COURT OF APPEAL FOR ONTARIO

CITATION: Pohl v. Palisca, 2020 ONCA 531

DATE: 20200826

DOCKET: C66534

Feldman, Fairburn and Nordheimer JJ.A.

BETWEEN

Harry Pohl

Plaintiff

(Appellant)

and

Walter Palisca, Palcam Technologies Ltd., Karin Palisca, 1401763 Ontario Inc. and Palcam Solutions Inc.

Defendants

(Respondents)

Marc Munro, for the appellant

Hedy Epstein, for the respondents

Heard: June 23, 2020, by videoconference

On appeal from the judgment of Justice James Turnbull of the Superior Court of Justice, dated January 2, 2019, with reasons reported at 2019 ONSC 16.

REASONS FOR DECISION

[1] The appellant owned a milling production company named Die-Metric Tools Inc. (“DMT”). In an agreement signed on August 9, 2010, the appellant sold DMT to Palcam Technologies Ltd. That same day, the appellant signed an agreement giving his written approval for Palcam Technologies to assign its contractual rights and obligations over to Palcam Solutions Inc. The respondent Walter Palisca was the principal and operating mind of both Palcam Technologies and Palcam Solutions.

[2] Also on August 9, 2010, the appellant and Mr. Palisca signed an employment agreement. Mr. Palisca signed as the new president and CEO of DMT. The appellant agreed to work for DMT for two years. He was there to promote the goodwill of DMT with suppliers, vendors and bankers, but did not retain any decision-making powers.

[3] Until new financing was arranged, the appellant remained personally liable as guarantor for DMT’s operating line of credit loan. Things did not go well for DMT. Less than two months after the August 9, 2010 agreement had been signed, the bank froze the line of credit because it discovered that DMT’s ownership had changed. Within days of that occurring, Mr. Palisca discharged the appellant from his employment with DMT and, within a short time of that, Mr. Palisca had DMT assigned into bankruptcy. This left the appellant personally exposed on the remaining amount owing on the line of credit.

[4] The appellant claimed for damages for breach of contract and oppression pursuant to s. 248 of the Business Corporations Act, R.S.O. 1990, c. B. 16 (“OBCA”), wrongful dismissal and punitive damages.

[5] The trial judge found a total amount of $225,297.20 had been misdirected from DMT to Palcam Technologies Ltd. This constituted a breach of the implied term of fair and honest dealing in the contract between the Palcam entities and the appellant. As the president, sole director and operating mind of DMT, Mr. Palisca was found to be jointly and severally liable with the Palcam entities.

[6] In the alternative, the trial judge also found that the appellant was entitled to the same relief under s. 248(2) of the OBCA. Being personally responsible for the DMT line of credit, the trial judge concluded that the appellant was a creditor of DMT and, as such, he had a reasonable expectation that the line of credit would be paid down. The trial judge found that, instead of paying down the DMT line of credit, Mr. Palisca improperly sent monies to the benefit of the Palcam entities. Therefore, in the alternative to the findings against the respondents for breach of the director’s duty and breach of the common law duty of honest performance, the trial judge concluded that the same amount of damages was owed to the appellant for oppressive conduct under s. 248 of the OBCA.

[7] The trial judge dismissed all other claims for breach of the August 9, 2010 agreement, wrongful dismissal and punitive damages.

[8] Therefore, out of a claim involving a total request for damages in the amount of over $1,700,000, the appellant was awarded $225,297.20 in addition to pre-judgment and post-judgment interest calculated in accordance with the rate that the bank was charging the appellant on the guarantee. That judgment has been satisfied.

[9] The appellant contends that the trial judge erred in failing to conclude that he was owed more damages. Specifically, the appellant says that the trial judge made three errors:

(i) failing to address the express term of the contract that imposed an unconditional obligation to pay the appellant a minimum of $750,000 for his shares;

(ii) failing to appreciate that the basis of the claim relating to lost employment was rooted in an oppression remedy, rather than contract; and

(iii) failing to award punitive damages.

