Whiteside v. Celestica International Inc., 2014 ONCA 420

COURT OF APPEAL FOR ONTARIO

CITATION: Whiteside v. Celestica International Inc., 2014 ONCA 420 DATE: 2014-05-23 DOCKET: C56676

Blair, Watt and Lauwers JJ.A.

BETWEEN

Jim Whiteside, Jason Wright, Steve Wilson and 3077187 Canada Ltd. Plaintiffs (Appellants)

and

Celestica International Inc. Defendants (Respondents)

Counsel: Peter N. Mantas, for the appellants R. Seumas M. Woods and Dustin Kenall, for the respondent

Heard: January 20, 2014

On appeal from the judgment of Justice Paul Lalonde of the Superior Court of Justice, dated January 21, 2013, with reasons reported at 2013 ONSC 323.

R.A. Blair J.A.:

OVERVIEW

[1] In August 2005, Celestica International Inc. acquired the shares of an Ottawa-based electronics company, CoreSim Inc. Mr. Whiteside was the major shareholder of CoreSim. Roger D’Hollander was the President and CEO of the company, although not a shareholder. Through 3077187 Canada Inc., Mr. D’Hollander had a separate agreement with Celestica entitling the corporate appellant to receive certain monies that were tied to the purchase price in the CoreSim purchase agreement.

[2] The Share Purchase Agreement between Celestica and the CoreSim shareholders provided that Celestica would pay the shareholders: (i) an initial payment; and (ii) an “Earn-Out Payment” if the CoreSim business met certain performance targets after the acquisition. The Share Purchase Agreement also set out a formula for determining whether those targets were met.

[3] Shortly after acquiring CoreSim, Celestica won a large contract to design a product for a Japanese company, NEC. The project was “run” from CoreSim’s old offices in Ottawa and involved some of CoreSim’s former staff. The dispute revolves around whether Lalonde J. was correct in refusing to include the revenue from the NEC project in the calculation of the Earn-Out Payment. This, in turn, depends on the interpretation to be given to the term “Total EBIAT” of CoreSim as defined in the Share Purchase Agreement. EBIAT is an acronym for “earnings before interest, amortization and taxes.”

[4] Mr. Whiteside and the corporate appellant allege that the trial judge erred in arriving at this conclusion. They assert that the revenue from the NEC project should have been included in the calculation of the Earn-Out Payment and that, had it been, they would have been entitled to their pro rata shares of the maximum Earn-Out Payment of $1.75 million. In Mr. Whiteside’s case, as a 40.4% shareholder, the amount would be $707,792.23. The corporate appellant was entitled to 15% of the Earn-Out Payment under its Letter Agreement with Celestica – an amount of $262,000.

[5] The trial judge ruled in favour of Celestica. He concluded that the EBIAT of the NEC Project was not to be included in the calculation of the Total EBIAT for purposes of determining the Earn-Out Payment. He also concluded that, even if it were, the threshold requirements for triggering the Earn-Out Payment had not been met.

[6] Respectfully, in my view, the trial judge erred in two respects in arriving at these conclusions:

(i) his interpretation of the Share Purchase Agreement failed to give effect to the contractual provisions governing the calculation of Earn-Out Payments, when the Shareholder Purchase Agreement is read as a whole and in context, and therefore the NEC Project EBIAT should have been included in the calculation of the Earn-Out Payments; and,

(ii) he made palpable and overriding errors in assessing the evidence of the appellant’s expert, Mr. Clarke, and Celestica’s witness, Mr. Tareque, and therefore erred in concluding that the contractual thresholds for triggering entitlement to Earn-Out Payments were not met, even if the NEC Project EBIAT were included in the calculation.

[7] I would therefore allow the appeal, but I would order a new trial on the issue of whether the threshold requirements for triggering the Earn-Out Payment were met. The following are my reasons for arriving at this decision.

FACTS

Celestica’s Acquisition of CoreSim

[8] CoreSim was an Ottawa-based high-tech business formed in 2002 by Mr. Whiteside and others. It specialized in providing value engineering and design analysis services to electronic companies, particularly those in the telecommunications and aeronautics sectors. Value engineering involves analyzing the functions of an existing system, product or piece of equipment, with the goal of improving the item’s performance, reliability, quality safety, and/or cost. Design analysis involves analyzing a prospective product’s design with a view to discovering potential flaws and suggesting improvements to the product in advance, when those changes can be made in a more cost-effective manner.

[9] The CoreSim business was successful. It soon grew to be an operation with some 30 employees under the direction of Mr. Whiteside, as Chief Technology Officer and Chairman of the Board, and Mr. D’Hollander, as President and Chief Executive Officer. Celestica became interested.

[10] Headquartered in Toronto, Celestica operates a global manufacturing network that provides a wide range of services and solutions to original equipment manufacturers in the communications, computing, industrial, and consumer sectors. It saw a fit with the specialized services and intellectual property provided by CoreSim.

[11] In the negotiations that ensued, however, the parties could not agree on the value of CoreSim’s specialized services and intellectual property. The end result was a Share Purchase Agreement dated August 5, 2005, in which Celestica acquired the vendors’ shares at an initial purchase price of $1,031,200 plus additional Earn-Out Payments, if the CoreSim business achieved certain specified performance targets over a stretch of three Earn-Out Periods. The Earn-Out Payments were to be based upon the Total EBIAT Amount for the former CoreSim business. The maximum Earn-Out Amount was fixed at $1,750,000.

