Wallace v. Allen et al. [Indexed as: Wallace v. Allen]
93 O.R. (3d) 723
Court of Appeal for Ontario,
Laskin, R.P. Armstrong and MacFarland JJ.A.
January 16, 2009
Contracts -- Damages -- Measure -- Trial judge erring in limiting damages for loss of opportunity to acquire business to three months -- Three months not adequate time to find another business opportunity and negotiate and close deal -- Reasonable time being seven months.
Contracts -- Formation -- Offer and acceptance -- Parties executing letter of intent with respect to purchase of shares of business -- Purchaser not present on date set for closing as he had gone to Florida with vendor's knowledge and approval -- Vendor refusing to close -- Trial judge erring in dismissing purchaser's subsequent action on basis that parties did not intend that there be binding contractual relationship until final share purchase agreement was signed -- Letter of intent evidencing intent of parties to be bound.
Contracts -- Specific performance -- Specific performance not appropriate remedy for loss of opportunity to acquire business where plaintiff was entrepreneur engaged in acquisition of businesses.
The defendant was interested in selling his business, and the plaintiff expressed an interest in acquiring it. The parties executed a "letter of intent for the share purchase and the sale" of four companies. Both parties acknowledged that all the terms they considered necessary or essential to the transaction were agreed upon and included in the letter of intent. Shortly before the date set for closing, the parties and their solicitors met for the purpose of finalizing the specific terms of the share purchase agreement. On the closing date, the plaintiff was not present, as he had gone to Florida with the defendant's knowledge and approval. The defendant treated the transaction as at an end and refused to close. The plaintiff sued. The trial judge dismissed the action on the basis that the parties did not intend that there be a binding contractual relationship until the final share purchase agreement was signed. The plaintiff appealed.
Held, the appeal should be allowed.
The trial judge erred in law in determining that the parties did not intend to be bound by the letter of intent. When read as a whole, the letter of intent evidenced the intention of the parties to be bound. Moreover, the conduct of the parties after signing the letter of intent demonstrated that they considered themselves legally bound to its terms.
Specific performance was not an appropriate remedy in the circumstances. While the business in question might be unique in what it did, the plaintiff was an entrepreneur who engaged in the acquisition of businesses for a living. An award of damages was the appropriate remedy.
The trial judge erred in limiting the plaintiff's damages to his loss of financial benefit for the first three months he would have operated the business. Three months is not an adequate time for a businessman to search out and find another opportunity, negotiate a new agreement of purchase and sale, and close that transaction. A reasonable time would be seven months. The damages were increased accordingly. [page724]
APPEAL from the judgment of Eberhard J., (2007), 2007 8935 (ON SC), 85 O.R. (3d) 88, [2007] O.J. No. 1074 (S.C.J.) dismissing an action for specific performance and damages.
Geoffrey D.E. Adair, Q.C., and T. Agape Lim, for appellant. J. Daniel Dooley and Tiffany V. Little, for respondents.
The judgment of the court was delivered by
[1] MACFARLAND J.A.: -- This is an appeal from the judgment of Justice M.P. Eberhard dated March 22, 2007 wherein she dismissed the plaintiff's claim for specific performance and damages. Overview
[2] In August 2004, Graham Allen mentioned to his friend and neighbour, Kim Wallace, that he wanted to sell his business, Region of Huronia Environmental Services Limited ("Region") and retire. Wallace expressed an interest in acquiring the business.
[3] On September 24, 2004, after weeks of negotiation and discussion, the parties executed a document which they described as "a letter of intent for the share purchase and the sale of the following companies". There followed a list of the four companies of which Graham Allen and his wife Gayle were the major shareholders. Both parties acknowledged that all of the terms they considered necessary or essential to the transaction were agreed upon that day and included in the agreement.
[4] On September 27 and thereafter, Wallace began to attend the business premises daily with a view to learning the business, getting to know the customers and staff, and doing everything necessary to provide a smooth transition in the ownership of the business from Allen to Wallace.
[5] On December 6, 2004, Wallace's solicitor, John Nichols, sent a proposed first draft of a Share Purchase Agreement to John Cockburn, solicitor for Allen. Mr. Cockburn prepared a lengthy, detailed memorandum of issues he considered necessary to address.
