ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NOS.: CV-12-456182 and CV-12-466964
DATE: 20130116

BETWEEN:

Veracap Corporate Finance Limited

Applicant

– and –

Donald Carefoot, Eugene Gouthro and Gendon Polymer Services Inc.

Respondents

Jason Squire, for the Applicant

Steven F. Rosenhek and Fida Hindi, for the Respondents

AND BETWEEN:

Donald Carefoot, Eugene Gouthro and Gendon Polymer Services Inc.

Applicants

– and –

Veracap Corporate Finance Limited

Respondent

Steven F. Rosenhek and Fida Hindi, for the Applicants

Jason Squire, for the Respondent

HEARD: January 15, 2013

REASONS FOR JUDGMENT

MORGAN J:

[1] This double application raises a single, neat question of contract interpretation. What meaning should be attributed to a fee provision in a consulting contract where the text is relatively clear on its face, but surprising in its literal meaning?

[2] Donald Carefoot and Eugene Gouthro are the principals of Gendon Polymer Services Inc. (the “Respondents”). They retained Veracap Corporate Finance Limited (the “Applicant”) to provide strategic business advice leading to the sale of their business.

[3] The Applicant charged fees for its services on a contingency basis, depending on the sale of the corporate Respondent and the price achieved in that sale. The retainer agreement signed on August 3, 2010 provides, in the relevant part, as follows:

3. Fee for Service

Veracap will be paid a Work Fee based upon mutually agreed hourly rates, in total not to exceed $40,000. If at any time the Client decides not to proceed with the Transaction, except as specified in Paragraph 12, no further obligation shall exist beyond the Wrok Fees billed to that time, as well as the confidentiality which Veracap will continue to be bound by, as specified in Paragraph 6, as well as the privisions in Paragraphs 7, 9 and 10 following.

The Client and Veracap have agreed upon a Minimum Target Price of CDN $6 million. On Closing Veracap will be paid a contingent Transaction Fee of 3.5% of Gross Aggregate Consideration, (GAC as defined below), plus 5% of any GAC above CDN $6 million. Hourly Work Fees as defined earlier, are non-refundable, but will be credited against Transaction Fees payable to Veracap. However, in the event of a successful sale, the combination of Wrok Fees and Transaction Fee to be paid to Veracap shall be subject to a minimum of $200,000.00.

[emphasis added]

[4] The Gross Aggregate Consideration is defined at length in the balance of this section of the retainer agreement. For present purposes, suffice it to say that this term refers to the total, overall sale price for the business, regardless of the form and timing of the payments.

[5] In January 2012, the two individual Respondents, through the efforts of the Applicant, entered into an agreement with a company owned by a U.S.-based investment corporation for the sale of the corporate Respondent. The purchase and sale agreement calls for a purchase price comprised of an initial payment of $11,565,335.00, followed by a second payment on December 31, 2012 and a third payment on December 31, 2013, calculated as a percentage of earnings for each of those calendar years. The total purchase price under the agreement is not to exceed $14 million.

[6] The evidence is that the purchase price is on course to reach the $14 million ceiling by the end of 2013.

[7] On January 20, 2012, the Applicant invoiced the Respondents as follows:

Initial Purchase Payment $11,565,335.00

Base Continent Transaction Fee @ 3.5% 404,786.00

Amount above minimum target price 5,565,335.00

Additional Transaction Fee @ 5% 278,267.00

Initial Purchase Payment Fee 683,053.00

Less Work Fees Received 55,000.00

Fee amount due on Closing 628,053.00

Plus H.S.T. 81,647.00

Total Amount due on Closing 709,700.00

[8] In other words, the Applicant has calculated its fee by taking 3.5% of the entire purchase price, and then adding 5% of the amount of the purchase price above $6 million. The part above $6 million therefore attracts a fee of 8.5%.

[9] The Respondents agree that the Applicant has earned a fee. Indeed, they initially accepted and paid the Applicant’s fee on the basis of the January 20, 2012 invoice. However, they objected to the Applicant’s invoice once the fee calculation was drawn to their more focused attention by their accountant.

[10] The Respondents take the position that the Applicant’s fee should be calculated by taking 3.5% of $6 million and then 5%, and not 8.5%, of the amount of the purchase price above $6 million. They say that they have overpaid the Applicant by making a first payment in accordance with the January 20th invoice.

