COURT FILES NO.: CV-10-409412

CV-10-412364

DATE: 20120718

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 1724684 Ontario Limited and 2234233 Ontario Inc. / Applicants in Court File No. 409412

AND:

Leafwood Investments Inc., and Goldman, Spring, Kichler & Sanders LLP Respondents in Court File No. 409412

AND RE: Leafwood Investments Inc. / Applicant in Court File No. 412364

AND:

1724684 Ontario Limited, 2234223 Ontario Inc., Shahin Talaei, aka Sean Talaei, and Ahad Jafarpour, aka Jeff Jafarpour / Respondents in Court File No. 412364

BEFORE: Justice E. P. Belobaba

COUNSEL: Joseph Markin for Applicants (Purchaser) in Court File No. 409412

David R. Rothwell for Applicant (Vendor) in Court File No. 412364

HEARD: June 25, 26, 27 and 28, 2012

ENDORSEMENT

Overview

[1] As part of a multi-million dollar land purchase, 1724684 Ontario Limited also agreed to buy a quantity of structural steel that the Vendor, Leafwood Investments, had planned to use in building the commercial plaza portion of the project. The Purchaser paid $11.8 million for the land parcel and, because it intended to include the plaza, agreed to pay $500,000 plus GST for the custom-made steel.

[2] The contractual arrangements provided that the $525,000 total was to be held in trust by the Vendor’s solicitor and released to the Vendor once the Purchaser had satisfied itself that the steel being held in storage was the steel that was purchased. If, acting reasonably and in good faith, the Purchaser was not satisfied by a certain date, the $525,000 in trust would be returned to the Purchaser.

[3] The sale of the land parcel closed on March 15, 2010. The APS, as amended, provided that the Purchaser would have a further five months until August 15, 2010 to complete the verification of the steel. Unfortunately, the steel manufacturer’s fabrication drawings were no longer available. Without the numbering on these drawings, the verification process would be much more time-consuming and expensive. The steel manufacturer offered to reproduce the fabrication drawings and also guarantee content and delivery but only if it was paid a fee. The Purchaser did not agree to the proposed fee. The months went by and the Purchaser was unable to complete the verification to his satisfaction.

[4] On August 13, 2010 the Purchaser advised the Vendor accordingly and demanded that the $525,000 in trust be returned with interest. The Vendor objected on two grounds: one, because the parties had arrived at a settlement several months earlier on May 13, 2010; and two, that the Purchaser’s efforts to verify the steel purchase were neither reasonable nor in good faith and were thus in breach of its covenants in the APS as amended.

[5] The Purchaser proceeded to complete the commercial plaza by purchasing other steel. The custom-made structural steel at issue herein remains in storage but now only has scrap value. The dispute before the court is about the $525,000 in the Goldman, Spring, Kichler and Sanders trust account.

[6] Both sides brought applications for various declarations and orders. A master ordered that the two applications be heard together. The applications judge directed a trial of an issue.

[7] The trial proceeded before me on the two issues set out by the applications judge:

(i) Whether there was a settlement on May 13, 2010 between the parties and whether the settlement documents of June 17, 2010 correctly set out the terms of the settlement;

(ii) Whether the purchaser’s steel requirements under s. 8 of the Amending Agreement were met or not and consequently who is entitled to receive the $500,000 plus GST in trust funds.

[8] For the reasons set out below, I have concluded that no settlement was reached on May 13, 2010. Nonetheless, the Vendor is entitled to the money in trust because the Purchaser did not act reasonably as required by s. 8 of the Amending Agreement.

Two preliminary matters

[9] I should first deal with the parties’ disagreement about the “open web steel joists” and the delivery charges.

[10] The open-web steel joists, in my view, were not included in the $500,000 structural steel purchase. It is evident that, at the very least, both the Vendor and the steel fabricator, Skyhawk Steel, are agreed on this point. I refer in particular to the emails from the Vendor’s counsel reminding the Purchaser that the Joists were not part of the steel purchase; Mr. Nourmansouri’s Reclamation of Property Claim of February 18, 2010 at para. 5; and Ms. Reed’s explanatory email of March 31, 2010 itemizing how the sale price of $500,000 was determined (“$472,500 for the steel, $20,000 for engineering, $8522 for demurrage, plus GST – all settled at $500,000”). I also refer to the Skyhawk proposal of March 27, 2010 that specifically added an additional charge of $105,000 for the “joists by Canam.”