[6] On December 9, 2004, the parties, their solicitors and Allen's accountant met for the purpose of finalizing the specific terms of the Share Purchase Agreement. The trial judge found that all issues raised between the parties that were intended to form part of the final Share Purchase Agreement were resolved and agreed to at that meeting, or at the very latest, within a day or two thereof.
[7] While December 29, 2004 was selected as a target date for closing, as the trial judge found, time was not of the essence. [page725]
[8] While Allen and his solicitor were in attendance and prepared to close the transaction on December 29, Wallace did not attend on that date.
[9] There was evidence that Wallace had gone to Florida to be with his family and did so with Allen's knowledge, approval and, indeed, encouragement. When Wallace did not appear on December 29, Allen treated the transaction as at an end and refused to close the deal or to propose an alternative date for closing and making time of the essence in relation to that new date.
[10] Wallace sued for specific performance and the trial judge dismissed his action, essentially finding that the parties did not intend that there be a binding contractual relationship until the final Share Purchase Agreement was signed.
[11] For the reasons that follow, I would allow the appeal, set aside the judgment dismissing the action with costs and in its place grant judgment in favour of Wallace for damages and costs. The Facts
[12] In the weeks after Wallace first told Allen he would be interested in purchasing Allen's business, the parties worked hard at negotiating an agreement. During these negotiations, Wallace presented two draft Letters of Intent to Allen, which he refused to sign because, as he put it, "there remained too many things up in the air".
[13] On September 23, 2004, the parties and their accountants met with a view to finalizing the outstanding issues. The sticking point at that time was Allen's requirement that Wallace provide a letter of credit to secure his obligations. Wallace refused to do so but offered a limited personal guarantee. The following day after Gayle Allen met with the Allens' solicitor and taken legal advice on the issue of the letter of credit as against a personal guarantee, the parties again met to discuss a further draft Letter of Intent prepared by Wallace. They also discussed a number of other matters not addressed in the Letter of Intent, including Graham Allen's personal tools and pick-up truck, Gayle Allen's Hummer and Allen's motorhome, all of which were thought to be assets of the business. Both parties agreed they reached agreement that day on all matters contained in the Letter of Intent, as well as on the additional items that were to be turned over to the Allens on closing "free and clear". That is to say, both parties acknowledged that all of the terms they considered necessary or essential to the transaction were agreed upon on September 24, 2004.
[14] Wallace's evidence was that he told Allen he would not work in the business without a binding agreement. [page726]
[15] Wallace's intention, shared with Allen, was to bring his friend Ralph Nelson into the business right away. Nelson at the time had secure employment elsewhere. For Wallace it was necessary he and Allen have a firm deal before he could ask Nelson to leave a secure job and come to work at Region. Nelson started to work with Region in early October 2004. In November 2004, Wallace bought a home in Orillia for his son David, who was also going to be involved in the business.
[16] Wallace himself worked at the business daily from September 27 through December 22, when he left to join his family in Florida.
[17] Within two weeks of signing the letter of intent, the Allens held a special employee meeting where he announced his retirement and the fact that he had "sold" his company and that the "deal was solid". Allen then turned the floor over to Wallace, who spoke to the employees.
[18] At the company Christmas party in late November 2004, Allen, as he had throughout the fall of 2004, introduced Wallace to employees, customers and business contacts as the "new owner" of Region. Thereafter, Wallace spoke to all those in attendance.
[19] Gayle Allen, in her Christmas card message to family and friends on December 4, wrote that the Allen family had "sold our business".
[20] On December 9, 2004, the parties met with their solicitors and Allen's company accountant, Tom Hards. Everyone understood the purpose of this meeting was to finalize the terms of the Share Purchase Agreement.
[21] The parties agreed that all of the issues raised and discussed at the December 9 meeting were resolved and agreed upon by December 16. December 29, 2004 was selected as a target date for closing.
[22] Allen acknowledged that when he entered his solicitor's office on the morning of December 29, 2004, he considered himself bound to the transaction and obliged to complete it. He was there to sign the necessary paperwork and he had arranged for the two minority shareholders, Laird Hollingshead and Clarence McGillivary, to be present for signing as well.
