COURT OF APPEAL FOR ONTARIO
CITATION: 798839 Ontario Limited v. Platt, 2016 ONCA 488
DATE: 20160620
DOCKET: C58414
Strathy C.J.O., Blair and Lauwers JJ.A.
BETWEEN
798839 Ontario Limited and Jacobus Hanemaayer
Plaintiffs (Appellants)
and
Robert Platt, James Bay Kaolin Corporation, James Bay Company Mineral Resources Inc., Black Gregor Explorations Ltd., Carlson Mines Limited, Source Resource Corp., Andre Boudreau and All-Terrain Track Sales & Services
Defendants (Respondent)
AND BETWEEN:
Robert Platt, Source Resource Corp., James Bay Kaolin Corporation and James Bay Company Mineral Resources Inc.
Plaintiffs
- and -
Community Expansion Inc., Great Lakes Nickel Limited, 153078 Canada Inc., 798839 Ontario Limited, Great Lakes Kaolin Inc., Mineral Research Canada Inc., 894456 Ontario Limited, 810031 Ontario Inc., 667188 Ontario Inc., 667190 Ontario Inc., 650326 Ontario Inc., 907248 Ontario Limited, Jacobus Hanemaayer, Jeffrey Hanemaayer, Earl Orth, Eric Kraushaar And Erin McGoey
Defendants (Appellant)
Paul J. Pape and Joanna L. Nairn, for the appellants
Robert Isles and R. Donald Rollo, for the respondent
Heard: May 12, 2016
On appeal from the judgment of Justice Michael A. Penny of the Superior Court of Justice, dated January 31, 2014, with reasons reported at 2013 ONSC 6879.
R. A. Blair J.A.:
[1] This appeal involves the contractual interpretation of an agreement relating to the development of certain mining claims located in the James Bay lowlands of Northern Ontario.
[2] The appellants, Jacobus Hanemaayer and 798839 Ontario Ltd., assert that the agreement was in effect an agreement of purchase and sale whereby full ownership of the Claims was transferred to them outright, in return for their undertaking – but at their complete discretion – to do certain work in developing the Claims.
[3] The respondent, Robert Platt says the agreement (which is called an "Option Agreement", refers to the parties as "Optionor" and "Optionee", provides that the Optionee "will earn a 100% interest" in the mining claims by fulfilling certain conditions, and that the agreement is intended to operate as "an actual earn in of interest" in the claims), is an option agreement. Because the appellants did not comply with the conditions underpinning the option, he therefore remains entitled to the Claims.
[4] Penny J. agreed with Mr. Platt.
[5] For the reasons that follow, I agree with Penny J.
Factual Background
[6] This appeal is the culmination of a long-standing litigious war of attrition between Mr. Hanemaayer and Mr. Platt. The conflict began more than a quarter of a century ago and stems from a deal made between the two men and their respective corporations in 1988. The relationship fell apart in 1989, spawning at least three legal proceedings. This action was commenced in 1990. The trial extended over a period of 6 months in 2013.
The Genesis of the Project
[7] In 1988, Mr. Platt was a mining promoter in Timmins. He owned the rights to a number of mining claims in Northern Ontario. While this lawsuit concerned several of these claims, the appeal is confined to the issue of ownership of what are known as "the Kipling Claims", located in Kipling Township about 60 miles north of Kapuskasing.
[8] The Kipling Claims were thought to contain valuable deposits of the mineral kaolin – a naturally white clay substance that is used as a filler in the pulp and paper, plastic, paint and rubber industries, as a coating for paper, and in the manufacture of ceramic products. The exploration and development of these claims is referred to in the proceedings as "the Kaolin Project".
[9] Mr. Platt had exhausted his own funding, however, and he needed financing or investors or both to continue his exploration and development activities in respect of the Kaolin Project and his other claims.
[10] Mr. Hanamaayer was an investor and had, or had access to, financing.
