Boliden Mineral AB v. FQM Kevitsa Sweden Holdings AB, 2023 ONCA 105

COURT OF APPEAL FOR ONTARIO

DATE: 20230216 DOCKET: C70070

Fairburn A.C.J.O., Simmons and Zarnett JJ.A.

BETWEEN

Boliden Mineral AB and Boliden Kevitsa Mining Oy Applicants (Respondents)

and

FQM Kevitsa Sweden Holdings AB, First Quantum Minerals Ltd., FQM Finance Ltd., and FQM Projects Finance Ltd. Respondents (Appellants)

Counsel: Patrick Flaherty, Andrew Finkelstein, and Brendan Brammall, for the appellants Crawford Smith and Zain Naqi, for the respondents

Heard: January 25, 2023

On appeal from the judgment of Justice Michael A. Penny of the Superior Court of Justice, dated November 1, 2021, with reasons reported at 2021 ONSC 6844.

REASONS FOR DECISION

Introduction

[1] In a transaction that closed in June 2016, the appellants (“FQM”) sold the shares of a Finnish mining company – the respondent Boliden Kevitsa Mining Oy (“Kevitsa”) – to the respondent Boliden Mineral AB (“Boliden”). FQM gave representations, warranties, and indemnities in the sale agreement pertaining to Kevitsa’s pre-closing tax liabilities.

[2] A reassessment of Kevitsa by the Finnish tax authorities in 2018 materially increased Kevitsa’s taxable income for 2012-2016. The parties did not agree on the extent of FQM’s indemnification obligation arising from the reassessment.

[3] The application judge agreed with Boliden and Kevitsa about the extent of FQM’s obligation. For the reasons that follow, we dismiss FQM’s appeal from that determination.

Background

[4] Kevitsa is a Finnish corporation. It owns and operates a mine in northern Finland.

[5] Until June 2016, Kevitsa (then known as FQM Kevitsa Mining Oy) was owned by FQM. Under a share purchase agreement governed by Ontario law (the “SPA”) that closed on June 1, 2016, Boliden purchased all the shares of Kevitsa for US$712,000,000.

[6] The SPA included representations and warranties by FQM that, with respect to the period up to closing, Kevitsa had timely filed all required tax returns which were “complete and correct in all material respects”, all taxes due and payable had been paid except for contested amounts disclosed and provided for in Kevitsa’s financial statements, there was no audit underway or discussion ongoing with any tax authorities, and “[t]here are no grounds for the reassessment of the Taxes of [Kevitsa and its subsidiary]”.

[7] Under what the application judge described as the SPA’s “general indemnification obligation”, FQM was required to indemnify Boliden and Kevitsa for any “Losses” arising from any breach or inaccuracy in the representations and warranties. The SPA defined “Losses” to include any loss, damage, penalty, tax, or interest, and specified that consequential or indirect loss was an indemnifiable loss to “the extent it is a reasonably foreseeable consequence of the event or circumstance constituting the ground for the applicable indemnification obligation”.

[8] The SPA contained a further indemnity that did not depend on a breach or inaccuracy of a representation or warranty. This tax-specific indemnity (to adopt the application judge’s description) required FQM to hold Boliden and Kevitsa harmless and to indemnify them against “any Taxes required to be paid or remitted by [Kevitsa] … with respect to any Pre-Closing Tax Period”.

[9] While it was owned by FQM, Kevitsa had accumulated tax losses. At the end of the 2015 tax year, Kevitsa had tax loss carry forward amounts of about 81 million €. Under Finnish law, tax losses of a company after a change in control are prima facie forfeited. FQM wrote the losses down to zero in anticipation of the sale, and no part of the purchase price on the share sale was attributed to the tax losses. However, a company may, after a change in control, obtain a permit from the Finnish Tax Administration to use pre-existing tax losses. Kevitsa applied for such a permit after closing, and one was granted. The result was that Kevitsa was able to use the pre-closing accumulated tax losses.