[23] When a telephone call to Wallace's solicitor disclosed that Wallace had not signed the necessary closing documentation and that there was no money in trust to close the transaction (which was an error; the money was in fact, in Mr. Nichols trust account), Allen decided he would not close the transaction. Despite repeated entreaties by Wallace over the days following, the Allens refused to complete the transaction. This action followed. [page727]
[24] The trial judge fixed the plaintiff's damages at $240,000, representing the loss of financial benefit to Wallace for the first three months that he would have operated the business had the transaction closed in a timely way. The trial judge found Wallace had mitigated his damages within the three- month period by using the $300,000 earmarked as the down payment for the Allen transaction to purchase his partner's interest in a marina business. Wallace's evidence was that he had ample resources to fund both deals and would in fact have done so. His statement of net worth, filed in evidence (contrary to the trial judge's finding) and unchallenged at trial, corroborated his ability to do so. Analysis
[25] The appellant raises five grounds of appeal. 1. Did the learned trial judge err in determining that the parties did not intend to create legal relations in entering into the Letter of Intent?
[26] The appellant submits that the trial judge erred in law in determining that the parties did not intend to be bound by the Letter of Intent. It is submitted that the trial judge failed to apply the presumption in law that one who executes a commercial document intends to be bound thereby, and that her construction of the Letter of Intent defeated the expectations of the parties and was contrary to the overwhelming weight of the evidence.
[27] In my view, the appellant's submissions are sound. When read as a whole, the document, the Letter of Intent dated September 24, 2004, evidences the intention of the parties to be bound. The critical clauses in the Letter of Intent, which contemplate a further agreement, are clear and unambiguous. Those clauses read:
IT IS ALSO AGREED BY THE PARTIES THAT THERE WILL BE MUCH LEGAL WORK TO BE DONE UPON ACCEPTANCE BY BOTH SIDES AND THAT THE WORDING OF THIS AGREEMENT MAY ALTER SOMEWHAT and
THIS LETTER OF INTENT MUST BE REDUCED INTO A BINDING AGREEMENT OF PURCHASE OF SALE BY THE PARTIES WITHIN THE NEXT 40 DAYS
[28] Both clauses contemplate that it is the wording of "this" agreement (not some other agreement) that "may alter somewhat" and "must be reduced into a binding agreement of purchase and sale" -- and only the wording, not the substance. I agree with the appellant that the document plainly expressed an intention on the part of the parties to be bound by the terms of the Letter of Intent, which terms were to be incorporated into a [page728] more formal document. The Letter of Intent was prepared by Wallace, who had had some prior experience in share/purchase agreements. Wallace was asked to comment on the reference to "much legal work to be done" and the contemplation of a further agreement between the parties. He explained as follows:
. . . A three or four page agreement in fact needed to become twenty or fifty pages or whatever. The details of, of this agreement needed to be spelled out and, you know, Graham and I knew it was going to become a lengthy process to spell out the terms of this agreement. Q. And how did you know that sir? A. Just through my past experience. I've been through share purchases and sales before and the paper, the paperwork is mind-boggling in the end. Q. What, if anything, did you think the agreement of purchase and sale would cover that was not in the letter of intent? A. Nothing that I can think of off hand. Q. Now Mr. Wallace, sir, assuming for the moment that both sides kept to the terms of the letter of intent, what was your belief and position as to whether or not either side was free to just ignore it and walk away? A. No. This letter of intent dated September 24 was binding to the both of us, we both had an equal amount to lose or gain.
[29] The parties used the language of contract -- they used terms such as "it is agreed" and "upon acceptance" and "this agreement".
[30] In my view, contrary to the finding of the trial judge, the language of the document itself speaks to an intention to be bound upon the signing of the document.
[31] In addition to the matters covered in the Letter of Intent, the parties discussed other issues not specifically contemplated in the Letter of Intent, including Allen's tools, vehicles used by the Allens and a motorhome, and agreed on these matters on September 24. In light of Allen's evidence that he had refused to sign earlier drafts of the Letter of Intent because they "left too much up in the air", his signature on this document evidences an intention to be bound. 2. Did the learned trial judge err in law in determining that the parties had no intention to create legal relations until such time as the agreed upon Share Purchase Agreement was, in fact, executed?
