Brompton Corp. v. Tuckamore Holdings LP et al.

[Indexed as: Brompton Corp. v. Tuckamore Holdings LP]

Ontario Reports

Court of Appeal for Ontario

MacPherson, Cronk and Benotto JJ.A.

July 10, 2017

136 O.R. (3d) 465 | 2017 ONCA 594

Case Summary

Contracts — Interpretation — Acquisition agreement providing that purchaser represented and warranted that purchaser "will have tax pools" as described in purchaser disclosure letter "immediately prior to Closing and after giving effect to the transactions contemplated by this Agreement" — Motion judge not erring in interpreting that provision as being directed solely to accurate identification of tax pools in existence and their value up to date of closing rather than as representation and warranty as to future tax utilization of tax pools.

Facts

The respondent purchased the appellant's business in exchange for the transfer to the appellant of certain securities held by the respondent. As a result of that transaction, the appellant became a minority shareholder of the respondent. Section 5.1(l) of the acquisition agreement stated that the respondent represented and warranted that, "Immediately prior to Closing and after giving effect to the transactions contemplated by this Agreement, the Purchaser will have tax pools as described in the Purchaser Disclosure Letter". The purchaser disclosure letter set out the tax losses, deductions and credits referred to as "tax pools" in s. 5(l) of the agreement.

Some years later, the appellant decided to divest its minority interest in the respondent and agreed to indemnify the respondent for its proportionate share of any tax liabilities assessed against the respondent under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) in respect of the period when the appellant was a respondent shareholder (the "Tuckamore indemnity").

In 2015, the Canada Revenue Agency disallowed the respondent's attempted use of the tax pools to reduce its taxable revenue during the 2009-2013 taxation years and assessed the respondent for $11.8 million in additional taxes, interest and penalties. The respondent invoked the Tuckamore indemnity. The appellant argued that the respondent had breached the representation and warranty in s. 5.1(l) of the acquisition agreement and could not rely on the Tuckamore indemnity. The motion judge granted the respondent's motion for summary judgment. The appellant appealed.

Decision

Held, the appeal should be dismissed.

The motion judge did not err in interpreting s. 5.1(l) of the acquisition agreement as being directed solely to the accurate identification of the tax pools in existence and their values up to the date of closing, rather than as a representation and warranty as to the future tax utilization of the tax pools.

Reasons

The Interpretive Issue

[1] BY THE COURT: -- The appellants appeal from the summary judgment granted against them by Hainey J. of the Superior Court of Justice, Commercial List, on February 1, 2017.

[2] The parties accept that the threshold issue on this appeal is the motion judge's interpretation of a written representation and warranty regarding tax pools given by the respondent's predecessor, as purchaser ("Brompton"), in favour of the appellants or their predecessors, as vendors ("Tuckamore"), in an acquisition agreement dated February 26, 2008 (the "agreement"). Under the agreement, Brompton purchased Tuckamore's business in exchange for the transfer to Tuckamore of certain securities held by Brompton. As a result of the transaction, Tuckamore became a minority shareholder of Brompton. It held its equity position in Brompton until September 2011.

[3] Tuckamore contends that the trial judge's interpretation of the tax pools representation and warranty is tainted by palpable and overriding errors and extricable errors of law. While Tuckamore advances other grounds of appeal from the motion judge's decision, it acknowledges that those grounds fall away if the motion judge's interpretation of the tax pools representation and warranty in the agreement is sustainable. Brompton agrees.

The Clause at Issue

[4] The clause at issue, s. 5.1(l) of the agreement, reads:

The Purchaser represents and warrants as follows to the Vendor and acknowledges and confirms that the Vendor is relying on such representations and warranties in connection with the sale by the Vendor of the Purchased Securities:

(l) Taxes. Immediately prior to Closing and after giving effect to the transactions contemplated by this Agreement, the Purchaser will have tax pools as described in the Purchaser Disclosure Letter.

(Bold in original)

[5] The purchaser disclosure letter cited in s. 5.1(l) sets out, in exhibit "A" thereto, the tax losses, deductions and credits referred to as "tax pools" in s. 5.1(l) of the agreement. Exhibit "A" lists the relevant non-capital losses and scientific research and experimental development expenditures and tax credits, together with their years of expiry and associated values for federal and provincial income tax purposes.

