Bell Aliant Regional Communications, Limited Partnership v. CAE Professional Services (Canada) Inc., 2012 ONSC 1915

COURT FILE NOS.: CV-11-419895/

CV-11-419897

DATE: 20120724

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

BELL ALIANT REGIONAL COMMUNICATIONS, LIMITED Applicant/Appellant – and – CAE PROFESSIONAL SERVICES (CANADA) INC. Respondent

Paul Schabas, Iris Fischer and Max Shapiro , for the Applicant

Patrick O’Kelly and Patrick Duffy , for the Respondent

HEARD: February 8 and March 23, 2012

GRACE J.

A. Background

[ 1 ] Bell Aliant Regional Communications, Limited Partnership (“Bell Aliant”) agreed to sell part of its Defence, Security and Aerospace (“DSA”) business to CAE Professional Services (Canada) Inc. (“CAE”).

[ 2 ] The transaction included a fixed price contract Bell Aliant had obtained to set up and service an information system for the Maritime Helicopter Program (the “helicopter contract”). [1]

[ 3 ] Adjustments to the $26.1 million purchase price were contemplated by an August 4, 2008 Asset Purchase Agreement (“APA”). The subject of this dispute is one of the adjustments relating to the helicopter contract.

[ 4 ] The helicopter contract was ongoing when the APA was scheduled to and did close. Sections 3.1 and 3.6 of the APA required the deduction of Deferred Revenue, as defined and adjusted in accordance with the APA, from the purchase price.

[ 5 ] After the May 1, 2009 closing and as the APA contemplated, Bell Aliant delivered its closing date financial statements together with the opinion of its auditor Deloitte & Touche LLP (the “audit firm”). Deferred Revenue was quantified at $2,071,772 based on estimated costs at completion (“EAC”) of $45,403,997.

[ 6 ] CAE was permitted to object to the closing date financial statements in writing. CAE did so. [2] It maintained that Bell Aliant had underestimated the EAC and Deferred Revenue relating to the helicopter contract. CAE maintained the EAC were $53,111,449 and that Deferred Revenue totaled $7,326,722. In its view that higher figure should have been deducted from the purchase price. Bell Aliant disagreed.

[ 7 ] The parties were unable to resolve the issues themselves. The dispute resolution provision contained in the APA was invoked. Section 3.5 (c) provides that:

…all unresolved matters shall be submitted to a national recognized firm of independent chartered accountants jointly appointed by the Parties (the “Arbitrator”) for resolution…Purchaser and Bell Aliant shall instruct the Arbitrator…to conduct the proceedings expeditiously and render its determinations not later than 30 days following receipt of all documentation requested by it. The rules and procedures…shall be determined by the Arbitrator in its discretion…and the Purchase Price and related allocations and adjustments shall be modified to the extent required to give effect to the Arbitrator’s determination.

[ 8 ] Jeffrey C. Smith of BDO Canada LLP was selected as arbitrator (the “Arbitrator”). A September 20, 2010 engagement letter was prepared and signed by the parties’ lawyers. The issue to be decided was framed: whether Deferred Revenue on Bell Aliant’s closing date financial statements was understated. [3] Procedurally, Bell Aliant and CAE agreed:

a) The record would be primarily documentary consisting of written submissions with supporting documents and law, written statements from no more than two witnesses per side, “any expert reports” and documents provided in response to a request by the Arbitrator;

b) Oral testimony would be restricted to cross-examination if requested by a party and in that event, re-examination;

c) There would be no oral argument;

d) That the entire process would be completed by November 30, 2010;

e) All costs would be shared equally.

[ 9 ] For reasons explained later, the Arbitrator allowed one additional round of submissions. That lengthened the process slightly. In all other respects, the process I have described was followed. [4]

[ 10 ] Submissions were accompanied by transactional documents, e-mails, correspondence, financial statements, forecasts, risk and issue logs, the auditor’s working papers and related items. In the end, the arbitration record contained more than 2,500 pages.