[11] Although he was not familiar with the mining industry at the time, Mr. Hanemaayer became interested in the project when he learned of the commercial potential of the kaolin ore body from Mr. Platt and coupled that information with what he learned elsewhere about the tax advantages then available for investments in the Canadian mining exploration field. He represented other investors who were also interested in the prospects of obtaining mining exploration tax write-offs. As the trial judge found, at para. 20, "Hanemaayer proposed to take a very significant role in, and to arrange for the investment of very significant funds to finance, the initial exploration phase of the Kaolin Project."
[12] Mr. Hanemaayer incorporated 798839 Ontario Limited (798 Ontario) to act as the flow-through Canadian resource corporation for purposes of developing the Claims. This meant 798 Ontario would issue what are known as "flow-through" shares to the Hanemaayer investors – principally Heinz Kraushaar (deceased by the time of trial) and Kraushaar's two corporations – to raise the needed funding. "Flow-through" shares were the mechanism by which investors in mining exploration companies at the time were able to obtain tax write-offs against their other income by "flowing" the exploration costs incurred by the Canadian resource corporation directly "through" that corporation to the investors' own tax returns to be set off against that other income.
The Agreements
[13] Two agreements relevant to the appeal were entered into in order to effect the further exploration and development of the Kipling Claims and to accomplish the sought-after tax advantages. The first was the "Option Agreement", dated November 1, 1988, between Mr. Platt and 798 Ontario. The second was a "Management Agreement", entered into between Mr. Platt's company, James Bay Kaolin Corporation ("James Bay"), and 798 Ontario on the same date, whereby it was agreed that James Bay would carry out the necessary exploration development of the Claims – at an amount mutually agreed upon – in order to prove or disprove the existence and extent of the kaolin ore body and then to facilitate a final feasibility study for a full production operation.
[14] Although Mr. Platt provided what was apparently a common form of mining exploration agreement to Mr. Hanemaayer to work from, Mr. Hanemaayer was at all times represented by Eric Kraushaar – a lawyer and advisor, and the son of the investor Heinz Kraushaar. Mr. Platt was not represented.
[15] James Bay subcontracted the work under the Management Agreement, or some of it, to the defendants André Boudreau and his corporation All-Terrain Track Sales & Services. The trial judge dismissed the action as against them.[^1]
[16] By the time the relationship between the Hanemaayer and Platt interests broke down in 1989, the investors had advanced $10.8 million to the exploration and development of the Kipling Claims through 798 Ontario. $1.2 million was ultimately returned to Mr. Hanemaayer and used for other purposes.
The Trial
[17] There were many issues in play at trial. The appellants argued that:
(i) the Option Agreement transferred title and ownership to them completely and they therefore owned the Kipling Claims; and the agreement placed Mr. Platt in the position of trustee and the monies had been advanced to him in trust;
(ii) Mr. Platt had misused the funds, or at least failed to account for them adequately, and the investors were entitled to several millions of dollars in "credits" as a result;
(iii) the misuse of, or failure to account adequately for, the funds was the cause of the breakdown in the relationship; and,
(iv) they were entitled to damages for the loss of certain tax benefits because Mr. Platt was obliged to ensure the monies were used in a fashion that would guarantee their entitlement to claim the deductions provided by the tax program.
[18] By the time of the trial in 2013, both Mr. Hanemaayer and Mr. Platt were incapacitated by age and health concerns. Mr. Platt was incapable of testifying (his examination for discovery was accepted as his evidence at trial) and Mr. Hanemaayer testified via a number of limited and carefully monitored video conference appearances from his home. Although credibility was a difficult issue given these factors, the trial judge ultimately found Mr. Hanemaayer's evidence was not reliable and made no adverse findings against Mr. Platt.
[19] As noted, the trial issues referred to above also related to mining claims other than the Kipling Claims. In addition, the trial judge was faced with counterclaims by Mr. Platt and by Mr. Boudreau and his corporation for damages they alleged they had sustained.