Background and the Indemnity

[6] In 2010, Tuckamore determined to divest its minority interest in Brompton. Accordingly, it approached Brompton and its other shareholders to determine if there was any interest in buying out its position. This led to a further agreement among the parties, dated July 5, 2011, regarding the sale of Tuckamore's minority interest. As a term of that agreement, Tuckamore agreed to indemnify Brompton for its proportionate share (40.94 per cent) of any tax liabilities, including interest or penalties, assessed against Brompton under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) in respect of the period when Tuckamore was a Brompton shareholder (the "Tuckamore indemnity"). Although several other agreements concern the commercial dealings between the parties, the focus of these reasons is s. 5.1(l) of the agreement and the Tuckamore indemnity.

The Central Question

[7] The matter now in contention is whether s. 5.1(l), properly construed in the context of the agreement as a whole, constitutes a representation and warranty as to the future tax utilization of Brompton's tax pools or, in contrast, whether it is directed solely to the accurate identification of the tax pools in existence, and their values, up to the date of closing of the purchase transaction contemplated under the agreement "after giving effect to the transactions contemplated by [the agreement]".

[8] The question of the proper interpretation of s. 5.1(l) is important because, after the closing of the transaction provided for under the agreement and after the date of the Tuckamore indemnity, the Canada Revenue Agency ("CRA") disallowed Brompton's attempted use of the tax pools to reduce its taxable revenues during the 2009-2013 taxation years. On March 4, 2015, the CRA assessed Brompton for approximately $11.8 million in additional taxes, interest and penalties. Brompton has challenged the CRA assessment in the courts. That challenge is still in progress.

[9] Following the CRA assessment, Brompton invoked the Tuckamore indemnity to claim that Tuckamore was obliged to indemnify Brompton for its proportionate share of the assessed taxes, interest and penalties and the costs incurred by Brompton in challenging the CRA assessment.

[10] Tuckamore resisted this claim, maintaining that s. 5.1(l) of the agreement is a representation and warranty that the tax pools would be available for post-closing tax utilization. Since the CRA has disallowed their use, says Tuckamore, Brompton has breached the s. 5.1(l) representation and warranty and cannot rely on the Tuckamore indemnity.

Motion Judge's Interpretation

[11] The motion judge recognized that the interpretive issue before him regarding s. 5.1(l) was one to which the principles in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 apply. Citing Sattva, he noted, at para. 26 of his reasons, that "the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix".

[12] Having next reviewed the governing principles for the interpretation of commercial contracts as set out by this court in Salah v. Timothy's Coffees of the World Inc., 2010 ONCA 673, at para. 16, the motion judge held, at paras. 29-31:

Applying these principles to the interpretation of s. 5.1(l) of the Acquisition Agreement, I have concluded that Brompton did not give Tuckamore a representation and warranty that the tax pools would not be subject to a future tax assessment by the CRA. The Purchaser Disclosure Letter does nothing more than list the amounts of the tax losses on a yearly basis specifying when each tax pool will expire. The Purchaser Disclosure Letter says nothing about the future use of the tax pools and there is no mention of whether they could be assessed by the CRA.

Brompton and Tuckamore are both sophisticated investors who carried out their own due diligence in respect of the tax pools. Commercial reality dictates that they both had to know that there was a risk that their intended tax applications of the tax pools could be assessed and disallowed by the CRA in the future. Neither could definitively predict what the CRA would decide if there was an assessment.

Under these circumstances it does not make commercial sense that Brompton would provide Tuckamore with a guarantee as to how the CRA would assess the use of the tax pools in the future. Considering the plain meaning of s. 5.1(l) of the Acquisition Agreement and the Purchaser Disclosure Letter against the factual matrix and the commercial reality of the transaction, I have concluded that Brompton's representation and warranty was only as to the existence, amount and expiry dates of the tax pools and did not guarantee their availability for future use without the risk of a CRA assessment. If Tuckamore truly wanted a guarantee that the future use of the tax pools would not be subject to an assessment by the CRA, the Acquisition Agreement could easily have specified this in clear unequivocal language. It did not do so.

(Emphasis added)

Court of Appeal's Analysis

[13] In our view, for the reasons that follow, Tuckamore has failed to identify either an extricable error of law or a palpable and overriding error in the motion judge's interpretation of s. 5.1(l) of the agreement. As Sattva instructs, the motion judge's interpretation is therefore entitled to deference from this court.