[12] This appeal is about how the Earn-Out Payment for the third period is to be determined. Mr. Whiteside says the targets were met and that the shareholders are entitled to the full additional payment of $1,750,000. Celestica says the targets were not met, and the appellants are entitled to nothing. Both sides agree that the appellants’ entitlement to receive Earn-Out Payments was based upon the former CoreSim business meeting certain specified earnings targets in the years following its acquisition by Celestica. However, for purposes of determining and calculating the Earn-Out Payments, they disagree on the whether those earnings targets were met for the relevant periods.

[13] Roger D’Hollander had been a shareholder of CoreSim but was not a shareholder at the time of the Share Purchase Agreement. His arrangement was incorporated into the Letter Agreement between Celestica and his corporation, the appellant 3077187 Canada Ltd. (“307 Canada”) which, in turn, incorporated the provisions of an earlier Letter of Intent. The Letter of Intent pre-dated the Share Purchase Agreement and set out the broad terms of the contemplated agreement. 307 Canada was entitled to receive an initial amount of $150,000 plus 15% of any Earn-Out Payments made to the shareholders as a performance bonus for Mr. D’Hollander’s management services.

[14] After the closing, Celestica maintained the former CoreSim operations in Ottawa, but did so as a part of Celestica’s Global Design Services group operating as the Celestica Ottawa site.

The NEC Project

[15] All went well until Celestica won its very profitable contract with NEC.

[16] NEC retained Celestica to design and build a highly-sophisticated telecommunications device which NEC would sell to telecommunications companies in North America. The device was described as a “packet and service aware transport platform” and, although the project was generally known as the NEC Project, it was sometimes called the “PSTP” development project.

[17] The Project came online in 2008 after a great deal of work and negotiations on the part of Mr. Whiteside and other former CoreSim employees, as well as by groups of Celestica designers and engineers in China, India, and New Hampshire. It called for Celestica to design both hardware and software (about 35% and 65%, respectively) for NEC. It is agreed that the hardware portion was “led” by Mr. Whiteside and his team in Ottawa and that some of the hardware used CoreSim’s former proprietary intellectual property. The CoreSim technology did not relate to the software, although the software portion of the Project was also “led” by Ottawa-based employees working in conjunction with a Celestica joint venture partner in India. There seems to be little doubt that the NEC Project was an Ottawa site project.

[18] Celestica made a $15 million profit on the Project before it was terminated in late 2008 and early 2009 because of the downturn in the global economy. Whether those profits should have been included in the Total EBIAT of the Ottawa site is the crux of these proceedings.

The Share Purchase Agreement

[19] Central to this appeal is the interpretation to be given to the terms of the Share Purchase Agreement relevant to the Earn-Out Amounts. They are based on the Total EBIAT Amount for the relevant Earn-Out Period.

[20] Here, the relevant Earn-Out Period is the Third Period. Section 2.4(h) of the Share Purchase Agreement provides that if, during that Period, (i) the Total EBIAT Amount is equal to or greater than $4,500,000, and (ii) the Total EBIAT Amount for the last six calendar months is equal to or greater than $975,000, each vendor was to receive his or her percentage share of the maximum Earn-Out Amount, less any amounts previously paid.

[21] Section 1.1 defines “Total EBIAT Amount”:

“Total EBIAT Amount” means, for any period, the amount equal to the EBIAT of the Acquired Business for such period, determined in accordance with Section 2.5.

[22] Section 1.1 also defines other terms that matter to the appeal, as outlined below, and s. 2.5 provides for the manner in which the Total EBIAT Amount is to be determined. The relevant provisions of s. 2.5 are as follows:

2.5(a) The Total EBIAT Amount for the First Earn-Out Period, the Second Earn-Out Period, the Third Earn-Out Period or any portion thereof (each, an “Earn-Out Period”) shall be calculated by the Purchaser in accordance with GAAP in a manner consistent with the accounting methods used by the Purchaser in the preparation of its audited financial statements, as adjusted in accordance with sections 2.5(b), 2.5(c) and 2.6. [Emphasis added]

(b) [Not applicable]

(c) For the purposes of calculating the Total EBIAT Amount for any Earn-Out Period, the Purchaser shall include (i) all Qualified Overhead (but shall exclude all Non-Qualified Overhead), and (ii) any portion of the EBIAT of the Purchaser or any of its Affiliates for such Earn-Out Period that is attributable exclusively to the provision of NRE Design Services by the Purchaser or such Affiliate (or any business unit of any of the foregoing) using the Unique IP, provided that (x) the Purchaser or such Affiliate was awarded the NRE Design Services due specifically to the Unique IP, and (y) the Unique IP is required for the provision of such NRE Design Services.The portion of the EBIAT of the Purchaser or any Affiliate to be included in any Total EBIAT Amount pursuant to clause (ii) above shall be based on the Purchaser's reasonable estimates, acting in good faith, based on the Purchaser's then current accounting policies, and shall not be subject to dispute by any Vendor pursuant to Section 2.7.

(d) Subject to the provisions hereof and Section 2.7(e), in order to facilitate the determination of the Total EBIAT Amount for any Earn-Out Period pursuant to the terms hereof, until December 31, 2008 the Purchaser shall maintain the financial records of the Acquired Business (or cause such records to be maintained) in a manner so as to permit the Total EBIAT Amounts for any Earn-Out Period to be readily calculated by it.