[32] In my view, the conduct of the parties after signing the Letter of Intent clearly demonstrates that the parties considered themselves legally bound to its terms. [page729]
[33] Wallace instituted efforts to get his son David and Nelson into the business. He began immediately to work in the business every day, on a full-time basis, through to December 22 when he left for Florida. Even the trial judge found that his efforts in this regard went beyond due diligence.
[34] Allen, for his part, announced his retirement and the sale of his business on at least two separate occasions, and introduced Wallace to one and all, as the new owner.
[35] Further, the first draft of the Share Purchase Agreement was delivered December 6, 2004. On December 9, 2004, the parties met for the express purpose of addressing any and all outstanding issues.
[36] From September 24 through to December 29, the parties conducted themselves as though they had a deal. Wallace put his solicitor in funds to close. The Allens showed up with the two minority shareholders for what they thought was the December 29 closing, prepared to sign the Share Purchase Agreement.
[37] To suggest that the parties did not consider themselves bound would be contrary to the evidence. 3. Did the learned trial judge err in law in failing to regard the parties as being bound to the Letter of Intent to the extent of at least having agreed to an obligation to negotiate a Share Purchase Agreement in good faith?
[38] In view of my findings in relation to the first two issues, it is unnecessary to deal with this third issue. 4. Did the learned trial judge err in law in rejecting the remedy of specific performance?
[39] The appellant submits as a matter of law where the object of the contract is unique, specific performance is the appropriate remedy, absent some good reason to the contrary.
[40] The argument can be made that every business is unique. The appellant is an entrepreneur engaged in the acquisition of businesses. His own evidence discloses that he has experience in the sale and purchase of shares of companies. Indeed, soon after the respondents refused to close the subject transaction, the appellant bought out a business partner's share in a marina business. While the company itself may be unique in what it does, the appellant's acquisition of the business was not -- the appellant acquires businesses for a living. In my view, the trial judge did not err in rejecting the remedy of specific performance. While the court's required supervisory role may have been a limited one, now some near four years have passed since this deal was scheduled to close [page730] and over four years since the deal was negotiated. On all the evidence, an award of damages is the appropriate remedy. 5. Did the learned trial judge err in limiting the plaintiff's damages to three months' loss of financial benefit?
[41] The answer to this question must be yes. I accept the appellant's submission in para. 62 of his factum:
The sole justification for limiting the plaintiff's damages to three months lay in his supposed mitigation combined with the finding that the plaintiff did not place any evidence before the Court that he was in a position to carry out both this transaction and the marina transaction.
[42] In my view, three months is simply not adequate time for a businessman to search out and find another opportunity, negotiate a new Agreement of Purchase and Sale, and close that transaction. If one considers that the parties hereto began negotiations early in August and were able to settle on a proposed closing date at the end of December -- some five months later -- in my view, seven months is reasonable. I would allow an additional two months to search out and locate a new investment opportunity. Here, the opportunity, or venture, had already been found and negotiations began in earnest immediately. There must in addition be some allowance for locating a suitable business investment and doing preliminary inquiries before the serious negotiation that will follow once an opportunity for investment has been located and selected. In my view, a reasonable time period to complete the foregoing would be seven months, and I would increase the damages accordingly.
[43] The trial judge assessed damages for three months at $240,000, or $80,000 per month, based on a careful consideration of the expert evidence before her. Other than the time period for which damages should be awarded, I see no basis to interfere with her calculation of those damages.
[44] Substituting the period of seven months for the three found by the trial judge, I would assess the plaintiff's damages at $560,000.
[45] For these reasons, I would allow the appeal, set aside the judgment dismissing the action and in its place, judgment shall issue in favour of the plaintiff in the sum of $540,000, plus appropriate prejudgment interest and costs.
[46] As the parties have agreed on the quantum of costs of this appeal, costs are awarded to the appellant in the sum of $35,000, inclusive of disbursements and GST. If the parties are unable to agree on the trial costs payable to the appellant in view of the result of this appeal, those costs may be assessed. [page731]
[47] Finally, if the parties are unable to agree on prejudgment interest, written submissions, not to exceed three pages, may be filed with this court.
Appeal allowed.