Court File and Parties
CITATION: Hammer v. Cleeves, 2015 ONSC 2547
COURT FILE NO.: C-829-13
DATE: 2015-04-17
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Carol Hammer
Plaintiff
– and –
Roy Cleeves and David Anderson
Defendants
Jeffrey Larry and Lindsay Scott, for the Plaintiff
Gary Petker, for the Defendants
HEARD: November 24, 27, December 1, 2, 3, 4, 2014 and January 16, 2015
G. E. Taylor
Introduction
[1] In September 2010, the plaintiff was a real estate agent with 33 years of experience. She was interested in finding a purchaser for her business which was known as the Hammer Team. The defendants were also real estate agents. They agreed to purchase the assets of the Hammer Team for $200,000 plus up to an additional $200,000 payable in annual installments of $40,000 if certain commission levels were achieved. The parties signed an Asset Purchase Agreement on September 22, 2010. The defendants paid a $5000 deposit. The defendants began operating the Hammer Team on October 1, 2010. The Agreement provided for a closing date of January 10, 2011 when the defendants would pay a second deposit of $15,000 with the balance of the purchase price being satisfied by a promissory note.
[2] In November, 2010, two of the real estate agents employed by the Hammer Team resigned. As a result of the departure of the two agents, the defendants notified the plaintiff that they would not be closing the transaction on January 10, 2011. The defendants however, offered to negotiate a new agreement for the sale and purchase of the Hammer Team based on a percentage of the commissions generated by clients of the Hammer Team over time. This is referred to as a sale by referral or on a referral basis. By January, 2011, the plaintiff was residing in Papua, New Guinea where she intended to remain for at least three years. The plaintiff was not interested in selling the Hammer Team on a referral basis. The plaintiff wished to complete the transaction as originally negotiated.
[3] The defendants have paid no additional amounts to the plaintiff for the purchase of the Hammer Team other than the deposit of $5000. The defendants have operated the Hammer Team since October 1, 2010 although they have on more than one occasion offered to return the business to the plaintiff.
[4] The plaintiff has commenced this action for payment of all amounts owing pursuant to the Asset Purchase Agreement together with other ancillary or alternative relief.
The Evidence
[5] The plaintiff became a real estate agent in 1977. In 1994 she created the Hammer Team. From 2006 onward, the plaintiff and the Hammer Team operated through the brokerage of Keller Williams Golden Triangle Realty. By early 2010 the plaintiff had decided to exit the real estate business. Accordingly, she began a search to locate a purchaser for the Hammer Team.
[6] One of the members of the Hammer Team was Suzanne Ethier, who was the plaintiff’s daughter. In May or June, 2010, the plaintiff approached Suzanne Ethier and offered to sell the Hammer Team to her for between $400,000 and $450,000. At that price, Suzanne Ethier was not interested. The plaintiff also approached Paul Allen, another real estate agent with Keller Williams. He was not interested in purchasing the Hammer Team. In August, 2010, the plaintiff approached the defendants. She told them that the selling price for the Hammer Team was $400,000. The defendants were interested.
[7] The plaintiff had her lawyer prepare a draft Asset Purchase Agreement which she reviewed with the defendants. This draft Agreement was dated September 1, 2010. In the original draft Agreement, the purchase price was $400,000 payable by way of a $40,000 deposit with the balance of the purchase price to be paid by way of quarterly installments of $15,000 commencing April 1, 2011. The original draft Agreement contemplated that the defendants would begin to operate the Hammer Team on a date in advance of the closing date which was scheduled to be January 10, 2011.
[8] A second draft of the Asset Purchase Agreement was prepared which was dated September 13, 2010. In that draft Agreement, the purchase price remained at $400,000 payable by way of a $5000 deposit on the date when the defendants began to operate the Hammer Team, a further $15,000 payable on closing, which remained January 10, 2011, with the balance of the purchase price payable in quarterly installments of $10,000 commencing April 1, 2011.