[11] The question for me is whether, based on the contractual documentation, the Purchaser’s submission that the Joists were always intended to be part of the structural steel purchase, is tenable. In my view, it is not. First, section 6 of the APS refers only to the steel that was already fabricated by Skyhawk and was in storage at Skyhawk. This would not include the Joists because the Joists were to be made by Canam and stored until delivery at Canam. As it turned out, Canam completed the Joists for only three of the five plaza buildings and these Joists are still at the Canam facility. And as a footnote: there is no evidence that Skyhawk paid Canam for the Joists that were completed. In short, the APS does not assist the Purchaser in its effort to show that the Joists were included in the steel purchase.

[12] Secondly, the Purchase Order for the steel clearly differentiates between the structural steel and the Joists. This differentiation is further explained on the attached “contract breakdown” page that shows how the $646,000 total price was calculated: $472,500 for the steel; $91,500 for the Joists; and $82,000 for the erection charges. (Recall again Ms. Reed’s email and the Skyhawk proposal in para. 10 above.)

[13] Thirdly, the Minutes of Settlement between Skyhawk and the Vendor dated December 7, 2009 refer to the “fabricated materials set out in Schedule A”. However, Schedule A refers to “structural steel”, “structural content” and “structural drawings”, none of which assists the Purchaser in its submission that the Joists were included in the steel purchase.

[14] In sum, for the reasons just stated, I am not persuaded that the Joists were included in the $500,000 purchase of structural steel.

[15] The delivery charges were always the responsibility of the Purchaser. Section 6 of the APS is clear that the Purchaser is to be responsible for “the costs of transportation of the steel to the site.” As it turned out, the Vendor agreed to pay Skyhawk $13,188 to cover the delivery fee as per its pro forma invoice. I will return to this point when I consider the reasonableness of the Purchaser’s conduct under the second issue.

[16] Turning now to the two issues before me.

Analysis

[17] I begin with this observation. The purchase and sale of the land parcel and the custom-fabricated structural steel was a significant commercial transaction that was carefully negotiated by sophisticated business people with the ongoing involvement of experienced legal counsel. I say this to make clear that the APS, the Amending Agreement and the dozens of emails, letters and other documents that are before me must be taken seriously and at face value.

[18] Much of my task in this trial is to interpret the competing versions of who did or meant what by considering the extensive written and contractual documentation.

(1) Was there a settlement on May 13, 2010?

[19] Despite the Vendor’s best efforts to craft what, in my view, was a reasonable settlement, no agreement was reached at the meeting of May 13 or in the days that followed. Mr. Kichler, counsel for the Vendor, insists that an oral settlement was achieved at this meeting as set out in the draft that he circulated on June 17. Mr. Kichler’s evidence was straightforward and credible. Mr. Kutner, counsel for the Purchaser denies any such agreement. His evidence was also straightforward and credible. The only way to resolve this issue is to consider the written documentation.

[20] The correspondence between the two lawyers, and particularly the correspondence originating with Mr. Kutner, both before and after the May 13 meeting, overwhelmingly supports the position of the Purchaser that no agreement was reached. In his correspondence leading up to the meeting, Mr. Kutner always made clear that his proposals were being advanced on a “without prejudice” basis. Even the Vendor’s litigation counsel, Mr. Rothwell, described the upcoming meeting in one of his emails as a “without prejudice meeting.” He also acknowledged that Mr. Kutner’s pre-meeting proposal of May 10, 2010 was set out in a “without prejudice letter.”

[21] I readily acknowledge that parties can arrive at a settlement even though much of the pre-meeting correspondence was presented on a “without prejudice” basis. But I am not persuaded that this happened here, based on the post-meeting correspondence.

[22] In the days immediately following the May 13 meeting, Mr. Kutner again repeated in numerous emails and letters that no settlement agreement had been achieved - that the meeting was “completely without prejudice” and that “only the parameters of a possible resolution” had been outlined. At most, there was a “tentative agreement.” As already noted, both lawyers were credible witnesses. Mr. Kichler, for the Vendor, said he took notes at the May 13 meeting but his notes were not produced. Based on the documentation before me, I am not persuaded that a settlement was reached at the May 13 meeting.