[20] With the exception of a claim by Mr. Boudreau's company for a loss sustained on the sale of a piece of heavy equipment that had been purchased for the project, the counterclaims were dismissed. The appellants' action was dismissed in its entirety. More particularly, for the purposes of the appeal, the trial judge held, at para. 307, that Mr. Hanemaayer and 798 Ontario had no interest in the Kipling Claims and that,
Title to the Kipling Claims rests entirely with Platt and his assigns. As a result, ownership and title to the mining claims in Kipling township which are the subject of the Option Agreement dated November 1, 1988 between Platt and [798] Ontario shall revert and be restored to Platt.
Analysis
[21] Although the appellants address items (i) through (iv) outlined in para. 17 above in their factum, they nonetheless raise only one issue on appeal:
Did the trial judge err in interpreting the Option Agreement to include an automatic reversion of the Kipling Claims to Platt in the event that development of the project was not fully funded?
[22] I see no basis for concluding that the trial judge erred in this respect. Indeed, I am in substantial agreement with his interpretation of the Option Agreement and his reasoning on this point set out at paras. 295-307.
[23] The trial judge properly held that in interpreting a commercial contract the court must give effect to the intention of the parties as derived from the words they have used, in the context of the contract as a harmonious whole and the factual matrix in which it was entered into. He relied on the following passage from this Court's decision in Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, 268 O.A.C. 279, at para. 16:
When interpreting a contract, the court aims to determine the intentions of the parties in accordance with the language used in the written document and presumes that the parties have intended what they have said. The court construes the contract as a whole, in a manner that gives meaning to all of its terms, and avoids an interpretation that would render one or more of its terms ineffective. In interpreting the contract, the court must have regard to the objective evidence of the "factual matrix" or context of the underlying negotiation of the contract, but not the subjective evidence of the intention of the parties. The court should interpret the contract so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity. If the court finds that the contract is ambiguous, it may then resort to extrinsic evidence to clear up the ambiguity. Where a transaction involves the execution of several documents that form parts of a larger composition whole – like a complex commercial transaction – and each agreement is entered into on the faith of the others being executed, then assistance in the interpretation of one agreement may be drawn from the related agreements.
See also Bell Canada v. The Plan Group, 2009 ONCA 548, 96 O.R. (3d) 81, at paras. 37-38, and De Beers Canada Inc. v. Ootahpan Company Limited, 2014 ONCA 723, [2014] O.J. No. 4904, at para. 3.
[24] The Supreme Court of Canada has recently held that "[c]ontractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix", and therefore that the trial judge's interpretation is entitled to deference on appeal: see Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 50. The appellants acknowledge this, but rely on the Court's recognition that if it is possible to identify an extricable error of law, a judge's error on such an issue does not attract deference: Sattva, at para. 53. Citing this Court's decision in First Elgin Mills Developments Inc. v. Romandale Farms Limited, 2015 ONCA 54, 381 D.L.R. (4th) 114, at para. 9, they argue that an extricable error of law occurs where the judge "misapprehended the evidence, reached an interpretation of the agreement that was commercially unreasonable, and improperly implied a term in the agreement when the legal standard for doing so was not met." They submit that the trial judge's interpretation is caught within these categories.
The Trial Judge Did Not Fail To Give Effect To The Plain Wording Of The Agreement Or Misapprehend The Evidence In Respect Of It
[25] First, the appellants contend that the trial judge failed to give effect to what they say is the clear language of s. 3 of the Option Agreement. Section 3 provides that "on closing[^2], the Optionor [Platt] shall transfer unto the Optionee [798 Ontario] 100% of its right, title and interest in and to the said Claims … to and for its sole and only use forever…" The appellants submit that this error was fed by a misapprehension of the evidence. What they characterize as the trial judge's misapprehension of the evidence is his finding that the transfer of title provided for in s. 3 was simply to facilitate the flow through of the development and exploration costs to the investors under the tax program by giving 798 Ontario the legal title to the Claims without transferring the beneficial interest in them to the corporation.