[9] A third draft Agreement was prepared dated September 22, 2010. This draft Agreement provided for a purchase price of $200,000 payable by way of a $5000 deposit, a further positive $15,000 on the closing date of January 10, 2011 with the balance of the purchase price to be paid in equal quarterly installments of $10,000 commencing on April 1, 2011. This draft agreement also included a clause entitled Persistency Bonus. The Persistency Bonus provided for further payments to the plaintiff based on the average gross annual revenue for the Hammer Team for three years commencing January 2011 to be calculated on January 3, 2014. The Persistency Bonus would be a maximum of $40,000 per year for five years commencing January 2017.
[10] On September 22, 2010, the plaintiff and the defendants executed the Asset Purchase Agreement. The final Agreement provided for the defendants to take over operation of the Hammer Team business on October 1, 2010 with the closing of the transaction to take place on January 10, 2011. The purchase price was $200,000 payable by way of a $5000 deposit on October 1, 2010, a further payment of $15,000 on January 10, 2011 with the balance payable in equal quarterly installments of $10,000 commencing April 1, 2011. The Agreement provided for the defendants to execute a promissory note for the full amount of the purchase price. The Agreement was reviewed by the defendants’ solicitor prior to execution.
[11] The Agreement also contained a clause for payment to the plaintiff of a “Persistency Bonus”. The clause reads as follows:
The average gross annual income for the Hammer Team has been established and agreed as $366,185. On January 3, 2016 an average will be taken of the gross annual revenue of the Hammer Team based on the previous 5 years (Jan. 2011 – Jan 2016). It is agreed and understood that a Business Persistency Bonus will paid [sic] to the Seller commencing no later than in the sixth year (Jan. 2017) and based on the following formula: if average gross revenue is equal or greater than $366,185, a bonus of $40,000 per year for 5 further years will be paid to the Seller for business persistency. If average gross revenue of the Hammer team has declined from the threshold level of $366,185 per year, the bonus due the Seller for the 5 year period will decline by the same percentage.
Example: If average gross revenue is $300,000, an (pprox..) 18% decline, the bonus to be paid for the remainder of the contract will decline by the same percentage to $32,800 per year, payable in equal quarterly installments of $8200.00.
[12] In the executed Asset Purchase Agreement there are handwritten changes to the Persistency Bonus clause which extended the three-year period for the determination of gross annual revenue to a five year period.
[13] The defendants assumed responsibility for operating the Hammer Team on October 1, 2010. The Agreement specified the assets purchased by the defendants which included a client database, websites, telephone numbers and books about real estate written by the plaintiff. The defendants took possession of the purchased assets on October 1, 2010.
[14] The Agreement required the defendants to offer employment to John Dewar, who was the office manager of the Hammer Team and who was responsible for maintaining and updating the client database and the websites. John Dewar has continued in the employ of the defendants from and after October 1, 2010.
[15] As of October 1, 2010 there were three real estate agents who were members of the Hammer Team. They were Suzanne Ethier, Ian Shantz and Tony Nath. They were referred to as “Buyer Specialists”. By the time the defendants took over the business of the Hammer Team, they were aware that Tony Nath was phasing out of the real estate business and was only working part time. Suzanne Ethier and Ian Shantz however were working full time as Buyer Specialists for the Hammer Team. The Agreement required the defendants to accept assignments from the plaintiff of the Buyer Specialist Contracts. No such assignments were prepared by the plaintiff or presented to the defendants. Suzanne Ethier and Ian Shantz did continue to work as Buyer Specialists for the Hammer Team after the defendants began operating the business.
[16] The Agreement contemplated that certain schedules would be attached. Clause 1.9 of the Agreement stated that the following schedules were attached: Schedule A – Buyer Specialists List; Schedule B – Buyer Specialists Contract; Schedule C – Form of Promissory Note; Schedule D – Allocation of Purchase Price; Schedule E – Litigation; Schedule F – Roy Cleeves and Dave Anderson Partnership Agreement.
