COURT OF APPEAL FOR ONTARIO

CITATION: Warburg-Stuart Management Corporation v. DBG Holdings Inc., 2016 ONCA 157

DATE: 20160226

DOCKET: C60304

Simmons, LaForme and Huscroft JJ.A.

BETWEEN

Warburg-Stuart Management Corporation

Plaintiff (Respondent)

and

DBG Holdings Inc., O’Hara Technologies Inc., 1346041 Ontario Inc., The Gil O’Hara Family Trust By Their Trustees Brian W. O’Hara and David P. O’Hara, Brian W. O’Hara and David P. O’Hara

Defendants (Appellants)

Douglas D. Langley, for the appellants

Peter I. Waldmann, for the respondent

Heard: December 11, 2015

On appeal from the judgment of Justice Frederick L. Myers of the Superior Court of Justice, dated March 10, 2015 reported at 2015 ONSC 1594 and from the costs award dated April 7, 2015 reported at 2015 ONSC 2178.

By the Court:

[1] The motion judge granted summary judgment to the respondent, Warburg-Stuart Management Corporation (“Warburg”), against the appellants, DBG Holdings Inc. (“DBG”), O’Hara Technologies Inc. (“OTI”) and 1346041 Ontario Inc. (“134”), on a joint and several basis for commissions owing on two engagement agreements, both dated August 23, 2012. The motion judge also dismissed Warburg’s action against the personal defendants.

[2] In calculating the amounts owing under the engagement agreements, the motion judge credited the appellants with a sum paid as an initial retainer under one of the engagement agreements.

[3] The appellants appeal from the finding that commissions were owing under the engagement agreements, and, in the alternative, from the quantum awarded. They also appeal from the finding of joint and several liability.

[4] Warburg cross-appeals from the dismissal of the action against the personal defendants and from the decision to credit the respondents with the amount of the initial retainer.

Background

[5] OTI is a manufacturer; 134 owns the land on which OTI’s products are manufactured; and DBG is a guarantor of various credit facilities extended to OTI and 134.

[6] In 2009, 134 and OTI obtained various loans and credit facilities from the Royal Bank of Canada (“RBC”), consisting of:

• a $2.7 million building loan secured by a collateral mortgage against 134’s land;

and five operating loans:

• a $3 million revolving line of credit (“Facility 1”);

• a $1 million revolving demand facility (“Facility 2”);

• a $1.5 million revolving facility by way of term loans (“Facility 3”);

• a $150,000 revolving lease line of credit (“Facility 4”);

• a $250,000 business VISA (“Facility 5”).

[7] In 2010, Facility 4 was cancelled by mutual agreement. In June 2012, RBC notified OTI and 134 that they were in default under their financial covenants and cancelled Facility 3. Although Facility 2 remained in existence, all parties understood it was no longer available because Export Development Canada withdrew its guarantee. Around the same time, RBC recommended that the appellants obtain restructuring advice.

[8] Acting on RBC’s recommendation to obtain restructuring advice, the appellants engaged Warburg to assist them with restructuring their financial affairs and with finding alternate financing. Two engagement agreements were signed, first, the building engagement agreement, aimed at procuring mortgage financing for 134’s building (signed by Warburg, OTI, 134 and DBG); and second, the operating engagement agreement, aimed at procuring revolving operating financing (signed by Warburg, OTI and DBG). The engagement agreements would automatically terminate 90 days after the appellants provide specified information and documentation to Warburg.

[9] The operating engagement agreement also provided that any “Advisory Services” to be provided by Warburg would be separately agreed on in writing and that Warburg would receive remuneration for these services as provided for in Schedule A to the operating engagement agreement. Schedule A stipulated an hourly rate for Advisory Services of $380 and stated that a $12,500 retainer “is required to commence Advisory Services.”

[10] In accordance with the terms of the engagement agreements, Warburg approached various financial institutions with a view to obtaining financing proposals and ultimately, in March 2013, approached RBC. On April 15, 2013, RBC responded with a proposal for refinancing, essentially in the same terms as Warburg had proposed to RBC.

[11] Subsequently, and unbeknownst to Warburg, on July 2, 2013, RBC delivered a discussion paper (term sheet) to the appellants. The appellants eventually signed the discussion paper on August 16, 2013. RBC provided a formal commitment letter on October 8, 2013. After obtaining legal advice, the appellants signed the commitment letter on October 31, 2013, exactly 91 days after they purported to terminate their arrangement with Warburg.