[23] The terms “Acquired Business” “Business”, “Intellectual Property”, “NRE Design Services”, and “Unique IP” are defined as follows:

“Acquired Business” means the Business, as operated by the Purchaser or any of its Affiliates (including the Corporation) after the date hereof;

“Business” means the business currently and heretofore carried on by the Corporation consisting of the provision of electronics design services utilizing schematic modeling, board vector capture and simulation, design verification, integrated static timing and signal integrity analysis, EMC/EMI analysis, power integrity analysis combined with the Corporation’s integrated design processes as applied to field programmable gate arrays (FPGAs) and application specific integrated circuits (ASICs), circuit board design and redesign, including electrical architecture, very-high-speed hardware description language (VHDL) and VERILOG coding and test bench simulation, schematic design, component selection and physical design;

“Intellectual Property” means all domestic and foreign trade-marks, trade names, business names, patents, inventions (whether patentable or not), copyrights, service marks, brand names, industrial designs, Trade Secrets, urls, domain names and all other industrial or intellectual property owned or used by the Corporation, and all applications therefor and all goodwill in connection therewith, including all licences, registered user agreements and all like rights used by or granted to the Corporation;

“NRE Design Services” means the design services that are provided by the Purchaser or any Affiliate of the Purchaser (other than the Acquired Business) using the Unique IP to any of their respective customers, for which the Purchaser or such Affiliate charges its customer on a "non-recurring expense basis", and for which it is not compensated as part of a "gain-sharing" or other profit-sharing arrangement with such customer;

“Unique IP” means the proprietary Intellectual Property owned directly by the Business (as it exists on the date hereof) which neither the Purchaser nor any of its Affiliates uses or has the right to use on the date hereof.

[24] The “Corporation” referred to in these provisions is CoreSim Inc.

[25] Finally, the Share Purchase Agreement contains an “entire agreement” clause, as set out in section 1.6:

This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether written or oral. There are no conditions, covenants, agreements, representations, warranties or other provisions, express or implied, collateral, statutory or otherwise, relating to the subject matter hereof except as herein provided.

307 Canada and the Letter Agreement

[26] In addition to the Share Purchase Agreement with the CoreSim shareholders, Celestica entered into the Letter Agreement with Mr. D’Hollander, which provided for the performance bonus payments referred to above. Paragraph 2 of the Letter Agreement sets out Celestica’s commitment:

Consistent with the earn out mechanism identified in the Letter of Intent relating to the purchase of the equity of CoreSim by Celestica, or any subsequent definitive agreements, additional payments will become payable to 3077187 Canada Ltd. as a performance bonus for your management services if and when any earn out payments become payable to the shareholders of CoreSim, calculated as 15% of such earn out payments, and, if payable, will be paid at the time that such earn out payments are made.

[27] The Letter of Intent referred to in this passage was a letter from Celestica to Mr. D’Hollander in his capacity as acting President of CoreSim. Its purpose was to “[outline] the business basis of [Celestica’s] offer to acquire all the issued and outstanding shares of CoreSim Inc.” The letter listed the “continued participation in the success of the CoreSim operations by way of an earn-out” as one of the benefits to the CoreSim shareholders of the transaction. It went on to outline in considerable detail the proposed earn-out scheme that was ultimately incorporated into the Share Purchase Agreement.

[28] Some excerpts from the Letter of Intent are of interest:

Both earn out payments will be contingent upon achieving performance hurdles consistent with the management forecast [previously] put forward by CoreSim management.

The earn-out payments referred to above shall be released upon the successor within Celestica to the CoreSim business achieving, at the CoreSim site … the earnings before interest, amortization and taxes (calculated on a basis consistent with Canadian generally accepted accounting principles, and using accounting practices to be mutually agreed in the definitive documentation) (“EBIAT”) for the appropriate period as presented in the management forecast…. The precise mechanics for making such calculations shall be developed and codified in the definitive documentation for the Transaction based on mutual agreement.

If the CoreSim technology or methodology acquired as a part of this transaction is deployed or employed at a Celestica site other than the CoreSim site and EBIAT is earned during the Earn Out Period at such other Celestica locations other than the CoreSim site from NRE related design projects which were awarded to Celestica by the customer due specifically to the unique CoreSim technology or methodology acquired as a part of this transaction and such technology or methodology was required for the completion of such projects, such EBIAT amount shall be counted in the total EBIAT used for the purpose of the earn out calculation above.

[29] The appellants assert that the latter provision is what became the important s. 2.5(c)(ii) of the Share Purchase Agreement outlined above.

The Issues

[30] Three issues raised by the appellants need to be addressed:

(i) Did the trial judge err in interpreting the Share Purchase Agreement for purposes of determining the correct Total EBIAT Amount to be applied to the Earn-Out calculation?

(ii) Did the trial judge err in failing to apply the correct agreement with respect to the claim of 307 Canada?

(iii) Did the trial judge make a palpable and overriding error in determining whether the Total EBIAT Amount met the threshold necessary to trigger the Earn-Out Payment?

[31] The appellants also argued that the trial judge erred in law by accepting the non-expert testimony of Mr. Abu Tareque over that of the expert witness, Mr. David Clarke. In my view, it is not necessary to resolve this legal question in order to determine the outcome of the appeal.

The Trial Judge’s Reasons

Total EBIAT and the Earn-Out Calculation

[32] The trial judge concluded that the Total EBIAT Amount was to be calculated solely on the basis of s. 2.5(c) of the Share Purchase Agreement because it was that provision “that details how to calculate the EBIAT for the purpose of the Earn-Out Payment”. In that respect, s. 2.5(c)(ii) was the relevant provision.

