2019 ONSC 846
DIVISIONAL COURT FILE NO.: 505/17
DATE: 20190207
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
C. HORKINS, CONWAY and LABROSSE JJ.
B E T W E E N :
ST. TAKLA HEMANOTE DRUGS LTD.
Plaintiff (Appellant in Appeal)
- and -
PHARMOY DISTRIBUTING INC., PHARMOY DISTRIBUTING (TWO) INC. carrying on business as SOUTH END PHARMACY, FARUQ LADHANI and IAN JAMES
Defendants (Respondents in Appeal)
Michael A. Katzman, for the Plaintiff (Appellant in Appeal)
J. Sebastian Winny, for the Defendants (Respondents in Appeal)
HEARD: December 4, 2018
REasons for decision
LABROSSE J.
THIS APPEAL
[1] This is an appeal from the July 25, 2017 decision of Lederer J. (the “Trial Judge”) who dismissed the Appellant’s claim for breach of warranty as against the Respondents Pharmoy Distributing Inc. (“Pharmoy”) and Faruq Ladhani, arising out of an Agreement of Purchase and Sale for the purchase of Pharmoy’s pharmacy business.
BACKGROUND
[2] The Appellant purchased a pharmacy business from the Respondent, Pharmoy. The Respondent Ladhani, was the principal of Pharmoy. The Appellant and Pharmoy signed an Agreement for Purchase and Sale on May 5, 2008 with a purchase price of $2,250,000 (the “Agreement”). The transaction closed in mid-June 2008.
[3] The pharmacy was located in a building along with a family medical clinic and a fertility treatment clinic. The parties negotiated that the goodwill of the business was to be valued at $2,074,000. The Appellants argue that the business from patients of the fertility clinic was considered an important part of the pharmacy’s goodwill.
[4] The Agreement included the following representation and warranty from the Respondent:
- VENDOR REPRESENTS, WARRANTS and undertakes to the Purchaser in consideration of Purchaser’s offer to Purchase and completion of same that:
(g) That the Vendor has no information or knowledge of any fact not generally known to the public relating to the business (or to the premises in which the business is to be carried on) which, if known to the purchaser, might reasonably be expected to deter the Purchaser from completing the transaction herein contemplated.
[5] The Respondent Ladhani signed a Statutory Declaration on closing confirming that the representations and warranties in the Agreement were true.
[6] In August 2008, Hamilton Health Sciences, which operated the fertility clinic, sent a letter to the pharmacy notifying that the fertility clinic would be closing on March 31, 2009.
[7] The Appellant brought an action against the Respondents seeking damages for breach of contract against Pharmoy and Ladhani, arguing that the existence of the fertility clinic was a significant factor in its decision to purchase the pharmacy and in its valuation of the business. The Appellant sought a reduction of $400,000 in the purchase price as a result of a breach of the warranty in paragraph 6(g) of the Agreement. The Appellant also claimed, as alternative causes of action, negligent misrepresentation, fraudulent misrepresentation and unjust enrichment.
[8] The action was heard by the Trial Judge over an eight-day trial in March 2017. The Trial Judge found that although formal notice of the fertility clinic’s closure was not given until August 20, 2008, Ladhani had knowledge about the impending closure of the fertility clinic before the transaction closed, and that he had not shared this information with the Appellant.
[9] The Trial Judge concluded that there was no breach of clause 6(g) of the Agreement, because the knowledge of the fertility clinic closing would not reasonably be expected to deter the Appellant from purchasing the pharmacy, given the limited financial impact from the loss of the fertility clinic revenues. Based on the evidence of the Appellant’s expert witness, the Trial Judge concluded that the closure of the fertility clinic would reduce the pharmacy’s profitability by $56,559 per year.
[10] The Trial Judge found that, “taking into account the overall size of the business and the value of the transaction, this was not enough such that a finding could be made that the buyer might reasonably be expected to be deterred from closing the transaction as contemplated.” He therefore dismissed the Appellant’s claim for breach of warranty.
[11] The Appellant also claimed damages for breach of a non-competition clause against each of the Respondents. The Trial Judge found that the Respondents did breach the non-competition clause and awarded damages to the Appellant of $11,600.00 plus pre-judgment and post-judgment interest. That award has not been appealed.
STANDARD OF REVIEW
[12] The standard of review on an appeal of a judge’s order is set out in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235. On questions of law, the standard is correctness. On questions of fact, the standard is palpable and overriding error. On questions of mixed fact and law, the Court stated that there is a spectrum. Where there is an extricable legal principle, the standard of review is correctness. However, with respect to the application of the correct legal principles to the evidence, the standard is palpable and overriding error.
[13] When interpreting commercial contracts, the Supreme Court of Canada’s decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633 states that the interpretation of a commercial contract is a question of mixed fact and law and is reviewed on the deferential standard of palpable and overriding error.
[14] At the hearing, the Appellant submitted that two issues are to be reviewed on a correctness standard. First, it submits that the Trial Judge’s interpretation of the warranty clause raises an extricable error of law. I disagree. The Trial Judge’s interpretation of the warranty falls squarely within the principles set out in Sattva and, in my view, raises a question of mixed fact and law. The Trial Judge did not apply an incorrect standard or fail to consider a required element of a legal test. He simply applied the wording of the warranty to the evidence at trial.
[15] Second, the Appellant submits that the Trial Judge’s application of the law on damages is subject to a correctness standard. However, the Trial Judge never assessed damages as he concluded that there was no breach of warranty. His assessment of the profitability of the fertility clinic business was done in the context of determining whether there was a breach of warranty. Since he concluded there was no breach, the issue of damages never arose. There was no error in the application of the law of damages.
