Court of Appeal for Ontario

Date: 20220829 Docket: C70098

Before: Huscroft, Harvison Young and Sossin JJ.A.

Between:

Eric Shedletsky, Mark Shedletsky and Jed Schneiderman Plaintiffs (Respondents)

And:

EQ Advertising Group, Ltd. and EQ Inc. Defendants (Appellants)

Counsel: Matthew P. Gottlieb and Philip Underwood, for the appellants Ken Prehogan and Max Skrow, for the respondents

Heard: August 19, 2022

On appeal from the judgment of Justice Fred Myers of the Superior Court of Justice, dated October 29, 2021.

Reasons for Decision

[1] Following the oral hearing, we dismissed this appeal for reasons to follow. These are our reasons.

[2] This is an appeal from the judgment of Justice Myers granting the plaintiffs/respondents, Eric Shedletsky, Mark Shedletsky and Jed Schneiderman, motion for summary judgment.

[3] The factual background may be summarized as follows. The respondents sold their shares of their business, Tapped Network, to the appellants. The price was to be paid partly in shares of the appellants and partly through an earnout mechanism over the ensuing two years. The earnout mechanism provided for the payment of up to $1.4 million, 60 days after the second anniversary of the closing of the Share Purchase agreement (“SPA”). The appellants argue that the motion judge made a number of errors in interpreting the SPA.

[4] As is typical in the start-up space, the appellants agreed to employ two of the respondents, Eric Shedletsky and Jed Schneiderman, for two years to help with the transition and integration of the purchased business into the appellants’ operations. From the respondents’ perspective, this also let them manage operations to try to maximize their earnout payments. The parties agreed that this was intended to be a “win-win” scenario.

[5] The parties’ employment agreements provided that Eric and Jed would continue as employees of EQ Advertising Group Ltd. (“EQ Advertising”) for two years. The executed employment agreements formed conditions of the SPA and were attached as schedules to it. The central aspects may be briefly summarized.

[6] The SPA contained an accelerated capital payment provision (“Accelerated Provision”) which further stipulated that if Eric or Jed were terminated without cause after the first anniversary of Closing but prior to the second anniversary of Closing, one-half (1/2) of the capital payment totaling $1,400,000.00 would become payable.

[7] The SPA also contained an unprofitable quarter provision (“Unprofitable Quarter Provision”) stipulating that if the appellants experienced an unprofitable quarter, this would constitute a termination for cause event and Jed and/or Eric may be terminated at that time without any penalty or impact on the capital payments.

[8] The dispute arose when on March 31, 2020, EQ Advertising furloughed Eric due to the COVID-19 pandemic. The letter from the employer stated: “I regret to inform you that due to the current business activity related to COVID-19, it has become necessary for EQ Advertising Group Ltd. (“EQ Works”) to temporarily reduce its workforce”. EQ Advertising cut off Eric’s salary, email, internal communications and told him not to come to work.

[9] EQ Advertising emphasized at the time, in no uncertain manner, that it was not the intent to terminate Eric’s employment for cause or to terminate his employment at all.

[10] On April 14, 2020, Eric’s lawyer wrote to EQ Advertising to assert that EQ Advertising had constructively dismissed Eric effective March 31, 2020.

[11] It was not until approximately two months later that EQ Advertising purported to terminate Eric pursuant to the Unprofitable Quarter Provision.

[12] The motion judge granted the respondents’ motion for summary judgment. In applying the established principles of contractual interpretation, the motion judge found that EQ Advertising had constructively dismissed Eric without cause and that the Accelerated Provision had been triggered.

[13] On appeal, the appellants raised several grounds. First, that the motion judge failed to give effect to and properly interpret the Unprofitable Quarter Provision in accordance with the “win-win” or “lose-lose” intention of the parties. Second, that he misinterpreted the Unprofitable Quarter Provision by reading in a provision which required EQ Advertising to explicitly state that it was terminating Eric’s employment for cause. Third, that he failed to consider that his interpretation of the SPA leads to a commercially absurd outcome.