B. The Asset Purchase Agreement

[ 11 ] The phrase Deferred Revenue was defined in the APA. [5] It was to be “calculated and presented on a basis consistent with” earlier audited statements [6] and Bell Aliant’s revenue recognition policy “all of which is to be in accordance with GAAP.” [7]

[ 12 ] Bell Aliant represented and warranted to CAE that the Deferred Revenue figure it had recorded “reflects the current and best assessment…in accordance with GAAP, consistent with past practices”. [8]

[ 13 ] The parties amended the APA several times before closing. In the Seventh Amendment, Bell Aliant promised to adjust Deferred Revenue. It also promised to revise the “Cost of Completion” of the helicopter contract “by providing sufficient contingencies, as required and reasonably estimated by Bell Aliant”. [9] [Italics added]

C. The Arbitrator’s Decision and Reasons

[ 14 ] On January 11, 2011, the Arbitrator’s decision was released. CAE advanced two reasons why Deferred Revenue was understated by Bell Aliant. First, CAE argued that Bell Aliant had improperly excluded known costs aggregating approximately $1.937 from its forecast. Second, CAE maintained that Bell Aliant did not make appropriate provision for various contingencies. CAE suggested that $5.77 million should have been allocated to those items.

[ 15 ] The Arbitrator first examined CAE’s allegation that Bell Aliant had deleted known costs from its forecasts prior to completion of the APA. He found that Bell Aliant had, indeed, removed substantial costs from its forecasts. The Arbitrator concluded that should not have occurred. Numbers had not been reworked to reflect business reality but to achieve a margin percentage targeted by a member of Bell Aliant’s senior management. At page 13 of his award, the Arbitrator wrote:

I have no hesitation in concluding that Bell Aliant senior management…interfered in the establishment of the Closing Date EAC of the [helicopter] contract to ensure a reported contract margin of approximately 20% and thus prevent a revenue reversal. There is considerable evidence of this in the productions. [10]

[ 16 ] After quoting at length from thirteen internal e-mails sent by Bell Aliant employees between November 20, 2008 and April 21, 2009, the Arbitrator reiterated his finding in these terms:

CAE has pointed out in its submission that it was the position of some financial management personnel at Bell Aliant that achievement of a target percentage gross margin should take precedence in the EAC calculation over the technical issues related to satisfaction of the contract specifications. I believe the evidence very strongly suggests that was the case. [11]

[ 17 ] The Arbitrator then considered whether “the EAC ultimately arrived at was sufficiently reasonable that Bell Alliant’s Deferred Revenue calculation can be considered to be in accordance with GAAP or...was materially misstated.” [12]

[ 18 ] Little comfort was taken from the opinion of the audit firm. The auditors had not seen the e-mails the Arbitrator reviewed. Nor had it been given detailed risk logs Bell Aliant maintained to facilitate the process of updating its EAC calculation from time to time. The Arbitrator wrote:

It is such information that draws into question the reasonableness of Bell Aliant’s EAC forecast. [13]

[ 19 ] CAE’s submissions had been accompanied by a September 23, 2010 report from KPMG LLP (“KPMG”). KPMG opined that the removal of certain costs by Bell Aliant and the failure to allocate and record certain contingent costs were not in accordance with GAAP. [14]

[ 20 ] The Arbitrator concluded CAE had proven [15] that Bell Aliant had understated EAC resulting in a material misstatement of Deferred Revenue.

[ 21 ] Focus turned to quantification. The task was formidable. The author of the KPMG report lacked expertise in project management or technology and therefore could not “be considered an expert on the actual EAC”. [16]

[ 22 ] The Arbitrator noted:

It is extremely difficult to conclude from the evidence what a reasonable Closing Date EAC was for the [helicopter] contract. As indicated earlier, no independent expert opinion has been produced by either Bell Aliant or CAE on the EAC of the [helicopter] contract. [17]

[ 23 ] For the reasons already summarized, the Arbitrator concluded Bell Aliant’s figure ($45,403,997) was low. However, CAE’s estimate of EAC ($53,111,449) was not “entirely reasonable”. It was much higher than any of Bell Aliant’s historical forecasts.

[ 24 ] The Arbitrator attempted to determine the appropriate figure.

[ 25 ] The Arbitrator concluded that Bell Aliant removed substantial costs from its forecast during the period of time covered by the problematic e-mails. The Arbitrator was not persuaded by Bell Aliant’s explanation for the removal. He concluded “Bell Aliant’s desired margin was as significant an issue to it as its actual cost structure.” [18] Although unable to “precisely reconcile” CAE’s figure of $1,937,108 to the changes made by Bell Aliant, the Arbitrator observed:

Bell Aliant did not argue that any of the costs CAE alleges were known and omitted were not removed from its EAC forecasts – rather it made more general arguments about it being entitled to employ mitigation strategies and the costs included in its EAC forecast were based on its cost structure and not CAE’s. Unfortunately, it appears to me that Bell Aliant’s desired margin was as significant an issue to it as its actual cost structure. [19]

[ 26 ] He concluded that $1.937 million had been “inappropriately excluded” on account of “omitted known costs”. The Arbitrator adjusted the EAC by that amount.

