CITATION: 1515474 Ontario Inc. v. Soocellus Ontario Inc., 2020 ONSC 270
DIVISIONAL COURT FILE NO.: 677/18
DATE: 20200406
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
AITKEN, PATTILLO AND PENNY JJ.
BETWEEN:
1515474 ONTARIO INC. and GERALD GUILBEAULT
Applicants
(Respondents in Appeal)
– and –
SOOCELLUS ONTARIO INC. and CANADA FORGINGS INC.
Respondents
(Appellants)
Mark Dunn and Samantha Galway, for the Applicants/Respondents in Appeal
Paul Michell, for the Respondents/Appellants
HEARD: January 14, 2020
l. a. pattillo j.
Introduction
[1] Soocellus Ontario Inc. (“Soocellus”) and Canada Forgings Inc. (“Forgings”) appeal from the Judgement of Dow J. dated October 1, 2018, allowing the oppression application of the Respondents 1515474 Ontario Inc. (“151”) and Gerald Guilbeault (“Guilbeault”) and ordering, among other things, that Guilbeault have sole authority to conduct a civil action which had been commenced and conducted by Forgings.
[2] For the reasons that follow, I would dismiss the appeal. In my view, when the application judge’s reasons for decision are read as a whole in conjunction with the evidence before him, I am satisfied that he did not err in applying the test for oppression or in the remedy he fashioned to address the oppression.
Background Facts
[3] In 1987, Guilbeault purchased an interest in Forgings, which manufactures forged products. Eventually, Guilbeault became the sole owner of Forgings through his wholly-owned company, Canforge Holdings Inc. (“Holdings”) which has subsequently changed its name to 151. Guilbeault successfully ran Forgings until 2014 when he decided to sell it due to health issues.
[4] In 2006, while Guilbeault was in charge, Forgings commenced an action against Atomic Energy Canada Limited (“AECL”) claiming damages for breach by AECL of a tender process in 2004 (the “AECL Action”).
[5] Guilbeault eventually agreed to sell Holdings’ shares in Forgings to Soocellus, a company owned by Scott Naar (“Naar”) and a consortium of investors. Naar was the vice-president of Forgings having joined the company in 2004 as its controller.
[6] Over the course of their working relationship, Naar and Guilbeault developed a special friendship as well as working relationship. Guilbeault delegated responsibility for almost all Forgings’ legal, finance and accounting matters to Naar. Naar also managed all of Holdings’ and Guilbeault’s personal finances. Guilbeault’s relationship with Naar was so close as to be like a family member. Naar was someone Guilbeault trusted completely.
[7] During the negotiations leading up to the sale, Guilbeault insisted that he receive the benefit of certain claims that had been made by Forgings, including the AECL Action which had been ongoing since 2006.
[8] By agreement dated November 14, 2014, Holdings agreed to sell its shares in Forgings to Soocellus for $13.4 million (the “Agreement”). Relevant to this application, the Agreement provides, in part, that:
a) Forgings shall issue special non-voting shares to Holdings with the right to receive the net proceeds of any recovery in the AECL Action (the “AECL Shares”) (para. 4.5);
b) Forgings will provide litigation funding for the AECL Action to a maximum of $100,000 per year over a three-year period commencing December 1, 2014. In the event the legal fees in any of those years exceeds $100,000, Guilbeault is responsible for any excess amount in any of those years and is required to reimburse Forgings within 90 days following receipt of an invoice from Forgings (para. 4.6);
c) The legal fees paid by Forgings will be reimbursed to it by Guilbeault in the event the AECL Action either settles or achieves a successful outcome at trial. If the Action is unsuccessful, Guilbeault is required to pay such legal fees to Forgings (para. 4.6); and
d) In the event the AECL Action is unsuccessful, and a costs order is issued against Forgings, Guilbeault must reimburse Forgings for such costs (para. 4.7).