[10] In 2017, the Finnish Tax Administration commenced an audit of Kevitsa. It issued a final reassessment report in December 2018. The focus was on a reorganization undertaken by FQM in 2010 that had generated interest expenses and foreign exchange losses, which were claimed in following years. Concluding that the reorganization was a tax avoidance measure devoid of economic substance, the reassessment disallowed about 113 million € in expenses that had been claimed in the 2012-2016 tax years, increasing Kevitsa’s taxable income by that amount.

[11] As a result of the reassessment, Kevitsa became liable to pay an additional 16,037,367 € for 2012-2016, made up of taxes, penalties, and interest. These amounts would have been higher, except Kevitsa was able to use the accumulated tax losses to offset the amounts otherwise payable.

[12] In 2017 and 2018, Kevitsa earned income, but it would not have had to pay as much tax for those years if it had been able to use the accumulated tax losses. However, as a result of the increased taxable income for the years 2012-2016 arising from the reassessment, the accumulated tax losses were effectively used up offsetting taxes that became payable in that period. Kevitsa therefore incurred additional tax liabilities for 2017-2018 of 14,398,435 €. The application judge described this as a “further consequence” of the reassessment.

[13] Kevitsa appealed the reassessment to the Finnish Tax Adjustment Board. FQM directed the submissions made by Kevitsa, as approved by Boliden. A key element of the submission on the tax appeal was that the reassessment was the result of a novel reinterpretation of Finnish tax law. The appeal was unsuccessful.

[14] A further appeal was taken to the Northern Finnish Administrative Court; that appeal was outstanding at the time of the application judge’s decision. We were advised by counsel that that appeal also proved unsuccessful, as was an application for leave to appeal to the Supreme Administrative Court of Finland. We were also advised that a further application for an extraordinary appeal to the Supreme Administrative Court was filed in December 2022. It remains outstanding.

The Application Judge’s Decision

[15] Before the application judge, FQM conceded that, as a result of the tax-specific indemnity, it was liable for reassessed taxes actually paid or ultimately found payable for the “Pre-Closing Tax Period”, that is, the years 2012-2015 and the portion of 2016 up to the closing in June. The application judge determined that FQM’s indemnification obligations extended to the tax liabilities brought about by the reassessment for the years 2012-2016 (including the post-closing part of that year) and the tax liabilities incurred in 2017-2018. He reached the conclusion by two routes.

[16] First, he found that FQM had breached the representation and warranty in the SPA that there “are no grounds for the reassessment” of Kevitsa’s taxes. He considered that representation and warranty to be “absolute and unconditional”, thus making irrelevant FQM’s evidence about what it actually knew or might reasonably have been expected to know about the prospect of a reassessment as at the closing date.

[17] He then turned to the general indemnification provision of the SPA relating to breaches of warranties and representations. He found that, but for the reassessment, the accumulated tax losses would have been available to offset Kevitsa’s taxable income in 2017-2018. But due to the reassessment, the accumulated tax losses were unavailable because they had to be used to offset increased taxes for prior years arising from the reassessment. The loss of the accumulated tax losses, leading to the requirement to pay higher amounts of taxes in 2017 and 2018, was a consequential or indirect loss that was a reasonably foreseeable consequence of the event or circumstance that gave rise to the indemnification obligation.

[18] Second, he found that under the tax-specific indemnity, the taxes for 2017-2018 were “Taxes required to be paid … with respect to [a] Pre-Closing Tax Period” because they were “causally linked to the reassessment of the 2012-2016 pre-closing tax years.”

[19] In light of the pending tax appeals and the fact that the final amounts of taxes owing could change, the application judge ordered FQM to reimburse Boliden and Kevitsa for the amounts that had actually been paid to the tax authorities for the relevant years (at that point, 8,644,615 €), with the final calculations to follow the final disposition of the tax appeals.