[33] Unpacking s. 2.5(c)(ii), the trial judge listed the “four requirements” for determining whether EBIAT was eligible for an Earn-Out Payment:

(i) The EBIAT must be “attributable exclusively to the provision of NRE Design Services”;

(ii) The charges must be for the use of “the Unique IP”;

(iii) Celestica must have been “awarded the NRE Design Services due specifically to the Unique IP”; and

(iv) The Unique IP was “required for the provision of such NRE Design Services”.

[34] After carefully reviewing the evidence, the trial judge concluded that “the NEC project [did] not fit squarely into the earn-out provisions of the agreement”. Although the Project met the first requirement outlined above, it did not meet the second, third or fourth requirement.

The 307 Canada Claim

[35] Except to acknowledge it in his recitation of the facts, the trial judge did not address the Letter Agreement between Celestica and 307 Canada or the separate claim of the corporate appellant. The appellants argue that he must therefore have applied the terms of the Share Purchase Agreement in determining the claim of the corporate appellant, and in doing so, he applied the wrong agreement.

Whether the Appellants Met the Thresholds Necessary to Trigger the Earn-Out Payments Even if the NEC Project EBIAT were Included in the Total EBIAT Amount

[36] The trial judge answered this question in the negative, too. After reviewing the evidence of the appellants’ Finance Controller for Global Design, Mr. Tareque, and the evidence of the appellants’ expert, Mr. Clarke, he found that the thresholds necessary to trigger an Earn-Out Payment had not been met, even with the total NEC Project EBIAT. Central to this finding was his rejection of the appellants’ argument that Celestica had deferred approximately $2.2 million in NEC Project revenues from the 4^th^ Quarter of 2008 (the end of the Third Earn-Out Period) to the 1^st^ Quarter of 2009. In doing so, he accepted the evidence of Mr. Tareque over that of Mr. Clarke.

ANALYSIS

[37] Only the first and third of these issues needs to be analyzed further. While the appellants are technically correct that the trial judge failed to deal with the claim of 307 Canada in the context of the Letter Agreement, the reality is that 307 Canada’s claim is, in actual terms, derivative of the success of the shareholders’ claims under the Share Purchase Agreement. If no Earn-Out Payment is triggered under the latter agreement, the corporate appellant has no claim to its “performance bonus” because the bonus is only payable “if and when any earn out payments become payable to the shareholders of CoreSim, calculated as 15% of such earn out payments”: Letter Agreement, at para. 2.

[38] Accordingly, while the Letter Agreement and the Letter of Intent referred to in it may have some relevance to the exercise of interpreting the Share Purchase Agreement, nothing more need be said about it in this context.

Standard of Review

[39] The interpretation of a contract is very much a legal issue. The standard of review is therefore at or towards the correctness end of the standard-of-review spectrum. However, factual findings, on which the interpretation is based, are to be reviewed with deference. Generally, factual findings may only be interfered with in the case of a palpable and overriding error on the part of the trial judge: Bell Canada v. The Plan Group, 2009 ONCA 548, 96 O.R. (3d) 81, at paras. 25-33.

[40] Here, the factual findings underpinning the trial judge’s interpretation of the Share Purchase Agreement and related documents are not dispositive of the appeal. The findings he made in this respect are supported by the evidence. However, he gave an interpretation of the contract that was too narrow; this was an error in law.

[41] On the second major issue on the appeal – whether the threshold for the Earn-Out Payments had been met even if the NEC Project revenues were included in the Total EBIAT – the trial judge made palpable and overriding errors of fact, in my view, and his decision on that issue cannot stand.

Total EBIAT and the Earn-Out Calculation

[42] The trial judge focused on paragraph 2.5(c) of the Share Purchase Agreement in determining what was to be included in the calculation of the Earn-Out Amounts. As noted above, he interpreted that provision as setting out “four requirements” that had to be met before revenues could be included in the Total EBIAT Amount.

[43] I begin by observing that the trial judge’s findings of fact – which support his conclusion that those four requirements had not been met – were open to him on the evidence. After reviewing the record, he found (i) that the earnings from the NEC Project were not “attributable exclusively to the provision of NRE Design Services”; (ii) that the charges were not for the use of “the Unique IP”; (iii) that Celestica had not been “awarded the NRE Design Services due specifically to the Unique IP”; and (iv) the Unique IP was not “required for the provision of such NRE Design Services.” There is no palpable or overriding error with respect to these findings.

[44] However, these findings of fact are not determinative of the contractual interpretation exercise and the trial judge erred in treating them as if they were.

[45] The guiding principles relating to the interpretation of a commercial contract have been articulated in a number of authorities in recent years: the text of a written agreement is to be read as a whole, without considering one provision in isolation from the others, and in the context of the circumstances existing at the time the agreement was made: Dumbrell v. The Regional Group of Companies Inc., 2007 ONCA 59, 85 O.R. (3d) 616, per Doherty J.A., at para. 53; Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, per Cromwell J., at para. 64; and Schneeberg v. Talon International Development Inc., 2011 ONCA 687, 343 D.L.R. (4th) 486, per Epstein J.A., at paras. 38-42.

[46] The trial judge correctly acknowledged these guiding principles. Respectfully, however, he failed to apply them. He took an approach that concentrated on s. 2.5(c) of the Share Purchase Agreement in isolation, without giving effect to the purchase-price provisions of the Share Purchase Agreement as a whole, and without adequate consideration of the factual matrix underlying the contractual arrangements between Celestica and the appellants. I say this for the following reasons.

[47] The overall scheme for determining the purchase price for the Vendors’ shares is set out in Article 2 of the Share Purchase Agreement. For purposes of the appeal, the relevant provisions are those contained in ss. 2.2, 2.3, 2.4, and 2.5.

