COURT OF APPEAL FOR ONTARIO DATE: 20231004 DOCKET: COA-23-CV-0102

Harvison Young, Thorburn and Favreau JJ.A.

BETWEEN

John Will Appellant

and

Geo. A. Kelson Company Limited Respondent

Counsel: Patrick J. Monaghan and Shane Marston, for the appellant David Lederman and Brittni Tee, for the respondent

Heard: September 19, 2023

On appeal from the judgment of Justice Audrey P. Ramsay of the Superior Court of Justice, dated January 3, 2023, with reasons reported at 2023 ONSC 29.

REASONS FOR DECISION

Overview

[1] The appellant, John Will, is a former employee of Geo. A. Kelson Company Limited (“Kelson”). Kelson had an Employee Share Purchase Plan (the “Plan”) that allowed employees to purchase shares in Kelson.

[2] In January 2017, Mr. Will sold his shares back to Kelson in accordance with the terms of the Share Ownership Agreement (the “Agreement”). He resigned soon afterward. One of the terms of the Agreement was that Kelson could repay Mr. Will for the value of the shares plus interest over a period of ten years.

[3] A dispute arose with respect to the interest owing under the Agreement and Mr. Will brought an application claiming that Kelson failed to (i) pay interest on overdue payments; (ii) pay an outstanding installment in a timely fashion; and (iii) communicate with him.

[4] Mr. Will claimed that in so doing, Kelson repudiated the Agreement and breached its obligation of good faith.

[5] The application judge ordered Kelson to (i) pay interest on any principal balance outstanding for the balance of the term; (ii) pay the overdue interest for the period from 2017 to 2021 in the amount of $82,141.18; (iii) reissue T5 forms with the correct interest amounts for 2018 and 2019 and assist Mr. Will in resolving the Canada Revenue Agency tax issues arising from the incorrect T5 forms; (iv) pay partial indemnity costs; and (v) pay post-judgment interest at the rate set out in the Agreement. The application judge made no order for pre-judgment interest.

[6] On this appeal, Mr. Will claims that the application judge erred by (i) holding that Kelson did not breach its duty of good faith; (ii) holding that Kelson did not repudiate the terms of the Agreement; (iii) ordering Kelson to continue to perform the balance of its obligations under the Agreement rather than requiring Kelson to pay the remaining principal up front and awarding damages; and (iv) omitting an award for pre-judgment interest on the amounts owing.

[7] He seeks “quantification and payment of the remaining debt” plus interest by lump sum award of $392,521.37, on the basis that to do otherwise “can only lead to more bullying, anxiety and expense”.

Background

[8] The factual background reviewed by the application judge is as follows:

[9] While he was a Kelson employee, Mr. Will purchased 40,500 shares in Kelson. The Plan provided that when employees retired or their employment ended, any shares would be sold back to Kelson. The Plan also provided that the shares would be sold, “at the Fair Value determined by the previous year’s financials which are calculated and audited in February of each year. The Board of Directors reserves the right to pay out 10% of the value each year until 100% is paid.”

[10] In January 2017, Mr. Will sold his shares back to Kelson for $963,900. In accordance with the terms of the Agreement, 10% of the purchase price was paid upon closing, and the balance, plus interest, was to be paid in annual installments of not less than 10% of the purchase price, i.e., $96,390. Six months after the sale, Mr. Will resigned.

[11] Between January 2017 and September 2021, Mr. Will received six payments. The first payment, in 2017, included principal only. A second annual payment was made in January 2018 and a third payment was made in September 2018. (This was because the annual payment date was changed.) A fourth payment was made in September 2019. Interest payments were made on both 2018 annual payments and the 2019 annual payment. The fifth and sixth payments, in September 2020 and September 2021, did not include interest.

[12] After the first payment with interest was made in January 2018, Mr. Will contacted Kelson to inquire about the interest.

[13] Kelson informed him that while he had earned $25,244.54 in interest, the interest was amortized over the remaining term. Despite receiving interest in the amortized amount, in 2018 and 2019, Kelson issued T5 forms with significantly higher amounts than the interest Mr. Will was actually paid.