[10] For the reasons that follow, we allow the appeal only on the first point.

Did the trial judge err in determining the express terms of the contract?

[11] The trial judge dismissed the appellant’s claim for damages in the amount of $1,500,000 for breach of contract as it related to payment for his shares in DMT.

[12] The August 9, 2010 contract was the culmination of months of difficult discussions and dealings between the parties. There is no need to review that history.

[13] For the purposes of this appeal, the key fact is that an agreement was reached between the appellant and Palcam Technologies Ltd. on August 9, 2010. On that same day, the parties signed a consent to assignment of the rights and obligations under the agreement from Palcam Technologies to Palcam Solutions. While Palcam Solutions was renamed 1401763 Ontario Inc. shortly after the transfer, like the trial judge, we will refer to that company as Palcam Solutions.

[14] Section 3 of the August 9, 2010 agreement shows that the respondent Palcam Technologies agreed to purchase all outstanding shares of DMT. The salient parts of s. 3 read as follows:

The purchase price for the Purchased Shares is $1,500,000.00 subject to adjustment as set out herein. The purchase price for the Purchased Shares shall be payable as follows: …

(c) In the event there are undisclosed or unknown losses and/or liabilities by [DMT] … prior to closing, the purchase price and the obligation to pay $750,000 set out in section 9 below shall be reduced on a dollar for dollar basis …

(e) (i) Commencing on March 1, 2011, payments against the debt will begin at a rate of 13% of Net Profits, excluding SR&ED, calculated quarterly in arrears. ...

(f) After March 1, 2011, 20% of SR&ED refunds (as and when received) will be utilized for repayment of the purchase debt.

[15] Section 9 of the agreement reads as follows:

In the event that one half of the purchase price (namely $750,000) is not paid to the Vendor [the appellant] within five (5) years of closing, the unpaid balance of one half of the purchase price shall be paid to the [appellant] immediately and the percentages set out in sections 3(e) and 3(f) above shall thereafter be doubled to 26% and 40% respectively. [Emphasis added.]

[16] The appellant maintained before the trial judge that he was owed the full $1,500,000. The trial judge rejected that argument. He concluded that, while the August 9, 2010 agreement refers to that amount, it was only to be paid if the company was profitable. In other words, payment for the share value was to be taken from the profits. If there were no profits, then no payments were owing. Given that DMT went into bankruptcy so quickly, there were no profits and, therefore, the money is not owed and there was no breach of contract.

[17] In this court, the appellant challenges an aspect of the trial judge’s finding about the meaning of the contract. While he is prepared to accept the interpretation of the contract that the full $1,500,000 was not owed, he argues that, at a minimum, the face of the contract required the respondents to pay $750,000 for the appellant’s shares at the five-year mark.

[18] The appellant contends that s. 9 of the contract is clear and unequivocal in this regard, saying that if $750,000 was not paid within five years, it had to be paid (or the balance had to be paid) “immediately”. The appellant submits that the trial judge erred by failing to provide any explanation as to why this language did not mean what it says.

[19] While the respondents acknowledge that the trial judge did not specifically address the $750,000 issue – the first part of s. 9 – they say that the reasons for judgment must be read contextually and against the factual matrix of the case. According to the respondents, this approach leads to the conclusion that the trial judge turned his mind to the issue raised by the appellant and determined that the $750,000 payment was not owing because, as a whole, the contract only required payment from profits. As there were no profits, there was no need to pay the $750,000.

[20] In support of this view, the respondents point to two passages in the reasons for judgment. The first passage appears early in the reasons:

[The appellant] was to be paid $1.5 million for his shares from profits of DMT. The payments were not to commence until March 1, 2011, at which time payments were to begin at a rate of 13% of Net Profits. In the event that one half of the purchase price of $1.5 million ($750,000) was not paid to the vendor within five years of closing, the unpaid balance of one half of the purchase price was to be paid forthwith. [Emphasis added.]

