SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-11-431351
DATE: 20121016

RE: Surrogit Investments Inc., Plaintiff

AND:
Allied Global Holdings Inc., Defendant

BEFORE: Pollak J.

COUNSEL:
Douglas Langley, for the Plaintiff
Darryl Mann, for the Defendant

HEARD: July 16, 2012 and August 20, 2012

ENDORSEMENT

Facts

[1] On January 5, 2007, Surrogit Investments Inc. (“Surrogit”) sold its shares in Allied Global Holdings Inc. (“Allied”) to Allied.

[2] Allied paid part of the purchase price on closing with the balance being deferred, pursuant to the terms of the Promissory Note (the “Note”). Surrogit made a formal demand for payment of the balance on June 21, 2011.

[3] Since Allied did not make payment, Surrogit commenced an action and moved for summary judgment for the balance due under the Note in the amount of $2,533,982.37.

[4] In defence of this motion, Allied submits that the terms of the Note clearly and unambiguously provide that no payments are due. Allied argues that its payments are conditional on its ability to make the payments without breaching its financial covenants to HSBC Bank (the “Bank”) under the 2007 HSBC Facility Letter. Allied relies on the specific language of the Note, the context in which the language is used and the purpose of the Note.

[5] Alternatively, if this Court finds that the terms of the Note are not clear and unambiguous, Allied submits that the motion should be dismissed as there is a genuine issue requiring a trial with respect to the interpretation of the terms of the Note.

[6] Section 3 of the Note provides the particular “terms set out herein” to which the “equal consecutive annual instalments” are subject:

Each Annual Payment due hereunder is subject to the Payor, both prior to and after making the payment due to the Payee, then being in compliance with the financial covenants under its banking facilities with HSBC Bank Canada (the “HSBC Facility”), as set out in the Facility Letter between the Payor and HSBC Bank Canada dated as of January 7, 2007 , a final executed copy of which has been provided to the Payee and is attached hereto as Exhibit A. [Emphasis added.]

[7] A copy of the January 5, 2007 HSBC Facility Letter (the “Facility Letter”) is attached as Exhibit A to the Note. The Facility Letter provides that it is subject to periodic reviews and that it can be amended, from time to time in writing and signed by a duly authorized official of the Bank.

[8] The term “Facility Letter” is defined in the Schedule, attached to Exhibit A, as “the letter from the Bank to the Borrower to which this Schedule is attached, together with the Schedule, and includes all amendments and replacements thereof”.

[9] By correspondence dated December 31, 2008, from the Bank to Allied, the Facility Letter was amended as follows:

Paragraph (f) in the Negative Covenants Section of the Facility Letter is hereby deleted in its entirety and replaced with the following:

[Allied shall not] repay any subordinated debt…provided however that (i) the Surrogit debt may be repaid pursuant to the terms of the promissory note issued by the borrower to Surrogit Investments Inc. dated January 5, 2007 to evidence such debt, so long as (A) the Borrower is up-to-date with all payments (both principal and interest) then due and owing by it to the Bank hereunder and (B) both prior to and after making any repayment of the Surrogit Debt, the Borrower remains in compliance with the financial covenants set out in the facility letter dated January 5, 2007 issued by the Bank to the Borrower.

[10] Correspondence dated February 23, 2010 from the Bank to Allied further amended the Facility Letter. In paragraph (f) under the heading of Financial Covenants, the Debt Service Coverage Ratio was changed to a minimum of 1.00:1, increasing to 1.15:1 by December 31, 2010.

[11] The parties agree that Allied has not been able to make any payments under the Note without breaching its financial covenants under the Facility Letter.

[12] Allied submits that any payments pursuant to the Note are conditional on Allied’s ability to make payments to Surrogit without breaching or causing a breach of these financial covenants.

[13] Surrogit, on the other hand, submits that when the wording of the Note was finalized, it was the common intention of the parties and the Bank that Allied would not be required to make the Payments if, on the payment date , Allied was not in compliance with its current financial covenants to the Bank (i.e. the amended Facility Letter). Surrogit submits that on January 5, 2008, Allied properly deferred its first annual payment to Surrogit. However, each January thereafter Allied has improperly refused to make any payments, even though the Bank has certified that it is in compliance with its current financial covenants for that year.