[14] When Mr. Will received the 2020 payment without interest, he again contacted Kelson. Kelson advised Mr. Will that it would look into the issue. Kelson’s position was that Mr. Will had been overpaid in 2018 as he had received two annual payments in the same year.

[15] Mr. Will made repeated efforts to contact Kelson, but the Kelson representative ceased to respond to Mr. Will’s queries as she claimed she was being harassed. In 2021, Mr. Will again received the principal amount for each installment of $96,390 but no corresponding interest payment. (A 2022 payment of the principal amount of $96,390 without interest was made in July 2022, after the application was heard and before the judgment was rendered.)

The Application

[16] Mr. Will brought an application seeking an order for a lump sum payment in the full amount owing under the Plan or alternatively, an order interpreting the provisions of the Plan and directing a trial. Mr. Will also claimed that Kelson breached its duty of good faith to him and repudiated the Agreement.

[17] The central issue was the interest owing on the principal amounts paid pursuant to the Agreement.

[18] Prior to the application Kelson conceded that interest was owed on the principal payments. The parties agreed on the method of calculating the interest but did not agree on the amount of overdue interest to be paid. Kelson retained a forensic accountant who used the actual interest rate and calculated that the amount outstanding was $82,141.18. Mr. Will used a predicted interest rate, compounded by the accrual of interest, and calculated that the amount outstanding was $86,562. Kelson also agreed to rectify the inaccurate T5s it had issued to Mr. Will that resulted in problems with the Canada Revenue Agency.

Analysis of the Application Judge’s Reasons

[19] The application judge held that Kelson did not breach its duty of good faith or repudiate the Agreement.

[20] She referred to the correct legal test to establish a breach of good faith, as set out in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494 and C.M. Callow Inc. v. Zollinger, 2020 SCC 45, 452 D.L.R. (4th) 44, and she noted that the test provides that the parties must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.

[21] The application judge held however, that there was no breach of the duty of good faith. She relied on evidence that (i) Mr. Will voluntarily resigned six months after selling his shares and that Kelson’s conduct was not oppressive or unfair in this regard; (ii) Kelson’s approach to the payment of interest had some merit as Mr. Will received two annual payments in 2018 not just one; (iii) Kelson was on track to pay off the debt to Mr. Will early; and (iv) Kelson acknowledged that blocking communication with Mr. Will was badly managed, however Kelson’s employee said it was done because she felt harassed and this did not amount to bad faith conduct. Finally, she noted that the incorrect T5s were not asserted to be part of the alleged bad faith conduct and that Kelson had already agreed to remedy this issue.

[22] The application judge also dismissed Mr. Will’s argument that Kelson’s refusal to pay interest amounted to repudiation of the Agreement.

[23] She correctly noted that repudiation occurs where one party, by words or conduct, shows an intention not to be bound by the contract: Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423, at para. 40. The conduct must deprive the innocent party of substantially the whole benefit intended under the contract: Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426, at pp. 499-500.

[24] We note that the failure to pay a minor portion of the monies owed does not meet the test for repudiation, as it does not deprive the innocent party of substantially the whole benefit that it was to obtain under the agreement: Place Concorde East Limited Partnership v. Shelter Corporation of Canada (2006), 270 D.L.R. (4th) 181 (Ont. C.A.), at para. 51. See also Galt Machining & Plating Inc. v. MLS Group Ltd., 2022 ONCA 546, at para. 14. (By contrast, Cosolo v. Geo. A. Kelson Limited, 2017 ONSC 4150, aff’d 2018 ONCA 318, cited by Mr. Will, is distinguishable as in that case, unlike this one, Kelson refused to continue to pay both the principal and the interest such that the contract was found to have been repudiated.)

[25] The application judge found that in this case, Kelson continued to pay all annual installments of the principal owing but failed to pay some of the accompanying interest payments. The application judge held that this did not constitute repudiation of the Agreement given the significant principal payments Mr. Will received. She held that Kelson’s undertaking to abide by Mr. Will’s interpretation of the interest payable and pay any outstanding interest further supported her conclusion. She found that there was no evidence that Kelson did not intend to be bound by the Agreement in the future.