[9] The sale transaction closed on December 5, 2014 and the AECL Shares were issued to Guilbeault personally. Subsequently, Naar became the President and CEO of Forgings. Guilbeault deposed that because of their background and friendship, at the time of the sale closing, he expected Naar to consult him before any significant step was taken and to follow his instructions on the AECL Action and protect his interests.
[10] Both before and after the sale, Naar was the person primarily responsible for instructing counsel on the AECL Action. Guilbeault was only involved in major decisions and had little contact with counsel. His only source of information concerning the AECL Action was Naar.
[11] There have been two mediations in the AECL Action but no settlement. Guilbeault participated in both. In the second, Guilbeault took the lead on behalf of Forgings. He rejected AECL’s offer of settlement and put an end to the mediation when it was clear that AECL was not willing to make an “acceptable offer”.
[12] In November 2016, Holdings commenced an arbitration against Soocellus pursuant to the arbitration clause in the Agreement claiming monies owing under the Agreement. On November 13, 2017, Holdings received an award ordering Soocellus to pay it $2,317,740.56.
[13] As a result of the arbitration proceedings, the relationship between Forgings and Guilbeault/Holdings deteriorated. Further, in the summer of 2017, Guilbeault discovered that Naar had caused Holdings to pay Forgings’ AECL Action counsel, contrary to the Agreement and without authorization. Subsequently:
Guilbeault’s requests (and those of his lawyer) for information about the AECL Action went unanswered;
The invoices of AECL counsel which were eventually produced showed relatively little activity on the AECL Action in 2016 and 2017 and that nothing appeared to have been done on the Action since June 2017; and
Payment to Forging’s AECL counsel was delayed.
[14] On December 6, 2017, Naar wrote a letter to Guilbeault on behalf of Forgings advising that Forgings wanted to end the AECL Action because it was worried that the Action would affect its ongoing business in a “challenging environment” and because Naar no longer had the time or resources to work on the Action. Naar stated that Forgings intended to instruct its AECL counsel to pursue a third mediation with AECL immediately. “There we will accept the best reasonable offer we are able to negotiate.”
[15] After some procedural jockeying, 151 and Guilbeault commenced this application which, as amended, claimed, in part:
a declaration pursuant to s. 248 of the Business Corporations Act R.S.O. 1990 c. B 16. (the “OBCA”) that the affairs of Forgings have been conducted in a manner that affects or threatens to affect a result that is oppressive, unfairly prejudicial or unfairly disregards the interests of Guilbeault in his capacity as a shareholder of the AECL Shares;
an order rectifying the oppression by:
a) vesting sole authority to direct the conduct of the AECL Action in Guilbeault;
b) In the alternative:
i. directing Forgings to instruct its AECL counsel to communicate with Guilbeault and disclose complete information about the claim and further providing Guilbeault with any documents he requests, acting reasonably; and
ii. directing Forgings to provide such information about the AECL Action and how it has been funded as Guilbeault may reasonably request.
The Application Judge’s Reasons
[16] In his reasons for decision, the application judge briefly reviewed the background behind the application including Guilbeault’s relationship with Naar, Holdings’ sale of Forgings to Soocellus, the provisions of the Agreement relating to the AECL Action, Guilbeault’s subsequent input into the AECL Action, the breakdown in the relationship between Guilbeault and Forgings/Soocellus, and Guilbeault’s subsequent issues in obtaining information about the AECL Action.
[17] The application judge found at para. 9 of the reasons that “it was clear the sale would not be completed without Mr. Guilbeault having input as to how the litigation against AECL concluded.”
[18] Further, the application judge noted at para. 13 that counsel for Forgings agreed that responses to Guilbeault’s requests for information about the status of the AECL Action “were not timely.”
[19] The application judge concluded that the Agreement was clear that Guilbeault had the financial benefit of the AECL Action along with the obligation to pay the costs and that his presence and involvement in the Claim appears to have added to its value. The only aspect of the AECL Action not clearly set out in the Agreement was who instructs counsel.
