SUPERIOR COURT OF JUSTICE - ONTARIO
RE: DILIP SHAH v. JAI KUMAR AHUJA
BEFORE: Justice T.A. Bielby
COUNSEL: P. Baxi, for the Applicant
G. Soni, for the Respondent
E N D O R S E M E N T
The applicant has brought an application seeking the release of $60,000.00 being held in trust. The monies represent a deposit paid by the respondent pursuant to a share purchase agreement.
The parties were partners in a gas station operation through two numbered companies.
The parties had a shareholder meeting on March 27, 2011, and it was agreed the respondent would purchase the applicant’s interest in the business. Paragraph 10 of the handwritten minutes of the meeting, set out at Tab A of the responding record states, “this agreement is conditional on getting approvals for Pioneer and Roynat only.”
Thereafter, the parties entered into a share purchase agreement dated April 14, 2011. The price of the purchase was $1,070,000.00 and the respondent paid into the applicant’s solicitor’s trust account a deposit of $60,000.00.
The applicant argues that the respondent failed to obtain full releases from Roynat and Pioneer in regards to the personal guarantees executed by the applicant vendor in favour of Roynat and Pioneer. The applicant submits these failures represent “breaches of covenants” and submits the deposit should be forfeited to the applicant.
The respondent argues the obligation to obtain the releases was condition precedent and the failure to be able to provide the releases means the contract fails and the deposit ought to be returned to the respondent.
The agreement in issue can be found at Tab A of the applicant’s record. Paragraphs 8 and 11 are specifically relied on.
It would appear that Roynat held, as security, the applicant’s $2,500,000.00 personal guarantee. While agreeing to reduce the amount upon the completion of the proposed sale, Roynat set out in a letter dated June 16, 2011, (Tab E, Application Record), that it still required the applicant’s personal guarantee in the amount of $500,000.00.
With respect to Pioneer, the respondent alleges he had verbally spoken with a representative of Pioneer who indicated the release would not be a problem. There is very little proof of this. In the supplementary affidavit of the applicant, at Tab B, there is an email sent out from Dave MacFarlane of Pioneer who says he has no record of having received the $2,500.00 application fee needed to process the request for the release. The respondent does not deny the fee was not paid.
This goes to the issue of what best efforts the respondent has made to secure the releases in relation to the applicant’s personal guarantees.
The closing date for the sale was extended from time to time. The last date agreed upon was June 20, 2011. The agreement set out that, in any event, the deal had to be closed before July 1, 2011.
The applicant, by email dated June 20, 2011, advised the respondent that he was not willing to proceed with the sale otherwise than as set out in the agreement (see Tab F, application record). The applicant took the position that he would consider the respondent in breach of the agreement if the respondent cannot comply with its terms.
There is no evidence before me to suggest the respondent did not want to close the deal or that somehow he had a hand in the position taken by Roynat, in an effort to nullify the agreement.
There is no real evidence before me as to what formal position Pioneer would have taken had the fee been paid. The respondent may or may not have been able to obtain the release of the applicant’s personal guarantee to Pioneer.
Given the history of the efforts to close the sale, the date of June 20th was likely not the last possible date for closing the purchase as the contract contemplated extensions and the final “drop dead” date of June 30, 2011, (i.e. before July 1, 2011.)
In terms of the relevance of the minutes, the applicant argues that the agreement, paragraph 13 thereof, dictates that the agreement represents the entire agreement between the parties and, therefore, the minutes are irrelevant. However, the terms of the two documents are not in conflict. Clearly, Roynat and Pioneer had to be onside with the deal and the assumption of all liability by the respondent.
Paragraph 8 of the share purchase agreement sets out the obligations of the respondent relating to the Roynat and Pioneer issues. He was obligated to obtain the releases relating to the applicant’s liability, including his personal guarantees with Roynat and Pioneer. The applicant submits this obligation was a covenant.
The paragraph, however, is to be read as part of the entire agreement with special reference to paragraph 11, “Conditions of Closing”. In that paragraph, both parties agree that the deal is conditional upon the release of the applicant from financial risk and again the agreement specifically references the personal guarantee in favour of Roynat and Pioneer. The transaction was to be “conditional” upon satisfying the obligation.