[ 27 ] The analysis turned to the second component questioned by CAE: a contingency provision. The Arbitrator found Bell Aliant’s figure too low and CAE’s too high.

[ 28 ] With respect to Bell Aliant, the Arbitrator said this:

I can take absolutely no comfort in Bell Aliant’s risk assessment and risk costing from Deloitte’s audit work because the audit papers provided to me show no audit work on the risk log. In fact, I am uncertain from the working papers if Deloitte was even aware of [Bell Aliant’s] detailed risk log. [20]

[ 29 ] On the other hand, while CAE’s “extensive review” of the risk log was “well conducted”, portions of its contingency calculation were rejected. The Arbitrator concluded that an additional $3.53 million should have been allocated to contingencies set forth in the risk log.

[ 30 ] As a result of adjustments on account of known costs and contingencies, the Arbitrator concluded EAC was $50,871,105. That meant Deferred Revenue on closing was $5,964,124. That number was more than the $2,071,772 figure appearing in Bell Aliant’s closing date financial statements but less than the $7,326,772 advocated by CAE.

[ 31 ] The Arbitrator observed:

My calculation of the additional contingency provision required is based on a detailed review of Bell Aliant and CAE’s submissions and comments on [Bell Aliant’s] Closing Date risk log. Again, I stress that my calculation is made without the benefit of either Bell Aliant or CAE having submitted any independent expert evidence on the EAC… [21]

D. These Proceedings

[ 32 ] Bell Aliant challenges the Arbitrator’s decision by application and notice of appeal.

[ 33 ] Bell Aliant’s application seeks to set aside the Arbitrator’s decision on the basis he exceeded his jurisdiction. Alternatively, Bell Aliant asks that the matter be remitted to another arbitrator for determination “after the delivery of expert evidence by the parties”. [22]

[ 34 ] Bell Aliant also served a notice of appeal. The notices of application and appeal rely on virtually the same grounds and seek the same alternative relief. The notice of appeal asks first for a declaration that Bell Aliant did not understate Deferred Revenue in its closing date financial statements.

E. The Notice of Application

[ 35 ] Section 46 (1) 3 of the Arbitration Act, 1991 [23] permits the court to set aside an arbitral award if it deals with a dispute not covered by the arbitration agreement or decides a matter beyond its scope.

[ 36 ] Bell Aliant’s counsel, Mr. Schabas, accepted that the Arbitrator was permitted to determine whether Deferred Revenue as recorded in the closing date financial statements was calculated in accordance with generally accepted accounting principles (“GAAP”). [24] However, he argued the Arbitrator was not permitted to undertake the exercise of quantifying any errors identified.

[ 37 ] I disagree. Section 3.5 of the APA gave CAE a twenty day period to review the closing date financial statements. Unless CAE gave written notice of objection within that timeframe, they were deemed to be approved.

[ 38 ] If notice was served, CAE was contractually obligated to set “out in reasonable detail the nature of the objection and the related amount(s) in dispute”. If Bell Aliant and CAE were unable to agree on “all matters in dispute” within a stipulated period, “ all unresolved matters” were to be submitted to arbitration. [Italics added] The wording chosen by these highly sophisticated parties is simple and clear. The Arbitrator was to determine the issues the parties could not settle.

[ 39 ] I have already referred to section 3.5 (c) of the APA. The Arbitrator was to make a “determination of all such matters”. The section required modification of the “Purchase Price and related allocations and adjustments…to the extent required to give effect to the Arbitrator’s determination”. That wording describes a mathematical exercise which could only be undertaken if errors were both identified and quantified by the Arbitrator.