[17] The Agreement contained the following clause under the heading “Entire Agreement”:
This Agreement, including all Schedules, constitutes the entire agreement between the Parties with respect to the subject matter and supersedes all prior agreements, understandings, negotiations and discussions, whether written or oral. There are no conditions, covenants, agreements, representations, warranties or other provisions, express or implied, collateral, statutory or otherwise, relating to the subject matter except as provided in this Agreement. No reliance is placed by any Party on any warranty, representation, opinion, advice or assertion of fact made by any Party its directors, officers, employees or agents, to any other Party its directors, officers, employees or agents, except to the extent that it has been reduced to writing and included in this Agreement.
[18] Two copies of the final Agreement were made exhibits. One copy, although signed and initialed by the plaintiff and the defendants did not have any schedules attached. A second signed and initialed version of the final Agreement was produced by the plaintiff. Schedules were attached to this version although the pages of the schedules were not initialed. A promissory note executed by the defendants in favour of the plaintiff in the amount of $200,000 payable in quarterly installments of $10,000 commencing April 1, 2011 was attached to the Agreement produced by the plaintiff. Schedule D, setting out the allocation of the purchase price was also attached. Lists of clients of each of the plaintiff, Suzanne Ethier, Ian Shantz and Tony Nath were attached. A Buyer Specialist Contract signed by Tony Nath was attached but no Buyer Specialist Contracts for Suzanne Ethier or Ian Shantz were attached.
[19] The plaintiff testified that after reviewing the first draft of the Asset Purchase Agreement with the defendants, she delivered to Roy Cleeves a copy of the Buyer Specialist Contracts for Ian Shantz and Tony Nath. In a handwritten note which the plaintiff said accompanied those Buyer Specialist Contracts, she advised that she could not locate a contract for Susanne Ethier but it was in the same form as the contracts for the other two Buyer Specialists. Ian Shantz testified that, while he may have initially signed a contract with the Plaintiff or the Hammer Team, when he returned after an absence of approximately one year, he did not sign a new contract. Suzanne Ethier testified that she had never signed a Buyer Specialist Contract. Roy Cleeves acknowledged receiving the handwritten note from the plaintiff indicating that the Buyer Specialist Contracts for Ian Shantz and Tony Nath were attached but he did not review the note or any documents that were attached to it.
[20] The Buyer Specialist Contract signed by Tony Nath sets out in some detail the responsibility of the agent. The agreement also appears to provide for termination by the Buyer Specialist on 30 days’ notice.
[21] Roy Cleeves testified that they did not receive copies of the Buyer Specialist Contracts. He said he was prepared to assume the risk that the Buyer Specialist Contracts would not be produced. He learned a day or two after signing the Agreement that there were no Buyer Specialist Contracts in existence for Suzanne Ethier or Ian Shantz. He also said that it was the intent of he and David Anderson that the Hammer Team agents would sign new contracts in the form he was using for agents with the Cleeves Team. The standard form Cleeves Team Independent Contractor Agreement provided for termination by the agent upon 14 days’ notice. Roy Cleeves testified that the defendants did not refuse to complete the Agreement for the purchase of the Hammer Team because of the failure of the plaintiff to produce copies of the Buyer Specialist Contracts for the agents working for the Hammer Team.
[22] Roy Cleaves testified that in August 2010 he was told by the plaintiff that the buyer specialists with the Hammer Team were happy and content although he was aware that Tony Nath was only working part time. He said the plaintiff represented that the Hammer Team was at “turnkey operation” meaning the business would run itself.
[23] A letter of requisitions dated October 13, 2010 was sent by the solicitor acting for the defendants to the solicitor for the plaintiff. The letter requested amongst other things, copies of Schedules A, C, D and F to the Agreement. The requisition letter did not request copies of the Buyer Specialist Contracts. Roy Cleeves explained that the lawyer did not request copies of the Buyer Specialist Contracts because a decision had been made to have the Hammer Team agents sign the form of agent contract in use by the Cleeves Team.