[21] The second passage appears in the conclusion to the section dealing with the appellant’s claim for breach of contract for the share payment. Presumably relying upon ss. 3(e) and (f), the trial judge again reinforced that the purchase price was to be paid from the profits:

As the plaintiff was to be paid from the profits of DMT and clearly the company failed before that could occur, I find that the defendants did not breach the contract as alleged by the plaintiff. The plaintiff’s claim for $1,500,000 representing the sum for which he agreed to sell his shares in the two corporations is dismissed. [Emphasis added.]

[22] The respondents also submit that the trial judge properly applied the principles of contractual interpretation and considered the factual matrix as an aid to interpreting the August agreement. DMT was a failing business when it was purchased. Therefore, if DMT was not profitable, there would be no funds with which to pay the appellant and he would not get paid.

[23] If the trial judge understood the contract to mean that the appellant was only “to be paid from the profits of DMT,” there was an obligation to explain the reason for that conclusion. This is particularly true as it related to reconciling the language of s. 9 containing, as it did, reference to the need for a minimum payment of $750,000 to have been made by the five-year point. That explanation is absent from the reasons.

[24] While the combination of ss. 3(e) and 3(f) clearly sets out how the shares were to be paid for while DMT was operating – percentages taken from profits and refunds – there is an aspect of s. 9 that had to be squarely addressed in the reasons in order to resolve the claim resting on breach of contract.

[25] Section 9 clearly reads that if “half of the purchase price” had not been paid to the vendor by the five-year mark, then “the unpaid balance of one half of the purchase price shall be paid to the Vendor immediately …”. In other words, the purchaser had five years in which to pay a minimum of $750,000. It is difficult to get around the clear direction. While s. 3 governs how payments were to be made while the company was making a profit, s. 9 made clear that “in the event” that at the five-year point half of the purchase price had not yet been paid, it had to be paid “immediately.” Indeed, the contract anticipated that there may not be sufficient profit to pay the purchase price in total. Presumably that is why, at the five-year mark, the percentage to be taken from the profits was increased to greater ensure the payment of the total purchase price.

[26] In our view, s. 9 is clear on its face that, at a minimum, whether the company was making a profit or not, $750,000 was owing to the appellant “immediately” at the five-year mark. Section 9 would have no purpose if it was not directed at a situation where the $750,000 was owed from something other than the profits as dictated within ss. 3(e) and (f). Otherwise, it would have been paid in accordance with those provisions. In our view, read contextually, the sole purpose of s. 9 was to ensure that a minimum payment of $750,000 was given to the appellant for the shares, and that payment had to be made at the latest within five years of closing.

[27] While the respondents argue that the factual matrix behind the contract supports the interpretation that nothing was owing given that the business failed, we do not agree. While we accept that the respondents purchased the appellant’s shares in a struggling business with the intention of making it profitable again, the contract still reflected the purchase of a business. It would simply make no sense for the appellant to give his business away, while remaining personally liable for the line of credit. The benefit to him, and the way to keep things honest, was the requirement that at least $750,000 would be paid by the five-year point. That is the factual matrix against which the August 9, 2010 agreement was struck.

[28] While we agree with the trial judge that this was not a claim for breach of contract that could result in the full purchase price being awarded to the appellant, a payment of $750,000 was required on the plain wording of s. 9.

Did the trial judge err in dismissing the appellant’s claim for lost employment?

[29] Also on August 9, 2010, the appellant and Mr. Palisca, as the new CEO and president of DMT, signed a “general employment agreement.” The appellant was to be compensated at a rate of $60,000 gross per annum, less statutory deductions, for maintaining goodwill between the DMT, suppliers, vendors and bankers.

[30] The problem is that there was a bank loan that required that the bank be informed at least 30 days prior to any transfer in DMT’s ownership. When the bank learned that the ownership of DMT had changed hands, it froze the line of credit. This was largely the end of DMT because creditors started demanding repayment.