Analysis

[20] FQM argues that the application judge erred in finding liability for any amounts beyond those ultimately found payable for the Pre-Closing Tax Period, that is, the tax periods ending on or prior to the closing date of June 1, 2016. FQM submits that this result cannot be sustained under either of the routes the application judge articulated.

[21] As we find no reversible error in the application judge’s conclusion under the first route (breach of representation and warranty/general indemnification), it is unnecessary to consider the arguments advanced relating to the second route (the tax-specific indemnity).

[22] The application judge’s interpretation of the SPA, a bespoke commercial agreement, is subject to a deferential standard of review in the absence of an extricable legal error: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 52-53.

[23] FQM argues that the application judge made two extricable legal errors in interpreting the breadth of the representation and warranty that there were no grounds for reassessment of Kevitsa’s taxes.

[24] First, FQM submits that the application judge failed to approach the matter from the perspective that a representation and warranty is required to be true on the date it is made (in this case, the date of closing of the SPA). FQM submits that this is a principle of contractual interpretation – representations in an agreement must be assessed as speaking from the time they are made and are not actionable simply because in light of a subsequent event they are no longer true – and cites Beatty v. Wei, 2018 ONCA 479, 429 D.L.R. (4th) 63, at paras. 7, 55.

[25] FQM points to the application judge’s statement that the representation and warranty “turned out to be inaccurate” as indicating that he did not apply the correct temporal focus. FQM submits that, viewed at the time of closing, the representation and warranty was true. The reassessment should be viewed as having arisen due to a post-closing reinterpretation of tax legislation, the characterization given to it in submissions directed by FQM and approved by Boliden for Kevitsa’s (to date unsuccessful) tax appeals from the reassessment.

[26] In our view, the application judge did not make the error alleged. He directed himself to the provision of the SPA that representations and warranties were to be true and correct at the time of closing. He considered the words used in the context of the agreement as a whole and the factual matrix. He distinguished the language of the representation and warranty in question from other representations and warranties in the SPA which were limited to the knowledge of the sellers. His conclusion – that the representation and warranty could be untrue as of the time of closing even if the prospect of reassessment was neither known to or reasonably expected by FQM (or, for that matter, by Boliden) at that time and only became apparent later – was reasonably arrived at. As the application judge stated:

As sophisticated commercial parties, FQM and Boliden both understood, by including this provision at all, that the door was not closed on a potential reassessment of Kevitsa’s tax position and that the risk of a reassessment could materialize after the SPA was concluded.

[27] We do not read the application judge’s statement that the representation and warranty “turned out to be inaccurate” to be a finding that the grounds for reassessment only came into existence after the closing, as opposed to a finding that they existed at the time of closing but became apparent later. This is especially so in light of the words he used immediately following the impugned turn of phrase. His full finding was as follows:

The representation and warranty in 3.1.22(d) says “there are no grounds”. That turned out to be inaccurate. There were grounds and the FTA acted on them to reassess Kevitsa’s 2012 to 2016, as well as the 2017 and 2018, tax years. That decision has been upheld on the first level of appeal. I conclude, therefore, that the reassessment of Kevitsa’s 2010 Restructuring was a “breach or inaccuracy” of the clear and unqualified representation and warranty that there were “no grounds” for a reassessment. [Emphasis added.]

[28] We also reject the argument that the application judge was required to find that because of the submission made on behalf of Kevitsa in its tax appeals, the grounds for reassessment only came into existence after closing as a result of a novel reinterpretation of Finnish tax law. To date, that submission has been rejected in the tax appeal process. The application judge expressly referenced that finding:

The Board found, among other things, that:

This case is about the tax legal evaluation of the arrangement undertaken by FQM group on the basis of Section 28 of the Tax Assessment Procedure Act [the general anti-avoidance provision], not about the retroactive interpretation of the tax legislation, as the Company has argued, or the retroactive change of taxation.

… taking into account the working of the tax evasion provision and the current state of case law, the reassessment decision of taxation made by the Tax Administration is not contrary to the principle of legality enshrined in the Finnish Constitution either. Hence, there is no reason to overturn the reassessment decision of the Tax Administration on this ground either.