[20] After setting out the test for oppression as provided at para. 56 of BCE Inc. v. 1976 Debenture Holders, 2008 SCC 69, [2008] 3 S.C.R. 560, the application judge stated at para. 16 of his reasons:
I have little difficulty concluding Mr. Guilbeault and Holdings have met the first part of the test with regard to reasonable expectations. I do so given, as stated above:
a) the only party with a direct financial stake in the outcome of the litigation is Mr. Guilbeault and Holdings;
b) Soocellus and Forgings tacitly recognized this by issuing Mr. Guilbeault shares equal to the value of any settlement or judgment obtained;
c) Mr. Guilbeault attended mediation, was given input to what was being proposed to resolve the claim and was not advised of Forgings position it had the right to settle the action without Mr. Guilbeault’s agreement; and
d) the amount paid for legal fees would ultimately be paid by Mr. Guilbeault.
[21] The application judge further stated at para. 17 that the reasonable expectations were “by and large” shared by both parties.
[22] The application judge next stated that having concluded the conduct of Soocellus and Forgings impinged on Guilbeault and Holdings’ reasonable expectations, he had little difficulty in concluding that the conduct of Soocellus and Forgings had been unfairly prejudicial to or unfairly disregarded the interests of Guilbeault and Holdings. In doing so, he rejected Soocellus and Forgings’ concerns that the AECL Action would affect their business. Based on a lack of credible evidence, he also rejected their concerns that if Guilbeault obtained control of the Action, he would have no regard to their interests.
[23] The application judge concluded by granting Guilbeault and Holdings an order vesting sole authority in Guilbeault to conduct the AECL Action, including access to Forgings’ counsel to be apprised of all aspects of the Action and providing Guilbeault with any documents in the file.
[24] In making the order, the application judge stated at para. 21 of his reasons that it was intended to end the inertia in the AECL Action and, to the extent possible, separate the parties from contact. In order to further separate the parties, the application judge further ordered that Guilbeault was required to pay all the costs of the AECL Action going forward and to repay Forgings for any costs they had paid to date.
Position of the Parties
[25] The Appellants submit that the application judge erred in law:
a) in failing to apply the test for oppression; and
b) in imposing the remedy which he did.
[26] They submit that the court should allow the appeal and either dismiss the application or, in the alternative, vary the application judge’s order and direct that Forgings assign the AECL Action to Guilbeault or whoever he may direct and require Guilbeault to post security in respect of the potential costs awarded against Forgings in the AECL Action in an amount to be agreed or determined on motion to the application judge.
[27] Guilbeault and 151 submit that the Appellants have failed to identify any legal error, palpable and overriding error or injustice in the application judge’s reasons to call into question his order. Accordingly, the appeal should be dismissed.
Standard of Review
[28] An appeal lies to the Divisional Court pursuant to s. 255 of the OBCA from an order made by the court under the OBCA.
[29] The standard of review in respect of an appeal is one of correctness on a question of law; palpable and overriding error on findings of fact; and palpable and overriding error on mixed questions of fact and law unless it is clear that the judge under review made some extricable error in principle with respect to the characterization of the standard or its application in which case it is correctness: Housen v. Nikolaisen, 2002 SCC 33, [2008] 3 S.C.R 69 at paras. 8, 10 and 37.
[30] Appellate courts should adopt a deferential stance when reviewing judgments rendered on oppression applications. Absent palpable and overriding error, an appellate court must defer to the trial court’s findings of fact. An appellate court may intervene and substitute its own decision for the trial court’s if the judgment is based on errors of law, erroneous principles or irrelevant considerations. Finally, even if it is not so based, an appellate court may intervene if the trial judgment is manifestly unjust: Wilson v. Alharayeri, 2017 SCC 39, [2017] 1 S.C.R 1037 at para. 59.
Analysis
1. The Oppression Test
[31] In BCE, the Court set out a two-part test to establish a claim for oppression. First, does the evidence support the reasonable expectations of the claimant and second whether the reasonable expectations were violated by conduct that was oppressive, unfairly prejudicial or unfairly disregarded a relevant interest (paras. 68, 70 and 89).