The motion judge’s decision

[12] The motion judge found the appellants liable to Warburg for commissions under para. 9 of the engagement agreements.

[13] Paragraph 9 of each engagement agreement required the appellants who were parties to the particular agreement (defined as “the Client” in each engagement agreement) to pay Warburg a commission if “within one (1) year of the termination of this Agreement, the Client executes an agreement to obtain financing from an investor/lender disclosed to the Client by [Warburg] during the term of this Agreement”.

[14] The appellants’ liability under para. 9 of each engagement agreement thus turned on the interpretation of the phrase a “lender disclosed to the Client by [Warburg]”. The appellants argued that RBC was not disclosed to them by Warburg because RBC was well known to the appellants and had been their longtime lender.

[15] The motion judge rejected the appellants’ argument and found that they were reading the term “disclosed” too narrowly. He noted that the other banks approached by Warburg were known to the appellants as well and that, considered in this context, “disclosed” referred to the willingness of a financial institution to make a financing proposal to the appellants.

[16] In relation to RBC, the motion judge determined that the appellants had not wanted to continue borrowing from RBC and that they were unaware that RBC’s commercial lending department would be willing to make them a financing proposal that would induce them to change their minds. Having regard to these circumstances, he concluded that Warburg “disclosed” RBC to the appellants by obtaining RBC’s April 2013 financing offer, which the appellants eventually accepted. In the particular circumstances of this case, RBC fell within the definition of the phrase, a “lender disclosed by [Warburg]”.

[17] The motion judge awarded Warburg the commissions it claimed, subject to a credit for the initial retainer paid to Warburg for Advisory Services. He held that the appellants were jointly and severally liable for the total amount owing and dismissed Warburg’s action against the personal defendants.

The appeal

[18] The appellants raise four main issues on appeal.

[19] First, the appellants argue that the motion judge erred in holding that the term “lender disclosed by [Warburg]” in para. 9 of the engagement agreements could include the appellants’ longtime lender, RBC. They say that the motion judge’s reasoning in this respect is tainted by palpable and overriding error in that he wrongly concluded that RBC had called the appellants’ loans and therefore began the interpretive exercise from the incorrect premise that RBC had excluded itself from the universe of available lenders. Further, they say that the motion judge’s determination results in a strained interpretation of the phrase “lender disclosed by [Warburg]” that does not fit with other provisions of the engagement agreements. Moreover, the motion judge improperly considered the events of March-April 2013 as part of the factual matrix to be considered in interpreting the engagement agreements.

[20] We do not accept these arguments. The motion judge stated at para. 7 of his reasons that RBC declared defaults on the appellants’ loan facilities in June 2012. Read as a whole, his reasons indicate he was well aware that RBC did not call the appellants’ loans in June 2012, but merely declared them in default. The isolated reference identified by the appellants is a harmless misstatement.

[21] We are not persuaded that the motion judge’s interpretation of the phrase “lender disclosed by [Warburg]” is either strained or inconsistent with the balance of the contract. As noted by the motion judge, many potential lenders were well known to the appellants. Warburg’s role was to procure financing proposals and it was by revealing the willingness of a lender to make a financing proposal that it “disclosed” the lender to the appellants. In our view, the motion judge reasonably interpreted the restriction on communicating with a lender disclosed by Warburg without Warburg’s consent in para. 9 of the engagement agreements as referring, in RBC’s case, to the commercial lending department.

[22] As we read his reasons, the motion judge did not use subsequent events to interpret the meaning of para. 9 of the engagement agreements. Rather, he examined those events to determine whether Warburg met the requirements of para. 9. He found that RBC fell within the definition of “lender disclosed by [Warburg]” because prior to Warburg’s involvement, the appellants were unaware that RBC’s commercial lending department was willing to make a financing proposal to them. Moreover, until Warburg obtained a proposal from RBC, the appellants did not want to continue borrowing from RBC.

[23] The motion judge found as a fact that it was as a result of Warburg’s efforts that RBC offered financing to the appellants. We see no error in that conclusion or in his finding that Warburg was entitled to the benefit of para. 9 of the engagement agreements in all the circumstances. RBC was not excluded as a “lender” under the engagement agreements. In our view, the motion judge’s interpretation of para. 9 is not inconsistent with the other terms of the engagement agreements.

[24] We would not give effect to this ground of appeal.