[26] I reject this submission.
[27] There was evidence from Mr. Platt upon which the trial judge could find, as he did, that 798 Ontario held legal title "[f]or tax and other reasons to protect its investment" and that "like a mortgagor, beneficial title remained with Platt" (para. 303). Counsel for the appellants conceded that there was evidence the investors had to have "title" in order to enjoy the benefits of the tax program. What the appellants characterize as a misapprehension of the evidence, therefore, is more accurately characterized as a disagreement with a factual finding made by the trial judge. The finding was supported by the record and puts the language of s. 3 in its proper perspective in relation to the other terms of the Option Agreement.
[28] The wording of the Option Agreement makes it clear: (i) that the Optionee (798 Ontario) would only "earn a 100% interest in the said mining claims" by fulfilling its obligations, over a period not exceeding five years, to finance and carry out the required exploration, development and testing work (emphasis added: s. 2); (ii) that upon 798 Ontario "satisfying the aforesaid obligations, [Platt] will retain a 5% net profit royalty interest in the said mining claims" (s. 2); and (iii) that the Agreement was "intended to be and shall operate as an actual earn in of interest in the Claims" (emphasis added: s. 8). These provisions are reinforced by the recitals to the Option Agreement as well:
WHEREAS the Optionor [Platt] is the beneficial owner, free and clear of liens and encumbrances, of certain mining claims situated in the Province of Ontario;
AND WHEREAS the parties hereto have agreed that the Optionee [798 Ontario] shall earn a certain interest in the mining claims of the Optionor [Platt] by financing and carrying out certain exploration development and testing work on the said Claims as hereinafter set out. [Emphasis added.]
[29] In my view, the trial judge's interpretation is consistent with, and gives effect to, the language of the contract as a whole, having regard to the circumstances surrounding its negotiation and the purposes for which it was entered into – the twofold purposes of developing the Kaolin Project and providing the flow-through tax benefits to the investors.
The Factual Matrix and Commercial Sense
[30] The appellants acknowledge the trial judge's interpretation of the Option Agreement was rooted in his view of the surrounding circumstances, but their second submission is that he ignored at least two critical parts of the factual matrix.
[31] The appellants say the trial judge failed to give effect to the fact that, at the time the Option Agreement was signed, Mr. Platt was in dire financial straits and in desperate need of an investor who could develop the claims. Accordingly, while the mining claims had significant potential value they were all but worthless to Mr. Platt without an investor willing to fund the development. It followed from this that Mr. Platt did not have the leverage to extract the type of unbalanced protection of his interests that emerged from the Option Agreement, the argument goes.
[32] From there, the appellants move to the additional aspect of the factual matrix they contend the trial judge ignored. They argue the trial judge's interpretation provides no protection for the up to $20 million that 798 Ontario may have had to put up (for all of the projects) because, on the trial judge's interpretation, they lose everything, and would be left with nothing to show for their investment, if the projects were not fully funded, while Mr. Platt would retain the Kipling Claims plus all the benefits of the investment in such circumstances. They submit that this makes no commercial sense and does not reflect their superior bargaining power at the time the Option Agreement was made. In short, since Mr. Platt did not have the bargaining power to negotiate such an unbalanced outcome, the Option Agreement must not provide for such an outcome, and the contrary interpretation put forward by the appellants is the reasonable interpretation.
[33] I see no merit in this argument.
[34] The trial judge was aware of, and took into account, the fact that Mr. Platt was in need of funds to advance the project. There is nothing in the record to support either the contention that the parties were in unequal bargaining positions or, if they were, that this inequality somehow led to what, on the appellants' interpretation would have been an equally unbalanced interpretation of the contract – one where Mr. Platt would give up all interest in his claims, and any control over and security for their exploration and development, in exchange for a potential 5% royalty (from a new company with no assets) at the end of the day. That is the logical end point of the appellants' position that the Option Agreement was in effect an agreement of purchase and sale pursuant to which they acquired the full legal title and beneficial interest in the Kipling Claims at once, whether they carried out their exploration, development and testing obligations or not, or advanced any funds or not.