[14] Allied relies on the fact that it would not be in compliance with the financial covenants in place in 2007, even though those financial covenants have been replaced and no longer apply. The second annual payment pursuant to the Note was due on January 5, 2009. On that day, Surrogit received a letter stating that the financial covenants between Allied had been changed on December 31, 2008, and although Allied was in compliance with the 2008 financial covenants now in effect, it would have been in breach of the original 2007 covenants and therefore was not permitted to make the second annual payment to Surrogit. Although Surrogit was not happy with this interpretation of the Note, it decided to permit the forbearance being sought by the company. No demand for payment was made at that time.

Interpretation of the Note

[15] It is necessary to interpret the words of the Note. Those words appear to be clear. Both parties believe that the words of the Note are clear, but they each advance different interpretations.

[16] Allied’s obligation to make payments is subject to Allied being in compliance with the “financial covenants under its banking facilities with HSBC Bank Canada, as set out in the Facility Letter between the Payor and HSBC Bank Canada dated as of January 7, 2007.”

[17] Surrogit submits that the financial covenants referred to are two financial ratios: a debt service ratio and a funded debt to EBITDA ratio.

[18] Those ratios are clearly set out in the Facility Letter, which is specifically identified, dated and attached. Surrogit submits that, notwithstanding the specific identification, due to the use of certain words in the present tense, the effect is to link the obligation to pay to Allied’s compliance with its current financial covenants.

[19] The wording of section 3 of the Note that is relied on refers (in the second line) to the Payee “ then being in compliance with the financial covenants under its banking facilities”, and refers (in the last line) to the “financial covenants to which the Payor is subject under the HSBC Facility.” The full text of section three is as follows:

Each Annual Payment due hereunder is subject to the Payor, both prior to and after making the payment due to the Payee, then being in compliance with the financial covenants under its banking facilities with HSBC Bank Canada (the “HSBC Facility”), as set out in the Facility Letter between the Payor and HSBC Bank Canada dated as of January 7, 2007, a final executed copy of which has been provided to the Payee and is attached hereto as Exhibit A. Except with consent from HSBC Bank Canada and subject to compliance with Section 4 below, the Payor shall not be required to make an Annual Payment then due under this Promissory Note to the extent that such payment would cause the Payor, either before or after the making of such payment, to be in breach of the financial covenants to which the Payor is subject under the HSBC Facility. [Emphasis added.]

[20] The use of “is” in the present tense is also repeated in each of section 4(a), (b) and (c) of the Note as follows:

In the event that the Payor is unable to make the whole of an Annual Payment for the reasons set out in Section 3, the Payor shall be required to:

(a) within 10 calendar days of the date that such Annual Payment first becomes due and payable, provide the Payee with written confirmation from HSBC Bank Canada that all or part of such Annual Payment which is otherwise due and payable under this Promissory Note would, if made pursuant to the terms hereof, result in the Payor being in breach of the financial covenants to which the Payor is subject under the HSBC facility.

(b) on the date that the subject Annual Payment is due, pay such portion of the Annual Payment then due that the Payor is capable of paying without breaching the financial covenants to which the Payor is subject under the HSBC Facility; and

(c) from time to time and at such times as the Payor is able to make further full or partial Annual Payments without breaching the financial covenants to which the HSBC Facility is subject, make catch up payments with respect to all overdue Principal Amounts plus interest at the Interest Rate accrued thereon.

To the extent that the Payor complies with the provisions of this Section 4, the Payor shall be deemed to not be in default of its obligations under this Promissory Note.

[21] Surrogit also refers to the fact that the Facility Letter contemplates amendments by the Bank, and to the definition of Facility Letter in the attached Schedule, to support its argument that as Allied’s financial covenants to the Bank change, so does its obligation to pay pursuant to the Note.

