. Lederman’s own costs of approximately $25,000.00, and his involvement later in the proceedings, the extent of the materials filed, the cross examinations completed of both Mr. Will and Ms. Kelson, and the multiple attendances at Civil Practice Court (five times) and multiple days of hearing, in my view, an award of partial indemnity costs of $35,000.00, plus HST of $4,550, is appropriate for legal fees. As for the applicant’s disbursements, of which $8,676.63 relate to three accounts by MDD, I would allow his disbursements account of $10,242.02 inclusive of HST. It was entirely reasonable, in the circumstances, for the applicant to secure the expert reports at the time.
A.P. Ramsay J. Released: January 3, 2023