[32] The application judge set out the BCE test for oppression in para. 16 of his reasons. Soocellus and Forgings submit, however, that he failed to apply the test by not addressing Guilbeault’s alleged expectations and whether they were reasonable and by simply concluding, without specifying any particular expectation, that Guilbeault and Holdings’ reasonable expectations had been violated.
[33] The application of the test for oppression to the facts raises a question of mixed fact and law. Given the Appellants’ submission, in my view they must demonstrate that the application judge made a palpable and overriding error. In that regard, they submit that the application judge made a palpable and overriding error in that he fundamentally misinterpreted the evidence in coming to his finding that Guilbeault and Holdings’ expectations were reasonable.
[34] I disagree. As noted in BCE at para. 62, the concept of reasonable expectations is objective and contextual. In my view, when the application judge’s reasons are read as a whole, it is clear that he did address Guilbeault’s expectations concerning his involvement in the AECL Action and concluded that those expectations were reasonable.
[35] The application judge found as a fact that the Agreement granted Guilbeault a direct financial stake in the outcome of the AECL Action together with the ultimate obligation to pay all of the costs; that Guilbeault would and did have input into how the litigation concluded; that his persistent presence and involvement in the Action appeared to add value; that the relationship between Guilbeault and those in control of Forgings had deteriorated since the arbitration; that Guilbeault’s requests for information about the AECL Action had not been met; and that counsel on the AECL Action had stopped working on the Action as of June 2017.
[36] While the application judge did not set out Guilbeault’s expectations specifically or find that they were reasonable before concluding that Guilbeault and Holdings had met the first part of the test concerning reasonable expectations, given the evidence before him and the position of the parties, I do not consider that he committed a palpable and overriding error.
[37] It is clear from the application judge’s reasons that there was no issue with Guilbeault’s expectations regarding his involvement with the AECL Action or that they were reasonable. As the application judge noted, the reasonable expectations were by and large shared by both parties.
[38] As stated by the application judge, the sole issue raised by Soocellus and Forgings was whether Guilbeault was entitled to sole control of the AECL Action. Soocellus and Forgings took no issue with Guilbeault’s other expectations concerning the AECL Action which were identified by the application judge in para. 16 of his reasons. Nor did Soocellus and Forgings raise any issue that those expectations were not reasonable.
[39] Further, notwithstanding the application judge did not expressly find it was Guilbeault’s reasonable expectation that, if Soccellus and Forgings decided to not pursue the AECL Action, he would be entitled to continue it and instruct counsel, in my view, reading the application judge’s reasons as a whole, it is clear that he did so find.
[40] The findings of fact which lead to the conclusion that Guilbeault had a reasonable expectation that, if Soocellus refused to pursue the AECL Action, he would have ultimate control are:
a) Naar, whose company acquired Forgings in 2014, was a close friend and a person Guilbeault trusted completely. This lasted until 2016 when the arbitration and other disputes took place. This falling out in 2016 coincided with a change in Forgings’ and Naar’s willingness to prosecute the AECL Action and to involve Guilbeault in that process;
b) Guilbeault was the only party with a financial stake in the outcome of the litigation. Both the up and down sides of the litigation were assigned to Gilbeault under the Agreement:
(i) only Gilbeault would receive any benefit if the AECL Action were settled or favourably resolved at trial; and
(ii) Gilbeault was ultimately responsible to pay the costs incurred to prosecute the AECL Action. Gilbeault was also liable to indemnify Forgings against any adverse award of costs.
c) Soocellus and Forgings recognized the exclusive nature of Guilbeault’s interest by issuing Guilbeault shares equal to the full value of any settlement or judgment obtained; and
d) Guilbeault attended and essentially “ran” the mediation as the “client”, had significant input into what was being proposed to resolve the claim and was was never advised by Forgings of its later position that it had the right to settle the AECL Action without Guilbeault’s agreement.