[35] The reality is that option agreements are by nature instruments that can be viewed as providing for "unbalanced" outcomes from the perspective of either the optionor or the optionee. The optionor benefits from the "price" if the option is exercised (whether the "price" is in the form of a money payment or, as in this case, other consideration in the form of work performed), but runs the risk of being stuck with that price even if the value of the property or right that is optioned turns out to be considerably more that the optionor bargained for. The optionee buys the ability to obtain the property or the right optioned at the agreed "price" upon performing its obligations, but has the complete discretion or freedom whether to perform the obligations or not; however, if the optionor chooses not to do so, it loses the price paid for the option.
[36] Either outcome can appear one-sided. However, the fact that one or another may occur does not indicate either that the negotiating table was tilted in favour of one party or another, or that the parties did not intend to enter into an option agreement.
[37] Moreover, it is in the nature of an option agreement that the optionee typically loses the option price if it decides not to pursue the option by paying the price (in this case, by performing all the exploration, testing and feasibility study obligations). As Angela Swan and Jakub Adamski note in Canadian Contract Law, 3rd Ed. (Markham, ON: LexisNexis Canada, Inc., 2012), at p. 276:
Option contracts are lopsided in the sense that, apart from the obligation to pay for the option, the optionee has complete freedom to exercise the option or not – and, of course, this is exactly what the optionee bought. Generally speaking, options will be strictly construed and the optionee, in particular, required to exercise the option exactly in accordance with its terms. The reason for this attitude is that, by giving the option, the optionor is taking the risk that it will be held to the terms of the deal, particularly the price, that it offered. It should be able to rely on the optionee having to comply precisely with the terms of the option, particularly the deadline for acceptance.
[38] This is the answer to the appellants' assertion that it makes no commercial sense to interpret the Option Agreement in a fashion that requires them to advance $10.2 million towards the Kaolin Project without obtaining any interest in the Claim. The exploration development, testing and feasibility study work they agreed to do was simply the price they agreed to pay for the right to earn their 100% interest in the Kipling Claims and to move forward with the Kaolin Project in conjunction with Mr. Platt who would thereafter retain the right to a 5% royalty payment from the profits of the venture.
[39] Mr. Platt also retained the right, after 798 Ontario had obtained its 100% interest, to buy back a minimum 50% interest in the Claims if the appellants did not proceed further to bring the mine into production. The trial judge rightly concluded that the "buy-back" provisions found at ss. 5 and 6 of the Option Agreement did not come into play in the circumstances. Nor were they inconsistent with the trial judge's interpretation of the Option Agreement. One might ask why Mr. Platt was being given the right to "buy back" a 50% interest (or more) in the Kipling Claims if the title and interest in the Claims had not been transferred as the appellants say was effected by s. 3. But the answer is that the buy-back provision only kicks in after the appellants have fulfilled the conditions necessary for earning their 100% interest; it is designed to ensure that once they had done so they continued to the production phase and that, if they did not, Mr. Platt was entitled to re-acquire an interest and do so himself.
The Implication of Terms
[40] Thirdly, the appellants argue that the trial judge erred by improperly implying a term into the Option Agreement, namely that the rights in the Kipling Claims would "revert" to Mr. Platt if 798 Ontario did not fulfill the conditions precedent to its obtaining its 100% interest. Again, I disagree.
[41] There was no need to imply a term that the beneficial interest in the Claim would revert to Mr. Platt, and the trial judge did not do so. The beneficial interest had never been transferred to 798 Ontario. What reverted back to Mr. Platt was the legal title, which had been transferred for the tax reasons outlined above. This is what the trial judge found to be the case, at para. 303:
For tax and other reasons to protect its investment, [798] Ontario held legal title to the Kipling claims but, like a mortgagor, beneficial title remained with Platt. Unless Hanemaayer financed the Project to the requisite state, legal title to the Kipling Claims would revert to Platt.