At the risk of stating the obvious, satisfying the obligation depends on the will of third parties. Is the respondent to forfeit the deposit because of the arms length decision of a third party?
The applicant argues simply that the respondent is in default as he failed to meet his obligations in not obtaining the releases. Paragraph 11 of the share purchase agreement goes on to state:
In the event this transaction does not close due to the purchaser’s default, any deposit shall be released and forfeited to the vendor in full as liquidated damages...
The respondent did not argue the $60,000.00 amount was excessive or unconscionable or that it did not represent a fair pre-estimate of damages. Accordingly, I agree that the deposit would be forfeited to the applicant if the respondent breached a covenant. The authorities filed by the applicant addressed this issue which generally was referred to as the grounds for the relief from forfeiture.
The matter, however, does not end there. The respondent argues that, in fact, the obligation to obtain the releases was a condition precedent, dependent on a third party and, if that term cannot be met, the contract is at an end and the deposit is to be returned to the respondent.
Regardless of whether or not a release would be forthcoming from Pioneer, Roynat was not prepared to release the applicant completely from a personal guarantee. The applicant was not prepared to accept anything less than what the agreement called for.
Paragraph 11 of the agreement states in part:
The Purchaser and Vendor hereby acknowledge, confirm and agree that this transaction is conditional upon the satisfactory full and final release and discharge of the Vendor pursuant to any and all security, guarantees, and agreements entered into by the Vendor relating to the business of the corporation, including but not limited to any personal guarantee the Vendor may have to Roynat and Pioneer…
The key word in that sentence is “conditional”. The minutes of the shareholder’s meeting referenced the deal to be conditional on the approval of Roynat and Pioneer.
The paragraph goes on to say that the condition is included for the benefit of the vendor and may be waived only by the vendor.
In short, the completion of the agreement was conditional on the respondent obtaining the applicant vendor’s release from his personal guarantees.
The Black’s Law Dictionary, 8th ed., defines condition as, “an uncertain act or event that triggers or negates a duty to render a promised performance.
Conditional is defined to mean, “subject to or dependant on a condition”.
A condition precedent is defined to mean, “an act or event, other than a lapse of time, that must exist or occur before a duty to perform something promised arises”.
On these definitions alone it could be argued there was no obligation on either party to complete the deal as long as the condition to release the personal guarantee was outstanding. To put another way, given Roynat’s position, there could be no compliance with the condition and, therefore, no legal obligation on either party to complete the deal.
The respondent filed with the Court authorities relating to condition precedents.
In Tully v. Zhilka, 1959 CanLII 12 (SCC), [1959] SCR 578, the plaintiff sought to buy land if the land could be annexed to the village and subdivided. This was a condition. The court ruled that the term of the contract was a true condition precedent which depended entirely on the will of a third party, the village. It was ruled that the condition was an external condition upon which the existence of the obligation depends. Until the event occurs there was no right to performance on either side.
In the matter before me, the fulfillment of the condition relied on the “will” of Roynat.
In my opinion, in taking into account paragraphs 8 and 11 of the agreement in issue, and specifically the use of the phrase, “This transaction is conditional upon...,” the fulfillment of the condition was an act that had to occur before a duty to perform arose. This is in accord with the intention of the parties as expressed in the minutes of the shareholder meeting. The agreement of purchase and sale did not fall through because of the default of the respondent. It fell through because a third party dependent condition could not be fulfilled.
I declare the share purchase agreement between the parties to be null and void and the deposit is to be released to the respondent.
I will accept written submissions as to costs, limited to three pages. The respondent shall file his submissions with my office within 10 working days from the release of this endorsement. The applicant shall file his submissions within 10 working days of receiving the submissions of the respondent.
Bielby J.
DATE: March 6, 2012
CITATION:, Shah v, Ahuja, 2012 ONSC 1479
COURT FILE NO.: CV-11-3300-00
DATE: 2012-03-06
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Shah v. Ahuja
BEFORE: Justice Thomas A. Bielby
COUNSEL: P. Baxi, for the Applicant
G. Soni, for the Respondent
ENDORSEMENT
DATE: March 6, 2012