[ 40 ] The scope of the exercise the parties contemplated is reinforced by the engagement letter their lawyers signed. It confirmed that the Arbitrator had been asked to provide “assistance in connection with the arbitration of a dispute…concerning certain Deferred Revenue… amounts reported on the Closing Date Financial Statements” [Italics added]. The arbitration record was to include documents provided “regarding…the calculation of Deferred Revenue…at Closing”. [25]

[ 41 ] It is clear the Arbitrator had authority – or jurisdiction – to make the inquiry and to render the decision he did. [26]

[ 42 ] Notably, Bell Aliant did not suggest there be a bifurcated process until after the arbitral award was released. In fact, in its initial submission to the Arbitrator Bell Aliant’s lawyers wrote:

The question is whether Bell Aliant reasonably complied with the applicable standard. Any modification to Bell Aliant’s calculations must be consistent with this overarching principle. [27]

[ 43 ] Bell Aliant submits that the Arbitrator also exceeded his jurisdiction in dealing with the issues without expert evidence. Respectfully, that complaint is not jurisdictional in nature. As Basterache and LeBel JJ. said in Dunsmuir v. New Brunswick :

“Jurisdiction” is intended in the narrow sense of whether or not the tribunal had the authority to make the inquiry. [28]

[ 44 ] The necessity for and effect of not having expert evidence relates to the quality of the decision and should be considered in the context of Bell Aliant’s appeal. I turn to it now.

F. The Notice of Appeal

[ 45 ] The subject of an appeal was addressed in section 3.5 (c) of the APA. It provides:

The Arbitrator’s determination of all such matters shall be final and binding on Bell Aliant and Purchaser and shall not be subject to appeal…absent manifest error…

[ 46 ] Bell Aliant argued the Arbitrator made errors of law and fact.

[ 47 ] With respect, this appeal does not raise a question of law. The Arbitrator correctly stated that the burden of proof lay with CAE. Whether the closing date financial statements were prepared as the APA required was an entirely factual issue.

[ 48 ] Does the arbitral award contain any “manifest error”?

[ 49 ] Bell Aliant accepts that the phraseology negotiated by the parties means that interference with the arbitral award is only appropriate if the Arbitrator made an error which is plain to see. [29] The bar Bell Aliant must clear is high. As Sharpe J.A. wrote in Inforica Inc. v. CGI Information Systems and Management Consultants Inc . :

This is in keeping with the modern approach pursuant to which the parties agree to have their disputes resolved by the arbitrator, not by the courts. [30]

[ 50 ] The language negotiated by the parties evidences their choice that access to the courts be strictly limited. I will address each of the instances of “manifest error” identified by Bell Aliant in turn.

1. The Absence of Expert Evidence

[ 51 ] Bell Aliant maintains that the Arbitrator was incapable of finding that the closing date financial statements were not prepared in accordance with GAAP in the absence of supporting expert evidence.

[ 52 ] I disagree. The purpose of expert evidence is to assist the trier of fact to understand evidence outside of that person’s range of experience. That additional knowledge is designed to assist the trier of fact to reach proper conclusions. [31] The Arbitrator selected by the parties is a chartered accountant as the APA contemplated. Familiarity with accounting – rather than legal – concepts was a prerequisite to an appointment which was to be and was made consensually.

[ 53 ] Having that expertise was clearly designed to expedite and facilitate the process of dispute resolution. The parties were permitted but not obligated to obtain expert evidence. Significantly, the engagement letter prevented the Arbitrator from appointing an independent expert without the parties’ prior written consent. However, he was permitted “to consult with other professionals in BDO Canada LLP…on accounting issues and standards”

[ 54 ] The Arbitrator’s familiarity with GAAP is evident from the award. Both parties referred him to sections drawn from the Canadian Institute of Chartered Accountants Handbook and statements of position developed by the American Institute of Certified Public Accountants.

[ 55 ] Furthermore, the Arbitrator’s initial concern with Bell Aliant’s calculations had a more pedestrian beginning. Forecasts were prepared for delivery to CAE. During the period pre-closing forecasts were being prepared, Bell Aliant employees exchanged e-mails concerning their content. CAE located those e-mails after closing and provided copies to the Arbitrator.

[ 56 ] A review created immediate and profound concern. Senior Bell Aliant employees reviewed the forecasts, were dissatisfied and declined to pass them on to CAE. Requests for revised estimates were made, resisted and repeated more insistently. Eventually, revised forecasts were provided, containing the desired result. They were accompanied by an e-mail expressing unequivocal reservation. The internal debate within Bell Aliant exposed the frailty of the assumptions upon which the revised forecasts were based. While the Arbitrator did not choose this word, his conclusion that numbers were manipulated is unmistakable.