[22] Surrogit relies on Bell Canada v. The Plan Group (2009), 2009 ONCA 548 , 96 O.R. (3d) 81 (C.A.), at para. 42 :

The application judge did not apply the Current Rules. His interpretation failed to give meaning and effect to a critical term of the parties’ agreement calling for conduct of the arbitration under “ the then-current rules [of the Institute]”. Early in his reasons, at para. 19, the application judge recognized that, “[v]iewed on its own, the second sentence in the Arbitration Clause constitutes a straight-forward agreement to comply with the provisions of both the Act and the rules of the Institute from time to time”…He added that he “[saw] no reason not to give effect to the express wording of this provision”. That is not what he did, however. In this respect, he erred in law by misapplying, or failing to apply, the principle that a contract is to be interpreted in a manner that gives meaning to all of its terms and avoids an interpretation that renders one or more of its terms ineffective. [Emphasis added.]

[23] I do not think that this jurisprudence assists the submissions made by Surrogit. The words under consideration were the “then- current rules” of the institute, which in my view are very different than the use of the words “then” and “is” in this case.

[24] Surrogit relies on the following principles of contractual interpretation from Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust , 2007 ONCA 205 , 85 O.R. (3d) 254 (C.A.), at para. 24 as being particularly relevant in this case. A commercial contract should be interpreted:

(a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;

(b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended what they have said;

(c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties; and (to the extent there is any ambiguity in the contract),

(d) in a fashion that accords with sound commercial principles and good business sense, and that avoid a commercial absurdity.

[25] Allied emphasizes that the purpose in interpreting a written agreement is to identify the intention of the parties and relies on the following principles of contractual interpretation from Helix Biopharma Corp. v. Lifecodes Corp. , [2001] O.J. No. 3507, at para. 12 :

(a) When construing a written agreement, the court’s aim is to determine the intention of the parties to the agreement. In this regard the cardinal presumption is that the parties have intended what they have said.

(b) The document should be looked at as a whole, with each contractual term considered in the context of the entire document. The court should make every effort to interpret the document on its face, without regard to extrinsic evidence.

(c) Where a document or term in a written agreement is unclear and ambiguous, the parole evidence rule allows for the acceptance of extrinsic evidence to alter or vary the written words.

(d) Although the evidence of the parties’ subjective intention is not admissible, evidence of mutually known facts may be admitted to identify the meaning of a descriptive term. Such evidence is limited to the factual matrix or circumstances surrounding the conclusion of the agreement. The test in respect of this is an objective one. That is, what in the circumstances would have been the intention of a reasonable person in the same situation as the parties?

[26] The parties are generally agreed on the applicable rules of interpretation. Both agree that extrinsic evidence should not be considered if the wording is clear and that the Note should be interpreted in a fashion that accords with sound commercial principles and good business sense, and that avoid commercial absurdity. I accept Allied’s argument that it is consistent with the wording of the Note that the parties, including the Bank, wanted certainty and established “a benchmark” with respect to the conditions of payment. That is why the parties were very specific in identifying the financial requirements that had to be met before payment was required. This, I agree, makes good commercial sense.

[27] I am of the view that the fact that the parties sought to identify the specific Facility Letter as at a particular date, and made that letter an Exhibit is very important. Surrogit could have added the words “and any amendments thereto” when referring to the specifically dated Facility Letter, as follows:

Each Annual Payment due hereunder is subject to the Payor, both prior to and after making the payment due to the Payee, then being in compliance with the financial covenants under its banking facilities with HSBC Bank Canada (the “HSBC Facility”), as set out in the Facility Letter between the Payor and HSBC Bank Canada dated as of January 7, 2007 ( and any amendments thereto ), a final executed copy of which has been provided to the Payee and is attached hereto as Exhibit A.

One of the most basic rules of interpretation, relied on by Surrogit, is that the intention of the parties is to be determined “in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended what they have said”: Ventas , supra , at para. 24.

[28] I do not accept the submissions of Surrogit with respect to the effect of the use of the words in the present tense. If the parties had intended that the criteria to be used would change as the Facility Letter was amended by the Bank, it would have been very easy to add words to the effect of those I have referred to above. The parties did not do so. I also do not find that the definition of Facility Letter in the attached schedule (which specifies that it includes any amendments to the Letter) nor the fact the Facility Letter could be and was amended by the Bank support Surrogit’s argument. I find that the wording of the Note is clear and provides that the financial covenants to be considered were those set out in that particular Facility Letter—namely the 2007 financial covenants. The amendments to the Facility Letter are therefore irrelevant. It is interesting to note that, in any event, the amendments made by the Bank are consistent with the apparent intention of the Bank to require that Allied at all times be in compliance with the 2007 financial covenants, before the Bank would permit it to make payments to Surrogit. I find that in order to support the interpretation urged by Surrogit, clear wording would have been required. The interpretation advanced by Surrogit is not supported by the clear wording of the Note.