[42] This is entirely consistent with the trial judge's overall interpretation of the Option Agreement. In a fashion with which I agree, he summarized that interpretation, at paras. 298 and 301-302:
These expenditures,[^3] and particularly the second of these expenditures, [were] specifically agreed to be discretionary to [798] Ontario. This does not mean, however that if, in its discretion, [798] Ontario chose not to finance the test facility, bulk sampling and material testing, it still earned its ownership interest of the Kipling Claims. To the contrary, the only interpretation of the Option Agreement that makes any sense is that while [798] Ontario could not be compelled to finance the test facility, bulk sampling and material testing (or be sued for failing to do so), if it did not finance these additional steps, the ownership of the Kipling Claims was not earned and reverted back to Platt.
In my view, Hanemaayer's interpretation of the Option Agreement would defeat its entire purpose. According to Hanemaayer, the Option Agreement was not an option at all; it represented an outright sale of the Kipling Claims against the promise of future consideration.
That is not how I view the Option Agreement. The Option Agreement must be read in the context of the other Agreements made by the parties at the time. Read as a whole and in the context of the surrounding circumstances, it is clear that the Option Agreement was critical to the protection of Platt's principal interest in and contribution to this deal – his ownership of the Kipling Claims. In order to acquire the Kipling Claims, [798] Ontario had first to finance the two steps necessary to conduct a feasibility study to determine whether the Kaolin Project represented a commercially viable mining operation. [798] Ontario could not be compelled to do so but, if it did not, it would not "earn" its right to the Kipling Claims.
[43] While the parties could have been more careful and included a specific term to this effect, it followed naturally from the failure of 798 Ontario to fulfill its obligation and earn its interest in the Claim. I observe again that Mr. Hanemaayer had legal advice and that Mr. Platt did not.
[44] The trial judge summarized his findings and conclusions at paras. 305-306:
I find, as a fact, that while [798] Ontario financed a drilling exploration program to prove or disprove the existence and extent of the kaolin ore body on the Kipling Claims, it did not finance pilot plant, bulk sampling, other material testing and other undertakings to the extent necessary to establish a final feasibility study for a full production mining facility.
Hanemaayer and [798] Ontario's failure to fulfill the second requirement to earn an interest in the Kipling Claims was not the result of Platt's conduct. Rather, the Kaolin Project was not taken to the bulk sample/test facility/commercial feasibility stage because, by December 1989, Hanemaayer had sized up Platt as somewhat naïve and a bit of a dreamer. He took Platt's vision of developing the Kaolin Project and used it to obtain an enormous tax benefit for the flow-through shareholder investors. He then concluded that he could easily squeeze Platt out of the Project and, with his superior financial resources, take over the entire Project for himself. Hanemaayer chose to cease all funding to Platt. The price of Hanemaayer doing so was to forfeit his interest in the Kipling Claims.
[45] These findings and conclusions are fully supported by the record.
Disposition
[46] For the foregoing reasons, the judgment below is affirmed and the appeal is dismissed.
[47] In accordance with the agreement of counsel, the respondent is entitled to costs of the appeal fixed in the amount of $20,000 inclusive of all disbursements and applicable taxes.
Released: June 20, 2016
"R.A. Blair J.A."
"I agree G.R. Strathy C.J.O."
"I agree P. Lauwers J.A."
[^1]: The appellants originally appealed against this decision as well. However, the appeal was dismissed as against Boudreau and All-Terrain by order of Rouleau J.A., dated February 18, 2015, for the failure of the appellants to comply with an order for security for costs granted in favour of Boudreau and All-Terrain by Simmons J.A. on December 17, 2014.
[^2]: The "closing" apparently occurred on November 7, 1988.
[^3]: The exploration, testing and feasibility study expenditures which constitute the "condition" set out in s. 2 of the Option Agreement.