[41] Accordingly, I am satisfied that the application judge did not err in his application of the reasonable expectation portion of the oppression test. The application judge’s factual findings which were amply supported by the evidence, were more than sufficient to enable him to conclude that Guilbeault and Holdings had met the first part of the test.
[42] Further, the application judge’s findings that Soocellus and Forgings failed to provide timely information to Guilbeault about the AECL Action and ceased to proceed with the Action in June 2017 are sufficient to support the application judge’s conclusion that their actions impinged Guilbeault’s reasonable expectations and were unfairly prejudicial to and unfairly disregarded Guilbeault’s interests in the AECL Action.
[43] In my view, there was no palpable and overriding error arising from the application judge’s finding that Guilbeault and Holdings met the test for oppression.
2. Remedy
[44] The Appellants further submit that the remedy imposed by the application judge in granting Guilbeault control of the AECL Action was both an error in principle and manifestly unjust given that he made no finding that Guilbeault had a reasonable expectation that he would control the Action. In essence, they submit that the remedy far exceeds the unfair prejudice or disregard of interests found by the application judge.
[45] Section 248(3) of the OBCA gives the court a broad discretion to “make any interim or final order as it thinks fit”. As noted in Wilson at paras. 26 and 27, however, the discretion is not limitless. It should go no further than necessary to correct the injustice or unfairness between the parties.
[46] In my view, based on the application judge’s findings, the order granted by him was neither an error in principle nor manifestly unjust. It was clear from his findings that the application judge found that the parties could no longer work together in respect of the AECL Action. Forgings and Soocellus clearly no longer wanted to pursue the AECL Action. Guilbeault, on the other hand, having the direct financial stake in the outcome (together with responsibility for the costs) wanted to continue to pursue the AECL Action to a satisfactory conclusion, either at trial or by settlement.
[47] The application judge’s findings that Guilbeault would and did have input into how the AECL Action was resolved coupled with Forgings’ actions in refusing to provide him with information concerning the status of the AECL Action, delaying the prosecution of the AECL Action, and ceasing work on it in June 2017, together with its December 6, 2017 declaration that it intended to settle the AECL Action for the best reasonable offer without Guilbeault’s input or agreement were sufficient, in my view, to enable the application judge to make the order he did.
[48] The application judge recognized, given the breakdown in their relationship, that the parties could not work together in pursuing the AECL Action. In such circumstances, an order requiring the Appellants to comply with the terms of the Agreement concerning the AECL Action would not have been sufficient particularly given Forgings’ intention to settle the Action for the “best reasonable offer” it was able to negotiate.
[49] Further, in making the order he did, the application judge considered and rejected Soocellus and Forgings’ submissions as to why Guilbeault should not be given control of the Action.
[50] Given the application judge’s findings that Soocellus and Forgings’ actions were unfairly prejudicial and unfairly disregarded Guilbeault and Holdings’ reasonable expectations concerning the AECL Action, in my view, the application judge’s order was appropriate to correct the unfairness that he found. There is no error of principle in respect of the order nor is the remedy the application judge fashioned manifestly unjust.
Conclusion
[51] For the above reasons, the appeal is dismissed.
[52] The parties have agreed on costs of $20,000 in total in respect of the appeal. I agree that such costs are fair and reasonable given the issues raised.
[53] Costs of the appeal to Guilbeault and 151 fixed at $20,000 in total.
L. A. PATTILLO J.
I agree
AITKEN J.
I agree
PENNY J.
Released: April 6, 2020
CITATION: 1515474 Ontario Inc. v. Soocellus Ontario Inc., 2020 ONSC 270
DIVISIONAL COURT FILE NO.: 677/18
DATE: 20200406
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
AITKEN, PATTILLO AND PENNY JJ.
BETWEEN:
1515474 ONTARIO INC. and GERALD GUILBEAULT
Applicants
(Respondents in Appeal)
– and –
SOOCELLUS ONTARIO INC. and CANADA FORGINGS INC.
Respondents
(Appellants)
REASONS FOR JUDGMENT
L. A. PATTILLO J.
Released: April 6, 2020