[24] Roy Cleeves testified that he was aware any representations were required to be in writing if they were to form part of a contract for the sale and purchase of real estate. He said he was aware of the Entire Agreement clause of the Agreement. He acknowledged that he did not ask that there be a term in the Agreement regarding the Buyer Specialists being willing to remain members of the Hammer Team under the new ownership. David Anderson testified that he understood the meaning of an entire agreement clause in a standard real estate contract. He said that when acting for a purchaser he makes certain that any buyer representation that the purchaser wishes to rely on is included in the contract.
[25] Roy Cleeves testified that the reason for the defendants refusing to complete the purchase of the Hammer Team was because of a representation by the plaintiff that the Buyer Specialists were happy and content, which the defendants say was a false representation. Roy Cleeves also explained that the defendants refused to complete the transaction because the database had been compromised by Suzanne Ethier and Ian Shantz when they departed the Hammer Team.
[26] The plaintiff testified that when she first met with the defendants about the possibility of selling the Hammer Team, she told them that she could not guarantee that any individual would remain with the Hammer Team but that generally the agents were happy. Roy Cleeves testified that in August 2010 he was told by the plaintiff that Suzanne Ethier and Ian Shantz were happy as members of the Hammer Team. He also testified that while initially the plaintiff asked that he and David Anderson not speak to the agents, that restriction was removed as of September 18, 2010. Roy Cleeves said he spoke to Tony Nath on or after September 18, 2010 and learned that he was phasing out of the real estate business. He acknowledged that he had the opportunity to speak to both Suzanne Ethier and Ian Shantz but declined to do so. He acknowledged being aware that Suzanne Ethier and Ian Shantz could leave that the Hammer Team at any time on short notice.
[27] David Anderson testified that he and Roy Cleeves were told by the plaintiff that the three Buyer Specialists who were members of Team Hammer were happy. He said the plaintiff instructed he and Roy Cleeves not to speak to any members of the Hammer team prior to the October 1, 2010 transition date. He said he convened a meeting with Suzanne Ethier and Ian Shantz within days of the transition date. They were both angry that he was present. He found the attitude of Susan Ethier in particular to be shocking. A few days later he had another meeting with Suzanne Ethier and Ian Shantz at which time they expressed their unhappiness with he and Roy Cleeves having purchased the Hammer Team. They said that they wanted a greater share of the commissions. David Anderson asked Suzanne Ethier and Ian Shantz to review their current contracts and was shocked to learn that they were not under contract to the Hammer Team.
[28] In cross-examination, David Anderson acknowledged that he was content to sign the Agreement to purchase the Hammer Team without reviewing the Buyer Specialist Contracts. He said he thought the contracts would mandate a period of time that an agent had to remain with the team although he acknowledged that it would be impossible to force a person to remain an employee against their will. He said he understood that the Hammer Team agents were happy and willing to remain as members of the team so there was no need to include in the Agreement a condition that the agents would remain. He acknowledged that he and Roy Cleeves could have negotiated a term of the Agreement providing that there would be a reduction in the purchase price if any of the Buyer Specialists were to resign within a certain period after they began to operate the business.
[29] On September 22, 2010, the defendants signed a promissory note in favour of the plaintiff agreeing to pay the sum of $200,000 by way of a payment of $15,000 on January 10, 2011 with the balance to be paid in quarter yearly installments of $10,000 commencing April 1, 2011. No payments have been made to the plaintiff on account of the promissory note.
[30] On November 9, 2010, Suzanne Ethier and Ian Shantz terminated their employment with the Hammer Team. On November 25, 2010 the defendants delivered a memo dated the same day to the plaintiff stating that they were not willing to complete the purchase of the Hammer Team as originally anticipated. The reason given for refusing to complete the purchase was the departure of Suzanne Ethier and Ian Shantz. The memo went on to state that the defendants were prepared to enter into a new agreement to purchase the Hammer Team on a referral basis based on 25% of the profit earned from Hammer Team clients.