[ 57 ] As noted, the arbitration process started with one expert’s opinion in hand. The audit firm had given an opinion that the closing date financial statements had been prepared in accordance with the APA. No comfort was taken from the auditor’s opinion because of the incompleteness of the information available to and reviewed by the audit firm.

[ 58 ] KPMG’s report identified specific areas of concern. The Arbitrator did not question the ability of the author to render any opinion but only one aspect of it. This passage illustrates:

CAE has produced a report from KPMG which concludes that Bell Aliant’s Deferred Revenue calculation was not made in accordance with GAAP. KPMG’s report cannot, however, be considered an expert report on the actual EAC of the [helicopter] contract. [Italics added]

[ 59 ] Its opinion was something which assisted the Arbitrator in the first stage of his analysis: determining whether Deferred Revenue “was understated”. [32]

[ 60 ] The Arbitrator had “expert” evidence from two sources on that threshold question: that of the audit firm which he rejected and that of KPMG which he accepted.

[ 61 ] In any event, the responsibility for reaching a decision, with or without expert evidence, lies with the trier of fact.

[ 62 ] The content of the e-mails, the weakness of the foundation for the audit opinion, the factual support for the KPMG opinion, the competing submissions of the parties which included input from those with accounting and technical expertise and the Arbitrator’s own experience, training and qualifications, led the Arbitrator to an appropriate and reasonable conclusion that EAC and Deferred Revenue were materially misstated.

2. The Adjustment of EAC and Deferred Revenue

[ 63 ] Mr. Schabas submitted the Arbitrator made a manifest error in determining what the EAC and Deferred Revenue should have been on closing.

[ 64 ] For reasons I have already given, I disagree. The APA and engagement letter gave the Arbitrator the mandate and responsibility to undertake that task. Jurisdiction was properly given, assumed and exercised.

[ 65 ] What about the reformulation of those numbers? Is Bell Aliant correct that the Arbitrator had to have expert evidence to undertake that task? No.

[ 66 ] Bell Aliant submits this case is analogous to the one facing the Court of Appeal in Martin v. Goldfarb . [33] In that case Mr. Martin was victimized by an unscrupulous former lawyer named Nigel Axton. Some of Martin’s legal work was handled by Farano Green. One of its members was aware that Axton had been previously convicted of fraud and disbarred. Believing that Axton had reformed, the information was not communicated to Martin. The trial judge concluded the information should have been passed on and that non-disclosure constituted a breach of fiduciary duty. Millions of dollars in damages were awarded.

[ 67 ] The Court of Appeal allowed the appeal in part. Finlayson J.A. referred to the trial judge’s observation that the evidence with respect to “the myriad of transactions and the money flow” was so deficient “it is now impossible to determine what was lost and if so, whether it was the loss of the lenders or Martin.” [34]

[ 68 ] The Court of Appeal overturned the significant damage award because the assessment “may be nothing more than guess-work”. [35]

[ 69 ] This case differs.

[ 70 ] Bell Aliant and CAE entered into a transaction which clearly delineated the parameters of any dispute. As noted, the items to be adjusted were identified and defined. The standards which Bell Aliant was to apply were articulated by reference to a prior audited statement, Bell Aliant’s revenue recognition policy, sufficient contingencies, reasonable estimates and GAAP.

[ 71 ] In short, the parties agreed what numbers would be provided, what they would reflect and the standards that would apply.

[ 72 ] The Arbitrator acknowledged that his calculations were “without the benefit of either Bell Aliant or CAE having submitted any independent expert evidence on the EAC of the” helicopter contract. Undoubtedly the undertaking was more onerous without expert evidence. However, it was not impossible – or a product of guesswork.

[ 73 ] The dispute spawned a small mountain of information. It included historical material which allowed the Arbitrator to look at the EAC and Deferred Revenue figures at points in time. Detailed narratives, including the risk logs, were provided to explain the approaches taken. The Arbitrator had the benefit of “Bell Aliant and CAE’s submissions and comments upon open risks” in the risk log. Some of the information was technical but it is both readable and understandable.

[ 74 ] Bell Aliant’s argument is based on the premise that evidence tendered was outside the education, training and experience of the Arbitrator. For reasons I have already given, that simply is not so. [36]

[ 75 ] Furthermore, exactitude was never contemplated by the APA. Consistency with past practice, adherence to GAAP and reasonable estimations of contingencies were the standards which Bell Aliant agreed to apply.