[11] Counsel for the Respondents submits that the fee provision is ambiguous, citing the Court of Appeal’s judgment in Dunn v Chubb Insurance Co. (2009), 2009 ONCA 538, 97 OR (3d) 701, at para 34 for the proposition that “[a] contractual provision is ambiguous if it is reasonably susceptible of more than one meaning.” He further submits that, as the Supreme Court of Canada said in Consolidated-Bathurst Export Ltd. v Mutual Boiler and Machinery Insurance Co., 1979 10 (SCC), [1980] 1 SCR 888, at 901, and reiterated in Eli Lilly & Co. v Novopharm Ltd., 1998 791 (SCC), [1998] 2 SCR 129, at para 52, “[w]here words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties.”

[12] Given the dispute over the meaning of the relevant provision, the Respondents seek to introduce extrinsic evidence that supports their interpretation. The Court of Appeal has instructed that “the first step in the process of determining the admissibility of extrinsic evidence…is to determine whether the text of [the relevant section] of the agreement is clear and unambiguous.” Hi-Tech Group Inc., v Sears Canada Inc. (2001), 2001 24049 (ON CA), 52 OR (3d) 97, at para 18. Accordingly, it is incumbent on the court to examine the fee provision carefully before embarking on a review that takes it outside the four corners of the contractual text.

[13] As the Respondents see it, the two plausible interpretations of the fee provision are:

(i) the Applicant gets a fee of 3.5% on the purchase price up to $6 million and 5% on the portion of the purchase price over $6 million;

or

(ii) the Applicant gets a fee of 3.5% on the purchase price up to $6 million and 8.5% on the portion of the purchase price over $6 million.

[14] It is understandable why the Respondents prefer the first interpretation over the second one. The second interpretation is a rather rich one for the Applicant. That, however, would not matter if it were found to reflect the specific agreement of the parties. More to the point, the second interpretation is an unusual one. Instead of a staged increase in percentage based on the purchase price exceeding a pre-defined target, the second interpretation gives a single percentage for the entire purchase price and an extra bonus based on the purchase price exceeding the target.

[15] That said, the second interpretation conforms to the actual words of the fee provision. The contract specifically calls for a 3.5% overall fee plus a 5% fee on the portion above $6 million. The Applicant followed the literal words of the contract in making the calculations found in the January 20, 2012 invoice.

[16] The text of the contract is not ambiguous in the usual sense. It is, however, surprising. A staged fee structure such as the Respondent’s first interpretation is what one might expect, but it is not what one finds in the contract.

[17] I acknowledge that, as the House of Lords said over forty years ago, “[t]he time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations.” Prenn v. Simmons, [1971] 3 All E.R. 237 (HL). In interpreting a commercial contract, this generally means that the court is entitled to take account of the “genesis of the transaction, the background, the context, and the market in which the parties are operating.” Reardon Smith Line Ltd. v Hansen-Tangen, [1976] 3 All ER 570, at 996 (HL).

[18] It is clearly established in the record that the Respondents themselves expected the clause to reflect the first interpretation. The initial proposal for a fee structure came from the Respondents, and was emailed to the Applicant on June 3, 2010. The proposal contained a staged fee in the following terms:

Basis of the Agreement with Veracap Corporate Finance

The preparatory phase will be based on time charged to a maximum of $40,000. This phase will end when the marketing and financial information is complete and the buyers are identified.

After this time (to be mutually agreed), Veracap will be compensated by the % of the transaction amount. This would be as follows:

3.5% up to $6,000,000 and 4% on any amount over $6,000,000

It is understood that if a transaction is completed the preparatory phase costs will be applied to the transaction compensation.

[19] The Applicant replied to this proposal by email four days later, and attached a revised draft retainer agreement that included a detailed fee provision. This fee provision was in the same operative terms as the final version signed on August 3, 2010. In his email of June 7, 2010, the representative of the Applicant advised the Respondents:

I have revised the contract, for the most part in keeping with the suggested terms outlined in the email I received from [the Respondents]… I also tweaked the incentive percentage, as much to convince you that as a negotiator I won’t just roll over, since that’s a critical role you’re untrusting [sic] to me. I hope you will find this fair.

[20] On a quick glance, the Applicant’s draft may have appeared to increase the second part of the fee from 4% to 5%. Upon more careful reading, one can see that it increased the fee in a far more substantial way. This was accomplished not just by slightly increasing the expressed percentage in the second stage of the fee calculation, but by changing the basic structure so that the portion of the sale price over $6 million (i.e. on more than half of the ultimate sale price of $14 million) was charged as an additional 5% fee. The Applicant’s “tweak”, in other words, more than doubled the fee in the second half of the calculation.

[21] It is difficult to know if this was done by design in order to catch the Respondents asleep at the wheel, but that is effectively what it did. Mesmerized by the Applicant’s covering email and by their own initial proposal, the Respondents obviously did not read the new fee provision with sufficient care. They therefore misconstrued, or missed altogether, the meaning that was otherwise apparent on the face of that provision.