[23] Even if I were to ignore the correspondence just discussed, I would still have to deal with the fact that the attempted summaries of what this purported settlement agreement contained do not match up. I have reviewed Mr. Kutner’s proposal of June 9, and Mr. Kichler’s suggested ‘minutes of settlement’ dated June 17, 2010. The parties were obviously very close to an agreement – indeed, they were agreed on the core issues such as the fact that Skyhawk’s $78,375 charge would be paid out of the $525,000 in trust and the fact the Purchaser would receive an $88,188 credit, to be reduced by the amount paid out of trust to Skyhawk. What was not agreed to was ‘who would pay the additional $7500 for the steel plates’ (it is not clear at all from the evidence that Skyhawk would absorb this cost as part of the $78,375 charge) and ‘whether the parties’ agreement had to be “conditional” upon finalizing an agreement with Skyhawk.’ Also, the Purchaser did not accept the Vendor’s suggestion about a full and final release.

[24] In sum, I am not persuaded on the evidence before me - whether on the correspondence or the “proposal”/ “minutes of settlement” documents - that a settlement was reached at the May 13 meeting.

(2) Which party is entitled to the monies in trust?

[25] If the Vendor breached its obligations under s. 8 of the Amending Agreement “to assist the Purchaser” in its verification process or if the Purchaser, acting “reasonably and in good faith” could not verify the structural steel purchase within the five months provided, the funds should be returned to the Purchaser. If, however, the Purchaser was unable to complete the verification process because it acted unreasonably and thus in breach of its obligations in s. 8, then the money in trust should be paid to the Vendor.

[26] In my view, the Vendor did not breach its obligations under s. 8 of the Amending Agreement. I find that the Vendor used its “best reasonable efforts” to obtain an inspection of the steel before closing. Indeed, the documentary evidence shows that the Vendor was quite persistent in this regard.

[27] After the closing, the Vendor continued to assist the Purchaser by providing the Purchaser with the relevant contact numbers, trying to arrange inspection times, urging Skyhawk or its trustee in bankruptcy to find and release the fabrication drawings (until it became apparent to all concerned that the fabrication drawings were no longer available.) I note that the Purchaser itself has agreed that the Vendor was “co-operative” and has not pointed to any particular failing or breach on the part of the Vendor of any of its s. 8 obligations. [1]

[28] The actions of the Purchaser, however, merit some comment. In my view, the Purchaser did not “act reasonably and in good faith to satisfy itself as soon as possible” about the integrity of the structural steel purchase and thus breached its obligations under s. 8 of the Amending Agreement.

[29] The basic problem, as I have already noted, was the fact that the fabrication drawings were not available for the Purchaser to use in its verification process. Skyhawk Steel had discarded these drawings two years earlier in 2008 after the structural steel in question had been fabricated. In my view, the risk that the drawings provided to the Purchaser by the Vendor might be insufficient for verification purposes was assumed by the Purchaser.

[30] The Purchaser’s lawyer drafted s. 8 of the Amending Agreement. The several drafts were admitted into evidence. It is evident from the red-lining that Mr. Kutner was trying to shift all, or almost all, of the risk relating to verification to the Vendor. Mr. Kutner first tried to get the Vendor to agree that it would deliver “a certified copy of all steel drawings” and cause its architect and engineer “to certify” that, in essence, the Purchaser was getting what it purchased. The Vendor would not agree to do this. The most the Vendor would do is provide the Purchaser with the drawings, purchase orders and invoices that it had in its possession without any certification of any sort. The risk relating to verification was clearly being shifted back to the Purchaser. The most Mr. Kutner could do for the Purchaser was to acknowledge “having received a full copy of the steel shop drawings prepared by VGA consultants ” [the Vendor’s architects]. The risk that the VGA drawings might insufficient for verification purposes was, in my view, assumed by the Purchaser.

[31] In March, 2010, just three days before the closing, the Purchaser was advised by its consulting engineer that he would need Skyhawk’s fabrication drawings to do the verification with reasonable despatch. [2] The parties soon learned that the fabrication drawings were no longer available, but they could be reproduced – and Skyhawk offered to do so for a fee. Assuming the fee was not exorbitant or otherwise unreasonable, the Purchaser, acting reasonably, was in my view obliged to pay this fee, acquire a new set of fabrication drawings and complete the verification of the steel purchase.

[32] If I am wrong in concluding that the Purchaser assumed the risk that the VGA drawings might be inadequate, then such risk should have been shared equally by the parties. In other words, when the parties discovered that the long-discarded fabrication drawings were essential for a reasonably speedy verification process, they should have agreed to split the Skyhawk charge for reproducing these drawings, with each side paying half.