[31] Mr. Palisca was convinced that the appellant had informed the bank about the change in ownership, resulting in the freezing of the line of credit. This resulted in the appellant being discharged from his employment. Indeed, the respondents pursued a counterclaim founded upon the alleged “wrongdoing” of the appellant in having the line of credit frozen.

[32] Leaving aside that it is hard to imagine how compliance with a term of the agreement with the bank – notification of any change in ownership of DMT – could amount to wrongdoing, the trial judge rejected the counterclaim. The trial judge came to the factual determination that it was not the appellant who informed the bank about the change in ownership. The respondents do not appeal from the dismissal of the counterclaim.

[33] Based upon his conclusion that the appellant had been fired for something he did not do, the trial judge concluded that he had been wrongfully dismissed. Even so, the trial judge concluded that the appellant could not succeed in his claim for wrongful dismissal because his employment contract was with DMT. Accordingly, the appellant had to prove his wrongful dismissal claim in the bankruptcy of DMT for the amounts he was entitled to under that contract and he could not, in law, “enforce that breach of employment contract against the named defendants.”

[34] The appellant argues that dismissing his claim for wrongful dismissal on this basis is in error because the claim was not founded in contract but in an oppression remedy. The appellant emphasizes that compensation for lost employment can be within the scope of the oppression remedy, the key question being whether the case “is an oppression claim with a wrongful dismissal component” or a “wrongful dismissal claim that happens to have an oppression component to it”: 2082825 Ontario Inc. v. Platinum Wood Finishing Inc. (2009), 2009 CanLII 14394 (ON SCDC), 96 O.R. (3d) 467 (Div. Ct.) at para. 44, citing Walters v. Harris Partners Ltd., [2001] O.J. No. 1560 (S.C.) at para. 2.

[35] The appellant argues that the employment contract was an integral part of the agreement of purchase and sale and, therefore, it is the oppressive conduct of the defendants that caused him to lose his employment and it is that conduct that is compensable.

[36] We see no error in how the trial judge decided the matter.

[37] As the respondents point out, the appellant was no longer an officer, director, shareholder or owner of DMT at the time that he was dismissed from DMT. Moreover, his employment was not terminated because of a pattern of oppressive conduct, but because his employer thought that he had triggered a chain of events that resulted in the bank freezing DMT’s line of credit. While the trial judge concluded as a fact that this was not true, the trial judge’s reasons make clear that there was no oppressive conduct linked to the appellant’s dismissal.

[38] Importantly, the trial judge found that “this was not a nefarious scheme hatched by Mr. Palisca and his companies to strip DMT of its assets and to simply allow it to go into bankruptcy.” Rather, the trial judge found “ample evidence” of significant efforts having been made to try and make the company viable and profitable again. He specifically found that the respondents were under no obligation to get refinancing. In any event, they did try.

[39] Accordingly, even if this claim was one rooted in an oppression remedy, it could not have succeeded.

Did the trial judge err in refusing to grant punitive damages?

[40] The trial judge concluded that, based upon his factual findings, punitive damages were not appropriate. As he said, the respondents’ conduct “falls short of the high handed, harsh, vindictive, reprehensible and malicious conduct required to found such an action.”

[41] The appellant asks us to come to a different conclusion. We see no error in the trial judge’s decision. He was clearly aware of the legal test applicable to awarding punitive damages. He applied that test. While the appellant would have us come to a different conclusion in this regard, that is not the function of an appellate court. The trial judge is owed deference in this respect and we see no basis upon which to interfere.

Conclusion

[42] The appeal is granted to the extent of providing an additional $750,000 for contractual damages jointly and severally against the defendants Walter Palisca and Palcam Solutions Inc. (now known as 1041763 Ontario Inc.) with pre-judgment interest commencing on August 9, 2015, being the date when this amount would have been immediately payable in accordance with s. 9.

[43] The appeal is dismissed in all other respects.

[44] On the agreement of the parties, the respondents will pay the appellant $20,000 in costs, all inclusive.

“K. Feldman J.A”

“Fairburn J.A.”

“I.V.B. Nordheimer J.A.”