[14] We note, first, that the agreement is far from a standard form contract. It is the critical centrepiece of a series of associated contracts that implemented complex commercial transactions. It was negotiated by sophisticated parties with the assistance of professional legal and tax advisors.

[15] In these circumstances, the motion judge was obliged to consider the commercial context in which the agreement was concluded, the surrounding circumstances that were known or ought to have been known to the parties at the time of contract formation, and the language employed by them. As Sattva instructs, at para. 47, in matters of contractual interpretation, "a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract". The overriding interpretive task, Sattva instructs, is to determine "the intent of the parties and the scope of their understanding".

[16] In our view, that is precisely the interpretive exercise that the motion judge undertook. His reasons confirm that he was alert to the controlling interpretive principles, to the commercial context and factual matrix in which the agreement was concluded, and the language employed in the agreement by these informed and knowledgeable parties.

[17] In particular, and contrary to Tuckamore's contention, we see nothing in the motion judge's reasons to suggest that he failed to consider and to situate s. 5.1(l) in the overall context of the transaction between the parties, the entire agreement, and the purchaser disclosure letter that followed. His reasons reveal that he was aware of the Tuckamore indemnity and of an indemnity given by Brompton in favour of Tuckamore under s. 10.2(b) of the agreement. We see nothing in his reasons to support the assertion that he failed to consider these indemnities and the agreement as a whole when interpreting the meaning of s. 5.1(l) and its scope. This case, therefore, is distinguishable from Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2016 ONCA 246, 399 D.L.R. (4th) 575. See, also, Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2017 ONCA 293.

[18] We also do not accept that the motion judge erred by conflating the purchaser disclosure letter and the agreement. The former document was incorporated by reference in s. 5.1(l). Regard to its contents was a proper and necessary consideration in interpreting the intended meaning of s. 5.1(l).

[19] Moreover, and importantly, the motion judge's interpretation of s. 5.1(l) gives effect to the plain language of the section, as well as that of the purchaser disclosure letter. Neither s. 5.1(l) of the agreement nor the purchaser disclosure letter refers in any way to the future use of the tax pools or to their viability as an effective tax reduction device. We agree with Brompton's submission, as the motion judge essentially found, that the language of s. 5.1(l) suggests that Tuckamore was to be protected from the risk of misstatement of the tax pools -- not from the risk of a failed future utilization of them -- both at the time of closing and thereafter. As the motion judge pointed out, if the latter protection was intended by the parties, it would have been a simple drafting matter to say so in explicit language. This did not occur.

[20] That this is the proper interpretation of s. 5.1(l) is bolstered by the only contemporaneous documentary evidence of the protections requested or negotiated by Tuckamore concerning the tax pools. There is no dispute that the only document bearing on this issue is a Brompton e-mail dated February 11, 2008 to its legal counsel in which a request by Tuckamore for inclusion in the agreement of "a rep [representation] by Brompton as to the amount/expiry date of its tax losses [and development and investment tax credits]" is recorded. That is precisely what s. 5.1(l) and the purchaser disclosure letter provided. There is no evidence that Tuckamore negotiated for a representation and warranty by Brompton that the tax pools could or would be effectively utilized in the future for tax purposes.

[21] Finally, we reject Tuckamore's submission that the motion judge's interpretation of s. 5.1(l) of the agreement is infected by his own subjective interpretation of the commercial realities surrounding the bargain between the parties. As we have emphasized, the commercial context of the agreement formed part of the circumstances surrounding the formation of the agreement that the motion judge was obliged to consider. Those circumstances included the obvious risk that a future attempt by Brompton to use the tax pools to reduce its taxable revenues could be rejected by the CRA. The motion judge's assessment of those circumstances, as known to the parties, attracts deference from this court.

[22] At the end of the day, there was no evidence before the motion judge that Brompton offered any guarantee or assurance, or that Tuckamore sought a guarantee or assurance, that the tax pools could or would be successfully utilized by Brompton in the future, without review or adverse assessment by the CRA. Indeed, the evidence was to the contrary. There was uncontradicted evidence before the motion judge from Brompton's then chief executive officer that such a guarantee or assurance -- about the future conduct or reaction of independent third party taxation authorities -- would be an extraordinary and unprecedented commercial event.

Disposition

[23] For these reasons, the appeal is dismissed. Brompton is entitled to its costs of the appeal, fixed in the amount of $30,000, inclusive of disbursements and all applicable taxes.

Appeal dismissed.

End of Document