The Requirement of Written Confirmation

[29] Surrogit also argues that the third annual payment pursuant to the Note was due on January 5, 2010 and that Allied made no payment and did not provide the required letter from the Bank. On February 23, 2010, Surrogit received a letter from the Bank referring not to Surrogit, but to a company called WGG Holdings Ltd. (“WGG”), which neither Steve Meschino nor Surrogit have anything to do with. It is submitted that when Allied failed to deliver the Bank letter required by section 4(a) of the Note, in January 2010, it defaulted under the Note. As January 2010 represented the third and final installment, the whole balance became due and payable.

[30] Surrogit relies on the affidavit of David Gallagher, who summarized Allied’s obligations pursuant to section 4(a) of the Note, which deals with providing the appropriate letter from the Bank:

Pursuant to the terms of the Promissory Note, if Allied is unable to make a payment under the Promissory Note, it must provide Surrogit with certain documentation that is described in the Promissory Note; and if Allied complies with these provisions of the Promissory Note, it is expressly stated that Allied shall not be deemed to be in default of its obligations under the Promissory Note.

[31] Allied’s response to this argument is that Surrogit did not complain about receiving a letter referencing WGG, and that Allied was not told that Surrogit did not receive the requisite notice under the Note in 2010. Surrogit therefore cannot rely on such objection now. Further, Surrogit does not rely on this in its pleadings. I agree that Surrogit cannot rely on such argument at this late stage when it has not been pleaded or objected to before this motion for summary judgment.

Condition Precedent

[32] Allied further submits that where a promissory note provides that an amount owing is to be paid subject to the satisfaction of a condition, the payment is not due until the condition has been satisfied. It relies on the case of FB Capital Corp. v. IoSolutions Inc. , 2006 8466 (ON SC) , [2006] O.J. No. 1070 (Sup. Ct.), at paras. 42 , 45, Sachs J. dismissed an action in a similar case and stated:

In the case before me, the agreement that created the obligation which the Promissory Note evidenced was the 1997 Agreement. Under paragraph 6 of that Agreement, the loan for which the Promissory Note is evidence was to be repaid “...subject to the prior payment of all other debt of the Corporation”. The evidence was uncontradicted that the “other debt” of the Corporation had not yet been repaid. Therefore, while IoSolutions could consent to repay the loan earlier (as they had in the past), they were not obligated to do so.

FB Capital submitted that this conclusion would be unfair. In effect, they would be left in what Sills J. in Skrien alluded to as a “totally absurd” position—namely, with “a loan that is never to be repaid, except at the whim of the borrower”. I disagree that this is the result of my decision. When IoSolutions has repaid its debt, FB Capital may, under the authority cited by Sills J., be able to demand repayment of its loan. That caselaw, like section 22 of The Bills of Exchange Act , suggests that “Where no time for repayment of a loan is set forth that loan is repayable on demand”.

[33] It is therefore submitted that in this case, if the Note is not due and payable (neither now nor at a determinable future time), the payments are to be made after the occurrence of a specified event that has not yet happened. I agree that the jurisprudence relied on by Allied is relevant.

[34] As Allied is unable to make payments under the Note without causing a breach of the 2007 financial covenants, the condition precedent set out in the Note has not been satisfied and Allied’s payment obligations under the Note are therefore not engaged.

[35] I agree that, as in FB Capital Corp. , when Allied is able to make payments under the Note without causing a breach of the 2007 financial covenants, the condition precedent will be satisfied and the Note will then be due and payable.

[36] I accept Allied’s submission that the language of the Note is clear and unambiguous as to the conditional nature of the payments, and that therefore the Note is not now due and Surrogit’s action should be dismissed.