[25] Second, and in the alternative, the appellants argue that the motion judge erred in calculating the amount owing to Warburg. The first way the motion judge erred is by finding that commission was owed to Warburg on loans that had been fully advanced by RBC years earlier rather than simply on the new facilities obtained under the 2013 RBC financing commitment.

[26] We do not accept this argument. Under the terms of paras. 9 and 4 of the engagement agreements, Warburg was entitled to be paid a commission in relation to the financing commitments into which the appellants entered. As noted by the motion judge, RBC made a fresh financing decision for all the loan facilities it provided. We see no basis on which to interfere with the motion judge’s interpretation of what was owing.

[27] The second way in which the appellants say the motion judge erred in determining the quantum owing is calculating commissions on what Warburg described as “Free Cash” in its claim. According to the appellants, “Free Cash” refers to the increase from $270,000 to $500,000 of the portion of the $3 million operating loan (Facility 1) that was not subject to margins. Since the amount was part of the $3 million on which commission had already been calculated, the additional commission of $20,000 awarded by the motion judge amounted to double-counting.

[28] We accept the appellants’ submission in this regard. The motion judge did not address this specific calculation in his reasons. Although Warburg claimed in oral argument on the appeal that the $500,000 is a separate facility unrelated to the $3 million operating loan, based on our review of the record, we are not persuaded that that is the case. We therefore reduce the amount of the commissions awarded in relation to the operation engagement agreement by $20,000.

[29] The appellants’ third argument on the appeal is that the motion judge erred in ordering that the appellants are jointly and severally liable for all amounts owing to Warburg. We agree with this submission. The motion judge provided no reasons for rendering the appellants jointly and severally liable and we can see none. Warburg’s claims against the appellants arise under the written engagement agreements. Liability under each engagement agreement should be restricted to the contracting parties under each agreement.

[30] The appellants’ final argument is that the motion judge erred in awarding higher costs than Warburg sought on a partial indemnity basis. Warburg sought substantial indemnity costs of $73,168.88 based on allegations of reprehensible conduct; or, in the alternative, partial indemnity costs to October 31, 2014 and substantial indemnity costs thereafter, totaling $70,538.79 taking account of offers to settle; or, in the further alternative, partial indemnity costs of $59,376.26. Taking account of a number of factors, including the fact that Warburg recovered nearly 100% of the amount truly in issue, the motion judge awarded Warburg partial indemnity costs of $65,000, inclusive of disbursements and applicable taxes. Assuming it was open to the motion judge to award an amount for partial indemnity costs greater than the amount claimed by Warburg, taking account of the reduction we have made to the amount Warburg recovered, we reduce the costs awarded to Warburg to the amount claimed by Warburg for partial indemnity costs.

The Cross-appeal

[31] Warburg raises two issues by way of cross-appeal.

[32] First, Warburg argues that the motion judge erred in giving the appellants credit for $12,500 on account of the initial retainer for Advisory Services in relation to the operating engagement agreement. Warburg points to para. 3 of the engagement agreement, which it claims entitled it to terminate the agreement and treat as forfeit all sums paid under the agreement in the event the appellants failed to disclose relevant facts. We see no merit in this argument. Although we agree that the appellants breached their disclosure obligations by failing to advise Warburg about RBC’s financing offer, Warburg did not terminate the engagement agreement. Therefore, it cannot rely on para. 3.

[33] Second, Warburg argues that the motion judge erred in dismissing its action against the personal defendants as the claims against them did not form part of the summary judgment motion. The appellants concede that the summary judgment motion did not address the personal defendants. In the circumstances, the order dismissing the action against the personal defendants should be set aside.

Disposition

[34] Based on the foregoing reasons:

i) the appeal is allowed in part, the order imposing joint and several liability on 134 for commissions owing under the operating engagement agreement is set aside, the amount owing for commissions under the operating engagement agreement is reduced by $20,000 and the amount awarded for partial indemnity costs is reduced to $59,376.26, the amount Warburg claimed for partial indemnity costs;

ii) the appeal is in all other respects dismissed;

iii) the cross-appeal is allowed in part, and the order dismissing the action against the personal defendants is set aside; and

iv) the cross-appeal is in all other respects dismissed.

[35] Costs of the appeal and cross-appeal are to Warburg on a partial indemnity scale fixed in the amount of $12,000, inclusive of disbursements and applicable taxes.

Released: “H.S.L.” February 26, 2016

“Janet Simmons J.A.”

“H.S. LaForme J.A.”

“Grant Huscroft J.A.”