[48] Section 2.2 defines the purchase price to include a closing date payment of $1,031,200 (to be divided amongst the shareholders in accordance with s. 2.3), together with “any additional amounts (collectively, the “Earn-Out Payments”) determined to be payable in accordance with Section 2.4 … to a maximum aggregate addition amount of $1,750,000” [Emphasis added.]. Section 2.4 sets out the parameters for paying the additional earn-out amounts for the three Earn-Out Periods (we are only concerned with the Third Earn-Out Period here). Those payments are triggered by the “Total EBIAT Amounts” reaching the thresholds described above.

[49] Section 2.5 is the provision which, as a whole, describes how the Total EBIAT Amounts are to be determined. In this respect, s. 2.5(a) is very important. To repeat, it says:

The Total EBIAT Amount for the First Earn-Out Period, the Second Earn-Out Period, the Third Earn-Out Period or any portion thereof (each, an “Earn-Out Period”) shall be calculated by the Purchaser in accordance with GAAP in a manner consistent with the accounting methods used by the Purchaser in the preparation of its audited financial statements, as adjusted in accordance with Sections 2.5(b), 2.5(c) and 2.6. [Emphasis added.]

[50] “Total EBIAT Amount” means “the amount equal to the EBIAT of the Acquired Business … determined in accordance with Section 2.5”: Share Purchase Agreement, s. 1.1 (emphasis added). Significantly, the EBIAT of the Acquired Business is not to be determined in accordance with s. 2.5(c) only, but in accordance with s. 2.5 as a whole.

[51] The trial judge’s focus on the language of s. 2.5(c) alone, without regard to the context of s. 2.5 as a whole, in order to determine how the Total EBIAT Amount was to be calculated, led him mistakenly to miss the subtlety of the mechanism created for that purpose. As the overarching provisions of s. 2.5(a) make clear, Total EBIAT Amounts are not calculated in accordance with s. 2.5(c); they are calculated … in accordance with GAAP, generally, and then adjusted for the items referred to in ss. 2.5(b), 2.5(c), and 2.6.

[52] Sections 2.5(b) and 2.6 are not relevant for purposes of the appeal. The former deals with adjustments for bad accounts receivable and for software licensing amortization considerations. The latter pertains to adjustments for various losses.

[53] Section 2.5(c) is relevant, however, because it provides for an adjustment of the Total EBIAT Amount, once calculated, to account for what is in essence the use of CoreSim IP in sites other than the Ottawa site where CoreSim’s Unique IP is used exclusively. In addition, s. 2.5(d) is important because “in order to facilitate the determination of the Total EBIAT Amount”, Celestica was required to maintain separate financial records for the CoreSim business, as operated by Celestica, “in a manner so as to permit the Total EBIAT Amounts for any Earn-Out Period to be readily calculated by it”. No such provision would have been needed if the s. 2.5(c) adjustment were the only “calculation” to be made, because s. 2.5(c) contemplates a self-contained and easily ascertainable item.

[54] To understand the basis for arriving at an Earn-Out Payment, it is necessary to understand the notion of “Total EBIAT Amount” and to what that notion refers. In my opinion, it is a reference to the EBIAT generated by Celestica’s Ottawa site.

[55] The Letter of Intent, cited above, is of some assistance in this regard. It states that “[t]he earn-out payments … shall be released upon the successor within Celestica to the CoreSim business achieving, at the CoreSim site, [the requisite EBIAT amounts]” (emphasis added.). It also distinguishes between “the CoreSim site” and “other Celestica locations” in the provision that appears to have formed the basis for s. 2.5(c) of the Sale Purchase Agreement.

[56] “Total EBIAT Amount” is determined on the basis of “the EBIAT of the Acquired Business”. The “Acquired Business” means the former CoreSim business “as operated by [Celestica] or any of its Affiliates”. The Ottawa site was that business. As Mr. Tareque, the respondent’s witness, explained, there was only one business unit in Ottawa and the Earn-Out calculations were based on the Ottawa site only, until the NEC Project was undertaken:

A. Let me put it this way, okay? Until we have the NEC project, everything was in order. There was only one business unit. Okay? And there’s only – the direction from the management was – the earn-out only – you calculate it based on the Ottawa site only. There was no NEC. After NEC comes on board and we won the project and, as the NEC, the Master Agreement was signed, management decided we should track NEC project separately and NEC project, PST project, will not be included in – in our earn-out statement. [Emphasis added.]

[57] The Third Earn-Out Statement – prepared by Celestica and delivered to Mr. Whiteside after the commencement of these proceedings – confirms this approach and reinforces the “calculation-subject-to-adjustments” paradigm of s. 2.5(a). It shows revenues less expenses to arrive at the “EBIAT Calculation per Agreement” (the Ottawa site EBIAT) and then provides for further “Items for Adjustment at year-end”. Included in those items for adjustment is a line item for “EBIAT incurred at other sites as a result of deploying CoreSim” (i.e., the application of s. 2.5(c)(ii)).

[58] Conduct of the parties to an agreement subsequent to the execution of the agreement is helpful in interpreting the provisions of that agreement where competing interpretations arise. As Laskin J.A. put it, in Montreal Trust Co. of Canada v. Birmingham Lodge Ltd., 1995 CanLII 438 (ON CA), [1995] 24 O.R. (3d) 97 (C.A.), at p. 108:

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”: S.M. Waddams, The Law of Contracts, 3d ed. (1993), at para. 323. Often, as Thomson J. wrote in Bank of Montreal v. University of Saskatchewan (1953), 1953 CanLII 166 (SK QB), 9 W.W.R. (N.S.) 193 at p. 199 (Sask. Q.B.): “there is no better way of determining what the parties intended than to look to what they did under it”.