[31] The plaintiff left Canada for Papua, New Guinea on November 26, 2010. She did not return to Canada until March 2013. The plaintiff’s response to the defendants’ proposal to re-negotiate and restructure the sale and purchase of the Hammer Team was that she wished to continue with the original Agreement. On January 10, 2011, Roy Cleeves, on behalf of the defendants, sent an email to the plaintiff stating as follows:
Hi Carol: As discussed we will not be closing the deal as originally structured and we are prepared to continue managing things as we have been until your return or other agreed upon solution so as not to damage the team, subject to your approval.
The plaintiff did not respond to this email. The defendants continued to operate the Hammer Team. They were continuing to operate the Hammer Team at the date of the trial.
[32] On December 4, 2010, the plaintiff sent an email to Paul Allen inquiring if he was interested in purchasing the Hammer Team. She explained that her arrangement with the defendants was “having a rocky start” and she was concerned that they might decline to complete the transaction. The plaintiff and Paul Allen were unable to negotiate mutually satisfactory terms for the sale and purchase of the Hammer Team.
[33] In January and February 2011, the plaintiff contacted Paul Allen on more than one occasion in an effort to negotiate a sale of the assets of the Hammer Team. Paul Allen was not interested.
[34] In the weeks and months following January 10, 2011, the plaintiff and defendants continued to communicate with one another. The plaintiff consistently asserted that she wished to complete the sale of the Hammer Team as an asset sale as originally contemplated. The defendants were equally consistent in making it clear that they were only interested in a deal that allowed them to pay for the business based on a percentage of profit earned from Hammer Team leads.
[35] In early 2011, the plaintiff was in regular contact with John Dewar. In her emails to John Dewar, on more than one occasion, the plaintiff referred to herself as the owner of the Hammer Team.
[36] In July 2011, the plaintiff retained counsel who wrote it to the defendants advising that the plaintiff intended to “exercise her rights under the Asset Purchase Agreement”.
[37] Suzanne Ethier testified that in the spring of 2010 she was approached by her mother about purchasing the Hammer Team. The purchase price suggested by the plaintiff was $450,000. Suzanne Ethier was not prepared to pay that amount because of the key role played by the plaintiff in the success of the Hammer Team. Suzanne Ethier testified that she made a counteroffer to her mother to purchase the business on the basis of a 25% referral fee. Plaintiff did not respond to the counteroffer.
[38] Suzanne Ethier testified that she was not happy when she learned that the Hammer Team had been sold to the defendants. She felt betrayed. She was given no information as to when the defendants would be taking over the business. She arrived at work one day to find David Anderson sitting at the desk previously occupied by her mother. David Anderson provided no explanation about the takeover, what roles people would play or the direction to be taken by the Hammer Team.
[39] Suzanne Ethier said that she had never had a written contract as a Buyer Specialist with the Hammer Team. She said it was not inevitable that she and Ian Shantz would leave the Hammer Team. Throughout October 2010 she said that she did not see any leadership on the part of the defendants and in particular David Anderson. There was also a dispute about David Anderson, in her view, interfering with her relationship with a client by altering the commission structure. This was the triggering event which caused her to resign from the Hammer Team.
[40] Ian Shantz testified that the plaintiff announced at a team meeting that the business had been sold. Prior to that she had not asked him if he would remain with the Hammer Team if it were to be sold. By this time he did not have a written Buyer Specialist contract with the Hammer Team. He said that he was prepared to continue working for the Hammer Team under its new owners but after a month or so he and Suzanne Ethier decided it was time for them to strike out on their own. He said that before the plaintiff sold the business the members of the Hammer Team were a happy and cohesive unit. The nature of the real estate business, however, is that agents are mobile.
[41] Both Suzanne Ethier and Ian Shantz denied accessing the Hammer Team database for the purpose of directing clients to themselves. They both testified that they contacted their own clients to advise that they had resigned from the Hammer Team.
Positions of the Parties
[42] The plaintiff’s position is that the Asset Purchase Agreement was a binding contract that was breached by the defendants. Although the plaintiff says that she did not make any misrepresentations to the defendants in the course of the negotiations which led up to the signing of the Asset Purchase Agreement, in any event, the Entire Agreement clause in the Asset Purchase Agreement governs and the defendants cannot rely on any misrepresentations that were not made terms of the contract.