[26] We see no palpable or overriding error in these findings.

[27] The application judge acknowledged however, that Kelson had breached its contractual obligations as it had failed to pay the interest owed under the Agreement. She accepted Kelson’s calculation of the outstanding interest owed.

[28] She ordered Kelson to (i) pay interest on any principal balance outstanding for the balance of the term; (ii) pay the overdue interest of $82,141.18 for the period from 2017 to 2021 (which was the amount Kelson acknowledged was owing); (iii) reissue Mr. Will’s T5 forms in the correct amounts and cooperate with Mr. Will and the Canada Revenue Agency to resolve the error; and (iv) pay post-judgment interest to Mr. Will at the rate set out in the Agreement.

[29] In addition, the application judge awarded costs to Mr. Will because (i) the proceeding could have been avoided if Kelson had responded to Mr. Will in a timely fashion; (ii) Kelson only conceded it owed interest after Kelson delivered its factum; and (iii) Kelson created the uncertainty that required clarification with the Canada Revenue Agency and would require post-judgment steps. Mr. Will was therefore awarded partial indemnity costs of $35,000, plus $4,550 HST, and disbursements of $10,242.02 inclusive of HST.

[30] In our view, the application judge accurately set out the legal tests for breach of the duty of good faith and repudiation of contract and, as noted above, there was evidence to support her conclusion that these tests were not satisfied. She noted that although Kelson should have paid the interest in accordance with the Agreement but did not, it had agreed to do so before the hearing. As such, she concluded that Kelson did not breach its duty of good faith or repudiate the Agreement, though she ordered Kelson to pay costs given the delay in paying the interest owing.

[31] The appellant argues that the application judge erred by not awarding damages for the breach of contract and by ordering that Kelson continue to make the remainder of the annual payments with interest, according to the terms of the Agreement.

[32] We disagree.

[33] Given her finding on repudiation, and Kelson’s undertaking to pay the interest, it was proper for the application judge to order Kelson to continue to perform the remainder of the contract. Damages are intended to put a party back in the position they would have been in had the breach had not occurred: Fidler v. Sun Life Assurance Co. of Canada, 2006 SCC 30, [2006] 2 S.C.R. 3. Ordering the payment of the overdue interest achieved this goal.

[34] The appellant also argues that the application judge’s judgment requiring that Kelson pay interest in the amount “as agreed” creates uncertainty and is unenforceable, given that there was no agreement between the parties. We do not agree with this submission. It is evident from the record that the application judge was referring to Kelson’s undertaking at the hearing to pay interest on the past annual payments and future annual payments as calculated in its expert report. This does not create uncertainty and should be enforceable in the event Kelson defaults on its obligations.

[35] The only outstanding issue is the allegation that the application judge failed to award pre-judgment interest.

[36] Kelson conceded in oral argument that no interest payments have been made since 2019 although Kelson takes no issue with the requirement to pay interest or the amount of interest payable as determined by the application judge. Kelson claims however, that pre-judgment interest on the outstanding interest should be awarded at the rates set out in the Courts of Justice Act, R.S.O. 1990, c. C.43, not the interest rate set out in the Agreement.

[37] No reason was provided for preferring the Courts of Justice Act rate and we note that post-judgment interest was ordered at the rate set out in the Agreement. For these reasons, we order pre-judgment interest at the rate set out in the Agreement.

Conclusion

[38] We see no error in the application judge’s articulation of the law respecting the duty of good faith and repudiation of the contract, nor do we find any palpable or overriding errors of fact in her assessment of the evidence. We also see no error in the remedy she ordered for the breach of contract.

[39] We agree with the appellant however, that pre-judgment interest should have been included in the judgment and remains owing. As such, the appeal is dismissed save for an order granting Mr. Will pre-judgment interest at the rate set out in the Agreement.

[40] Given that the respondent was primarily but not entirely successful on appeal, there should be reduced costs payable to the respondent in the amount of $15,000 inclusive of disbursements and HST.

“Harvison Young J.A.”

“Thorburn J.A.”

“L. Favreau J.A.”