[ 76 ] With substantial factual support, the Arbitrator concluded they were not met. The record provided the information necessary for the Arbitrator to tackle the task of revising Bell Aliant’s figures to ones determined in accordance with the standards the APA mandated. [37] Any estimate is likely to be imperfect. However, the arbitral award evidences the attempt to complete a recalculation which reflected the detailed submissions of the parties.

3. Specific Adjustments

[ 77 ] Bell Aliant submits the Arbitrator made a manifest error in his approach to a specific issue.

[ 78 ] The Risk Log assigned each item a number. Mr. Schabas took me to risk 1352. Before closing it was described as “Assignment of L-3 MAS Contract”. “L-3” was a short reference to L-3 Communications (Canada) Inc. which had retained Bell Aliant. “MAS Contract” was a reference to the helicopter contract. According to Mr. Schabas the risk was designed to address the possibility that L-3 would not consent to the assignment of Bell Aliant’s contract. In other words, he submitted the risk was designed to address the possibility the APA would not close. Bell Aliant assigned $0 to this item.

[ 79 ] After closing, the risk was re-named by CAE and additional contingencies were addressed. CAE estimated aggregate “expense exposure” of $3.35 million for risk 1352. It applied a “risk weighted contingency” of ninety percent or $3.015 million.

[ 80 ] An adjustment of $1.675 million was made by the Arbitrator. Mr. Schabas suggested this was an example of a clear and obvious – or manifest – error. How did the Arbitrator reach that aspect of his decision?

[ 81 ] The Arbitrator was contractually permitted to pose questions and took full opportunity to do so. On November 8, 2010 he forwarded a lengthy letter to the parties’ lawyers. Many questions were asked. With respect to risk 1352, the Arbitrator asked CAE to respond to Bell Aliant’s position it was “effectively closed as a risk because L-3 did…sign the Assignment and Assumption Agreement” in November, 2008.

[ 82 ] CAE devoted several pages to its answer. It maintained risk 1352 had been “inaccurately named”. The lengthy explanation which followed included the following passage:

It was labeled as related to the risk of the assignment process as it was thought…that certain risks related to the milestone specifications, delivery schedule, and sign-off mechanism could be resolved during the process of securing the consent to assign the contract to CAE. The underlying risks were…not resolved with the assignment of the contract to CAE on November 21, 2008.

[ 83 ] CAE proceeded to provide a detailed description of the items it maintained risk 1352 was intended to cover. Its position was supported by an important person: Ken Howard. He served as Bell Aliant’s project manager with respect to the helicopter contract. Mr. Howard continued in that role with CAE post-closing.

[ 84 ] Prior to closing, Mr. Howard’s discomfort with the figures Bell Aliant presented was palatable. Indeed, he repeatedly expressed concern about the adequacy of the forecasts. He provided a detailed rationale. His views were criticized and rejected by more senior personnel. The forecasts presented to CAE changed. However, Mr. Howard continued to express his opinion they were wrong.

[ 85 ] CAE’s submissions took full advantage of Bell Aliant’s pre-closing internal debate. Many of the e-mails referenced by the Arbitrator involved exchanges with or about Mr. Howard. Mr. Howard certified the accuracy of the answers CAE provided to the Arbitrator.

[ 86 ] Bell Aliant also responded to the Arbitrator’s questions. Its position with respect to CAE’s reliance on Mr. Howard was articulated clearly and forcefully. It said:

The risks or issues described in Mr. Howard’s evolving risk logs engage a specialized expertise in both risk management and computer technology. CAE’s position…turns almost entirely upon the evidence of Ken Howard whose divided loyalties and shifting perspectives over time is apparent. By contrast, Bell Aliant relies upon a team of individuals…CAE seeks to implicate all of these professionals in a conspiracy to understate risk – except Mr. Howard whose plainly conflicted evidence is somehow preserved…

While CAE criticizes Bell Aliant’s senior management, the new evidence recently disclosed by CAE confirms that CAE’s own senior personnel closely managed the creation of Mr. Howard’s new risk log. The new evidence also confirms the extent to which CAE’s risk evaluation radically shifted and grew exponentially in the days leading up to October 6, 2009 when CAE filed its Letter of Objection.