[43] The position of the defendants is that the plaintiff breached of the terms of the Asset Purchase Agreement because the Buyer Specialist Contracts were not attached as a schedule to the Agreement. The defendants also maintain that the plaintiff made misrepresentations to them about the contentedness of the Buyer Specialists and the nature of the Hammer Team business. The defendants submit that the departure of Ian Shantz and Suzanne Ethier shortly after they began operating the Hammer Team is evidence that they were not happy and content as represented by the plaintiff and that the business was not a “turnkey operation” as also represented by the plaintiff.
Discussion and Analysis
[44] The parties entered into a valid and binding agreement for the purchase by the defendants of the Hammer Team from the plaintiff. The terms governing the sale and purchase were comprehensively contained in the Asset Purchase Agreement dated September 22, 2010. It is the position of the plaintiff that the Agreement is binding and enforceable. It is the position of the defendants that the plaintiff breached the terms of the Agreement.
[45] I do not understand the defendants to suggest that they did not receive all of the assets as set out in the Agreement.
[46] By way of the memo dated November 25, 2010, the defendants asserted the position that they would not be completing the purchase of the Hammer Team because of the departure of the Buyer Specialists Suzanne Ethier and Ian Shantz. Subsequently, the defendants took the position that they were justified in refusing to complete the purchase because of the failure of the plaintiff to produce and attach as a schedule to the Agreement, the Buyer Specialist Contracts for Suzanne Ethier and Ian Shantz.
[47] I am satisfied that the Buyer Specialist Contracts for any of the Buyer Specialists were not attached as Schedule B to the Agreement as contemplated by Article 1.9. Further, I am satisfied that at least for Suzanne Ethier, there was no Buyer Specialist Contract and never had been. I find that Ian Shantz, at one time, was subject to a Buyer Specialist Contract but whether that contract remained in existence after he returned it to employment with a Hammer Team is uncertain.
[48] However, I am also convinced that the absence of the Buyer Specialist Contracts and the failure to attach them as Schedule B to the Agreement had nothing to do with the refusal by the defendants to complete the purchase. The evidence is clear that the defendants were not interested in the contractual terms governing the relationship between Suzanne Ethier and Ian Shantz and the Hammer Team or the plaintiff. The defendants were not interested in the Buyer Specialist Contracts because their intent was always to have new contracts entered into in the form being used by the Cleeves Team. Roy Cleeves testified that he learned within a day or two of signing the Agreement that there were no agent contracts in existence. I infer this means the defendants were aware that there were no existing Buyer Specialist Contracts for Suzanne Ethier and Ian Shantz before they took over operation of the Hammer Team on October 1, 2010. If having Suzanne Ethier and Ian Shantz subject to written employment contracts was an important part of the transaction, I doubt that the defendants would have taken over operation of the Hammer Team.
[49] The failure of the lawyer acting for the defendants to requisition copies of the Buyer Specialist Contracts in the letter to the plaintiff’s lawyer dated October 13, 2010 is consistent with the conclusion that the attachment of the Buyer Specialist Contracts as a schedule to the Agreement had been waived by the defendants because of their expressed intent to have the agents of the Hammer Team sign new contracts in the form in use by the Cleeves Team.
[50] I conclude that the defendants refused to complete the purchase of the Hammer Team because of the departure of Suzanne Ethier and Ian Shantz as Buyer Specialists with the Hammer Team. That was the reason given by the defendants in the memo they delivered to the plaintiff on November 25, 2010.
[51] I find that the departure of Suzanne Ethier and Ian Shantz cannot justify the defendants’ refusal to complete the transaction because there was no term in the Agreement that any employee of the Hammer Team would continue with their employment for any period of time beyond either the transition date or the closing date. The defendants recognized employees would be free to leave if they so wished. Indeed, the Cleeves Team contract permitted an agent to give 14 days’ notice of termination which was less than the notice requirement in the Buyer Specialist Contract used by the Hammer Team.