See also Canadian National Railways v. Canadian Pacific Ltd. (1979), 1978 CanLII 1975 (BC CA), 95 D.L.R. (3d) 242, at p. 262 (B.C.C.A.), affirmed 1979 CanLII 229 (SCC), [1979] 2 S.C.R. 668; and Arthur Andersen Inc. v. Toronto-Dominion Bank (1994), 1994 CanLII 729 (ON CA), 17 O.R. (3d) 363, at p. 372 (C.A.).

[59] The evidence of Mr. Tareque and the Third Earn-Out Statement support the appellants’ interpretation of the Share Purchase Agreement. So, too, does the language of the Letter of Intent, which formed part of the factual matrix underlying the signing of the Share Purchase Agreement. So, too, as well, does the fact that several other projects similar to the NEC Project and performed at the Ottawa site – but where the sales lead came from Celestica, not CoreSim – received full EBIAT credit for purposes of calculating the Total EBIAT Amount under s. 2.5. Many of those contracts did not involve the exclusive use of CoreSim’s Unique IP and some did not involve any such use (for example, a contract with Nortel known as Nortel s8000). However, all received full EBIAT credit for purposes of the Earn-Out calculation. This confirms that contracts other than those that met the “four requirements” of Section 2.5(c)(ii) were being credited. The only contract that was not included was the one that would have made a difference in calculating the Earn-Out: the NEC Project.

[60] The evidence of Paul Barsley, the Vice-President of Design Services for Celestica and the person responsible for Celestica’s Global Design Services at the relevant time, supports the evidence of Mr. Whiteside with respect to the foregoing. At para. 50 of his affidavit sworn on September 14, 2012, Mr. Barsley said:

Mr. Whiteside alleges that Celestica awarded CoreSim’s former shareholders 100% credit for other projects similar to NEC where the lead was generated outside of Ottawa. I agree that there were cases in which projects “owned” by Celestica Ottawa arose from leads generated by other parts of Celestica. Celestica Ottawa had its own dedicated sales team for design analysis and cost reduction projects. As a result, many of the projects the site owned were projects it won through its own sales efforts. Other projects came in through the work of the rest of my business development team which promoted value engineering and design analysis services. … [These types of projects] were assigned to Celestica Ottawa since it had the available project managers and resources needed to carry out the projects. To the extent the earnings generated by the projects met the requirements set out in the Agreement they formed part of the calculation of EBIAT for the purposes of the Earn-Out Calculation. [Emphasis added.]

[61] Interestingly, Mr. Barsley did not deny Mr. Whiteside’s evidence that these other projects received full EBIAT credit. He merely says that “to the extent the earnings generated met the requirements” of the Share Purchase Agreement they were credited. He stated specifically that “[t]he NEC project as a whole was different than those projects because ultimately the work involved with it did not all meet the test in the Agreement”.

[62] Whether that is so or not is the nub of the issue, of course.

[63] For the reasons articulated above, I conclude that a proper interpretation of the Share Purchase Agreement results in the profits from the NEC Project being included in the calculation of the EBIAT of the Ottawa site and, therefore, in the Total EBIAT Amount to be applied in determining the relevant Earn-Out Payments.

Whether the Appellants Met the Thresholds Necessary to Trigger the Earn-Out Payments Even if the NEC Project were Included in the Total EBIAT Amount

[64] The trial judge also found that, even if the NEC Project were included in the Total EBIAT Amounts, those earnings were not sufficient to meet the threshold necessary to trigger the Earn-Out Payments. In making this finding, he relied principally on the evidence of Mr. Tareque, which he accepted over that of the appellants’ expert, Mr. Clarke.

[65] This issue turned on whether Celestica had understated the NEC Project earning for the 4^th^ Quarter of 2008 and deferred those revenues to the 1^st^ Quarter of 2009. December 31, 2008 was the last date of the Third Earn-Out Period and therefore earnings after that date were not to be included in the calculation of the Earn-Out Amounts. The appellants alleged that approximately $2.25 million in earnings were deferred. Mr. Tareque denied there had been any revenue deferral. Mr. Clarke’s expert opinion, as expressed in his Original Report, was that the appellants were correct. In his Supplementary Report – prepared following the production of a newly revised NRE Tracker ver. 17 – Mr. Clarke testified that at least $1 million had been deferred, which was enough to trigger the Earn-Out Payments.

[66] Needless to say, it is within the purview of a trial judge to weigh and assess the evidence and to prefer the testimony of one witness over another in making his or her findings. Absent a palpable and overriding error, a trial judge’s findings are entitled to deference and this Court will not interfere with them or substitute its own view of the facts.

[67] Respectfully, however, the trial judge made two palpable and overriding factual errors in assessing the evidence. In addition, he failed to consider an important piece of evidence. These errors significantly affected his review of the evidence and it follows that his findings and conclusions on the threshold issue cannot stand.

The Clarke Methodology and the “SAP” Data

[68] First, the trial judge criticized Mr. Clarke’s methodology on the basis that he had failed to base his opinion on what is known as the “SAP data” and that he had not reviewed the affidavit of Mr. Tareque before providing his opinion.