[14] For the reasons that follow, we would not give effect to any of these grounds of appeal.

[15] It is well established that the motion judge’s interpretation of the contract is entitled to deference in the absence of an extricable error: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 SCR 633, at paras. 52–55.

[16] All of the grounds of appeal reflect disagreement with the motion judge’s interpretation of the contract rather than extricable errors.

[17] Turning to the first ground of appeal, we find no extricable error in the motion judge’s interpretation of the Unprofitable Quarter Provision. He acknowledged the appellants’ submission that the SPA may have had a “win-win” purpose, but he emphasised that giving it effect would “ignore the plain words of the parties’ agreement”. Essentially, the appellants were attempting to “read out or ignore” the clear words of the contract which stipulated that “[i]f Eric or Jed are terminated without cause … the Capital Payment totalling $1,400,000.00 will become payable” (emphasis added).

[18] Further, the motion judge identified that the Unprofitable Quarter Provision created an exception to the Accelerated Provision. However, the motion judge found as a matter of fact that EQ Advertising did not exercise its option to terminate Eric for cause. EQ Advertising condoned the Unprofitable Quarter and terminated Eric without cause, thereby triggering the Accelerated Provision. EQ Advertising tried to “cooper up” the file in June 2020, by purporting to pay salary retroactively from April 16, 2020, which they then believed to be the relevant quarter-end to give them cause for dismissal. This simply reinforced that as of March 31, 2020, EQ Advertising did not purport to exercise a right to terminate Eric for cause.

[19] Turning to the second ground of appeal, we find no extricable error in the motion judge’s interpretation of the Unprofitable Quarter Provision. In particular, the motion judge did not read in a provision which required EQ Advertising to explicitly state that it was terminating Eric’s employment for cause.

[20] The motion judge first identified that Eric’s employment contract, which is appended to the SPA, contained the Unprofitable Quarter Provision which specifically states that an Unprofitable Quarter is “a termination for cause event”. He then contrasts it with the language of the Accelerated Provision, which is triggered by a “without cause” termination.

[21] After carefully considering the plain language of both provisions, the motion judge interpreted these provisions in light of the employment agreements appended to the SPA, and in light of the employment law terms of art employed by the SPA. It was open to the motion judge to conclude that the SPA required EQ Advertising to terminate Eric “for cause” to avoid triggering the Accelerated Provision. This interpretation gives life to the words of the contract and is consistent with the factual matrix underpinning the SPA.

[22] Finally, the appellants argue that the motion judge erred by failing to consider whether his interpretation of the SPA was commercially reasonable or gave rise to a commercial absurdity. We disagree.

[23] First, the motion judge interpreted the Accelerated Provision and the Unprofitable Quarter Provision with regard to the purpose for which those clauses were negotiated – to protect the parties’ respective interests – as well as the factual matrix underpinning the SPA.

[24] Second, the motion judge interpreted the plain and unambiguous language of the agreements with consideration for the purpose behind the Unprofitable Quarter Provision, which was to permit the appellants to “step in and replace the [respondents] as management” in the event that “things were not proceeding as hoped”. We find no error. The commercial reasonableness of the motion judge’s interpretation is furthered by the fact that EQ Advertising neither intended to “step in” nor actually “stepped in” for Eric, meaning that the Unprofitable Quarter Provision simply was not triggered.

[25] Third, the motion judge identified that in fact it was the appellants advancing a commercially absurd argument since it argued that “what they said, did, and intended as at March 31, 2020 does not matter under the share purchase agreement”.

[26] Finally, and as noted by the respondents, the appellants’ proposed interpretation of the agreement would lead to commercial absurdity as any termination during an Unprofitable Quarter – whether with or without cause – would not trigger the Accelerated Provision. As the motion judge found, such an interpretation would clearly ignore the plain words of the parties’ agreement.

[27] The appeal is dismissed. The respondents are entitled to costs in the agreed amount of $25,000, inclusive of disbursements and H.S.T.

“Grant Huscroft J.A.”

“A. Harvison Young J.A.”

“L. Sossin J.A.”