[33] And that’s exactly what (almost) happened. Skyhawk offered, for a fee of $78,375 plus tax, to bring the steel to its shop, tabulate it, re-divide the steel as per each building, repaint the elements as required, produce new fabrication drawings, and load and ship the steel to the job-site. The Vendor, in its letter of May 4, 2010, offered “as a gesture of goodwill” to pay half of the Skyhawk fee. The Purchaser rejected this offer, describing it as “totally unreasonable and unacceptable.”

[34] In my view, the Purchaser, acting reasonably, as contractually required by s. 8 of the Amending Agreement, should have accepted the May 4 offer and should have agreed to pay one-half of the $78,375 Skyhawk fee, or about $39,000 to complete the verification process. Had this been done, the steel, in all likelihood would have been delivered to the job-site by the end of June at the latest and the verification could easily have been completed well before the August 15 deadline. [3]

[35] It is important to note that the Purchaser was itself willing to pay Skyhawk $25,000 for new fabrication drawings: see Mr. Kutner’s letter of May 10, 2010. Also, as already noted, the Purchaser was contractually obliged to pay the $13,188 delivery charge: recall above, para. 15. In other words, sometime in late April or early May, 2010, the Purchaser would have paid just over $38,000 for the new drawings and the cost of delivery. It is therefore reasonable to conclude that the Purchaser should have accepted the Vendor’s 50/50 offer and paid what would have been about $39,000, which included delivery.

[36] By failing to do so, the Purchaser breached its covenant under s. 8 of the Amending Agreement.

[37] The Vendor is therefore entitled to the monies in trust, with the following caveat. During the trial, counsel for the Purchaser suggested that the Vendor was not entitled to the $25,000 in GST because the purchase price, including GST, was the $500,000 stipulated in the settlement agreement with Skyhawk. He also referred to the $7500 cost of the steel plates that were apparently delivered to the job-site but were then lost or misplaced by the Vendor. In other words, there is a strong possibility that the Purchaser may be entitled to receive $32,500 of the monies in trust. Unfortunately, neither of these points was fully developed at the trial.

[38] I will therefore allow both sides an opportunity over the next four weeks to make a brief written submission on each of these points – first, the Vendor and then the Purchaser. It is my hope, of course, that the parties can resolve the GST and steel plates issues on their own so that no further submissions are needed.

Disposition

[39] The Vendor is entitled immediately to $492,500 of the $525,000 being held in trust by Goldman, Spring, Kichler and Sanders LLP, plus accrued interest. The Purchaser is entitled to the remaining $32,500 plus accrued interest, unless the Vendor disagrees, in which case the parties shall make brief written submissions as noted above.

[40] I have considered the parties’ cost submissions. This was the directed trial of two issues. The Purchaser prevailed on the first issue. The Vendor prevailed on the second issue. Success being divided, there will be no costs award.

[41] Order to go accordingly.

Belobaba J.

Date: July 18, 2012

[^1]: Even the exchange of correspondence after July 15, 2010 when the Vendor offered to move the steel “to Peter’s place” and then failed to follow-up was not impugned as a breach of s. 8 because the Purchaser, by its own admission, was no longer pursuing verification but was simply trying to do an inventory for settlement purposes. That is, the Vendor’s non-response to the Purchaser’s July 28, 2010 email was not advanced as a breach by the Vendor of its s. 8 obligations.

[^2]: It is interesting to note that until March 12, 2010 (when the Purchaser received the email from LorEng pointing out that the VGA erection drawings were insufficient and that it also needed the fabrication drawings in order to identify the structural elements) the Purchaser genuinely believed that the steel purchase could be verified by using just the Purchase Order and the VGA drawings: see Mr. Kutner’s email to Mr. Rothwell dated March 4, 2010.

[^3]: According to Mr. Kutner’s emails of March 19 and March 24, 2010 the verification would take about two weeks using the fabrication drawings and about six weeks without the drawings. This raises the interesting question: why didn’t the Purchaser request that the steel be moved to the job-site or another convenient location (at the Purchaser’s expense) so that the verification could have been completed in six weeks even without the fabrication drawings? Section 8 of the Amending Agreement would have had to have been amended to accommodate this and the Vendor may not have agreed to do so, but the Purchaser did not even make the request.