[ 87 ] Bell Aliant addressed risk 1352 specifically. It wrote:

As at April 30, 2009, risk item 1352 was described as the risk of L-3 seeking concessions from Bell Aliant in order to assign the contract to CAE. This risk should have been closed once the Assignment and Assumption Agreement had been signed by L-3 in November, 2008 and the APA had been agreed to.

[ 88 ] As required, the parties answered the Arbitrator’s questions simultaneously. On December 2, 2010, the Arbitrator confirmed that CAE and Bell Aliant had “agreed to forgo any cross-examinations”. However, they were given one final opportunity “to address documentation and points presented in the responses”. [38]

[ 89 ] Each party delivered final submissions dated December 17, 2010. [39] Bell Aliant characterized CAE’s argument with respect to risk 1352 as “curiously late…transparently self-serving and lacking in credibility”. On the other hand, CAE submitted it had done “what Bell Aliant should have done in providing for an adequate contingency provision as at Closing.”

[ 90 ] After reviewing CAE’s answers, Bell Aliant identified four “areas of concern” and asked for permission to deliver a final submission. After an exchange of electronic messages, the request was denied.

[ 91 ] In his decision, the Arbitrator made three important findings:

a) First, that Bell Aliant’s risk log showed 108 open risks on closing. Twenty one of those – including risk 1352 - were classified as red – or as having a high probability of occurrence. A numerical value had only been ascribed to four of those risks. Risk 1352 was not one of them;

b) Second, that “absolutely no comfort” could be taken from Bell Aliant’s risk assessment and risk costing;

c) Third, that CAE’s “extensive” review of Bell Aliant’s risk log was “well conducted”.

[ 92 ] However, the Arbitrator concluded that the ninety per cent contingency applied by CAE to risk 1352 was inappropriate because the helicopter contract was “a mature” one. He determined that fifty percent was appropriate. He reasoned:

I cannot accept that at such a late stage in the contract 90% of the risk exposure in respect of unbounded functional requirements will be realized. Further, I cannot accept that all realized expense will be CAE’s responsibility.”

[ 93 ] While not expressly stated, it is clear the Arbitrator rejected Bell Aliant’s argument that risk 1352 related only to the possibility the APA would not be completed. He accepted that the category was, indeed, designed to cover something more.

[ 94 ] In quantifying the contingency, $0 was clearly inappropriate. The colour red had been assigned by Bell Aliant and maintained long after L3 had consented to the assignment of the helicopter contract to CAE. Having accepted that risk 1352 included a number of items, the Arbitrator was in a position to assign a value to them.

[ 95 ] Bell Aliant suggested CAE exerted the same pressure on Mr. Howard post-closing. It alleged Mr. Howard added items to risk 1352 to placate his new employer. That position appears more wishful than factual. [40] The e-mails relied upon by Bell Aliant are not, with respect, persuasive.

[ 96 ] Nonetheless, the Arbitrator did not accept CAE’s number. It too was reviewed and rejected.

[ 97 ] The narrative underlying the Arbitrator’s reworking of the numbers assigned to various contingencies is not detailed. His comments are short and succinct. However, when read in the context of the entire award, the thought process is clear. Bell Aliant’s process was so seriously flawed its numbers were rejected.

[ 98 ] CAE’s numbers and rationale were preferred. They were far more reliable but still required adjustment. The Arbitrator’s award reflects the fact that the object of the exercise was to reasonably estimate EAC – and therefore Deferred Revenue - because Bell Aliant had failed to do so.

[ 99 ] On the evidence, the Arbitrator’s findings and conclusions were factually supported and reasonable.

G. Conclusion

[ 100 ] For the reasons given, Bell Aliant’s application and appeal are dismissed.

[ 101 ] If the parties are unable to agree on costs, they may deliver written submissions with respect to that issue to me through Judges’ Administration, Court House, 12 th Floor, Unit “K”, 80 Dundas Street, London, Ontario, N6A 6B2 according to the following schedule:

a. Those of CAE by August 24, 2012;

b. Those of Bell Aliant by September 14, 2012;

c. Any reply of CAE by September 24, 2012.

[ 102 ] The parties are asked to restrict the submissions referred to in subparagraphs a. and b. to no more than five pages exclusive of supporting dockets and authorities and the reply submissions to three pages.

“ Justice Duncan Grace”

GRACE J.