[16] In summary, the standard of review on this appeal is palpable and overriding error.
ISSUES RAISED
[17] In its materials, the Appellant raises a number of issues on the appeal that overlap and not all pursued during the hearing of the appeal. The issues raised at the hearing are as follows:
(i) Did the Trial Judge err in his interpretation of the Agreement between the Parties?
(ii) Did the Trial Judge err in his analysis of the Appellant’s expert’s report by failing to appreciate and misapprehending the specific calculation of loss to the Appellant?
(iii) Did the Trial Judge err by failing to provide sufficient or adequate analysis and reasons for his decision to permit meaningful appellate review?
ANALYSIS
(i) Did the Trial Judge Err in his Interpretation of the Agreement between the Parties?
[18] The Appellant submits that the Trial Judge erred in his interpretation of the Agreement and misapprehended the central issue in the case, which was whether or not the information regarding the fertility clinic was information that might reasonably have been expected to deter the Appellant from proceeding with the transaction. The Appellant submits that had the appropriate issue been considered, the Trial Judge would have concluded that any purchaser would have wanted to know the withheld information and the vendor would have reasonably expected that knowledge of this information might deter a purchaser from closing the transaction.
[19] I disagree. The withholding of the information about the fertility clinic alone did mean that Pharmoy breached the Agreement. The withheld information had to be significant enough for the Appellant to reasonably be expected to be deterred from completing the transaction. The Trial Judge properly directed himself to whether para. 6(g) had been breached and broke down this key provision of the Agreement. The Trial Judge concluded that the Appellant had overvalued the profitability of the fertility clinic business. He noted that the Appellant had purchased the pharmacy perceiving that it was a growth market and that it was seeking compensation for “a bet it made and lost”.
[20] The essence of the Trial Judge’s conclusion is found at para. 45 of his reasons. The Trial Judge was provided with the evidence of how the Appellant calculated the value of goodwill as being the earnings before interest, taxes, depreciation and amortization (EBITDA) for the fiscal year ending on March 31, 2008 and applied a multiple of 5 to determine the goodwill of the pharmacy business as set out in the Appellant’s expert report.
[21] He determined that the reduction in profitability (or reduction in EBITDA) from the closure of the fertility clinic was $56,559 for the fiscal year ending March 31, 2008 and that in the context of the transaction as a whole, this would not reasonably be expected to deter the Appellant from completing the transaction as contemplated. This finding was available to the trial judge on the record before him and reflects no palpable and overriding error warranting intervention by this court.
(ii) Did the Trial Judge err in his analysis of the Appellant’s expert’s report by failing to appreciate and misapprehending the specific calculation of loss to the Appellant?
[22] The Appellant submits that the Trial Judge did not properly grasp the expert’s calculation of damages for breach of warranty. In doing so, he failed to consider the reduced amount the Appellant should have paid for the pharmacy, thus erring in his analysis of damages and committing an error of law.
[23] The Appellant’s expert calculated damages as being the reduction in goodwill from the lost fertility clinic revenues. The expert’s report concluded that there was a reduction in EBITDA of $91,000 for the fiscal year ending March 31, 2008. This amount was multiplied by five to determine the reduction in goodwill. However, there was an error in that calculation. The Trial Judge determined the reduced profitability (or reduction in EBITDA) from the lost fertility clinic revenues to be $56,559 for the fiscal year ending March 31, 2008. The Appellant agrees that this amount is accurate.
[24] It was therefore not an error for the Trial Judge to have relied on the reduction in EBITDA, being an essential component of goodwill, to conclude that this was not sufficient in the overall scheme of this transaction for a finding to be made that the buyer might reasonably be expected to be deterred from closing the transaction as contemplated. There was therefore no breach of warranty and no entitlement to damages.
(iii) Did the Trial Judge err by failing to provide sufficient or adequate analysis and reasons for his decision to permit meaningful Appellate review?
[25] The Appellant argues that Trial Judge’s reasons fail to address necessary issues and are therefore insufficient. The Appellant also argues that the Trial Judge failed to rule on the Appellant’s alternative causes of action.
[26] The Trial Judge’s reasons demonstrate that he did consider if the Appellant may have reasonably been expected to be deterred from completing the transaction if it had known that the fertility clinic was closing. The Trial Judge adequately addressed this central issue in his reasons.
[27] Although not addressed in the decision, the alternative causes of action were clearly put to the Trial Judge but were not strongly pursued by the Appellant at trial. On appeal, the Appellant has presented no argument to show that any of the alternative causes of action has any chance of success or were otherwise made out on the record.
[28] Any failure of the Trial Judge to address the alternative causes of action is not an error that amounts to a substantial wrong or miscarriage of justice that would engage para. 134(6) of the Courts of Justice Act.
CONCLUSION
[29] I conclude that the Trial Judge made no reviewable error and accordingly, the appeal is dismissed.
COSTS
[30] Having considered the submissions of the parties, I conclude that the Respondents are entitled to their costs of this appeal fixed in the amount of $5,000 inclusive of HST and disbursements.
M. LABROSSE J.
I agree __________________________ C. HORKINS J.
I agree __________________________
B. CONWAY J.
Date:
2019 ONSC 846
DIVISIONAL COURT FILE NO.: 505/17
DATE: 20190207
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
B E T W E E N :
ST. TAKLA HEMANOTE DRUGS LTD.
Plaintiff (Appellant in Appeal)
- and -
PHARMOY DISTRIBUTING INC., PHARMOY DISTRIBUTING (TWO) INC. carrying on business as SOUTH END PHARMACY, FARUQ LADHANI and IAN JAMES
Defendants (Respondents in Appeal)
REasons for decision
Labrosse J.
Date: February 7, 2019