[52] The defendants were aware of the Entire Agreement clause of the Agreement. The defendants did not attempt to negotiate a term of the Agreement to protect themselves from the abrupt departure of Suzanne Ethier and Ian Shantz as Buyer Specialists with the Hammer Team.
[53] The defendants argue that the plaintiff misrepresented the happiness of Suzanne Ethier and Ian Shantz to continue as members of the Hammer Team under the ownership of the defendants. I accept that Suzanne Ethier was angry with her mother when she learned that the business had been sold. Her evidence however is that she was prepared to continue working for the new owners and she in fact did so for a period of time. I accept also the evidence of Suzanne Ethier that the catalyst for her departure was the perceived interference with a client relationship by David Anderson. The evidence of Ian Shantz is that he was a satisfied member of the Hammer Team as of the transition date. His decision to leave was based at least in part on the decision of Suzanne Ethier. Finally, I think it is significant that the defendants made no effort to speak to Suzanne Ethier and or Ian Shantz in advance of taking over operation of the Hammer Team to confirm their understanding that both would continue to be employed in the long-term by the Hammer Team under its new ownership.
[54] I do not believe the plaintiff represented to the defendants that the business of the Hammer Team was “turnkey operation” and all they had to do was show up and the business would run itself. Roy Cleeves testified that it is not possible to become a successful real estate agent by simply showing up. To be successful requires much hard work.
[55] In any event, if there were misrepresentations made by the plaintiff, they were not incorporated into the Asset Purchase Agreement and therefore are subject to the Entire Agreement clause.
[56] In Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, Cromwell J., writing for the majority, stated at paragraph 62 that he agreed with Binnie J. regarding the analytical approach to be followed when dealing with the applicability of an exclusionary clause. That analytic approach is set out at paragraphs 121 to 123 as follows:
The present state of the law, in summary, requires a series of enquiries to be addressed when a plaintiff seeks to escape the effect of an exclusion clause or other contractual terms to which it had previously agreed.
The first issue, of course, is whether as a matter of interpretation the exclusion clause even applies to the circumstances established in evidence. This will depend on the Court’s assessment of the intention of the parties as expressed in the contract. If the exclusion clause does not apply, there is obviously no need to proceed further with this analysis. If the exclusion clause applies, the second issue is whether the exclusion clause was unconscionable at the time the contract was made, “as might arise from situations of unequal bargaining power between the parties” (Hunter, at p. 462). This second issue has to do with contract formation, not breach.
If the exclusion clause is held to be valid and applicable, the Court may undertake a third enquiry, namely whether the Court should nevertheless refuse to enforce the valid exclusion clause because of the existence of an overriding public policy, proof of which lies on the party seeking to avoid enforcement of the clause, that outweighs the very strong public interest in the enforcement of contracts.
[57] I have no difficulty in concluding that the Entire Agreement clause in the Asset Purchase Agreement applies to the representations which the defendants allege were made by the plaintiff regarding the contentedness of the Buyer Specialists and that the Hammer Team business was a “turnkey operation”. I do not find the clause in question to be unconscionable. Plaintiff and the defendants negotiated the Asset Purchase Agreement as parties with equal bargaining power. The defendants were successful in negotiating several changes to the draft Agreements which were in their favour. Their solicitor reviewed the Agreement prior to execution. Finally, there is no public policy reason for not enforcing the Entire Agreement clause in the present case.
[58] The defendants have further argued that by attempting to sell the Hammer Team to Paul Allen after the defendants refused to complete the Agreement, the plaintiff has lost the right to seek to enforce the contract. The plaintiff attempted to negotiate with Paul Allen with a view to selling the Hammer Team. However, the negotiations did not come to fruition. Had the plaintiff and Paul Allen entered into an agreement for the sale and purchase of the Hammer Team and that transaction was not completed, then I would agree that the plaintiff could not revert to the position of seeking to enforce the Agreement against the defendants. That would have amounted to an election. In my view, the plaintiff did not get to the point of having to elect because Paul Allen was not interested in the entering into an agreement with the plaintiff to purchase the assets of the Hammer Team.