[69] The SAP document was an internal Celestica document containing data showing Celestica’s actual revenue and expenses.[^1] This was in contrast to another internal document, the NRE Tracker document, which everyone agreed was a project management tool containing only projections. Or at least, it contained only projections until the final NRE Tracker document – NRE Tracker ver. 17 (new) – was produced on the eve of trial.

[70] The trial judge was under the impression, erroneously, that Mr. Clarke had not considered the SAP documentation and information in arriving at his opinion. This was an important consideration in his rejection of Mr. Clarke’s evidence. At para. 114 of his reasons, the trial judge observed that “[a] serious issue in this case is the fact that in his expert report, Mr. Clarke did not take the SAP document into account” and concluded, at para. 117, that “Mr. Clarke’s failure to take the SAP into account in his expert report renders his expert report incomplete”.

[71] The finding that Mr. Clarke did not take the data in the SAP document into account is contrary to the evidence.

[72] First, it was on the basis of the SAP records that Mr. Clarke initially opined that the $2.25 million had been deferred. His Original Report contains the following statements:

II - Executive Summary and Conclusions

The CoreSim Shareholders allege that Celestica deferred between $2.5 million and $2.7 million in revenues from the 2008 fiscal year to the first two quarters of Celestica’s 2009 fiscal year. The effect of the revenue deferral was to reduce the EBIAT such that no further earn-out amount was owed to the CoreSim shareholders.

Our analysis of the revenues and expenditures for the NEC PST project as recorded in the general ledger (referred to as SAP lines information) reflected an understatement of revenues in the 2008 fiscal year end of approximately $2.2 million. The understatement consisted of an under billing for work to the end of fiscal 2008 of approximately $2.7 million less 2008 accrued revenue of approximately $0.5 million. [Emphasis added.]

IV – Scope of Review

Information Relied Upon

During the course of this assignment we have reviewed and relied upon the following information:

i) A copy of the spreadsheet titled “NEC PL HC Ottawa from celine.xls”

V – Background

NEC PL HC Ottawa from celine

The NEC PL HC Ottawa from celine (the “NEC PL”) spreadsheet was provided to us. The NEC PL is the internal Celestica accounting record for the PST project. The spreadsheet includes the detailed SAP (Celestica’s accounting software) accounting output related to Celestica’s GCS Division, which includes all North American design sites, including Ottawa and the NEC PST project. [Emphasis added.]

The spreadsheet reports quarterly P&L;s for the NEC project for all of Celestica’s sites servicing the NEC contract including NEC Ottawa. In addition, to the P&L;, the spreadsheet contains the detailed SAP lines (or general ledger account details) for PST contract transactions specific to NEC Ottawa. The quarterly P&L; account totals for NEC Ottawa can be agreed to the total SAP lines related to that account number in the SAP Line detail for the same quarter. We note that the NEC Project entries start in mind-January 2008. [Emphasis added.]

[73] Secondly, it is quite clear from Mr. Clarke’s testimony at trial – both in chief and in cross-examination – that he did in fact rely on the SAP documents in formulating his opinions. Counsel for Celestica at trial appears to have accepted this and was careful to clarify that Mr. Clarke’s opinion was based on two documents:

Q. Your – your report, fair to say is predominantly based on – on two documents: the NRE Tracker … You’re agreeing with that?

A. Yes, I am.

Q. … and then the – the SAP lines.

A. Yes.

[74] The trial judge placed considerable emphasis on the difference between the NRE Tracker documents (containing projections only) and the SAP documents (containing actual financial data). In his view, Mr. Clarke had not taken the latter into account. The appellant’s counsel at trial conceded that, if that were the case, it would undermine Mr. Clarke’s opinion. However, the foregoing excerpts from the Original Report and the testimony at trial confirm that that was not the case. The trial judge mistakenly found that it was.

The Failure to Consider Mr. Tareque’s Affidavit

[75] Mistaken, too, was the trial judge’s conclusion that Mr. Clarke’s report could not be said to be “entirely comprehensive” because, among other things, “he did not review … the affidavit of the defendant’s finance controller Mr. Tareque” before preparing it.

[76] However, Mr. Clarke could not have reviewed Mr. Tareque’s affidavit at the time he prepared his Original Report because Mr. Tareque’s affidavit had not yet been sworn. Mr. Clarke’s Supplementary Report – prepared after disclosure by Celestica of the new NRE Tracker ver. 17 – refers specifically to Mr. Tareque’s affidavit. Mr. Clarke’s testimony at trial confirmed this and, indeed, he was cross-examined at some length about what he had or had not done following receipt of a copy of the affidavit.

NRE Tracker ver.17 (new)

[77] Finally, the trial judge’s failure to consider the significance of the revised NRE Tracker ver. 17, on which Mr. Clarke’s Supplementary Report was based, significantly undermines his findings on this issue as well. He makes no reference to the new version in this part of his analysis.

[78] Central to the trial judge’s finding that the threshold for triggering the Earn-Out Payment had not been met was his view that “Mr. Clarke did not take the SAP document into account” but instead relied on the NRE Tracker ver. 17 which “[was] a cost projection document only” whereas “the SAP document [was] the document to rely on to find out what happened financially”. For the reasons explained above, the first of these findings is incorrect. The second is as well.

[79] The trial judge appears to have been under the misapprehension that Mr. Tareque’s evidence in his affidavit and at trial established that all of the NRE Tracker documents were projections. However, that is not the case.

[80] It may well be that earlier versions of the NRE Tracker were based on projections to be used as project management tools because they came from the project manager. Whatever may have been the case with earlier versions of the NRE Tracker documents, however, the NRE Tracker ver. 17 (new) was different; on Mr. Tareque’s own evidence, it was prepared by him and it showed actual expenses and revenue recognition.