[22] The Court of Appeal has stated that, “the aim [of contract interpretation] is to determine the objective intentions of the parties from the words they have used.” Coventree Inc. v Lloyds Syndicate 1221, 2012 ONCA 341, at para. 16. To do otherwise would be to elevate the subjective intentions of the misconstruing party over the presumed meeting of the minds reflected by the text.

[23] Legal scholars have stressed the concepts of equality and reciprocity as underlying the force of contract. One side’s unilateral understanding cannot make for an intelligible bargain. It is, first and foremost, the text of the agreement that provides the details of the exchange and that thereby reflects the mutuality inherent in the parties’ legal relationship. Professor Peter Benson explains in “The Idea of Consideration”, 61 UTLJ 241, at 273 (2011):

The significance of this reciprocity is…that, vis-à-vis the other, neither party retains any unilateral authority with respect to the form and content of his or her own promise or act…The parties’ promises are intelligible solely in and through this relation”.

[24] I hasten to emphasize that although the Applicant’s covering email was distracting, there was nothing deceptive about the drafting of the fee provision. Its words are not hard to understand if one comes to the text without preconceptions. The Applicant sent it to the Respondents for their review, and the Respondents concede that they in turn sent it to their lawyer. The Respondents sat on the draft agreement for several months before signing it. Although they may not have received helpful advice or properly digested it, they had ample opportunity to do so.

[25] Given the general notion that “no contracts are made in a vacuum”, Reardon Smith, supra, at 574, the Respondents submit evidence of what they say are the standard fee provisions in consulting contracts of this kind. They point out that the leading consulting companies in the same industry as the Applicant typically have staged fee structures much like the Respondent’s original proposal here. It makes business sense, they argue, to interpret the present contract in light of the standards of the industry.

[26] Whatever the industry standard may be, it is not germane to the objective meaning of a contract provision that was specifically negotiated. The retainer agreement in issue is not a consumer contract that takes a standard form. Professor Benson indicates that contract law focuses on autonomous bargains, and does not force a transaction to conform with some external notion of economic fairness. As the learned author puts it, “[t]he conception of reciprocity is, thus, purely juridical; not economic.” “The Idea of Consideration”, supra, at 273.

[27] The courts have on occasion made the language of a contract yield to so-called “business commonsense”, but only where “detailed semantic and syntactical analysis of words in a commercial contract is going to yield to a conclusion that flouts business commonsense”. The Antaios Compania Neviera S.A. v Salen Rederierna A.B., [1985] 1 AC 191, at 201. That, however, is not our case. While the fee provision in the retainer agreement may be surprisingly generous to the Applicant, its language does not contain any linguistic acrobatics. There is certainly no reason to resort to external business contexts in order to make sense of the words used in drafting it.

[28] Accordingly, much as I sympathize with the misapprehension that the Respondents may have been operating under, I conclude that the Applicant’s interpretation of the fee provision is the correct one. It is not excessively formalistic, nor does it reflect some “old intellectual baggage of ‘legal’ interpretation [that] has been discarded.” Investors Compensation Scheme Ltd. v West Bromwich Building Society (No. 1), [1998] 1 All ER 98 (HL) (per Lord Hoffman).

[29] The fee provision is not truly susceptible to any reasonable interpretation other than the one reflected in the Applicant’s January 20, 2012 invoice. The Respondents’ understanding was based on a misimpression gained by reading the Applicant’s covering email and by having their own previous proposal in mind; it does not reflect a careful reading of the contract that they actually signed.

[30] The Applicant’s fee is calculated by taking 3.5% of the entire purchase price up to $14 million, plus 5% of the purchase price above $6 million (i.e. 5% of up to $8 million).

[31] In my view, this is an appropriate case for a modest cost award. The Respondents were incorrect in their interpretation of the contract, but it is hard to fully blame them for arriving at that misinterpretation. The Respondents shall pay costs to the Applicant in the amount of $5,000.00, inclusive of disbursements and HST.

Morgan J.

Released: January 16, 2013

COURT FILE NOS.: CV-12-456182 and CV-12-466964

DATE: 20130116

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Veracap Corporate Finance Limited

Applicant

– and –

Donald Carefoot, Eugene Gouthro and Gendon Polymer Services Inc.

Respondents

AND BETWEEN:

Donald Carefoot, Eugene Gouthro and Gendon Polymer Services Inc.

Applicants

– and –

Veracap Corporate Finance Limited

Respondent

REASONS FOR JUDGMENT

E.M. Morgan J.

Released: January 16, 2013