[59] For the foregoing reasons, I conclude that the defendants are in breach of the Asset Purchase Agreement for the purchase of the Hammer Team and as such are liable to the plaintiff for damages.
Damages
[60] I do not accept the submission of the defendants that the plaintiff abandoned the assets which made up the Hammer Team. The plaintiff at all times expected to be paid for the assets sold to the defendants. The defendants continued to operate under the banner of the Hammer Team and to obtain the benefit of the assets all without paying what was owing to the plaintiff pursuant to the Agreement. The plaintiff did not intend to make a gift to the defendants of the Hammer Team.
[61] The defendants submit that the plaintiff failed to mitigate her damages. In my view, the plaintiff was justified in allowing the defendants to continue to operate the Hammer Team and to sue for damages.
[62] The defendants agreed to pay $200,000 for the purchase of the assets of the Hammer Team as evidenced by their execution of the promissory note dated September 22, 2010. The defendants have paid $5000 on account of the purchase price. The plaintiff is entitled to judgment for the balance in the amount of $195,000.
[63] The plaintiff is also entitled to judgment for an amount calculated pursuant to the Persistency Bonus clause in the Agreement. The difficulty is that the period covered by the Persistency Bonus calculation does not end until December 31, 2015. I have considered granting a declaration that the plaintiff is entitled to judgment for a further amount to be calculated pursuant to the terms of the Persistency Bonus clause. The difficulty with that approach is that the parties will not be able to conclude this matter until well into the future.
[64] Exhibit 2 is a spreadsheet prepared by the defendants setting out the commissions earned by the defendants from transactions involving former Hammer Team clients. The plaintiff did not seem to take exception to the accuracy of that spreadsheet. I have therefore decided to do a rough damage calculation to estimate what the plaintiff would be entitled to receive pursuant to the Persistency Bonus clause and grant judgment in favour of the plaintiff for that additional amount.
[65] According to Exhibit 2, gross commission income earned from October 2010 to June 2014 totals approximately $240,000. This is a period of approximately 3 ½ years. It is obvious that commission income has decreased significantly over the years. The average gross annual revenue will be nowhere near the base of $366,000 which is the basis on which the Persistency Bonus is to be calculated. In my view, the total gross commissions earned in the period January 2011 to December 31, 2016 will not exceed $300,000. This translates into a yearly average of $60,000.
[66] Applying the formula from the Persistency Bonus clause in the Agreement, gross annual revenue is approximately 83.5% less than the anticipated revenue of $366,185. The payment of the annual Persistency Bonus of $40,000 must therefore be reduced by 83.5% which I calculate to be $6600 per payment. The Persistency Bonus was to be payable over five years starting in January 2017. As the plaintiff will be granted judgment for an amount payable immediately, the total of the five annual payments should be reduced. The plaintiff will be granted judgment based on the Persistency Bonus calculation of a further sum of $30,000.
Conclusion
[67] The plaintiff is entitled to judgment against the defendants for $225,000 plus interest and costs.
[68] If counsel are unable to agree on the appropriate disposition as to costs, they may make written submissions. The written submissions on behalf of the plaintiff are to be delivered to my office within 14 days of the release of these Reasons, not to exceed three pages in length exclusive of a Bill of Costs and Costs Outline. Responding submissions are to be delivered to my office within 28 days of the release of this these Reasons, not to exceed three pages in length. Counsel are directed to file electronic copies of their cost submissions at Kitchener.Superior.Court@ontario.ca to my attention.
G.E. Taylor, J.
Released: April 17, 2015
CITATION: Hammer v. Cleeves, 2015 ONSC 2547
COURT FILE NO.: C-829-13
DATE: 2015-04-17
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Carol Hammer
Plaintiff
– and –
Roy Cleeves and David Anderson
Defendants
REASONS FOR JUDGMENT
G. E. Taylor, J.
Released: April 17, 2015