Released: July 24 , 2012

COURT FILE NOS.: CV-11-419895/

CV-11-419897

DATE: 20120724

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

BELL ALIANT REGIONAL COMMUNICATIONS, LIMITED PARTNERSHIP Applicant/Appellant - And – CAE PROFESSIONAL SERVICES (CANADA) INC. Respondent

REASONS FOR JUDGMENT

GRACE J.

Released: July 24, 2012

[1] The parties described this contract as the MHP IIE contract.

[2] A letter of October 6, 2009 identified the areas of disagreement.

[3] Another issue was also identified, addressed and determined. It is not relevant to these proceedings.

[4] Each party filed initial submissions dated September 27, 2010. Bell Aliant then filed Reply Submissions and CAE rebuttal submissions dated October 28, 2010. Deloitte & Touche LLP’s working papers delivered to the Arbitrator together with three volumes of additional productions (two from CAE and one from Bell Aliant). Questions were posed by the Arbitrator and answered and each party provided “final” submissions dated December 17, 2010.

[5] The APA also defined the phrase Adjusted Deferred Revenue which appears in sections 3.1 and 3.6.

[6] They were dated December 31, 2007.

[7] These requirements are drawn from paragraphs (v) and (eeee) of Schedule “A” to the APA.

[8] This representation and warranty appeared in paragraph (p) of Schedule “B” to the APA.

[9] This requirement was added in paragraph 17 of the Seventh Amendment to the APA.

[10] Arbitrator’s Award dated January 11, 2011, p. 13.

[11] Ibid. at p. 20.

[12] Ibid.

[13] Ibid.

[14] Those opinions were expressed at pages 14 and 16 of the KPMG report.

[15] The Arbitrator noted at p. 5 of the Award that “the burden of proving that the Closing Date financial statements were not prepared in accordance with GAAP rests with CAE.”

[16] Arbitration Award, p. 20.

[17] Ibid. at p. 21.

[18] Ibid. at p. 22.

[19] Ibid.

[20] Ibid .

[21] Ibid. at p. 24.

[22] The excerpt is drawn from para. 1 (b) of the Notice of Application.

[23] S.O. 1991, c. 17 ,

[24] [24] Undoubtedly Mr. Schabas would prefer that I add “applied in a manner consistent with those accounting principles used in the preparation of the” December 31, 2007 financial statements as section 3.4 of the APA and paragraph 17 of the seventh amendment to the APA envisioned.

[25] These excerpts are drawn from the first and third pages of the Engagement Letter.

[26] Dunsmuir v. New Brunswick , 2008 SCC 9 , [2008] 1 S.C.R. 190; Arbitration Act, 1991 , supra note 3, s. 46 (3).

[27] This quote is drawn from page 3 of the initial submissions made on behalf of Bell Aliant dated September 27, 2010

[28] Dunsmuir , supra note 26 at para. 59 .

[29] Chainauskas Estate v. Reed , [2009] O.J. No. 3017 (C.A.) at para. 41 .

[30] (2009) 2009 ONCA 642 , 97 O.R. (3d) 161 (C.A.) at para. 14 ; Universal Settlements International Inc. v. Duscio , 2012 ONCA 215 at para. 31 .

[31] R. v. D (D.) , [2000] S.C.C. 275; Carmen Alfano Family Trust v. Piersanti (2009), 78 C.P.C. (6 th ) 88 (Ont. S.C.J.) .

[32] This quotation is drawn from the engagement letter.

[33] (1998), 1998 4150 (ON CA) , 41 O.R. (3d) 161 (C.A.).

[34] Ibid. at para. 68.

[35] Ibid. at para. 70.

[36] Freyberg v. Fletcher Challenge Oil and Gas Inc. , 2005 ABCA 46 at paras. 86-87 ; R. v. Abbey , 1982 25 (SCC) , [1982] 2 S.C.R. 24 at 42.

[37] Wood v. Grand Valley Railway Company (1915), 1915 574 (SCC) , 51 S.C.R. 283.

[38] This excerpt is taken from a December 2, 2010 e-mail from the Arbitrator to the parties’ lawyers.

[39] The Arbitrator denied Bell Aliant’s request to deliver a response to CAE’s final submission.

[40] Bell Aliant’s factum references CAE e-mails in September, 2009. They evidence time constraints and ongoing work rather than pressure. During argument, Mr. Schabas referred me to a November 2, 2009 e-mail. However, that e-mail did not deal with the amount of the contingencies but rather their description and categorization. By then Mr. Howard had already suggested the contingency should be in the magnitude of $7.24 million.