[37] On this basis, I find that Surrogit has not satisfied its burden of proof that it is entitled to judgment against Allied as claimed. Surrogit’s motion for summary judgment is therefore denied.

Allied’s Request for Summary Judgment

[38] The parties agree that:

(a) Summary judgment cannot be granted if there is a genuine issue requiring a trial. The moving party has the onus of demonstrating that there is no genuine issue requiring a trial.

(b) On a Summary Judgment Motion, the Court must ask whether the full appreciation of the evidence and issues that is required to make dispositive findings can be achieved by way of summary judgment, or whether this full appreciation can only be achieved by way of a trial.

(c) The “full appreciation test” requires the Court to do more than simply assess if it is capable of reading and interpreting all the evidence that has been put before the Court on the Motion. Instead, the Court must assess whether the attributes of the trial process are necessary to enable the Court to fully appreciate the evidence and issues posed by the case.

(d) A Summary Judgment Motion cannot serve as a substitute for trial where the case calls for multiple findings of fact on the basis of conflicting evidence.

[39] Allied relies on Combined Air Mechanical Services Inc. v. Flesch , 2011 ONCA 764 , 108 O.R. (3d) 1, leave to appeal to S.C.C. granted, [2012] S.C.C.A. No. 47, [2012] S.C.C.A. No. 48.

[40] Allied also relies on the case of Manulife Bank of Canada v. Conlin , 1996 182 (SCC) , [1996] 3 S.C.R. 415, at paras. 69 , 71, wherein the Supreme Court of Canada has held that an action can be dismissed against a respondent on an applicant’s motion for summary judgment:

The order originally appealed from was granted on a motion for summary judgment brought by the bank. The respondent Conlin had brought no cross-motion for summary judgment dismissing the action. There had been no examination for discovery and no trial. Given that an appeal court may not make an order which the trial judge would not have had the jurisdiction to make…the appellant argued before us that the Court of Appeal had jurisdiction only to set aside the order for summary judgment and send the matter back for trial. The question to be answered, therefore, is whether the motions court judge had the jurisdiction to dismiss the action against the respondent.

Considered in light of Rule 1.04(1), in my opinion, Rules 20.04(2) and (4) gave Killeen J. the jurisdiction to dismiss the action against the respondent. The motions court judge could either have found that there was no genuine issue for trial or he could have found that the only genuine issue was an issue of law. In either case, it would have been within his jurisdiction and, by extension, within the jurisdiction of the Court of Appeal, to dispose of the matter by dismissing Manulife’s claim . [Emphasis added.]

[41] Allied urges this Court to dismiss Surrogit’s action even though it has not filed a cross-motion for summary judgment.

[42] Is this is an appropriate case for the Court to exercise its jurisdiction to dismiss an action where the respondent has not filed a cross-motion for summary judgment? The issue in dispute between the parties was a question of the interpretation of the Note. I have found that the wording of the note is clear and that there is no obligation for Allied to pay Surrogit at this time as the conditions of payment have not yet been triggered.

[43] I have found that for the reasons set out above, Allied has not satisfied its burden of proving that it is entitled to the relief sought in this motion. Further, Surrogit’s motion for judgment is the only motion before me. Allied’s motion is therefore denied.

[44] Allied has not brought a cross-motion for summary judgment against Surrogit. Surrogit has made no submissions on this issue. In this case, there are no issues left to be adjudicated between the parties. The findings made by this Court could lead to the conclusion that Surrogit’s action against Allied should be dismissed. However, the only motion before this Court is Surrogit’s motion for summary judgment against Allied. Although, on the basis of the jurisprudence relied on by Surrogit, there is support for its submission that this Court has jurisdiction to dismiss the Action, I will not grant this request by Allied. As Allied did not bring a cross-motion for dismissal of the Action, Surrogit was not given any notice that such relief would be requested by Allied. Allied did not provide this Court with any reason why this lack of notice should be disregarded in the circumstances of this case.

Costs

[45] The parties have agreed that a reasonable amount for the costs of this motion, on a partial indemnity basis, is $24,026. Failing the agreement of the parties, submissions may be made on costs by Allied for October 26, 2012 and by Surrogit for November 9, 2012 .

Pollak J.

Dated: October 15, 2012