[81] That this is so is clear from Mr. Tareque’s cross-examination on NRE Tracker ver. 17 (new) and on the new information it disclosed:

Q. Okay? Do you recognize this document (NRE Tracker 17 (new))?

A. Yes.

Q. Okay. And the new – the boxes – the bottom three boxes here.

A. Okay.

Q. Okay? I can tell you they weren’t in the previous version of the NRE Tracker version 17.

A. I think I explained that why – because the previous versions of the NRE Tracker came from the program officer, not from me. So the process is we get the NRE Tracker from the program office and then we create at the bottom table so that we can book our accounting entry.

Q. … So this is something that you, your team, created, not the project team.

A. Bottom part.

Q. Just the bottom part.

A. Taking their data, the same data, and just summarizing in there so that we can book accounting entry.

Q. Okay. So to some degree, you are using the NRE Tracker.

A. We are using NRE Tracker for recognizing revenue for labour, recognizing revenue for travel, reimbursement – consultant, and to some degree, material.

Q. And – and the figures that are here, they would be more recent and therefore more accurate than what we would find in version 13.1.

A. Because version 13, December was projected. So…

Q. And this one now has got figures that were projected then, have now become actual.

A. Actual.

[Emphasis added.]

[82] This was a meaningful admission because it cast the latest NRE Tracker ver. 17 in an entirely different light than the previous versions, which were projections only. NRE Tracker ver. 17 (new) recorded actual financial information, not projections. Given the importance placed by the trial judge on the distinction between relying on documents that were projections only (the previous NRE Tracker documents) and on those that provided actual financial data (the SAP documents), this development – and the fact that NRE Tracker ver. 17 (new) showed understated revenues of a little over $1 million in the fourth quarter of 2008 – may well have changed his views on the evidence of Mr. Clarke and on the appellant’s arguments. In Mr. Clarke’s opinion, the application of these additional revenues to the calculation of the Earn-Out Amount would have been sufficient to trigger the Earn-Out Payments.

Remedy in Relation to the Threshold Issue

[83] I have concluded that the trial judge’s misapprehension of the evidence led him into palpable and overriding error on two of the main factual pillars underlying his acceptance of Mr. Tareque’s evidence over that of Mr. Clarke: his finding that Mr. Clarke did not take the SAP documents into account in arriving at his opinion; and his finding that Mr. Clarke failed to consider the affidavit evidence of Mr. Tareque, Celestica’s main witness on this issue. In addition, the trial judge’s failure to consider the newest version of NRE Tracker ver. 17 and to recognize its difference from earlier versions and its potential significance for the “deferral-of-revenue” argument may well have affected his assessment of the competing testimonies of Mr. Clarke and Mr. Tareque as well.

[84] At the very least, these errors call into question the trial judge’s findings and conclusions in determining whether the threshold for payment of the Earn-Out Amounts had been met. In my opinion, those findings and conclusions must be set aside.

[85] That said, I do not think this Court is in the position to substitute its own view on whether the threshold has been met. It is one thing to conclude that the trial judge’s findings on the assessment of the evidence should be set aside. It is quite another thing for an appellate court to speculate on what different findings may have been made or, indeed, whether the findings would ultimately have been different if it cannot be clearly determined on the record. Here, it cannot be determined on the record. Mr. Clarke and Mr. Tareque were each cross-examined effectively by opposing counsel and there may be issues arising with respect to the testimony of each of them, as well as with respect to the calculation of the Total EBIAT itself.

[86] As a result, I would set aside the trial judge’s ruling that the threshold necessary to trigger the Earn-Out Payment had not been met, even if the total NEC Project EBIAT were included in the Total EBIAT Amount. And I would order a new trial for the determination of that issue alone.

Choosing Between an Expert and a Non-Expert Witness

[87] In light of the foregoing conclusions it is not necessary to deal with the discrete issued raised by the appellants with respect to whether the trial judge erred in law in favouring the evidence of a non-expert witness over that of an expert witness. The trial judge erred in misapprehending the evidence, as explained above. That error is sufficient to dispose of the appeal.

DISPOSITION

[88] For the foregoing reasons, the appeal is allowed, the order of the trial judge is set aside, and judgment is granted:

(a) declaring that the total NEC Project EBIAT is to be included in the calculation of the Total EBIAT Amounts for purposes of determining the appellant Whiteside’s entitlement to Earn-Out Payments and the corporate appellant’s entitlement to its contractual percentage of any such Earn-Out Payments;

(b) setting aside the trial judge’s finding that, even if the total NEC Project EBIAT were included in the calculation of the Total EBIAT Amounts, the thresholds necessary to trigger the Earn-Out Payments had not been met, and directing a new trial for the determination of that issue; and

(c) declaring that the appellant Whiteside is to be paid his pro rata share of any Earn-Out Payments found to be payable under the Share Purchase Agreement, and that the appellant, 307 Canada is to be paid 15% of any such Earn-Out Payments.

[89] We were provided with draft bills of costs by counsel for each party. However, in view of the disposition above – if they are unable to agree – the parties may make brief further submissions as to costs, not to exceed four pages in length, within two weeks of the release of these reasons.

Released: May 23, 2014

(R.A.B.) “R.A. Blair J.A.”

“I agree David Watt J.A.”

“I agree P. Lauwers J.A.”

[^1]: The SAP document is described in its electronic format as NEC PL HC Ottawa from celine.xls.