The completely artificial and cascading arrangement now at hand involved tax evasion. This came up only in the tax audit of the Company. By behaving in the above-mentioned way, the Company filed an essentially false tax return intentionally or by gross negligence with a view to evading tax.

[29] In our view, it was open to the application judge to determine that the grounds for reassessment existed at the time of closing because that was consistent with the result arrived at in the Finnish tax process that determines tax liabilities.

[30] For the same reasons, we also reject FQM’s second and related argument that the application judge read words out of the representation and warranty, essentially treating it as though it warranted that there could never be a reassessment. The application judge found, in accordance with the wording of the provision, that the representation and warranty was breached because grounds for a reassessment existed at the time of closing.

[31] FQM also argues that the application judge erred in finding that the tax liabilities for 2017-2018 were indemnifiable under the general indemnification provision.

[32] According to FQM, the application judge erred in treating the requirement of reasonable foreseeability of consequential or indirect losses under the general indemnification provision as the equivalent of the common law concept applied in breach of contract cases. In the latter context, losses are reasonably foreseeable if they would follow from a breach of the contract in the ordinary course of things or if they would be expected to so follow by the parties at the time of contracting by virtue of their special knowledge: Hadley v. Baxendale (1854), 156 E.R. 145 (Exch. Ct.); Victoria Laundry (Windsor) Ltd. v. Newman Indust. Ltd., [1949] 1 All E.R. 997 (C.A.). But in the SPA, FQM maintains, the words have a more limited, and limiting, meaning.

[33] FQM argues that, in light of the meaning of the general indemnification provision in the SPA that FQM contends for, the application judge erred in failing to consider whether the reassessment was a reasonably foreseeable consequence of the 2010 reorganization, which it submits was the ground for the applicable indemnification obligation.

[34] FQM goes on to argue that the application judge failed to consider that the accumulated tax losses, which pre-existed closing, were not transferred or paid for as part of the sale transaction, the uncertainty that a permit would be sought and obtained to use them after closing, the uncertainty that there would be income to use them against, and the uncertainty of a reassessment, in concluding that loss of the ability to use accumulated tax losses to offset 2017 and 2018 income was a reasonably foreseeable loss.

[35] We reject this argument. First, we see no error in the application judge’s use of the common law concept of reasonable foreseeability. The SPA is a contract made among sophisticated parties who chose Ontario law to govern their rights and obligations. Having used legally laden terms, it was reasonable for the application judge to have interpreted those terms against that legal backdrop.

[36] Second, the application judge was entitled not to consider a loss to be remote because a reassessment (and therefore a breach of the representation that there were no grounds for one) might have been viewed at the time of closing as unlikely. It was the breach of this representation and warranty that was the event or circumstance giving rise to the applicable indemnification obligation. The question was not whether that breach was considered as likely, but the reasonable foreseeability of the losses that would flow from that breach if it did occur.

[37] Third, the application judge expressly considered, and found on the evidence, that it was reasonably foreseeable that Kevitsa would apply for a permit to use accumulated tax losses, and although the granting of a permit was not a foregone conclusion, it was reasonably foreseeable that the application to use them would be successful. The finding was open to the application judge on the record.

[38] We thus see no reversible error in the application judge’s interpretation of the reasonable foreseeability requirement. He noted that the loss of the ability to use the accumulated tax losses, given they had been used up to reduce taxes for pre-closing years as a result of the reassessment, led to a requirement to pay higher amounts for taxes for post-closing years. His conclusion that this loss was recoverable under the general indemnification provision was justified in light of the facts he found and his interpretation of the SPA, which are entitled to deference on appeal.

Conclusion

[39] For these reasons, we dismiss the appeal with costs payable to the respondents in the amount agreed to by counsel: $25,000, inclusive of disbursements and applicable taxes.

“Fairburn A.C.J.O.”

“Janet Simmons J.A.”

“B. Zarnett J.A.”